Sunday, April 13, 2008

Stiglitz and the Charmin Prescription

Nobel Prize winner, Joseph Stiglitz was on CNBC this past week offering his views of the current economic situation. Stiglitz is calling for a further 10-20% decline in house prices and the worst recession since the Great Depression. No argument here. He does a nice job of explaining why this recession is not your typical run-of-the-mill downturn.

Where I take issue with him is on his policy prescriptions. He (like most) is calling for a "more effective stimulus package - bigger, better design..." More specifically, he'd like to see an expansion of unemployment insurance because he feels it offers the biggest bang for the buck in terms of the stimulus you get per dollar of spending and because "it's a lack of jobs, not a lack of searching for jobs that's the problem."

He then brings up the issue of budget stress that states and municipalities will be undergoing as their balanced budget requirements require them to reduce their spending as their revenue (think property taxes, capital gains taxes, income taxes, sales taxes) falls. This is an important issue which hasn't received much attention - yet. However, he then goes on to say, "We need to have a program to stop this downturn by supplementing the income, making up for the loss of revenue. It wasn't their fault. It's the fault of macroeconomic management at the federal level."

So basically Stiglitz (like virtually all of the other pundits) just wants to bail everyone out. If you lost your job and you couldn't find a new one (or weren't willing to take a step down in pay or prestige) in 26 weeks, no problem. We'll just keep cutting you a check. Is your state struggling because current tax revenue can't support the expansion in services it approved over the past 5 years? Don't bother raising taxes or even contemplate cutting spending. We'll just cut you a check. Calm down. No need to worry about being fiscally conservative. We'll be cutting you a check. And for you states who've been the most fiscally irresponsible we'll be sending you the biggest checks of all!

Of course, the "we" is the federal government which is you and me and all of our other fellow taxpayers in this country. And, I suppose that we should consider the fact that
the we don't have the money laying around to do these things, so we would have to borrow billions on top of our already staggering debt load. And I suppose we should be concerned that increasing our borrowing from our already unsustainable level is ultimately going to cost us in terms of a weaker dollar, rising inflation, higher taxes, smaller future entitlement benefits, and/or rising interest rates. And maybe we should think about the implications for moral hazard if we keep collectively wiping this country's hindquarters every time its bowels get a little shaky.

Nah. We'll just cut a check.