Ben Stein: What if a Slowdown is a never-ending story

This is a bit surprising article by a commentator who is usually more right wing than this! Stein is recommending a very large stimulus package. This is quite likely what Obama will bring. It remains to be seen how well it will work.

NY Times Business Section, November 23, 2008Everybody's BusinessWhat if a Slowdown Is a Never-Ending Story?By BEN STEIN
I AM endlessly charmed by chatter about when this slowdown/recession will end. Will it be late 2009? Maybe early 2010? Just a few days ago, a man stopped me at a party and asked: "Are we in the fifth inning? The fourth inning?"I am charmed by these comments and questions because they assume a fact not in evidence: that the slowdown/correction/recession will end within a short time — or even within a measurable time.But this does not look like a typical recession. A typical recession is brought on by Federal Reserve tightening in the face of excessive demand and rising prices. The economy still functions normally, but purposeful credit tightening slows activity. When the Fed loosens up and money starts flowing, demand increases and growth returns. This, at least, is the pattern of the large recessions we have had since the Great Depression, which was a special case, as we shall see.Smaller recessions have been brought on simply by the inventory-business cycle, but they, too, were amenable to Fed stimulus.That was because normal credit mechanisms were working.This time it's different. Or, because that is a dangerous phrase, let me say that maybe this time it's different.The problem now, as in 1929 to 1940, is that the economy is not functioning normally. It is shot through and through with fear, even terror. Worse yet, and unlike the situation in the Depression, government miscues have been only a part of the problem. This fear is so pervasive that it has brought the credit sector to a virtual shutdown, even to borrowers with good credit. At this point, the lending sector is so panicked —largely from the government's inconsistent behavior and failure to rescue Lehman Brothers — that it is frozen. Not totally, but way too much for ease of lending and maybe even for the survival of a robust economy. And if a colossal worldwide deleveraging spreads to Treasury debt owned by foreigners, the situation will be deadly serious.The unemployment rate is rising. Housing is in collapse. Manufacturing is weak. The unionized auto sector is dying before our eyes. Commodities are falling hard and fast.In this situation, the nation faces a real peril: we could reach a state of long-term equilibrium — as economists say — well below full employment. This condition had been thought by classical economists to be impossible to reach. But the Depression taught us that if there is enough fear in the economy, lenders will not lend and economic activity will continue indefinitely at a level consistent with serious recession or even depression.This was John Maynard Keynes's great contribution to economic understanding, and it's a big one. Of course, it is contested, as all macroeconomics is, and it may not be the full explanation, but we know from observation that an industrial economy can run well below capacity for a long time.We should be terrified by this prospect. It would mean real suffering for tens of millions of people in America — maybe billions worldwide.In this situation, where fear rules, we must turn to the federal government for relief. The private sector is the patient, not the doctor. Solvency guarantees for banks that lend are a must. No more Lehmans can be allowed to happen. A truly serious stimulus package is very much in order. It has to be big enough and last long enough that Americans do not just sock it away under the mattress. We cannot nickel-and-dime our way out of this. The inflation threat is small in an economy in full credit-collapse mode. There is virtually no dose of stimulus that is too much in an economy as shellshocked as today's.Closely related is the question of the Big Three automakers. To let them fail or go through bankruptcy would be a mistake horrifyingly similar to allowing Lehman to fail, and in some ways worse. It would kick the economy to the curb, increase the dose of fear running through the nation's bloodstream, frighten consumers from buying, choke lending, and tend to keep the economy from returning to full employment.I understand well the arguments against rescuing Detroit, as I have often said. But I also understand that if you have a wayward child who's hit by a falling tree, you don't stop to lecture her about her wayward ways. You get her to the hospital right away.Once we have a Treasury secretary who gets this, once we enact a stimulus package that is big enough and long-lasting enough to do the job, perhaps with Treasury rebates for buying cars, trucks, refrigerators and toasters, we can be strict with Detroit. But to add hundreds of thousands of workers from the auto sector to the jobless ranks would be suicidal during these times.We must remember that economies don't always revive automatically. And the credit crisis, the deleveraging crisis and the Treasury gaffes are more than enough to keep the economy weak. To add to the patient's woes by allowing a vital organ to fail — in this case, the auto industry — is just plain foolish.This whole thing is not guaranteed to end in smiles. But we can stop pretending that it will get better no matter what mistakes we make in policy. Saving the automakers is a step out of the darkness. Or, I might say, allowing them to die is a step toward a terrifying dusk._______________________________________________