The Long View 2009-02-07

The Long View 2009-02-07
Thomas Cole The Course of Empire: The Savage State 1836 Public Domain

This mention by John J. Reilly of his work for West Publishing Company spurred me to archive John's CV from his website. It is easy even for me to forget how many things John wrote in the 1990s. There are even a few pieces referenced in that CV that were not published on John's website, and are now likely hard to find.

John J. Reilly’s Curriculum Vitae
This is an archive of John J. Reilly’s CV from his website. I have preserved it as a testament to a life well-lived, and a marker to articles that John wrote that did not appear on his website, and because of that I do not have specific permission to re-print them.

On the Need for a Tranquilizer Bill

When I worked for the West Publishing Company in the 1980s, we would get huge continuing-resolution bills to classify, immense pieces of legislation running to over a thousand pages. For several years, the Democratic Congress and the Reagan Administration could not agree on ordinary budgets passed on an ordinary schedule. Instead, they kept the government running with dozens of these special bills, usually passed at the last moment before the federal government's checks would start to bounce. The bulk of the money they allocated was for a few major items, of course, but the text was dense with appropriations for special projects, some of them quite tiny. The editors' job was to go through these monstrosities and find any items that would have some effect for two years or more. Those were worth putting into the United States Code, which West had the contract to compile under the supervision of a congressional office.

This was a god-awful way to run a government, or indeed any continuing institution. But let us not digress.

I can't say that I have read the stimulus bill that the Senate apparently agreed to last night. I have, however, gone through the original House version (again, in the interests of legal editing). I did not find it as ridiculous as those Reagan-era continuing resolutions, though much of it did consist of items that raised the question, "Why are we talking about that now?" The version in the Senate seems to have been streamlined in detail And the total expenditure, though I believe it's still the biggest spending bill in human history.

I would not quarrel with Peggy Noonan's characterization of the behavior of the two parties in this affair:

The national conversation on the economy is frozen, and has been for a while. Republicans say tax cuts, tax cuts, tax cuts. Democrats say spend, new programs, more money. You can't spend enough for the Democratic base, or cut taxes enough for the Republican. But in a time when all the grown-ups of America know spending is going to bankrupt us and tax cuts without spending cuts is more of the medicine that's killing us, the same old arguments, which sound less like arguments than compulsive tics, only add to the public sense that no one is in charge.

President Obama does not know what he is doing, either, but he does have the air of someone who is trying to figure it out. This is all we can reasonably ask of anyone in his position. As for the Republicans, their strategy regarding the stimulus bill was a masterpiece of plausible deniability. If the economy perceptibly worsens after it's passage, then it was not their fault, since hardly any of them voted for it. If the economy improves, then the bill that finally passed was vastly improved with their input, and in any case became law only because some Republicans voted for it.

Very clever, but it's a bad idea to be clever this way in public, especially when people are paying attention.

The final bill will no doubt keep local government running in many places; it will also maintain demand through support of the public sector. It will help to stop things from getting worse. As for making things better, however, it seems to me that the concept of "stimulus" is inapposite in the current historical context. The problem is that the economy is stimulated. It has been mercilessly stimulated by low interest rates, tax cuts, and deficit spending (sometimes serially and sometimes all at once) since at least the Asian currency collapse during the Clinton Administration. Markets are supposed to be media for transferring information in the form of prices. In the last ten years, however, so much money that isn't "about" anything has been forced through the system that the fuses blew.

This is not your average recession. Actually, it's not even a recession at all, in the sense of a historically familiar inflection of the business cycle. It's a technology failure. I have always recoiled at the use of the term "technology" to refer to anything but hardware. I have been particularly annoyed by the way that intellectual property laws now treat financial algorithms like patentable gadgets. Nonetheless, the behavior of the financial system in recent months was a essentially a design failure. Twenty-five years of financial models turned out not to work. The enterprises that grew up to make use of them, and particularly the housing industry, are in many respects morbid; we should not want them to revive, not in their former state. We particularly don't want to "revive" the housing market. We want to anaesthetise it like The Blob in the various movie remarks of that names and carefully dispose of all the pieces. Home ownership can be wonderful, but there is no shame in renting.

In a way, what we are seeing now is what the Y2K bug would have been like if it had been more than a scam of the Cosmic League of Meretricious IT Consultants. Why yes, the thieving geeks would say, your software seems to have no trouble managing the change in the century number, but what about cascading effects from unknown external systems? Only we can protect you against those. Today's financial system is the result of the same scam, in mirror image. The Y2K gurus saw danger perceptible only to experts like themselves; the hedge-fund mathematicians saw safety perceptible only to themselves. Indeed, now that I think about it: how many of the dot-com wizards went on to work in the financial industry? Somewhere a prosecutor should be looking into this. But let us not digress.

The moral of this story is that stimulation beyond the support of ordinary demand, either through spending or tax cuts, will not have good effects. Markets don't need more capital that is "about" nothing; that would simply blow more bubbles. The motto of an effective reform would be: "Risk must stay with revenue."

Copyright © 2009 by John J. Reilly

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