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It's Really Quite Simple

By William F. Buckley

It is a field day for practitioners in politics. In South Carolina the hottest issue this week wasn't the specter of recession and what the federal government should do about it, but the Confederate flag. A citizens' group pressing for the restoration of public display of the flag was running ads promoting Mike Huckabee over John McCain and Mitt Romney.

Huckabee, one South Carolinian said, is "a Southerner, who understands why Southerners value our heritage." Huckabee himself said: "You don't like people from outside the state coming in and telling you what to do with your flag. In fact, if somebody came to Arkansas and told us what to do with our flag, we'd tell them what to do with the pole."

In Michigan, on the other hand, the economy dominated the campaign, but the candidates concentrated on Michigan's distinctive problems, posed by the declining American auto industry. Such long-term problems were not what was exercising the president and congressional leaders in Washington. They were concerned with how they could jolt the economy out of the slide caused by the mortgage crisis.

The prescriptive remedy for overspending is reduced spending. Although it isn't being said in as many words, the trouble we are in is an aspect of overspending. But, paradoxically, the solution is not only to spend more, but to spend it quickly.

Mark Zandi, chief economist at Moody's, proffers recent findings about how this might be done. An increase in unemployment benefits, he says, produces about $1.73 in additional consumer demand for every dollar spent. If Congress acted on that assumption, then $100 billion going directly to unemployment pools would increase consumer spending by $173 billion.

If Congress elected instead to energize the money being spent by reducing (or forgiving) taxes, it would do well, but not nearly so well: $100 billion in tax rebates would mean $119 billion infused into the economy. But hear this, $100 billion returned to taxpayers through reduced tax rates would mean only a $59 billion increase in spending. It should not surprise us that the propensity to consume is highest among the unemployed. But it is discouraging to be told that reduced income taxes do not result, pro tanto, in increased consumer spending.

The debate, therefore, rolls on. Almost certainly the package enacted by Congress will include a bit of every nostrum: lower tax rates, tax rebates, unemployment subsidies. What isn't likely to come out of it is generic reforms of a kind that might have spared us the collapse. And why is this so? Because economic practices are governed by political considerations. It is tempting to blame the leaking roof on the rainfall.

If there is a single image to crystallize the American dream, it would be house ownership. And the moment one makes widespread home ownership a priority, one is required to come up with a structure of credit devices.

Principal among these, of course, is the mortgage. There is nothing inherently corrupt about mortgage lending. The problem comes in when the mortgage is set at a figure that does not correspond with economic reality.

Why should such a thing happen? It could be that, when the petitioner comes in with his hard-luck story, the man on the other side of the desk is Jimmy Stewart, who ends up granting a much more generous mortgage than if he were a tough hombre making the rules.

But there would be a limit to how many such mortgages even a Jimmy Stewart could write if it hadn't been for the folks who came up with a way to sell the mortgages to third parties. These might be other banks. Or insurance companies. If you persuade an obliging behemoth to take on just, say, one-millionth of the risk you undertook, well, that is prudent at every level. But the problem comes when the banks that were willing to take just a little bit of risk find themselves staring at the million people on whom they depended for ballast-IOUs in hand.

When that happens you have only the government to lean on. And fortunately for the improvident lender, there are so very many people now involved, the general mood is cooperative. Whether Congress goes with tax-rate cuts or with rebates or with subsidies, the public is not likely to grind the government on the wheels of economic orthodoxy.

Copyright 2008, Universal Press Syndicate

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