Rip the Bandaid, Lessons from Reagan as an Election Turns

“Government always finds a need for whatever money it gets” – Ronald Reagan

… and then some …

I’m continually stunned – though I suppose I shouldn’t be if it’s continual – at the complete difference of thinking and conception between the freedom-loving mind and the progressive mind. It seems that “they” (the progressives) are forever saying one thing and doing what would seem to be the exact opposite, until one finds out that they actually believe that their actions are consistent with their words.

Case in point: I caught a brief bit of a documentary on President Obama earlier tonight. The discussion was the financial collapse that occurred during the campaign of 2008, and worsened after the election as we led up to his inauguration. In a meeting with his advisors the president-elect, facing the worst financial downturn since the Great Depression, wanted to “rip the bandaid off fast”. Apparently to Mr. Obama this meant pumping a massive federal spending program into the economy for the purpose of stimulus. He could not have been more wrong.

I don’t mean here that the stimulus was the wrong approach (I don’t think stimulus was or is a good thing, but that’s actually a side point). Rather, I mean that “ripping off the bandaid” means exactly the opposite of bailouts and stimulus.

John Stuart Mill famously noted: “Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works.” Here, here. The problem we faced in 2008 was not that the panic threatened to destroy wealth, or that the coming economic slowdown threatened to snowball into the next great depression. The problem we faced was that capital had already been diverted into unproductive works (e.g., building too many houses for too much money that people couldn’t possibly afford). The system badly needed to shed the unproductive portions of the economy. This is creative destruction (a la Schumpeter).

Ripping off the bandaid is then to let the bottom fall out. Let the unproductive and misallocated sectors of the economy feel the full brunt of the pain in their misallocation. Don’t spend trillions of dollars (in deficit) in order to soften the blow … that’s taking the bandaid off slowly.

I remain convinced that if Obama had followed my advice the unemployment numbers would have been much worse early in his term, and he’d also have a fairly simple re-election task in front of him now. Would we be better than 8.3% unemployment right now? Maybe or maybe not – but we’d be advancing at a good pace rather than stagnating.

You see, bad economic performance in 2009 and 2010 can easily be pinned on George W. Bush. But bad performance in 2012? Nope.

When Ronald Reagan took office in January of 1981 unemployment was 7.5% – no picnic. He then dispatched Paul Volcker to break the back of the Carter stagflation, and unemployment rocketed up to 10.8% in December of 1982. Bad news for midterm elections, but the story wasn’t over for Reagan. Having ripped the stagflation bandaid off, he then saw unemployment plummet, hitting 7.2% by election day 1984.

(You may object that Reagan also ran massive deficits. He did indeed. He also faced Democratic hegemony in Congress and a Cold War with the Soviets, but I digress. Beyond that, the big economic issue of the day was inflation, not the bursting of a Fed-induced housing bubble. The medicine didn’t taste good, but it did solve the problem.)

Having missed a golden opportunity in 2009 to really rip the bandaid off, Obama now faces some election trouble. Today was Labor Day here in the U.S., but a spontaneous movement in the social media circles turned it into “Empty Chair Day” – a head-nod to Clint Eastwood’s satire (based on Bob Newhart’s schtick) of the president as an empty chair. It may seem like a small, quirky thing, but it’s the kind of image that sticks. It speaks of a president asleep at the wheel, away from his post, off-the-clock … perhaps playing golf when he could have been leading.

To top it off, sometime during this week’s Democratic convention, the U.S. national debt will pass the round number of $16,000,000,000,000. (It stands at $15,998,767,200,000 or so right now, according to the debt clock, and is ticking along at about $1,000,000 every minute and a half.) It just smells like things are breaking bad for the president. The imagery isn’t good and will be incredibly easy to spin and call out for Republican opposition groups.

Is this a Romney slam dunk? By no means. The guy is impressively uninspiring and may not offer the great alternative people would want. (By contrast, Reagan would absolutely “Jimmy Carter” Obama if given the same set up.) That said, “competence” may be a winning argument. The chips are “falling where they may” quite on their own, and showing up with a steady hand might just do the trick.

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