FDR Redux

I am as much a Hayekian on depression matters as anyone, but I question the assertion that "uncertainty" explains all that is happening right now. While this particular administration appears to have less than the usual understanding or respect for unintended consequences, it is not as if they are massacring the Cossacks right now. If anything, big business has been overly well-treated by this administration's insistence on bailing out all and only the corporatest of the corporatists.

The problem is the constant perceived need to inflate bubble after bubble, sometimes on what seems like a whim. So many parts of the economy are out of whack with where they should be it is amazing. Keynes cited "sticky wages" as the reason for government stimulus - but really, whose wages are sticky these days? Mine aren't. My company could announce across-the-board 10% cuts tomorrow and lose maybe 10% of its employees, but in the large part remain intact. We would not have much of a choice, and really in private concerns where there is some employee ownership sometimes a pay cut is not the worst thing.

The sticky wages are the government wages. Here in California we get side-by-side headlines of 12% unemployment and public employees complaining about having to forgo their annual 3% cost of living adjustment - the same public employees who earn far more than their private counterparts for less productive tasks. If anything is a good excuse for privatizing state functions during a recession, that must be it: private companies can hire, fire, and adjust wages far more nimbly. And no, it is not because they are cruel evil capitalists, it is because they are beholden to the laws of economics on a day-to-day basis.

The other alternative, which aside from punishing savings in favor of borrowing is relatively equivalent, is inflation. However, the inflation needs to be across-the-board. In this sense, the actions of the Fed buying its own debt then lending the cash to banks through the reserve banking system is probably the most equitable way to go about things. It injects money at the base. Sure, it makes some bankers disproportionately wealthy, but it also inflates the money supply from the bottom and limits ability of politics to dictate economics. Unfortunately, this mechanism seems to have fallen out of favor with the new administration, which prefers to administer the cash based purely on who paid for its election fund. The UAW wants a piece of GM? We can buy that! Swing states are hurting? Let's pour stimulus funds on them so they'll vote democrat in '12!

The big silver lining is that they have spent their political capital early, and set themselves up to have a very rough 2012. As of now, it looks like at least one house of Congress is going to turn Republican, which means my favorite type of federal government - deadlocked. Why is this bad for 2012? Stimulus funds run out in 2011, and if there are enough deficit hawks in one house to prevent a redux, then Obama can't pull a Roosevelt '36. By which I mean, of course, tanking the economy for 3 straight years by feeding special interests and killing golden gooses, then pouring stimulus money on the masses for 12 months leading up to reelection thanks to the illusion of sinking unemployment, only to run out of other people's money after the election and sink the economy even deeper for the next two years.