Legislating in Panic

The late William A. Niskanen was an astute observer of Washington policymaking for more than 40 years, as assistant director of the federal Office of Management and Budget, director of special studies in the Office of the Secretary of Defense, director of the Program Analysis division at the Institute of Defense Analysis, chief economic adviser to President Ronald Reagan, and then for more than 25 years as chairman of the Cato Institute. Late in his life, as Congress hurriedly considered President Obama’s “stimulus” spending bill, he offered these reflections on the results of legislating in haste. (I would add the Patriot Act, passed immediately after the 9/11 attacks, as another example.) His cautions are worth reading again.

Slow Down the Political Response to a Perceived Crisis

By William A. Niskanen

Repeating his plea for the fiscal stimulus plan on February 5, President Obama said that “The time for talk is over. The time for action is now, because we know that if we do not act, a bad situation will become dramatically worse. Crisis could turn into catastrophe for families and businesses across the country.”

This is the fifth time in my adult life that the president has asked for or asserted unprecedented authority on an expedited basis with little or no congressional review. Each of the prior occasions turned out to be a disaster.

The first of these episodes was in August 1964. Following a reported attack by North Vietnamese torpedo boats on two U.S. destroyers operating on an electronic intelligence mission in the Gulf of Tonkin on August 4, President Johnson ordered a U.S. air strike on where these boats were based. On August 5, President Johnson asked Congress to approve a resolution “expressing the unity and determination of the United States in supporting freedom and protecting peace in southeast Asia,” with express support “for all necessary action to protect our Armed Forces,” although he repeated prior assurances that “the United States seeks no wider war.” On August 10, after less than nine hours of congressional debate, Congress approved a joint resolution which authorized the president “to take all necessary steps, including the use of armed force, to assist any member of the Southeast Asia Collective Defense Treaty requesting assistance in defense of is freedom,” a resolution that passed the House with no dissenting vote and passed the Senate with only two dissenting votes. At the time, Senator Morse warned that “I believe this resolution to be an historic mistake.” As it was. In 1967, a Senate committee learned that the Navy communications center in the Philippines had questioned whether there was any attack on the U.S. destroyers on August 4. After huge fatalities to Vietnamese, Cambodians, and Laotians, and 58,000 U.S. combat fatalities, the war did not end until the North Vietnamese captured Saigon in April 1975. In contrast with the administration’s. “domino theory” rationale for the war, there was no spread of communism to the rest of southeast Asia. The U.S. and the unified Vietnam now have peaceful and productive relations, and the U.S. has acquired another exotic Asian cuisine.

The second of these episodes was on August 15, 1971 when President Nixon announced his New Economic Policy on Sunday night television when Congress was in their summer recess. Provoked by a flight from the dollar that spooked Treasury Secretary John Connally and acting on his own authority without consulting Congress or the international financial authorities, Nixon imposed a comprehensive system of wage and price controls for 90 days, imposed a 10 percent surcharge on all imports, and ended the Bretton Woods system of buying and selling gold at a fixed dollar price. In the name of increasing employment, he also asked Congress to approve a package of budget measures, none of which were approved. The import surcharge was dropped in December 1971. The wage and price controls were gradually changed into “guidelines” by President Ford and President Carter. Continued price controls on gasoline, however, led to queues at service stations until these controls were finally eliminated by one of President Reagan’s first actions in January 1981. What were the effects of Nixon’s New Economic Policy? The consumer price inflation increased from 4.4 percent in 1971 to 13.5 percent in 1980, and real GDP declined in 1974, 1975, and 1980. Congress should clearly have reviewed the major measures that Nixon implemented on his own authority.

