Micro Versus Macro

It's not easy to hold fast to your free market economic principles these days. The Democrats are trying to out demagogue each other on the horrible state of the economy and how the only answer to our woes is government, government, and yes MORE government. Most of the Republican candidates aren't much better. From the populism of Hucakabee to the corporatism of Romney, there's not a lot for a free marketeer to get excited about.

Then there's the various stimulus plans. On a policy level, they are all variations on the theme of "feeling good while accomplishing little." As Alan Reynolds explains in today's Journal (free for all):

All proposals for fiscal stimulus claim to "jump-start" the economy by having the government borrow money from Smith and give it to Jones.

Unfortunately, Smith is paid interest on that IOU, which implies a higher tax burden on somebody. That future taxpayer is, as usual, the forgotten man. All the attention is instead focused on Jones -- trying to get the Jones family to spend more on what Mr. Bush alluded to as "basic necessities."

Investors know such consumer staples are the least cyclical component of the economy. The most recession-prone household purchases are those that can most easily be postponed, such as new homes, cars, appliances and furniture. Increasing the generosity of unemployment benefits, home heating subsidies, and food stamps is no help to such cyclical industries.

An indiscriminate spurt in "aggregate demand" is essentially irrelevant to longer-term economic problems concentrated in particular industries and particular areas. Food stamps don't buy condos in Las Vegas or new cars from Detroit. Subsidies to lower-income households are also very difficult for Congress to take back and therefore unlikely to prove temporary.

Extending unemployment benefits "increases the average duration of unemployment by about two weeks," according to the Congressional Budget Office. That is certainly no stimulus. The resulting higher unemployment rate then provides an ironic rationale for more spending, which hurts rather than helps. Transfer payments discourage work. Federal purchases absorb real resources such as skilled labor, real estate and equipment that would otherwise be available at a lower cost to private business.

But on a personal level, I feel a bit like Krusty debating whether he should vote for Sideshow Bob:

Krusty: Well, he framed me for armed robbery, but man, I'm aching for that upper-class tax cut. [votes for Bob]

Well, I know the stimulus plans are a joke, but man, I'm aching for that $1600 tax rebate.

Same with today's interest rate cut by the Fed:

The Federal Reserve, confronted with a global stock sell-off fanned by increased fears of a recession, cut its target for the federal funds rate by three-quarters of a percentage point to 3.5%, the biggest single cut in interest rates since August 1982.

Given the weakness of the dollar and some other frightening signs that we're already slumping towards a Seventies style era of stagflation, a rate cut by the Fed is not what I would prefer from a policy perspective. But as someone who's been trying to sell a house in a soft market and hopefully purchase another one soon, lower interest rates sound pretty damn appealing right now.

It's a tough time to separate the politics from the personal.