At a gathering last night of intelligent young conservatives, I was defending the point that the TARP and some kind of fiscal stimulus had been absolutely essential last year – that otherwise the world economy might have plunged into Depression – and that conservative organizations like the Heritage were right and courageous to have supported the Obama administration’s actions at the time. We can criticize some of the details of those actions, especially some of the payoffs to Democratic interest groups embedded in the stimulus and the budget for the second half of 2009. But as an AEI colleague of mine put it, in those critical hours it was more important to be fast than to be smart. And it’s not like the GOP does not sometimes deliver payoffs to our interest groups too.
This defense met some resistance. The dominant view in the conservative world rejects the decisions of last year, and even questions whether conditions were really so very dangerous after all.
One attendee said something very thought-provoking. “Maybe it was a good thing we weren’t in power then – because our principles don’t allow us to respond to a crisis like this.”
My answer: If your principles don’t allow you to save your country when it needs to be be saved, then there’s something wrong with those principles.
John Guardiano offers an idea above about how conservatives might respond to today’s crisis. I don’t share his point of view exactly … given the extremity of the country’s fiscal challenges, I see no responsible way to sustain a defense budget over 4% of GDP. If that means winding up Iraq, Iraq is going to have to be wound up. If that means ending the Afghan surge by January 2011, the Afghan surge will have to end in January 2011.
What is clear to me is this:
* The world financial system nearly collapsed in September-October. It had to be saved. TARP was messy, TARP rescued a lot of people who didn’t deserve rescuing, but TARP was indispensable. We’ve lived through a 1929-31 type experience, but without TARP we might have rediscovered the horrible difference between a 1929-31 style severe recession, and a 1932-33 style economic collapse.
* Monetary policy had done all it could do for the US economy by January 2009. Fiscal stimulus was needed. I’d have preferred a payroll tax holiday to the spending measures put in place by the Obama administration, but I prefer those spending measures to doing nothing. Those spending measures, including cash for clunkers, cushioned the fall of the US economy in the second quarter of 2009, and they reduced the rate of decline to almost zero in the third quarter. They offered real (if expensive and inefficient) help when help was needed.
* The indications are that employment recovery will be slow and painful. (See the ominous words of San Francisco Federal Reserve board president Janet Yellen here: “The strength and durability of the expansion is in question. … The danger is that demand may grow at too anemic a pace to support vigorous expansion.” Republicans must – MUST – offer answers to this predicament, and our usual inventory of policies will not suffice. A capital gains tax cut will do little at a time when almost all investors are looking at huge accumulated capital losses.
* The Obama administration’s most serious economic policy failure has been its inability to devise a policy to remove the bad debts from the books of financial institutions and get them lending again. Let’s criticize them for that! But our criticism will only have bite if we have an alternative remedy to offer. How can we do that if any attempt to address the problem elicits only angry cries of “No bail outs!”
* There’s a big difference between addressing a systemic financial crisis and rescuing individual non-financial companies struggling with chronic economic failure of their own making. Condemnation of the GM and Chrysler bailout is a valid and useful bright line to separate Republicans from Democrats.
* No responsible governor could have refused the federal money on offer in 2009. States must balance their budgets. In the span of 12 months, tax revenues collapsed for most states: by 11.5% for example in Florida. What was Gov. Crist supposed to do about that? Chop state spending by 11.5% on six weeks’ notice? And what effect would it have on the nation’s economy if big states were laying off teachers, halting all road maintenance, and closing hospitals? If we make refusal of stimulus funds a litmus test of political acceptability, no sitting governor who cared about his or her job would be eligible for a Republican nomination for anything. We’d be left only with the governors who had physically or mentally checked out of their jobs: the Sarah Palins and the Mark Sanfords.