Blog cafe : In 1932?

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: President-elect Obama in an interview with ‘60 Minutes’ was asked directly if the current economic situation is similar to the situation in 1932. His first response showed judgment—as he put it, in 1932 the unemployment rate was 25% and the economy was in much worse shape than today. However, he also quickly added that our current situation is the worse situation we have faced since 1932. His position is not uncommon, but I remain confused by this “argument” whether it is uttered by the President-Elect or by a university colleague. The position relies on an assessment of the counter-factual—that in fact had we not agreed to the $700b plus bailout, the economy would have deteriorated to a 1932 type crisis. We are told simultaneously that Hank Paulson has made mistakes in implementation and is still trying to figure it out, and yet that the serious steps we have taken have prevented the economy from sliding into a 1932 type crisis.

But the data on the credit crunch is more complicated than this position lets on, the distortions to market signals caused by government manipulation are real, the perverse incentives created by bailouts will be with us for years, and the costs of rent-seeking are accumulating. $700b becomes $850b which then results in a swarming of special interest groups that cannot be denied their share of the funds.

So I put back to our new President what argument would give [him] pause about the counterfactual and how much accumulation of the inefficiency and ineffectiveness of the current policy path would lead to shift focus from government’s positive role in the economy to the needed restraints on government involvement so market forces can adjust to changing realities ?