HOMEBLOGSThe False Alarm of 2008 Continues
18 February 2009

The False Alarm of 2008 Continues

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This is a Post from one of my best students ever: Casey Mulligan.

When Casey writes, people should listen and learn.

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Policy makers and political candidates told us at the end of September that the economy was in crisis and that we likely faced a second Great Depression. Yet the Bureau of Economic Analysis showed recently that so far this recession is mild by historical standards. Nevertheless, President Obama's fear-mongering continues.

The economic news headline on January 26, 2009 was that the annualized real G.D.P. growth rate was ‑3.8 percent in the fourth quarter. In plain English: adjusted for inflation, total spending in the United States economy was about one percent lower in October-December than it was July-September. (The fourth quarter performance would have to repeat itself three more times – for a full year – in order for real GDP to actually fall the 3.8 percent in the headline.)

None of us likes to see our purchasing power fall, but it helps to put the one percent drop in perspective. That drop was pretty similar to what happened during the 1990 recession. Real spending has so far done much better than the 1981-82 recession, when it fell three times as much. The Great Depression of the 1930s was far worse.

Another way to understand the headline: spending fell $120 per person.

Normally, a small G.D.P. change is not big news – but it is today, because political leaders of both parties have grossly exaggerated the economy’s problems. October 1 began the quarter, within just a few days of Bernanke’s and Paulson’s telling President Bush “if we don’t act boldly, Mr. President, we could be in a depression greater than the Great Depression.” Then presidential-candidate Barack Obama said that “the credit market is seized up and businesses, for instance, can’t get loans to meet payroll.”

These dire alarms were used to justify hastily giving Paulson the authority to spend $2300 per American to bail out banks. Yet they were speaking about an economy that so far has only dropped by $120 per person. Perhaps the economy has more to fall, but it doesn’t make sense to spend thousands of dollars in order to rescue a few hundred.

The economy is hard to predict, so the alarmists might be excused for thinking that this recession was much worse than previous ones. But the January 26th report finally showed us that so far this recession is a lot like 1990’s: not a happy time, but mild by the standards of previous recessions.

Nevertheless, Congressional Democrats and President Obama persist in sounding economic alarms to justify still more government spending. President Obama said Wednesday that the recession will become “a catastrophe” unless an economic stimulus bill soon becomes law. The proposal now is a stimulus plan costing almost $3000 per American.

Only a few people pointed out last year that chaos for the finance industry does not necessarily mean tragedy for the economy as a whole, so that bailouts and stimulus packages are worth far less than their price tag. Now we know: the economy as a whole continued to maintain high levels of production production and spending. Although the economy should be closely watched in 2009, taxpayers would be better served if their representatives would discern hype from real disaster, and thereby better protect taxpayer wallets from the alarmists.

Posted by Casey B. Mulligan

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INTRODUCTORY NOTE

Starting January 30, 2012, I decided to put the random (economic) thoughts that I was posting on Facebook, in a blog. In this site you will be able to read all Facebook notes going back to 2008, (without my Friend’s comments, unfortunately), but we will only maintain the new thoughts. If you want to check out the old comments, they are still posted on Facebook. If you want to comment on them, you have two options (1) Become a Facebook Subscriber. Since all the posts will also appear in Facebook, you will be able to comment there. (2) Comment on Twitter, as each post will also be announced in Twitter.

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