Scott Adams: The unexpected economist

Scott Adams, creator of Dilbert, is best known for his sense of humor. He seems to be developing a sense of social responsibility, too.

Adams' blog is one of my favorite places on the Internet, one of only a handful of pages I try to check every day.

I like his blog because Adams is both funny and smart. He understands that he can exert a certain amount of public influence, but unlike most celebrities, he's smart enough to recognize his own limits. He's also smart enough to expand those limits by gathering data and studying the opinions of others.

Earlier this month, Adams spent his own money on what he calls the Dilbert Survey of Economists, gathering the opinions of over 500 professional economists to see if they could tell us anything useful about McCain's and Obama's economic plans.

They couldn't, really--ask 10 economists to count their own fingers and you're likely to get 11 different answers--but this in itself is good information, because it teaches us that economics is not yet a real science.

On Tuesday, Adams asked the readers of his blog (a valuable if unreliable resource) to help him find a good analysis of the potential consequences of allowing the free market to deal with the recent market meltdown.

Wednesday, in a post titled "The Credit Crunch Explained," Adams identified an article in The New York Times as the best of the responses he received.

Unfortunately, that piece by David Leonhardt was really very bad, and it seems to me that if Adams is going to become as useful to his species as he would like to be, he needs to learn how to recognize bad arguments like this one.

I started to write a comment on his blog, but as it grew longer, I decided to post it here instead. I know that Adams tracks appearances of his name on the Internet (as I do), so I'm pretty sure he'll see this here, and probably pay more attention to it because it's reaching a much larger audience than it would in his blog comments.

Here are some of the danger signs I noticed in the Leonhardt article:

The sob story and the sockpuppet
Leonhardt played to the reader's emotions with a sob story about Meyer Mishkin, a shirtmaker during the Great Depression, whose grandson Frederic Mishkin was until recently a member of the Board of Governors of the Federal Reserve.

Leonhardt used Meyer Mishkin as a sockpuppet for two emotional arguments, opening the article with the assertion that it's wrong to want to punish the "rich scoundrels" of Wall Street, and in closing, that it's also wrong to do nothing.

Leonhardt said something has to be done, but he didn't say what. Of course, if we must act, but we can't punish anyone, about the only thing that's left is to reward someone.

An article of this type is designed to bias or predispose its readers toward a particular course of action that will be communicated to them somewhere else. By not explicitly naming its goals, this type of article avoids triggering negative reactions that might block the desired effect of the piece.

Leonhardt claimed that the Great Depression came about because the government did not respond properly to the stock-market crash of 1929, but the simple fact is that the government DID act, and the government's actions are what made that depression "great." Older readers at least have probable heard of the principal governmental overreaction: the 1930 Smoot-Hawley Tariff Act, which interfered with international trade to the detriment of the U.S. economy.

On the other hand, the government's failure to assist the credit market after 1929, natural factors such as drought, and the actions of various large companies and foreign governments all played a role. Leonhardt could have mentioned these other factors at least briefly, as I just did, but he didn't-- because his purpose was not to inform or to help his readers to reach a logical conclusion. He was seeking an emotional response.

So what Adams needs to learn is that when someone presents only some of the facts, he should assume the writer is avoiding conflicting facts in order to mislead his readers.

How to use the hammer
Now, we got into this mess because of government intervention in the economy, but that doesn't necessarily mean that more intervention is a bad thing. Intervention is usually like using a hammer to repair an engine, but even jet-engine mechanics keep hammers in their toolboxes. They just use them very carefully and delicately.

In fact, at least three major kinds of government intervention led us to this point: first, the government forced banks to make bad housing loans through the Community Reinvestment Act (the last evil legacy of an evil man, Sen. William Proxmire, D-Wis.); second, the Federal Reserve pushed interest rates too low (an attempt to fight inflation, which wasn't entirely wrong-headed, just overdone); and third, the European Union's monetary policies drew much of the liquidity out of U.S. markets. The effect of that latter point was more a matter of timing than causation, really, and one could reasonably say that the U.S. government could have tried to compensate, but that would just have gotten us into a pissing contest with the EU without addressing the other causes that would eventually have led to this kind of collapse anyway.

None of these influences is completely partisan, though the Democratic Party supported the CRA more than the Republicans did (largely a cynical effort to make Republicans look cruel and heartless for not wanting poor people to have houses of their own). The policies of the Fed were maintained by both Republican and Democratic administrations, and were certainly worst under the current Bush administration. The EU's motivations were more nationalistic than a matter of political ideology.

