Monday, September 10, 2012

Bloodletting and the Practice of Economic Stimulus

An economic downturn in 1920-21 sent unemployment up to 12 percent. President Warren Harding did nothing, except for cutting government spending. The economy quickly rebounded on its own.  In 1987, when the stock market declined more in one day than it had in any day in 1929, Ronald Reagan did nothing. There were outcries and outrage in the media. But Reagan still did nothing.  That downturn not only rebounded, it was followed by 20 years of economic growth, marked by low inflation and low unemployment.  - Thomas Sowell
Even in 1933 if you read the Annual Report [of the Federal Reserve] you will "discover" how much worse things would have been if the Federal Reserve hadn't behaved so well!  - Milton Friedman

The liberal/progressive narrative that I've been hearing for a while, and will continue to hear, I'm sure, all the way into November, is that Obama put a "bottom" under the economic "freefall"--implying a certain physics in which the recession would lead to X% (20%?, 25%?) unemployment under the sheer momentum of the object.  After all, in physics, the body keeps moving at a constant rate unless another force acts upon it.

Whenever the economic stagnation is juxtaposed against repeated "stimuli"--attempts at defibrillating the economy--that have contributed to a deficit that dwarfs Bush's record-breaking expenses on bailouts and war, the left-wing narrative is JUST THINK HOW BAD IT WOULD HAVE BEEN IF THERE WERE NO STIMULUS.  This is exemplified by Andrew Sullivan's typical description: "It put a bottom under the free fall."

From well before the 1700s even into the 1910s, doctors swore by bloodletting.  The theory was simple enough, but doctors would have told you that much more important than the enviable simplicity of the theory was the fact that they had seen it work over and over again in actual practice.  We now know that patients pulled through in spite of bloodletting rather than because of it.  But then, if a patient had died without the treatment, a doctor would have opined that the sufferer may well have had a fighting chance if only some blood had been let.  If a patient's recovery was slow after bloodletting, a doctor would not have suspected that the recovery might have been faster without treatment. (Just think how much worse off he'd have been if we hadn't let out his blood!) And if a patient had died, they naturally would never have suspected  that the patient might have pulled through without the treatment; the patient was obviously a goner anyway--the doctor can only do so much.

As with bloodletting, all we can (allegedly) say about the slowest recovery in several generations is My God, we would have had the Great Depression Part II if we hadn't poured money into this problem! since it is absolutely unthinkable that the interventions are part of the problem rather than a fairly effective treatment "considering how bad the patient was to begin with."

Sullivan has argued that the analytical model for predicting maximum unemployment would have worked if the Obama team would have only correctly measured what was actually happening in the economy, which seems to me rather like saying that we could have predicted how soon the suicidal jumper would hit the ground if we had realized just how fast he was falling.  It implies they didn't know what would happen because they didn't truly understand the effects of the economic forces at work in the recession.

Sullivan writes that many economists in both public and private sectors agreed with the failed analysis.  One might well say that there were and are economists that fundamentally disagreed with the analysis as well (as not all economists worship at the Keynesian altar with Paul Krugman), and would dispute that only Obama's explanatory framework (with the correct economic shrinkage plugged in this time!) explains the observations. And some might well dispute that Sullivan's "entirely empirical" observations are the only relevant observations for understanding what happened.  I'm fairly certain the Nobel prize-winning economist Milton Friedman would have taken some issue with it.  Some might even bring some criticism to the accuracy of these observations.  Those who read Sullivan's objective rant with satisfaction will probably be unfamiliar with these suggestions, as they probably have not looked for a second opinion.

One point on which many take issue with Bill Clinton's recent expression of the liberal trope that "no president ... could have repaired all the damage he found in just four years" is the recovery after Carter's malaise turned into a nasty recession with peak levels of unemployment in Reagan's first term.  As one commentator puts it, "The biggest bulge under the rhetorical rug is the remarkable, the historic, turnaround in the American economy that came to be known as the Reagan Recovery -- for within four years it had repaired the damage of the Carter Years, which was one heck of a lot."  And I think that many would take issue with the assertion that Reagan's situation was not comparable to Obama's.

Didn't the liberal commentators of the time cry out for government intervention?  Somehow, the freefalling economy found a bottom without Reagan providing it with one crafted by the government.  Whatever checked the momentum of that falling body, it wasn't the government.

The Wikipedia article on Bloodletting attributes the persistence of the bloodletting practice in spite of its lack of efficacy to an "underlying belief ... that it was better to give any treatment than nothing at all."  For many conservatives and libertarians, this seems to express much of what motivates the modern left-leaning voter.

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