Bad Politics

As I’ve written several times before, I don’t believe that the various federal government stimulus efforts did anything to help the economy.  In fact, they’ve done quite a lot of economic damage by distorting a more efficient allocation of capital and by encouraging the moral hazard where private actors who take unreasonable and large risks get to keep the profits if their bet works and get bailed out by taxpayers if it doesn’t

However, plenty of smart people, including a whole lot of folks at market-oriented think tanks, thought large-scale federal intervention in the economy was necessary to stave off an economic collapse. 

Whatever you think of the economic merits of federal stimulus efforts, one thing is very clear — giant federal stimulus efforts were bad politics for President Obama.  It may have made some political sense for an outgoing President Bush to do whatever he could to avoid being cast as the next Herbert Hoover.  But Obama’s political interests should have been different.  He entered office in the midst of a severe economic downturn that had started under his predecessor.  If he had followed the smart political example of Ronald Reagan he would have basically let the downturn run its course and then have rapid economic growth following.  Instead, Obama (and Bush’s) stimulus efforts essentially borrowed consumption from the recovery to soften the severity of the downturn.  The downturn may not have been as bad as it would have been, but the recovery is also much weaker than it would have been.

Reagan’s example may or may not be good policy, but it is certainly good politics.  As any student of Machiavelli learns, you should have all of the bad at the beginning and then let the benefits roll in over time.

3 Responses to Bad Politics

  1. Jonathan says:

    Heartily agree. Well said.

  2. Greg Forster says:

    Did “a whole lot of folks at market oriented think tanks” endorse the *stimulus*, as distinct from TARP and other bailout programs?

    Because whether or not you think those other programs were bad policy, I don’t think they were anywhere near as damaging politically as the stimulus. In fact, I think if there had been no stimulus the bailouts would have generated little blowback, because it was the stimulus that really drove the public narrative that the administration was just blowing a bunch of money to no good purpose.

  3. It’s true that a bunch of free-market think tank people supported TARP but opposed Obama’s stimulus package. It’s not clear whether that is because they are substantively different in how the government attempted to intervene in the economy or because the administration had changed. Whichever government effort people supported for whatever reason, my point is just that it has hurt Obama politically to soften the downturn at the expense of the upturn.

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