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<< Previous   of   Next >>   ADVERTISEMENT   CONTACT THE HERALD Mike Benbow, Business Editor benbow@heraldnet.com   Published: Sunday, November 23, 2008 Delay will only make this economic crisis worse By James McCusker Herald Columnist One of the positive developments in technology has been "noise cancellation" headphones and similar devices. The physics of sound can get incredibly complicated, and the math makes your head ache, but the basic idea behind noise cancellation is simple. Whatever the sound wave is doing, do the opposite and the waves will cancel each other out. The economics behind fiscal and monetary policy are very similar to noise cancellation physics -- including the math and the headache. But, again, the basic principle is pretty straightforward. Essentially, the idea is to smooth out the wave action of the economy, the upward and downward swings that can cause so much dislocation, inefficiency and personal pain. In theory, if the swings seem to be getting out of hand we apply an economic wave in the opposite direction. The waves should cancel each other out and the economy can continue chugging along. There are two ways to generate a needed opposite, "counter-cyclical" wave force: fiscal policy and monetary policy. It is no secret that conservatives tend to prefer monetary action and liberals tend toward fiscal methods, but the truth is that once we leave the blackboard and enter the real world, economic policy immediately becomes messy. It doesn't need help from politics for that. One of the messy problems in coming up with an effective counter-cyclical force is calculating the right amount. The economy doesn't just sit there waiting for you to do something. In fact, the longer you wait, the stronger the pro-cyclical forces get. A pro-cyclical force in the economy is one that pushes the economy in the direction it is already going. In a recession, for example, pro-cyclical forces tend to make it worse. Some of these pro-cyclical forces are caused by our human nature; others by social structures and laws. Irrespective of the cause they cannot be ignored. In Washington, D.C., Congress and the Bush administration are pondering an economic stimulus of some sort. This would be a counter-cyclical move to provide an opposing force to the contracting economy and could involve direct payments, tax cuts, or both. At the same time, however, state, county, and city governments around the country are going wild with pro-cyclical actions. As the economy moves into recession they are laying off workers, cutting back expenditures and raising taxes and fees. It is not a blame issue, exactly. State governments, for example, are generally required by their constitutions to balance their operating budgets. And when they are faced with declining revenue because of an economic recession, they either have to raise taxes or cut expenditures. Either choice is pro-cyclical and will have the effect of further contracting the economy. Individual behavior is usually pro-cyclical, too, even though our habits tend to make us slow to respond to upward or downward economic swings. One of the significant, pro-cyclical, problems in our economy now is that individual consumers have reduced spending, lowering aggregate demand. That was reflected in the Consumer Price Index, which declined 1 percent in October, the biggest drop since February 1947. Pro-cyclical individual behavior becomes a factor in calculating either monetary or fiscal policy counter-moves. One of the issues complicating the GM, Ford, and Chrysler bailout, for example, is the fact that consumers are not buying Detroit's cars. The amount of capital sufficient to rescue auto companies who can't sell their cars would be daunting even to a free-spending Congress inclined to help. The economics lesson in all this is that the enemy of economic policy is delay. The longer we put off doing something, the more ingrained the pro-cyclical behavior of individuals, businesses and governments becomes and the more force will be needed to reverse it. In this situation delay has its own sort of perverse multiplier effect. If we thought that an interest rate cut of one-quarter point was enough last year, now it will take twice or three times that. A year ago, a mortgage rescue for homeowners probably would not have been too expensive, while FDIC's latest plan costs over $10,000 per home. Six months ago, an economic stimulus program involved hundreds of dollars for most households. Today, unless it involves checks for at least two grand, we are probably wasting our time if we expect to turn the economy around. If you don't believe in bailouts, rescues, counter-cyclical fiscal policy, or even high fiber and the hanging curve ball, there is nothing to be discussed ... or done. Congress, though, seems inclined to believe that the right government action can get our economy back on track. Because of the pro-cyclical forces in our economy, though, Congress needs to remember while time is money, delay is money squared. And that kind of math can give us a real headache. James McCusker is a Bothell economist, educator and consultant. He also writes a column for the Snohomish County Business Journal. READER COMMENTS Be the first to comment. You must be a registered user and verify your e-mail address to post comments to blogs or articles on HeraldNet. To register, click here. To read other terms and conditions, click here. Log out

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