What can we do about the situation now? I can't suggest any particular immediate response because I don't have enough information. In principle, it should be possible for the Federal Reserve and the Treasury to figure out how the economy ought to be operating right now, and apply some careful taps with their big hammers to nudge the economy back on course. But exactly where to tap is way beyond me.

It's clear we need to resolve the liquidity problems, and it seems like that's being done. Some good, profitable businesses absolutely require loans to continue operating. (In the long run, they may prefer to keep more of their own cash on hand rather than relying on short-term loans, but that has its own economic consequences.)

Other good businesses need loans to expand, and entrepreneurs need loans to start new businesses. (Personally, I missed out on an opportunity to make millions of dollars because the company I helped build from 2004 to 2008 couldn't get funding this spring and had to shut down, so I suppose I'm hypersensitive to the needs of entrepreneurs.)

We also need to restore consumer confidence, because when people stop spending money, businesses make less money, which means they have less money to invest in themselves and banks are less willing to loan them more.

A bad situation, but not yet a catastrophe
I don't favor any dramatic steps. This is a bad situation, but it isn't all that bad yet. The net effect on the economy from all of these related banking and insurance problems is in the range of a trillion dollars-- but that's only about 7 percent of our gross domestic product. So this failure is pretty much like a plumber losing $3,000 in Las Vegas. It's painful, but hardly catastrophic. He still has his job, he still has his house and car. Maybe he needs to borrow a thousand bucks from his more prudent brother-in-law to make the next mortgage payment, and he might be eating hamburger instead of steak for a while, but he'll be OK.

I don't mean to oversimplify the situation, but that comparison is numerically reasonable. Macroeconomics is hugely complex because it involves many aspects of human psychology, including politics, and many objective factors, some of which can't really be measured in practice. But at the same time, the fundamental issues of macroeconomics are very simple: how much of the population is doing productive work, how productive are they, what is the net surplus, where is it going, what are people spending money on, where are they investing?

For most of these issues it's pretty easy to see which direction is good.

It's better if more people are working more productively, producing more of a surplus that gets reinvested in ways that expand the economy.

It's better if fewer people are doing non-productive work, which describes most government jobs (that is, both government employees and people who are privately employed for governmental reasons like tax accounting).

It's better to have more economic activity driven by the profit motive in a free market, because in all free transactions, both parties benefit. Nothing truly good ever happens when people act against their own interests (as banks did because of the CRA).

Unfortunately, as long as the government has the Constitutional authority to meddle in the economy, there will always be politicians wielding political sticks and economic carrots. We need a Constitutional amendment that enforces a separation of economy and state just as we currently separate church and state. This would abolish the Federal Reserve and end the government's power to force or entice people to accept short-term harm in pursuit of illusory long-term benefits.

With the government out of the picture we'll also avoid the other key factor contributing to the current mess: the fact that ALL the major banks were operating under the same policies, so the collapse hit all of them at the same time. Less central control means more frequent problems with individual businesses, but fewer problems that affect the whole economy.

There will always be people making bad decisions; one of the great advantages of the free market is that these bad decisions usually have only local effects.

There are still good reasons for government oversight of economic activity. We need the power of government to define common terms in law, certain common standards such as those for workplace safety and environmental protection, enforce contracts, punish fraud, and provide a sort of insurance policy of last resort for people who acted fairly, honestly, and reasonably but still ended up on the wrong side of long odds.

But as long as the economy as a whole can be manipulated by bureaucrats and self-interested businessmen, we're going to have periodic breakdowns like this current one, and that's what we need to stop.

[Jack_B_Nimble]

Wow... I thought we had learned something since Adam Smith, but some people seem to have missed a class. While I would like to see a reduced role of the government in economic dynamics, to truly eliminate the government would require government spending be reduced to zero. Unless you want to switch back to the Articles of Confederation, eliminating federal budgets, spending and currency decisions by turning it all back to the states, there is no practical method for implementing your solution.

Your opinions are just as extreme and silly as the muckety-mucks that got us into this mess. Please do us a favor and stay out of the decision making process.

[drfrost]

I agree that the government can't really be totally separated from our economy, but at present they have infested it like a weed. They control state's behavior (where the constitution has given them no power) by threatening to withhold federal funding if the states do not comply with whatever agenda they are pushing at the moment. They pervert the taxation system in order to manipulate their citizens, punishing this behavior and rewarding that one (again, delving into realms where the constitution essentially forbids them from).

