Recession may be less damaging without govt bailouts

The Business Times
Published November 19, 2008
Recession may be less damaging without govt bailouts
By KEVIN HASSETT

WHEN times are bad, you find out who you are. In some sense, economics is like sports. Sometimes you get slaughtered, but if you believe in yourself and keep fighting, you can win again.

A look at US history suggests that even during the worst US recessions, Americans have been able to turn things around. There were times when things looked so bleak that only a fool might have hoped for a brighter future. Eventually, that brighter future arrived.

Yes, a pessimist might say, but this time things are much worse. I am not so sure they have to be, provided we remember who we are.

Things are certainly bad. It looks like third-quarter gross domestic product growth will be revised deep into negative territory. The data in hand suggest that fourth-quarter GDP will drop at a rate of as much as 4 per cent.

The consensus of many forecasters is that this fourth quarter will be the worst in this recession, that the economy will begin inching away from the abyss next year. The latest read on the first quarter of 2009, for example, at Moody's Economy.com, is that the economy will decline about 2 per cent, with smaller declines thereafter.

While there are no guarantees, this suggests that the recession may not dive into economic territory that is wholly unfamiliar to us. If that is true, why the 1930s-style rush to big government?

Although the last two recessions were mild, most recessions in the post-World War II period saw GDP declines that were larger than those now predicted.

The 1948-49 recession lasted almost five quarters, and two of them saw real GDP decline by more than 4 per cent, based on an annualised rate. In the 1953 recession, there was a quarter in which real GDP dropped by more than 6 per cent by that same measure. The largest such decline since 1947, more than 10 per cent, took place in the first quarter of 1958.

In the 1960 recession and again in the 1974 recession, there were quarterly drops of about 5 per cent on an annualised basis. In the 1980 recession, there was an almost 8 per cent annualised drop in one quarter, and in 1981, two successive quarters posted drops of 4.9 per cent and 6.4 per cent.

A look back at those terrible times is heartening. Even with those setbacks, the US economy grew on average 3.4 per cent per year between 1947 and this year's third quarter.

Why did things always work out in the end? Because we remembered who we were when times got tough.

The US has always distinguished itself relative to its major trading partners by having a higher faith in free markets and a greater respect for the limits of big government. Sure, the US passed a stimulus package now and then, but it also let failure run its course and refused to resort to excessive big-government intrusions into the private sector.

The risk is that we will forget this lesson. First we bailed out the financial companies; now president-elect Barack Obama is asking for US$50 billion to bail out the auto companies, an effort backed by Treasury Secretary Henry Paulson. Next we will see a tax credit for people who buy General Motors Corp cars at stores of bankrupt retailer Circuit City, provided they use the car to go to a Detroit Lions game.

A look at economic history suggests that the crazy policy intrusions have to stop. Failure can be a good thing, and recessions force economic stragglers to make tough decisions. Those tough decisions set the stage for the recovery.

GM, for example, makes some good cars and some bad. It has 21 plants now operating in North America and plans to close three, but probably needs to close a lot more.

As it does, its sales will have a harder and harder time supporting the excessively generous benefits the company promised workers. We have a place where creditors and workers iron out messes like this through renegotiation and reorganisation. It's called bankruptcy.

To hear the bailout people talk, you would think that taking a firm to bankruptcy is akin to sending it to the mortuary. That is false. Bankruptcy is more like intensive care. It's where we have always sent our sickest companies.

Sending taxpayer money to GM will not help it in the long run. Our economy will be saddled with tossing resources at a struggling company indefinitely. The sooner GM reorganises and becomes more efficient, the sooner our economy will begin heading in the right direction.

Like the recessions of the past, this one will end. Our economy will be stronger, sooner, if we let the healing process begin. -- Bloomberg

Kevin Hassett, director of economic policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He was an adviser to Republican Senator John McCain of Arizona in the 2008 presidential election. The opinions expressed are his own.