Network News

X My Profile
View More Activity

A Prescription for a Crippling Recession

I'm not quite prepared to say that John Tamny's column on "the Flip Side of Failure" is the worst piece I've read since the onset of the recession, but it's arguably the most overblown.

Tamny's thesis is pretty simple. Another way of looking at a devastating recession is that it represents "assets falling into the hands of those who can either afford them, or who possess a stated objective to use them more wisely. In short, the flipside of failure is opportunity." And Tamny, to his credit, gives examples. Buffalo Wild Wings, for instance, which has taken over eight restaurants formerly owned by the Don Pablo's chain. And Panera Bread Co., which is moving into some of the buildings previously inhabited by the now-shuttered Bennigan's. This seems, to me, like a fundamentally sad macroeconomic story: A lot of jobs were lost and a couple of jobs were gained. This is like taking consolation because you won $50 at slots even as you lost several thousand in Vegas. But Tamny is more enthused. "The failure of certain chains and restaurants has created opportunities for other eating establishments to expand," he writes.

He also quotes a Los Angeles Times article tracking a couple of different experiences in the housing market. In one, an older man lost his job due to a heart problem, and that, plus legal costs incurred by a wayward son, led him to lose his house. But wait! On the flip side of that guy's heart-trouble-related "failure" are Hilary and Mark, newlyweds who never thought they'd be able to afford a house in Los Angeles. Squeal!

Elsewhere, a Chinese company purchased the Hummer brand. "It would be impossible to calculate," writes Tamny, "but it's likely that the creation of the Hummer brand (and the factories necessary to build it) from scratch would have cost many multiples of the $500 million that Sichuan paid GM for Hummer."

For all that, the article would be an innocuous enough tour through the recession's thin silver lining if not for its conclusion:

[T]hese stories do remind us that just as the human body frequently heals itself during times of illness, the economy is ultimately comprised of self-interested individuals who, if left alone, will work in order to improve their individual financial situations.

In that sense, the answer to our sagging economy today is not more government intervention, but instead a humble federal government that will sit back and let the economy heal itself. The flipside of economic failure is economic opportunity, and it's time for Washington to get out of the way so that individuals can turn misfortune into opportunity.

That's quite a conclusion based off five anecdotal examples. Indeed, as a macroeconomic prediction, it's not even clear what it means. What would a "humble federal government" do, exactly? Shut down the stimulus projects so a couple million more people end up unemployed and a couple million other people can buy their possessions at fire sale prices? Shut down the system of financial supports which are currently sustaining a weakened lending market? Should they have held back from Detroit's collapse so that the assets of the various companies were simply liquidated, along with what was left of the Rust Belt's economy? Should they cut off economic aid to the states so infrastructure literally crumbles? I want specifics!

The idea that government should get out of the way because Panera has taken over eight of Bennigan's former locations beggars belief. At the end of the day, it will be a resuscitation of household spending and business expansion that restarts our economic growth. But for now, both have fallen through the floor, with terrible consequences for both individuals and businesses. What little demand exists is being substantially kept afloat by the massive intervention of the federal government. At this moment, federal spending does not exist in competition with household spending. It's one of the last forces sustaining it. Indeed, the idea that the economy will heal itself if the government only steps out of the way is exactly the thinking that led to the deep recession of 1937. What a pity those lessons haven't been better learned.

By Ezra Klein  |  June 15, 2009; 4:51 PM ET
Categories:  Economic Policy  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati   Google Buzz   Previous: Primary Documents: Obama Speaks to the American Medical Association
Next: What We Miss When We Talk About Taxing Health Insurance

Comments

Uh, could you run that by me again with some numbers. I'm talking about the claim that "What little demand exists is being substantially kept afloat by the massive intervention of the federal government." Last time I checked most of the stimulus was unspent and the economy had declined a couple of percent on an annualized basis. I think that might leave some demand in a $14 trillion economy.

Seems like in your haste to nail Tamny you've gone a little hyperbolic.

Posted by: TomLindmark | June 15, 2009 5:12 PM | Report abuse

Similar to Mark and Hillary, my wife and I bought a house that we probably wouldn't have been able to afford had the sellers not been going through a divorce.

So that's a long way of saying that I'm available on background when Tamny wants to write a "The Flip Side of Divorce" article.

Posted by: JEinATL | June 15, 2009 5:17 PM | Report abuse

Love the conclusion of his article.