My 2 cents...

[Peter Glaskowsky]

I think you missed much of what I wrote, too. I'm not calling for anarchy. It's clear to me, however, that government intervention in the economy is generally a bad thing. It got us into this mess.

[M C]

This is yet another really bad "expert" explanation - funny how this crisis has brutally revealed how poor the average economist's knowledge is, and how basically economics is much, much more of a grouping of staunchly held and often sadly blinkered philosophies than it is a science.

Thanks for the entertainment, Peter, but I sure hope people don't consider your philosophy to be fact.

[c|net Reader]

Your reply is useless. Without pointing to the mistakes in the blog and providing corrections, or at least your theories and explanations, you've done nothing but badmouth and belittle the author. How is that helping?

[Quincy2001]

<i>Unfortunately, as long as the government has the Constitutional authority to meddle in the economy, there will always be politicians wielding political sticks and economic carrots.</i>

In terms of the text of the document, and the plain meaning of it, the Federal Government has very little authority to meddle in the economy, and it's mostly limited to the list of things that the author cited as governmental needs.

The interventions that caused this crisis, Federal Reserve manipulation of the currency, Fannie Mae and Freddie Mac, and the CRA are nowhere to be found in the Constitution, and under a plain language reading would in fact be proscribed by the 10th Amendment. The problem here is the body of case law generated by generations of jurists ignoring the text of the Constitution in deference to governmental interests in the current time.

We don't need to change the Constitution to stop this nonsense, we simply must enforce the one we have.

[Peter Glaskowsky]

I wish we could rely on the Supreme Court to enforce a strict interpretation of the Constitution-- that is, no authority to perform any function not listed in Article 1, Section 8.

But we can't.

However, clear First Amendment-style language prohibiting economic interventionism would be much more difficult to argue around, if only because the process of getting a new amendment in place would make the people's will unmistakable... at least for a while.

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[1truBob]

gotta call ******** on this: "the government forced banks to make bad housing loans through the Community Reinvestment Act (the last evil legacy of an evil man, Senator William Proxmire, D-Wis." That, sir, is a damned lie. Standard banking practice assumed that non-whites were bad credit risks -- the act required banks to overcome that prejudice. Your statement presumes that prejudicial practice to be founded on fact. You are making the absurd assumption that loans to minorities are bad loans, simply because the borrower is not of the majority. That is so blatantly ridiculous that it taints everything else you say with the pungent smell of fresh organic fertilizer.

Lastly, your gratuitous slander of Sen. Proxmire proves that you are neither a gentleman nor a scholar. Indeed, it violates cnet's terms of use for comments - - i guess those same terms don't apply to cnet's bloggers.

[Peter Glaskowsky]

Unfortunately, the CRA was a case of solving a bad problem by creating a worse problem.

I'll let Proxmire's reputation stand for itself. He did some good things, but his heart was in the wrong place.

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[c|net Reader]

The CRA was about making bad loans. It called for banks to ignore the indicators of credit risk in order to meet quotas. If banks were truly prejudiced in dealings with minorities, that should have been the target of the law. Forcing banks to meet quotas and, in consequence, take on undue risks, was wrongheaded.

Don't make everything out to be racial. Focus on the facts and we'll all benefit.

As for Proxmire, I have no idea why the author called him evil, but I agree that the ad hominem attack was inappropriate. It added nothing useful to the content.

[pilgrim49]

Hear, hear! I feel duped by CNET using a Scott Adams headline to snag me into reading this person's mish-mash of economic theory, as if these are credible views vs. partisan opinion. Sorry, 1truBob is right on, and he really only scratches the surface of the errors in this blog.

[chash360]

You make some interesting points, and I agree with some of them. But highly disagree with others. Governments role is to provide a common framework, a set of standards that we all must abide. The Banking and Insurance industry is no exception. Unfortunately the politicians have allowed these rules and laws to be corrupted.

Please tell me why a business that is in the black, making a significant profit from its business, needs to borrow money? (if the answer is to expand and grow, then why should a business grow faster than it can truly afford?) The truth is they use this borrowing tactic to avoid taxes.

I agree that entrepreneurs and startups need to be able to borrow, thats a no brainer.

