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Op-ed Warriors Defend the Bailout

Mises Daily: Friday, October 08, 2010 by

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Confession time: I still read newspapers the old-fashioned way, meaning the way my father and grandfather did, on paper, frequently at the kitchen table, and to the smell of a hot, Honduran coffee.

I have various reasons for not yet giving in completely to the digital delivery of news. The paper I read, the Birmingham News, is a good though not great paper, and although my cost of delivery has increased during the Great Recession, I consider its coverage of the state to be indispensable for my work in the areas of teaching and research.

It also runs Pearls Before Swine, one of the funniest comics in print today.

Nonetheless, for the News to improve in this most competitive era ever in the history of newspapers, it will have to address its editorial page, which has narrowed its focus over the last decade to a select group of establishment-right and establishment-left mouthpieces. Balance, apparently, is reading progovernment views from both sides of the ideological spectrum.

Any changes in this regard would have to involve dropping Froma Harrop, the syndicated columnist who also serves on the editorial board of the Providence Journal. The Birmingham News editors must believe that Alabamians need to know what this Rhode Island Red thinks about the welfare state, if only to balance out Charles Krauthammer's' views on the warfare state.

Hint: they are both pro-state.

I have written about Harrop before on Mises.org, after she wrote a piece laughing at fathers who question the morality of using full-body scanners on their eight-year-old daughters in US airports. In HarropWorld, if the state wants to do something to you or your family, and if it defines its actions as being for your own good, then it is good. End of discussion.

One action the state has defined as good in this sense has been its massive stimulus of billions of dollars, created out of thin air, into the economy to counter a painful correction process. This is a difficult argument to make indeed, given the talk today of unemployment seemingly stuck near the 10 percent range, to say nothing of growing concerns about a double-dip recession.

But this is why Frau Harrop matters to establishment thinking. She defends the nonobvious in the same way a devoted state sycophant in 19th-century Europe would deny that his emperor isn't wearing any clothes. In her case, she trots out an argument that, despite today's difficulties, the economy would have been in much worse shape today had the government not intervened in the correction process with billions of stimulus dollars. She writes,

Had Washington not taken any aggressive steps starting in 2008, the results would have been horrific. … Real gross domestic product would have fallen a "stunning" 12 percent, rather than the actual decline of 4 percent. Nearly 17 million jobs would have vanished, twice as many as the real count. And the unemployment rate would have peaked at 16.5 percent.

Her justification for these figures? It is a paper published this past summer by economists Alan Blinder and Mark Zandi, who argue that Washington actually saved our economic hides.Download PDF

But any economist worth his or her salt who has read this paper would not want to bet the bank on its findings. For one thing, it presents only one simple model, which is scientifically unheard of when addressing something as complex as the US economy. Secondly, it doesn't even measure the effect of the stimulus on the macroeconomy. If you accept the single model (constructed by Zandi), you simply learn how the economy would have progressed today absent any interventions.

Third, the results of the simple model are, well, simplistic. In its first appendix, the authors indicate as much, by noting that interventions in market forces actually fed the crisis. They get no argument from me on that point. Bailing out Bear Sterns while letting Lehman fail, the two TARP votes, the incessant clamor about (nonexistent) systemic risk, and so on were all geared toward justifying bailing out Wall Street firms that found themselves on the wrong side of housing risk. Saving them fed into a climate of uncertainty that persists to this day.

But none of these factors were actually included in the model that Harrop so admires. If they were, we can assume that the results would not have endorsed Blinder and Zandi's preferred policy implications and would have, in fact, caused the results to lose statistical significance.

But we have seen efforts like this before, such as Blinder's New York Times op-ed extolling the economic benefits of a proposed Cash for Clunkers program (which I named "The 'I Hate the Poor' Act of 2009"). They serve a political purpose and then find their way down the memory hole. Meanwhile, no one seems to notice that the economic crisis ended with trillions of dollars of private debt being transferred to the public.

This is truly criminal, but Harrop, Blinder, and Zandi want the focus to be on how bad things could have been. Talk about blinders. I wish the Birmingham News wouldn't help them reach the light of day.

Now who took the comics page?