The Washington Post Profiles Ben Bernanke

A thoughtful piece in the Washington Post on Ben Bernanke is extremely
laudatory about his new approach at the Fed.

I still worry that in the end that the government will have spent trillions too much to fight a recession and that economic growth will suffer for decades. There is a real principal-agent problem at work here. If the government does nothing and we have a huge depression, Bernanke and Obama get blamed. If the government does nothing and we don’t have a depression, they don’t get much credit.

If the government spends trillions and we still have a huge depression, people will say, “Think how bad things would have been if they hadn’t spent those trillions.” If they spend trillions and we don’t have a depression, people give them credit for averting the depression.

So even if the trillions do nothing, the government still has a strong incentive to appear to be doing something, even if the cost is high. And we will probably never learn whether the trillions were well spent, so we won’t know any better the next time around.

Imad Qureshi

I partially agree but I think you are exaggerating the cost of bailout . What about the cost of unemployment benefits, lost taxes and social cost due to unemployment (I think unemployment will increase crimes). I think net loss would be much less than what you are afraid of and economic growth will not suffer for decades as you predict.


And this case provides a clear example of why the founders of the country didn't believe that politics should be a profession, but rather a public service. If politicians would do what is right, rather than what will get them re-elected, our world and our grand-children's world would be a much better place.


"(I think unemployment will increase crimes)"

Then the worst crime rate in this country's history should have occurred during the Great Depression.

The vast majority of people don't commit crimes to put food on the table. They do it because they are depraved and immoral. It's much more a product of culture and upbringing than economic circumstances.

In any case Levitt is dead on. The stimulus is a heads-I-win-tails-you-lose situation. If the economy sucks, Krugman will claim more needed to be spent. If it improves -- and we have emerged from every recession in the country's history -- then spending gets the credit.

Dr. Tonic

The best thing the government could do for our future would perhaps be to burn 2 trillion dollars.

Can you imagine the outcry?


Have you looked at the trade data? At the macro data? Oh, wait, according to many of your colleagues, the government merely displaces private money so doing nothing is the best choice. I have a suggestion: pretend that you're actually in a position of power and then see if you could in good conscience do nothing. Then think about whether the incentive to look good is really that important in your mind.


I completely agree and feel this way about every president's approach to the economy - I don't personally know the true term of business cycles well enough to understand the cause and effect relationship between policy and the quarter-to-quarter results. How do we solve this principal-agent problem though? It is something that has been perpetuated to all levels of government. I'm at a loss and would love to hear anyone's recommendations.


Not sure Obama and co. get off the hook if we still have a "huge depression". Seems a pretty thin assertion to base this argument...



I think you're putting too much weight on cyclical factors in determining serious crime activity. As I put it when this potential correlation comes up, "as far as individuals with a significant disposition to commit serious crime are concerned, it is always a recession." They have poor job prospects to begin with, and let's face it, life for the unskilled and underskilled is never going to improve while the supply grows unabated and technological innovation curtails demand, relatively speaking.

But that's just one facet of your comment. I'm still pondering the broader issue.


So are you arguing that we shouldn't do something when the majority of Americans want something done? if only we could get around this pesky democracy business and let elites with their worries that cannot be verified with anything other than vague counterfactual hypotheses decide things for us. I have zero interest in listening to people who did not understand at the time what a mess we were going to be in. This includes many on the President's team - even "math-puzzle solver" Larry Summers.

Tariq F

Interesting point you make here. In Canada in Fall Prime Minister Stephen Harper argued that Canada would largely emerge unscathed from the global recession and thus did not need a significant stimulus package of any other kinds of emergency measures. (Indeed, Canadian banks are in solid shape - better than any other Western economy - although growth has and will inevitably slow... especially since 79% of exports go to the US).

So Harper released a budget in Fall that had no real special measures or stimulus component. He barely survived a no confidence vote as a result. Finally in January his party presented a new budget that had a large stimulus package - partly to satisfy other G20 countries and partly, it seems, to convince the public that he was aware of the global problems and doing something about it.

While we can argue for hours about the need of such a package for the Canadian economy, it seems clear to me that he viewed the size and nature of the final plan he came up with as unnecessary but was pushed into doing it because it was politically expedient.... before it, he was viewed as "doing nothing" or "living in denial" about global problems by opposition politicians, whereas now he can say that he, like other G20 leaders, is safeguarding the economy and taking decision action - even if he really deep down may view it as unnecessary here given the macro data.


