Obama's False Dichotomy in Approaching the Economic Troubles

So, you know, we can differ on some of the particulars, but again, the question I think that the American people are asking is, do you just want government to do nothing, or do you want it to do something? If you want it to do something, then we can have a conversation. But doing nothing -- that's not an option from my perspective. --President Obama

This refrain was repeated several times in President Obama’s primetime briefing yesterday: the contrast between doing something vs nothing. The implication is that monetary policy, fiscal stimulus, bailout packages we have had so far are nothing. He didn’t say what qualifies as something. I suspect for an approach to qualify as something it has to involve in borrowing close to a trillion dollars. We can debate what we’ll do with the money, but if you don’t agree with the concept of a huge stimulus “we’re probably not going to make much progress” in negotiating a plan.

I am a supporter of Obama and the Keynesian idea of using fiscal policy (i.e. borrowing money) to level out the peaks and valleys of the economic cycle. I have even argued for a fiscal policy board to use fiscal policy the same way the Federal Reserve uses monetary policy to stabilize the economy. My perception of this stimulus, however, is that it’s analogous to the health benefits of alcohol. Alcohol, in doses of one to two ounces of liquor a day in healthy adults, has health benefits that outweigh its health costs. It’s possible that there’s a special case where a doctor might instruct someone to take three to four ounces. (I have no idea if such a special case really exists.) I feel like we’re in that situation and making plans to load up on booze and debating what kind of drinks the "ethanol therapy program" will consist of. It’s hard to choose between brandy or scotch, but it’s not hard to find the will to have a drink. If the doctor instead recommended something less pleasant (prune juice, fresh vegetables, etc), I would probably ignore the advice for the most part. That’s what’s driving this stimulus package: 10% solid Keynesian economic theory and 90% desire to live beyond our means.

Living beyond our means got us here. We need to stop as soon as possible so future hiccups don’t turn into crises. For this fiscal stimulus to work in the long-run, it needs to be followed by a debt payoff package to slow down the economy and improve our debt-to GDP-ratio.