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How Not To Fix the Economy

Government doesn't learn from experience.

By Will Offensicht  |  May 7, 2012

The New York Times recently asked, "Is our adults learning?"  This grammatically-incorrect title introduced an article which wonders why our society keeps making the same mistakes over and over.  After discussing the heated arguments between economists for and against the Obama stimulus, the article observed:

We went ahead and spent the roughly $800 billion. What have we learned?

For certain, nothing. The economists who supported the stimulus now argue the economy would have been worse off without it. Those who opposed it argue that the results have been meager.  [emphasis added]

Part of the problem is that our government's accounting system is so opaque that nobody can even agree on how the money was spent.  The important point is that after spending 800 billion dollars, we don't know whether all that spending had much if any effect.

The genius in our federal system as originally set up was different states could try different solutions to various problems.  That way, it's possible to directly compare different methods and how they work, so we can all learn what to do in different situations.  Out current government loves to impose "one size fits all" approaches which means that we can't readily learn much of anything.  All we can do is to argue about what "might have been" which isn't very persuasive.

Businesses Learn, Government Doesn't

Businesses experiment all the time.  Internet firms in particular compare their sales rates with different landing pages, color schemes, and every other possible variable.

Sometimes this reveals totally unexpected results.  Amazon found that the appearance and layout of their landing page didn't matter much: the main variable was speed.  For every extra .1 second the page took to load, the probability that a customer would hit the "Buy" button dropped by 1%.  Amazon's data-driven push for speed above everything else ultimately led them into the cloud business, a completely different arena from selling books where they started out.

By 2000, the credit card company Capital One was running 60,000 randomized tests a year trying out different innovations and strategies.  Google ran about 12,000 randomized experiments in 2009.

Unfortunately for politicians, experiments show that most new ides don't work.  Politicians aren't at all interested in being told that their wonderful plans have failed.  What's worse, even when a government program is known not to work, politicians can be counted on to double down on it if they think it will give them votes or campaign contributions.  Every government program has a special interest group that will fight to the death to keep it from being eliminated because it works for them.

We saw this in the Wall Street Journal's comments on Mr. Obama's promise to cut the interest rates which are charged on student loans:

... but of course the real beneficiaries are colleges. They've reliably raised their prices to capture each new subsidy increase.

Everybody knows that colleges will hike tuition to soak up however much money the government is willing to lend.  More than 53% of bachelor's degree-holders under 25 are jobless or working at jobs that don't require degrees.  The students have been conned into taking on huge debt loads to buy degrees which have no economic value.

That won't stop the government from trying to attract student votes by lending more money - total student debt passed the trillion-dollar mark some months ago.  Many of these loans will go bust, of course, because too few students are willing to put in the work needed to get a degree in a topic like engineering that leads to an actual job.  Those loans won't ever be repaid - like so much government spending, the money has been flushed straight down the toilet - but the bill for new loans made to yet more incoming freshmen won't come due until another President is in office.

Government Doesn't Want to Learn?

Our government's reluctance to learn is illustrated vividly by the New York Times article "Death of a fairy tale."  The Times never met a spending program it didn't like.  The "fairy tale" they're talking about is the idea - which has been thoroughly proven on multiple occasions both small and large - that cutting spending can cure economic ills.

The article reminds us that many pro-spending voices argued that cutting spending to improve lenders' confidence in getting their money back wouldn't lead to prosperity in Greece or anywhere in Europe.  From the Times' point of view,

The good news is that many influential people are finally admitting that the confidence fairy was a myth. The bad news is that despite this admission there seems to be little prospect of a near-term course change either in Europe or here in America, where we never fully embraced the doctrine, but have, nonetheless, had de facto austerity in the form of huge spending and employment cuts at the state and local level.

Huge spending and employment cuts?  Not in any government we know.  Have you seen spending cuts anywhere?  Is spending cuts the reason our deficit percentage is now the highest it's ever been outside of WWII?

The Times evidently hasn't read the Wilson Quarterly article which pointed out that high levels of entitlement spending make it hard to recover from the recession.  Government spending for welfare, health care, government employees, and pensions is much, much higher than ever in the past.

If government spending could cure a recession, the current entitlement spending levels would have cured the Obama recession long ago.  The problem is that excess government spending and the resulting uncertainty prevents private investment, which (other than war) is the only thing that actually ends recessions.  Even the liberal Wilson Quarterly has learned that and said so.

The problem is not that government doesn't learn, but that it's learned all too well that spending taxpayers' money can buy votes and campaign contributions.  People who receive more from the government than they pay in taxes tend to vote for more spending.  So long as they get re-elected, what politician cares about the economy?  After all, their salaries will be paid no matter what happens to the rest of us.

It remains to be seen if there are still enough voters who oppose unlimited spending to swing elections.