Spending $700 billion (which is really $2.5 trillion since you are borrowing the money) to stop a recession—no worse that what we saw in 1990-91 (one quarter of -3 percent growth and one quarter of -2 percent growth) or even 2001 (one quarter of -1.4 percent growth)—seems nutsy. If they want to get this thing passed, Paulson and Bernanke better be more explicit about the risks. ~James Pethokoukis
As others have noted, two days before he wrote the quote above Pethokoukis was issuing dire warnings of 20-30% unemployment and $30 trillion dollar losses unless everyone got with the program. “It’s time for shock and awe,” he said. He was especially annoyed with those “MellonHeads,” as he had called them, who argued against the bailout. But, as I suspected, the alarmists seem to be wildly wrong in what they are saying will happen. At the very least, there is a much more plausible-sounding projection that sounds very unpleasant, but is far short of catastrophic. The figures from the quote above come from the forecast of Global Insight:
Although the U.S. financial crisis is bringing sweeping changes to Wall Street, parallels to the Great Depression are overblown. The U.S. economy is far more resilient today, thanks to income support policies, federal deposit insurance to prevent banking panics, and flexible exchange rates. From 1929 to 1933, real GDP contracted 27%, prices fell 25%, and the unemployment rate climbed from 3% to about 25%. Even in our pessimistic alternative forecast, the peak-to-trough decline in real GDP is just 1.5% and the unemployment rate peaks below 7.5%.
Let’s understand that this would be a sharp and nasty recession, and at the time it will seem small consolation that unemployment has gone up to “just” 7.5, especially if you are one of the people affected by job losses. In the last week, pro-bailout advocates have frequently chided critics for wanting to cut off our collective nose to spite our face, but if Global Insight’s forecast of what will happen if Congress takes no action is correct it is the proponents of the bailout who will probably be doing more long-term harm than good if they get their way. That doesn’t mean that absolutely nothing should be done. It does mean that the bailout simply doesn’t make sense. Besides being overwhelmingly unpopular, and thus politically radioactive to anyone who supports it, the bailout is probably overkill, an excessive response to an excessively-hyped danger.
Something that I have noticed over the last decade or so is the insistence, usually but not always by Boomers, that such-and-such a crisis or threat is the greatest we have ever faced. Put it down to generational self-absorption or self-importance, or put it down to wanting to outdo the experience of their parents, but at several points in the last decade there have been hysterical reactions on both sides of the political spectrum to events that some large part of the population deems the greatest, most important or worst thing to have ever happened. The threat of jihadism, we have been regularly told, is greater than any threat we have faced before, which is objectively absurd. Some of the more excitable antiwar activists have repeatedly said that the war in Iraq is the greatest blunder in U.S. history (not so–entry into WWI was), as if to invest the conflict and opposition to it with a kind of world-historical importance that it will remarkably probably not have in retrospect. As with opposing jihadism without hysterics, it is possible to oppose the war and recognize it as deeply wrong without these theatrics. Now we are in the midst of a financial crisis, and it is very serious, but it is as if one cannot recognize something to be serious and very worrisome without engaging in neocon-like hyperbole. If there is a danger of economic contraction, it can’t just be like any old recession. No, it must be a second Depression, and if you don’t accept this fearmongering you are not to be taken seriously. When people are trying to scare you like this, it is because they are covering over some weakness in their argument. They make it seem as if they are trying to get you to focus on real dangers, but they are more often distracting you from their abuses or errors.
As with the debate concerning the response to terrorism, there is a tendency to want to break down the debate along exceedingly simplistic lines: either you understand how serious the problems are, or you don’t, and even if you do there can be no disagreement about how to respond to the situation. If you are not on board with every illegal and unconstitutional act of the government to fight terrorists, you “do not understand the threat we face,” and now if you are not on board with one of the largest expansions of the state into the economy in history you simply don’t get how bad things are. The goal of this framing is always the same: to intimidate and frighten dissenters, increase the power of the state and erode the last remnants of free society in the name of security.
Free people accept a certain degree of insecurity and uncertainty in order to remain free. This conflicts with ideals of comfort and convenience, as it always has done, but if there is one lesson that we all ought to be learning from this crisis it is the very simple truth that we cannot have it all. There are always trade-offs, and to have the degree of comfort and security pro-bailout advocates consider essential we have to trade far too much freedom and cede far too much power. Given enough time to reflect on the matter, it becomes clear that this is the fundamental question, and we know what the answer should be. That is why there has been such an effort to rush the decision and keep people from thinking about it, because without the sense of urgency and the fear it inspires it seems unlikely that such a terrible idea would be given a hearing.