Tariq F

Actually, to add to the above, the main reason his government nearly fell was actually a change in funding political parties that the new budget included, which united all opposition parties against the minority government.

But still - it was interesting that he as criticized for doing nothing in response to the crisis and ultimately was forced to unveil a large plan to satisfy critics.

Gerrit Lansing

"The more that plans fail the more Planners plan" The Gipper at the '64 RNC


yeah, this post is preposterous- anyone that would argue to do nothing in the face of what happened in the 30s is truly naive- try to fathom the level of suffering back then, and the ethical imperative is to try to fix the mess that the bankers made (for the fourth time!)


The calculus of this argument seems backward to me. Levitt argues that there are four scenarios possible:

1. If government does nothing and we have a depression;
2. If government does nothing and we don't have a depression;
3. If government does something and we have a depression; and,
4. If government does something and we don't have a depression.

In terms of logic you can model these scenarios the following way:

1. If not A then B
2. If not A then not B
3. If A then B
4. If A then not B

Levitt argues that the political consequences for these scenarios favor Obama and therefore the incentive is to do something (A) even if the cost is high. But the more plausible reality is that the net political consequences for these scenarios are equal. Another look:

1. If government does nothing and we have a depression (Obama gets blamed - score of -1);
2. If government does nothing and we don't have a depression (Obama gets credit - score of +1);
3. If government does something and we have a depression (Obama gets blamed - score of -1); and,
4. If government does something and we don't have a depression (Obama gets credit - score of +1).

Obama gains only if the economy improves. Clinton was largely a non-factor in the economic-boom of the 90s but still received ample credit. The incentive is not to do something or not do something, rather political gain is based on economic growth (regardless of action or inaction). So where is the overwhelming incentive to do something?

The main fault in Levitt's argument is that he assumes people will not blame Obama for spending billions, trillions on recovery and stimulus without adequate progress in the economy and he assumed Obama will not get any credit if the government does not spend billions, trillions on stimulus. This assumption seems very unlikely.



"...see if you could in good conscience do nothing."

The wise can. The rest cannot.

Kevin MN

It amazes me that every economist speaks in near absolute terms as if there is an objective right. Obviously Mr. Levitt has an opinion, but there are plenty of economists that disagree with him. There are well-respected economists on both sides of the issue. It would be fantastic if more of them would acknowledge this and have more discussion than preaching. Many free-marketers seem like Preachers, with an unshakable faith in free markets, less regulation, and lower taxes. Unfortunately, faith isn't science.

Adam Bee

Funniest comment so far:
"The vast majority of people don't commit crimes to put food on the table. They do it because they are depraved and immoral."

The vast majority of people are depraved, immoral criminals?

Even if that were true, the question would be "Who is on the margin between committing a crime and not? What pushes that person over the edge?"

If you can imagine someone just on that knife-edge of criminality, it's not hard to imagine that unemployment would push someone over that edge. And in fact the data bear that out.

As you might guess the rest of that comment is similarly clueless. The fact that the Great Depression was not the high point of the crime rate is not a counterexample to the assertion that, ceteris paribus, unemployment causes crime.


Remember both

the right-wing bush admin. consistently inept

and the much smarter meritocracy that Obama brought to the government

basically said the same thing:

without government intervention a collapse of the financial markets is probable, if not certain.

Of course, academic ideologues will take different opinions, but the fact the right and the center-left two different governments agreed is telling.

Neither wanted a financial collapse on its watch, despite the fact bush didn't seem to care much if iraq collapsed or louisiana/gulf coast as a result of katrina/rita collapsed.

But, the worst financially, of course, is the inept regulation under bush, that of course is a central cause of the crisis.


"And this case provides a clear example of why the founders of the country didn't believe that politics should be a profession, but rather a public service. If politicians would do what is right, rather than what will get them re-elected..." [John]

One, what is "right" is usually in the eye of the beholder. Two, the financial crisis is about as far a representation of a clear right waywrong way situation as possible. Many economists think a boost in government spending is necessary, but the nature of the boost is debatable, along with the costbenefit of having one.

Three, while it is often more politically difficult not to act than to act in disastercrisis situations, I don't think that dynamic is influencing the administration's decision making in this case. They sincerely believe that strong government intervention is the best option.

Four, just about every President, even the great ones like Lincoln, have modified their stance or acted for political purposes at the expense of what is "right."This isn't a modern phenomenon by any means.



I am not worried about the government doing something or nothing, so much as I worry about the government doing the wrong thing. History is full of examples of governments doing the wrong thing.