Induced Panic

John Stossel takes politicians and “experts” to task for exaggerating the extent of the current crisis. He observes:

But people are losing their jobs! President Obama frets that “the unemployment rate could reach double digits.” Yes, that would be bad, but in the recession of ’82, it reached 10.8 percent. Yet no one even remembers the “crisis” of ’82. Today’s 7.2 percent unemployment rate is higher than we’ve grown used to, but we’ve experienced that rate 16 times over the past 35 years. And it pales in comparison to the 25 percent rate of the Depression era.

That self-induced panic spurs government decision-makers to undertake a flurry of activity, not knowing whether they are making matters worse or better. He writes:

What if the government had cut loose GM, Citigroup, and the others, forcing them to do what businesses do in hard times: renegotiate with creditors and revalue assets? Wouldn’t prices have found a more solid floor? We’ll never know. But today the CEOs of those companies would be suckers to drastically revalue assets or sell off a cherished part of the company. If they did that, and then Congress showered their industry with money, they would have cheated their shareholders. Better wait to see what the politicians will do. And so government programs frighten private investors away from making the tough decisions that would start them on the path to real recovery.

Of course some of those companies would fail, and suddenly letting that happen is a political no-no. When the automakers came to Washington to beg, Nancy Pelosi said, “We reject those advocating bankruptcy.” Why? Bankruptcy can be a good thing. Kmart declared bankruptcy in 2002, but it didn’t disappear. Filing for bankruptcy allowed the company to reorganize itself and reemerge stronger.

George W. Bush told CNN, “I’ve abandoned free-market principles to save the free-market system.” Why did Bush and Pelosi think they knew how to run the economy? F.A. Hayek famously termed this the “fatal conceit”–governments can’t possibly know everything that’s going on in an economy, and so while government intervention may delay some economic pain, it cannot stop it.

Part of the difficulty here is that fiscal conservatives lost control of the narrative. The “it was the fault of greedy Wall Street bankers” storyline persisted while the government policies which induced much of the damage (e.g. excess liquidity from the Fed, affordable housing legislation, Freddie Mac and Fannie Mae’s subprime mortgage frenzy) were largely ignored. The fault lies not just with the media or Democratic politicians, who all seized on the crisis to push their anti-free market visions, but with the Republican presidential candidate who largely adopted his opponent’s diagnosis of the problem. (And that is not to say that financial wizards weren’t responsible for a large portion of the damage — only that government officials were no wiser.)

So the citizenry has come away convinced not only that things are horrible, but that government is the source of untapped wisdom that can steady the ship. To some degree Democrats have an ace in the hole: the business cycle eventually pushes us along, and we will recover within a reasonable period of time. So all of the frenzied political activity will then be cited in retrospect as the cause of the recovery, leaving unanswered questions about whether we could have recovered just as quickly without running up the debt, creating new avenues for corruption, and burdening taxpayers with a raft for failing firms.

Certainly the public is not in the mood to hear a “less is more” message. And Republicans are reduced to fiddling with the stimulus bill at the margins. The only silver lining for fiscal conservatives: the public is about to see how corrupt, ineffective and antagonistic toward wealth creation the federal government can be.