I absolutely agree that only productive work is what creates value, and that non-productive work depletes value. But government work is not non-productive work, government creates and maintains the framework for an economy to exist. No business could reach even a fraction of its potential, without the infrastructure provided by the government. Imagine if you did not have any highways, to transport your goods. Imagine if you did not have schools to educate your workers. Imagine if you had no communications to advertise your products and services. The list goes on and on.

Your example of government tax accountants being a money drain of non-productive work, would be greatly simplified by fair flat taxes easily calculated with no rich and corperate loopholes, but I suspect you would not like that either. If following your advice of less regulation, the banks and insurance industries would have sucked all the money out of the economy already, as they have already attempted to do with the current greedy tactics of buying and selling credit and debt to obscure poor desicisions, and real problems. Again this is being done to keep the perception of the true value inflated.

The most non-productive work there is, exists on Wall Street, where they are not creating any real value, but rather manipulating peoples confidence of a speculative value, and attempting to make a profit from it. Wall Street has a valuable purpose, to regulate via free market forces the value of real commodities. Credit and Debt is not, and never should have been allowed to be treated as a commodity.

As a proposed solution to these problems I don't believe any one thing will do, but I do agree that this 'crunch' is not as critical as it is being hyped. Individual mortgage debt would not be in such danger if we were not bleeding productive jobs to the 3rd world countries. This is governments fault for allowing it, and corperations fault for doing it. How do they expect the average consumer to be able to afford products and services, if they don't have jobs?

One thing that could be done to smooth out the impact and volitility of the stock market is to simply implement increased buying, holding and selling periods of all stocks across the board in all trasactions. This could eliminate the flux, and artificial inflations and depletetions that occur with the relatively new breed of daytraders.

Government would do well to recognize the American consumer as a valuable commodity, we consume more as individuals than most of the rest of the world and if you want access to those valuable consumers to make a profit from, you should be prepared to pay a little more for it (iow: a quantity discount).

Wall-Street (shareholders) want to drive growth, because that is how they make lots of money. But in the natural world things can only grow so fast, if you attempt to exceed that natural growth rate, the bubble will burst. Shareholders do not do productive work, they do not create value, in fact in todays daytrader mentality they siphon off value, by forcing publicly traded business, to sacrifice their own real business for sake of the bottom line numbers. Layoffs to keep the profit numbers up this quarter, means they will do less productive work in the next. Holding back re-investment in new business opportunities, to pay more shareholder expected dividends, and executive bonuses (executives that are shareholder BOD puppets).

You can analyze money through an economy like electrons through a circuit, and when you approach the econmics with such a natural law foundation as that, you can see the problems and begin to see how to address them. Follow the money, and you will find the problem. (hint: pure unreinvested profit = wasted heat/resistance) The ideal economy is a superconductor carrying a lot of voltage (volume of money) and current (moving quickly) with little resistance or heat.

[Peter Glaskowsky]

I don't know anyone who wouldn't approve of a simpler tax structure. My personal ideal is a system that requires everyone to pay the costs of the services they receive from government plus some additional amount to pay for services provided to people who can't pay. But it's wrong to say that rich people should be forced to pay more taxes, without limit, just because they can. That amounts to punishing success.

These requirements create the outline of a simple tax plan: a percentage of earned income with an exemption so that no tax is paid below a certain level plus a cap so that no tax is paid above a certain level. That gives us just three figures to debate: the percentage, the exemption level, and the cap. I've run these numbers many times over the years, and they seem to work out with a percentage around 25%, an exemption around $20,000 for a family of four, and a cap around $200,000.

I'd have to dig up the latest government figures to see if these numbers still produce enough total tax revenue to cover the kind of Federal government I can support, but they're probably pretty close.

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[c|net Reader]

I'll reply to just one of your points now: we don't need the Government to educate students. Private education, including homeschooling, works just fine. If you want to ensure that all have access to some minimal level of education, then use the Government to take from those with more money to provide vouchers to those with less. Let all other forms of schooling compete, but take the Government out of it. You'd be amazed at the quality of the results.

[sbosolutions]

Wow this was horribly written and researched. I realize you are only a blogger but at least try to get something correct in your meandering **** of an 'article'.

Please stick to talking about computers. The world already has enough misinformation from Fox News and religious nuts.

[Peter Glaskowsky]

Well, if you see specific errors, feel free to point them out. Otherwise I'll have to assume you just can't accept my conclusions no matter how I arrived at them.

