Let them eat cake

Free Exchange at the Economist: The End of Consumption

Of all the arguments in favour of a large stimulus package, the need to put a floor under this seems to be the most important. It would be nice if the American economy didn't rely so heavily on consumer spending, but it does. Reducing the importance of such spending over the course of a decade would be healthy; doing it over the course of a few months will be disastrous. These numbers will correspond directly with additional job losses in the retail sector, leading to reduced spending, and so on. And falling import prices indicate that we can't expect foreign consumers to lead recovery. The recession is global in nature.

During the financial crisis saga, there were voices that bemoaned growing government intervention over time, and of course, the $700 billion bail-out remains unpopular. But there is a strong case that the timidity of the initial response fueled the need for subsequent interventions. As many economists noted, the purchase of troubled assets might have worked if done at the time when the troubled assets were the primary problem. But by the time that solution was proposed by Hank Paulson, the crisis had grown much larger—a cycle of deleveraging threatened the solvency of a number of major financial institutions. And then, the government might have quickly nationalised struggling banks, but didn't. Instead, Mr Paulson chose middling equity injections that have kept some of the larger banks in zombie territory. And they continue to return to haunt policymakers.

The point is that bold action in the short run can forestall more significant and unpalatable interventions down the road. Massive stimulus may not look very appealing at the moment, but if nothing is done and all the pro-cyclical feedbacks now unwinding continue, then the proposals that emerge with unemployment at 12% will be much more drastic and heavy-handed. And that is something that people of all ideological inclinations should hope we can avoid.