There is no doubt that unbridled, unrestrained capitalism works; that it creates opportunities. The problem is: IT IS REALLY PAINFUL.

But congrats to JEinATL on your house.

And to TomL...you are correct about the fiscal stimulus but you are forgetting about the quantative easing (monetary policy) we have undertaken.

Posted by: scott1959 | June 15, 2009 5:25 PM | Report abuse

Liquidate, liquidate, liquidate!

Posted by: eRobin1 | June 15, 2009 5:25 PM | Report abuse

The stimulus isn't, at this point, the primary piece of the federal intervention. TARP, the federal reserve's new balance sheet, the new lending programs, and all the other pieces of the financial intervention have been a massive success in that they've succeeded in helping us avoid a total meltdown and instead fall into a more manageable, but still quite painful, slump.

Our entire banking system, in other words, is being kept alive and subsidized by both direct infusions of federal money and the implicit guarantees that the feds will protect against collapse. And without a banking system, how much demand do you think there'd be?

Posted by: Ezra Klein | June 15, 2009 5:38 PM | Report abuse

Ezra....I thought I said that, albeit far less eloquently and with far fewer words :-)

Posted by: scott1959 | June 15, 2009 5:44 PM | Report abuse

Its also a case a rhetorical lag to pretend that the stimulus funds are not beginning to be spent. Roughly $250b per year of spending and likely $300b a year of stimulus impact may not be a majority of the present output/capacity gap, which is probably in the range of $1,000b annually ... but note that the first month that any appreciable amount had been disbursed was also the month that the previous free fall in employment started pulling out of free fall.

Posted by: BruceMcF | June 15, 2009 5:54 PM | Report abuse

Sounds like Tamny thinks we need to purge the rottenness out of the system.

Posted by: citizen62 | June 15, 2009 7:03 PM | Report abuse

sounds to me that Tamny wants to KEEP the rottenness in the system. That rottenness is the poorly reasoned belief that Darwinistic survival of the fittest is what has made America great, and that, if left unhindered by statism, also ensures clean markets. It doesn't of course, as we see in every financial collapse.

Survival of the fittest means that anarchy is subdued such that people can vote governments into power, as an expression of free will, in order to create and sustain the rule of law. Free markets left unfettered continuously attempt to circumvent the rule of law until countered by some form of policing.

The belief in the self-cleansing, invisibly handled economic market never seems to stretch itself to encompass the same dynamic working in the political sphere, but it should.

We're seeing that invisible hand of the social conscience at work now, as Ezra and others here illustrate: minimizing pain, aiming for the greater good, propping up the corrupt and greedy because they'll selfishly create too much damage in their fall if we don't. It's all free-market thinking.

Posted by: wapomadness | June 15, 2009 8:42 PM | Report abuse

Well it's rare to see the belief articulated so nakedly, but there's always been a sizable contingent of rich folk who can afford to be more annoyed by taxes and "socialism" than they are fearful of losing their jobs or homes.

Those people like recessions just fine, and they are the audience for articles what a great opportunity the recession is to buy some cheap stocks or perhaps hire a nanny.

Posted by: Aatos | June 15, 2009 10:14 PM | Report abuse

A deeper problem with the silver-lining theory is that a serious chunk of the assets created in the recent boom were exurban housing, malls, and big-box stores.

When the recovery gets underway, gasoline will likely return to or surpass its prices of last summer. And over the next decade or so, either gasoline will get a LOT more expensive, or the world economy will spend a lot of time in the doldrums. Either way, all that exurban construction will likely be of very little use in the long term. Sure, somebody may be able to buy it for cheap, but for what purpose? How are they going to make money off it?

Posted by: rt42 | June 16, 2009 9:31 AM | Report abuse

What all this people - Tamny, Megan McCardle, etc - seem to forget is that while it is fun to celebrate that economies are cyclical and life is constant change, humans beings need food, water and shelter every single day. And if they are to be productive, and help make everyone else rich, they need education, transportation and safety.

It's that simple. Policy needs to flow from that simple set of constant needs. Fail that, and you fail as a society. See Iraq, Colombia, Mexico, etc.

Posted by: Dollared | June 16, 2009 2:04 PM | Report abuse

If Tamny were educated, he might have something more substantive to say.

Posted by: RamuR | June 18, 2009 6:17 AM | Report abuse

The comments to this entry are closed.

 
 
RSS Feed
Subscribe to The Post

© 2010 The Washington Post Company