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[dmack747]

Whoever wrote this fails in their attempt to deliver a logical argument. He is blaming the subprime mess on the EU, low interest rates, and some old Housing Act. Out of a list of a 100 reasons those would not even crack the top 50. The biggest reason for the meltdown is the lack of government intervention. If Republicans want to live and die without the government they shouldn't come crying when all hell breaks loose. That is why I do agree the markets should correct themselves this time....let the small banks be crushed, let credit be tight, let housing come back down to normal (still a long way to we go back to pre boom levels), and then once we achieve equilibrium, the government needs to regulate lending practices so greed doesn't put us back into one of these messes.

[Peter Glaskowsky]

As I showed, there was no lack of government intervention. Banks made bad housing loans because they were commanded to by the Federal government and given low-interest government loans to fund these bad mortgages. This was an attempt by the Federal government to manipulate the banking industry for political reasons (that is, buying votes), and like every previous case of political interference in the economy, it turned out badly.

Wall Street executives behaved badly, but that was also inevitable. You won't find many men of principle involved with fundamentally fraudulent schemes like this one. The few good people who were involved (on Wall Street and in the Federal Reserve) were trying to keep this scam from harming the rest of the economy, and honestly, they pretty much achieved that goal. I just wish they had chosen to blow the whistle earlier in more specific terms instead of offering mild criticisms such as Alan Greenspan's reference to "irrational exuberance."

[c|net Reader]

I'm sorry, but Government is the problem, not the answer. You say Republicans are crying when things go bad, implying that they want Government help now, but not before. The problem is that there was Government intervention before and it was a principal cause of the problem. More of what hurt us won't help us.

[gefitz]

You criticize on one hand by saying the following: "because his purpose was not to inform or to help his readers to reach a logical conclusion. He was seeking an emotional response."

AND THEN, in the same article, I read this: "the government forced banks to make bad housing loans through the Community Reinvestment Act (the last evil legacy of an evil man, Sen. William Proxmire, D-Wis.)".

Usually, when I'm assessing an article and sorting out whether to give it a moment's thought, my first filter includes "If author is pot calling kettle black, throw article into circular file and disregard".

[Peter Glaskowsky]

Well, Proxmire was hardly central to my thesis.

[The_Decider]

Your racist assertion about minority lending finds smiles at Fox, but nowhere else.

Deregulation caused this mess. End of story.

[Peter Glaskowsky]

I didn't say anything about minority lending.

You can cling to your counter-factual belief that deregulation was somehow involved, but in the real world, it wasn't.

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[c|net Reader]

Minority lending was part of the problem insofar as the Government forced bad loans. Minority lending is not a problem for creditworthy customers. If there are fewer minority customers who happen to be creditworthy, then there should be fewer loans to minorities. If not, there should be no difference.

[jburnham]

This article has it so wrong it?s hard to know where to begin. I suppose I should introduce myself first. I?m an entrepreneur who is trained as an economist (GWU ?92) and I?m basically a free market advocate, although I realize the limitations and failures of the free market and the necessity of government oversight and regulations of the free market in some circumstances. Economics is indeed a young science, but it?s not as immature as Peter suggests. If you listen carefully to economists when they offer their opinions, they usually do so with caveats and conditions, much as a software engineer might when offering budget or timeframe estimates that would depend on future changes the customer might want in the application being developed.

After lecturing us on how Scott Adams got it so wrong on his blog, Peter then proceeds to make many of the same mistakes he scolded Scott for making. Let?s begin:

1) ?the Federal Reserve pushed interest rates too low (an attempt to fight inflation, which wasn't entirely wrong-headed, just overdone)? ? This demonstrates Peter?s lack of even a basic understanding of economic principles. In fact, reducing the interest rate increases the risk of inflation and would never be used to fight inflation. Reducing the interest rate is used to stimulate the economy, which increases inflationary pressures.

2) After accusing Leonhardt of using sock puppets for emotional impact, Peter uses the word ?evil? to describe those who disagree with him and their policies: ?the Community Reinvestment Act (the last evil legacy of an evil man, Sen. William Proxmire, D-Wis.)?. Branding something ?evil? is the last refuge of a scoundrel who lacks a legitimate argument for his case.

3) The Community Reinvestment Act (CRA) is not the primary culprit in the housing market crash. Not even close. The CRA did not force banks to make unwise loans. It DID provide them some cover when they chose to make unwise loans to minorities, and low income applicants for mortgages.

