By Richard Vedder
Here is a contrarian view on the economy. We may be heading into a mild downturn --even a small recession --but no big deal. However, nervous politicans and new leaders at the Fed are going to screw things up. They are pushing for a huge stimulus package to get unemployment at acceptable levels by next November.
The economic experience of the 1970s is that stimulus packages do not work --period. If timing is bad, they can be worse than useless. They do nothing to deal with long run problems (e.g., inadequate capital investments). More importantly, they raise inflationary expectations. That raises interest rates, lowers stock prices. That lowers returns on endowments, leads to reduced university private giving, and does nothing to stimulate the economy in way leading to more state appropriations. The 1970s was generally a mediocre decade for universities relative to the golden days of the 1950s and 1960s --yet was accompanied by vigorous, high deficit fiscal policy and expansive monetary policy.
The university community --as the nation as a whole -- would be better off with a more relaxed, less panicky, "rules" approach that does not depend on the whims of the fed. Bernanke is no Greenspan or Volcker (I was against his appointment) --if for no other reason than he is an academic shielded his whole life from the consequences of adverse economic policies (unlike Greenspan). The CPI rose more last year than the year before, and the falling dollar shows that the world is losing confidence in this great standard of value. You heard it here first.