Wednesday, May 19, 2010

A Good (Economic) Doctor?

Suppose you’re sick and have had a mild fever for a couple of days. A friend tells you about a wonderful new doctor. This physician has a great personality and wonderful bedside manner. His credentials sound good and he promises the most effective treatment. You set up an appointment. The doctor examines you and prescribes the latest medication, one reputed to solve your problem quickly. Very nice – except that your temperature goes up and you feel worse for a week. However the doctor is so nice and has such a good personality that he is able to comfort you.

Now next year you get the same sickness but that doctor is not available so you go to a different one. This guy is not nearly as personable. Worse yet, he refuses to prescribe any medication saying that your illness will clear up on its own in a few days. You argue that you need treatment but he continues to refuse so you go away angry. However within two days you are again well.

Which of those doctors is really competent? Which should you trust next time you get a similar disease? If you answered the second, go to the head of the class – and be prepared to endure criticism for that choice.

“What's that?” you say. Nobody would continue to trust a doctor who makes things worse. Are you sure about that? Some actually prefer a physician who provides emotional support to one with less personality but better medical skills.

Now change the situation a bit. This time the patient is the national economy, disrupted by business failures and unemployment. Shouldn't we prefer an economic “physician” who refuses to provide ineffective treatment? Isn’t that better than comforting words accompanied by counterproductive solutions? Yet it is nearly an article of faith today that the measures that have failed repeatedly are the only solution to our economic woes and that the “do-nothing physician” is either incompetent or uncaring, probably both.

Our history has several examples of economic problems, both with and without federal intervention to fix those problems. That intervention has a terrible track record, yet most people assume it is necessary. That track record began with the intervention leading up to and during the Great Depression. Prior to that time we had suffered many economic downturns, all short-lived. Then Hoover and congress reacted to the stock market crash of 1929 with punitive tariffs, wage controls, and other intervention. Roosevelt increased the government controls. Interestingly, unemployment was trending downward when the Smoot-Hawley tariffs were imposed which means that the treatment was not applied until the patient was already improving.

In fact unemployment was never higher than 10% before those government measures. However by a year after that intervention unemployment rose to nearly 30% - and remained above 20% for nearly three years thereafter. The patient was worse but the doctor claimed his treatment was working. In fact the depression did not end until World War II intervened.

Contrast this with Reagan’s action (or lack thereof) after the 1987 stock market crash. Reagan refused to intervene and as might be expected was excoriated for that. Politicians and the news media publicly called him everything from inept to uncaring. We can only imagine the unprintable words they used in private. A lesser man would have caved to the pressure but Reagan held firm. His stubbornness was followed by sustained growth and low unemployment.*

What is hard to believe is how effectively the proponents of government economic intervention have sold their bill of good. Today it is considered axiomatic that government should manage the economy although there is essentially no evidence that government has ever done so effectively. We keep insisting that the doctor should act, even after his treatment repeatedly worsens the illness.

Only when voters demand that government cease meddling will our economy recover quickly from the normal ups and downs of this natural world.

(For more information on the benefits of avoiding inappropriate action, see

*The intervention by Hoover, Roosevelt and congress, and Reagan’s different approach are documented on pp 70-74 of Thomas Sowell’s book, Intellectuals and Society. Contrary to popular belief, Hoover did intervene and was in fact rather proud that he considered himself the first president to deal with a deteriorating economy.

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