How the economists missed the biggest thing in their lives

"Why the heck did they not know?" is a common question at economic presentations these days. Today's guest blogger, Michael Graham, elaborates.

Recently, the Queen pointedly asked the brains of my alma mater, the London School of Economics, why they could not have foreseen the coming cataclysm. Weeks later Her Majesty received a lengthy reply that could have been best reduced to a simple “We don’t know”. On my latest trip to a deeply troubled Britain, I couldn’t help but notice an eye-catching headline in The Daily Telegraph. “The Fiscal Ruin of the Western World Beckons” was probably exaggerated. Nevertheless, there should be no doubt about the hole our world has dug itself into. Or the extent to which Mr. Volcker, now head of President Obama’s Economic Advisory Panel, and Ben Bernanke, the re-nominated Federal Reserve chairman, are going to have their work cut out for them. Everyone should want to wish them well.

Those free-market champions Ronald Reagan and Margaret Thatcher would certainly not approve of the bailouts, relief packages, loan guarantees and diverse other rescue measures provided financial institutions and auto manufacturers judged too big to be allowed to fail. The very successful “cash for clunkers” incentive only adds to what one critic has expressively likened to a bewildering alphabet soup.In the case of the U.S., estimated total government support now exceeds a staggering $10 trillion. That’s before the $1 trillion currently being proposed by the Obama Administration for healthcare. The pattern is similar in many other countries, most notably Britain. And also in Canada, which has swung dramatically into the red at both the national and provincial levels. Adam Smith, of Wealth of Nations fame and the father of modern-day free markets, would probably roll in his grave at the resulting interference with the invisible hand of his competitive world marketplace.

No doubt, government intervention on today’s scale must make it harder to keep participants in disciplinary line. As a result, daunting economic risks stand to become all the greater. Nevertheless, to quote Jeffrey Immelt, Chairman & CEO of General Electric, we have no choice but to accept that “the government has moved in next door and it ain’t leaving”.

There could be offsetting comfort in comedian Will Rogers’ homily that “the good thing about government is that we don’t get what we pay for”. But, like it or not, we have entered a prolonged government-private sector partnership of unknown consequences on a scale few would have ever imagined. It must be remembered, that government spending cannot prop up wounded economies indefinitely. Nor can pump-priming fiscal deficits be recipes for sustainable economic growth. Rising government debt also inhibits fiscal and central bank manoeuvrability. A trio like this can bring only short-term stimulus at best.

Web: grahamis.ca

Email: Michael@grahamis.ca