Haste Makes Waste

Fri, 06 Feb 2009 15:54:37 +0000

Two hits on The Washington Post website are all you need to see this morning to understand why policy makers need to be very careful in the coming weeks.

First, here's an article on the January employment numbers, which show continued, even accelerating, contraction in the labor market. A few paragraphs in, we get:

The headline number is likely to figure into ongoing debate in the Senate today over the Obama administration's proposed economic stimulus package.

President Obama has warned of possible double-digit unemployment if the government does not act quickly, and the head of his Council of Economic Advisers used the new numbers to reemphasize the point.

"If we fail to act, we are likely to lose millions more jobs," council chairwoman Christina D. Romer said in a news release.

We may be likely to lose millions more jobs even if we do act. Why don't we think before we act? All you have to do is go to another article to see the consequences of acting before thinking:

The Bush administration received assets that were worth $78 billion less than the amount it invested as part of the massive infusion of capital into the country's banks, congressional investigators have found.

The investigators concluded that the Treasury under the federal bailout had invested $254 billion into companies but the preferred stock it got in return had a market value at the time of only $176 billion, or 69 percent of what the government paid, according to a congressional oversight panel report scheduled to be released today.

[...]

The panel's findings do not imply that the government has lost money on the investment because companies are still required to repay the amount invested plus interest. The lower market value determined by the panel reflects the risk that companies will default on those obligations. The panel found that a private investor would have charged significantly more to invest the same amount in the companies because of the greater risk and that the government did not charge this premium.

How did this happen? First, we had people running the Treasury who were inclined to throw money at the problem. Second, we had little expertise in Congress that would be needed to curb these inclinations. Third, we had mass hysteria that we needed to do "something" quickly, in order to avoid a catastrophe.

I haven't seen a change in outlook at the Treasury. They have recently proposed more of the same. The new Congress does not appear to be any more expert on matters of bailout and stimulus than the old Congress. And today's employment report has stoked more demands to do "something."

Look, it is unfortunate that the economy is contracting, but we have automatic stabilizers in place to cushion that blow on those who will be hit hardest -- we'll pay unemployment benefits to those workers who lose their jobs and we'll collect less tax revenue from those whose incomes fall for other reasons. But when we are in a contracting economy, it is even more important to not waste money.

Congress and the Obama Administration should be very discriminating in what they will spend money on. Bailout money for banks and large firms should go. Every piece of pork in the stimulus bill should go. Every additional tax cut should go. What should remain are the highest value public infrastructure projects, many of which the government has been deferring for years or decades.