The primary culprits in the housing and resulting financial crises are greed on both the part of mortgage lenders and housing speculators and lax government oversight of the lending market. The government relaxed lending rules and lowered the ratios of the hard money banks were required to keep on hand to back their mortgages and mortgage-based securities. This encouraged rampant speculation in the housing market.

This is the latest asset bubble caused by panicked baby boomers trying to set aside money for their retirements after decades of spending more than they earned. There is just too much money chasing too few wise investments in the domestic U.S. economy. What makes the housing bubble different is that it is a leveraged asset bubble, the first such bubble since the Great Depression. It will take us a LONG time (think 6 to 10 years) to dig out from under this one, because of its leveraged aspect. Japan went through a very similar crisis in the 1990?s and it took them a decade to dig out. We might get lucky and dig out in 6 years because we are a more truly free market economy than Japan was, especially in the financial markets. The trade-off is that we will likely experience more pain in the short term as the markets adjust. We need to walk the fine line between permitting the markets to adjust and avoiding catastrophic pain and loss of faith in the financial markets, which could actually turn a Great Doldrums or Great Recession into another Great Depression.

Texas went through a similar and more severe real estate crisis back in the 1980?s. Almost every Texas-based bank went belly-up. Fortunately, the banks in the rest of the U.S. were in good enough shape to buy up the assets and be patient lenders. In a nation-wide crisis like the current one, there are two options: foreign financing or a government bailout. Guess which one is more likely? Back in March, when I asked Freddie Mac?s chief economist, Frank Nothaft, about this scenario on a national scale at a National Economist Club luncheon, he called it a ?Great Depression? scale event, if it were to occur. You can find the video on C-SPAN if you search for it. Very interesting talk, IMHO.

Sorry, Peter, we?re going to need more than enforcement of contracts and definitions of terms from our government on this one.

[defoliant]

Oh my, I'm not really sure where to start in assessing your comments, Peter. It pains me to see the explosion of 'sudden expertism' during any crisis. After the Iraq invasion, everyone was a master of military strategy, counter insurgency, and/or foreign policy. Now everyone thinks he or she is an economist. It's fantastic to see folks get interested in issues they otherwise ignore, but only if the perform the due diligence to understand the subject matter about which they are trying to speak.

First, I think it's silly to call you a racist to dislike the CRA, but you need to check the facts before tossing blame around. Many bad loans have been made over the past decade, and it's easy to blame a law that 'forced' institutions to lend to borrowers they would otherwise have ignored. Such an argument FEELS right...but it is not supported by facts.

In truth, only 50% of the bad loans that comprise what we now call 'toxic debt' were made by CRA regulated banks, and over half of these were made by institutions only partially regulated by CRA...leaving only about 25% of the debts on the doorstep of fully CRA regulated banks (these data come from the admittedly left wing Center for American Progress - but numbers don't lie). Moreover, the only independent study of the CRA indicates that there is a NEGATIVE correlation between CRA regulation and bad loans (see http://findarticles.com/p/articles/mi_m0EIN/is_2008_Jan_7/ai_n27490119 ).

What all this seems to suggest is that government regulations forced lenders to properly screen borrowers at a greater rate than unregulated lenders did. I'm no advocate of intense government regulation, but here it seems to have worked better than the alternative.

Secondly, you argue that the Fed, in trying to fight inflation, kept interest rates too low. (?!?). I had to read that many times to ensure I had got your comment right. Low interest rates INDUCE inflation...the Fed kept interest rates low in the early '00s to combat a recession and had been steadily raising them before the current crisis began. Low interest rates certainly jump started borrowing, and the Fed's recent efforts to raise rates is what caught a lot of borrowers with ARMs by surprise, but it wasn't part of the problem. The problem was a financial industry that ignored what would happen to their bad loans if rates ever went up...which they had to do eventually.

Finally, you say you 'don't favor any dramatic steps' right before advocating a constitutional amendment to forbid the government from interfering in the economy. I'll skip the obvious dichotomy inherent in stating these two points as part of the same article and simply agree with an earlier commenter. The constitution grants the federal government only the powers to levy taxes, spend the money generated by those taxes, and regulate interstate commerce. The government has expanded its powers far beyond this initial scope...an expansion whose merits are certainly debatable.

Moreover, such an amendment would do little to curtail the Fed's power. Few people seem to understand that, other than appointing its chairman, the government has little control over the Fed. The Fed is independently financed by its own market transactions and it makes its own policies..though obviously it does so in consultation with Treasury and other federal institutions as a courtesy.

Finally, you do, in fact, massively 'oversimplify the situation' to the detriment of your argument. An economy is not defined by the amount of money in it. As the physicist above pointed out, an economy is driven by the methods and velocity by which money travels through it. Capitalism is called capitalism because it depends on capital. If no capital is available in the form of financing, credit, or other instruments then there can be no investment...and investment is the mother of innovation...and innovation is where productivity growth comes from (you are indeed correct in naming productivity as a vital component of the economy - virtually any economist will tell you that it is the SOLE source of per capita income growth). Therefore, if credit markets dry up, the cost is not the $1 trillion in bad loans, rather it is the collapse of economic growth induced by the absence of credit. Japan is only now coming out of a THIRTEEN YEAR recession resulting from a credit crunch that was caused by the bursting of their real estate bubble. Please do not minimize the danger of the current situation through 'oversimplification'.

[c|net Reader]

"Numbers don't lie."

Right.

[wavefront999]

I hope you realize that while Fanny and Freddy are partially responsible, they were not the only ones packaging bad mortgages in securities and selling them off. It was because the government didn?t impose the necessary regulations on these types of sales that the problem grew to the size it is now. Less regulation would only exacerbate the problem.

[johnwbishop]

..."the Federal Reserve pushed interest rates too low (an attempt to fight inflation, which wasn't entirely wrong-headed, just overdone).."

Please tell me this is a typo: that "low" should read "high". Otherwise, the author really is subtracting value from this discussion.

[Peter Glaskowsky]

Low interest rates are usually associated with inflation, but that doesn't mean that low interest rates cause inflation. After all, the Fed has been maintaining low interest rates for some 20 years, and consumer prices have been relatively stable for that whole time.

But, that said, I realize that I've fallen into the same trap that too many people do-- using the word "inflation" to describe consumer price increases. I've complained about this very thing many times elsewhere, but I did it here anyway, purely for the convenience of not having to explain the difference between inflation and consumer price increases. I plead no contest and throw myself on the mercy of the court. As my own harshest judge, I sentence myself to re-reading my well-worn copy of Henry Hazlitt's Economics in One Lesson.

Oh, well. I should know better than to give people an excuse to be distracted from central themes.

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[M C]

Just returning to say "wow."

This is turning into a slaughter. Wonder if CNet might just hit the "delete" key on the original blog post.

[Peter Glaskowsky]

I don't think CNET is a democracy. Neither is reality.

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[gamathers11]

I tend to agree the greed of the top people in the financial institutions are mostly to blame. I vote that if a government bailout is required to prop up a financial institution then the CEO and all the Directors should be forced to contribute all their assets to help remedy the situation.

[Inashoe]

David Leonhardt met Scott Adams after he wrote a nice piece about his book The Dilbert Principle for BusinessWeek years ago. They're friends.

[Peter Glaskowsky]

Interesting. Thanks for passing that along.

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[Dr_Zinj]

On the issue of outsourcing jobs, it you have a company incorporated in the U.S. and owned by U.S. citizens then the tax rate for that company would have a percentage added to their total equal to the percentage of workers employed by the company outside the United States. In other words, if 50% of your workforce for your company were in Indonesia, your company's tax rate would be 150% of the normal rate.

Of course if that's still not enough, then maybe we have the company also be required to pay 50% of the difference between their foreign workers' salaries and their domestic workers' salaries into social security and unemployment funds.

[Peter Glaskowsky]

Huh? Why on earth would you suppose that's a good idea?

Dude, companies don't hire workers overseas because they're looking to screw American workers.

They do it because at the rates American workers would demand, the work isn't worth doing at all.

In any event, when a company in country A gets work done in country B, it results in a flow of value from B to A that exceeds (and usually greatly exceeds) the flow of value from A to B. This is true of any employment relationship-- the company always makes more money from the employees' work than the employees receive in salary.

So what you're suggesting will harm our country, and it won't help our workers, either, because companies still won't hire domestic workers for the lost positions. They'll just avoid doing whatever business it was that those overseas employees would have worked on.

[Peter Glaskowsky]

I should add that the other reason companies hire overseas workers is that they can't even find American workers. Our unemployment rate has been pretty low, after all.

Punishing companies for finding a way to do business in spite of a lack of domestic workers is just crazy.

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