The third of these episodes was in early October 2002 when Congress approved the Iraq War Resolution, giving President George W. Bush almost complete discretion on whether, when, and how to go to war with Iraq. The resolution cited numerous conditions to justify a war with Iraq without mentioning whether Iraq was a direct threat to the United States. This resolution was approved by a large bipartisan majority in both the House and the Senate, including the approval by Joe Biden and Hillary Clinton, and five proposed amendments to limit the discretion of President Bush on this issue were also defeated by a large bipartisan majority. The outcome was that the U.S. military forces initiated war against Iraq in March 2003. Early in the war, it became clear that Iraq did not have any weapons of mass destruction and had not supported al-Qaeda, so the argument for the war shifted to more nebulous rationales, such as creating and preserving democracy in the Middle East. The U.S. experience in both Iraq and Afghanistan proved that our military can defeat most existing governments quickly but that we do not have the knowledge or patience to be a successful occupying power in a hostile environment. In any case, the new status of forces agreement with the Iraqi government commits U.S. forces to be withdrawn by the end of 2011, making the Iraq war one of our longest wars with a yet uncertain outcome. This is another case in which Congress did not take sufficient time to review a very important issue, in part because of the rush to go home to run for reelection.

The fourth of these episodes was in October 2008 when Congress approved the Emergency Economic Stabilization Act of 2008, incorporating the Troubled Asset Relief Program (TARP) that gave the Secretary of the Treasury almost complete authority to spend up to $700 billion (!) to purchase “troubled” assets, primarily mortgage-backed securities, and to increase the capital in selected banks. This act is the outgrowth of a three-page proposal by Treasury Secretary Henry Paulson on September 19 that, in turn, was the result of a concern by Paulson and Fed Chairman Ben Bernanke that lending among the major Wall Street banks had almost ceased after the collapse of Lehman Bros. The proposed law was expanded to 110 pages but was defeated in the House on September 29. The Senate expanded the bill to 451 pages, adding about $150 billion of expenditures for unrelated measures, and approved the expanded bill on October 1. The expanded bill was then approved by the House and signed by the president on October 3, making it possible for Congress to go home to run for reelection. The only significant constraint that Congress added to Paulson’s original proposal was to require subsequent congressional approval to release the second $350 billion of the authorized expenditures. As it turns out, Secretary Paulson was not clear what he would do with all this money. He originally expected to use most of this money to purchase mortgage-backed securities from the banks. On October 14, however, the program shifted to buying preferred stock and warrants from the nine largest banks and then from hundreds of smaller banks. As it turns out, this program was an expensive failure. On February 5, 2009, a congressional panel that oversees TARP reported that the Treasury paid $254 billion for preferred stocks and warrants that may only be worth about $176 billion. And to the administration’s irritation, most of the banks used the Treasury money to increase their capital ratio rather than to increase lending. The Obama administration and Congress have yet to determine what to do with the remainder of the appropriation for this program.

The fifth of these episodes, of course, is the current congressional deliberation on the fiscal stimulus plan for over $800 billion (!) of additional spending and tax reductions. Most of the details of this plan were apparently selected by House Speaker Nancy Pelosi, but the guiding principle seems to be White House Chief of Staff Rahm Emanuel’s advice that “You never want a serious crisis to go to waste. And this crisis provides the opportunity for us to do things that you could not do before.” President Obama and the congressional Democrats have used this opportunity to seek approval for policies that they have supported for years, wrapping them in a package and calling it a fiscal stimulus plan. The only coherence in this plan is political, not whether it is an effective or efficient method to stimulate the economy. The House passed this plan with little congressional debate or a single Republican vote on January 29. As I write, a group of moderate Republican Senators is bargaining for larger tax reductions consistent with maintaining a $800 billion limit on the sum of spending and tax measures. Again, as in the four prior episodes, there is every reason not to rush to approve a program of such magnitude. The primary reason for the current financial crisis is that many banks cannot evaluate their own solvency or that of their current or potential counterparties, primarily because of the difficulty of valuing mortgage-backed securities and other complex derivatives, and neither TARP nor the fiscal stimulus plan addresses this problem. Our political system, unfortunately, is strongly biased to try to protect people against the effects of a crisis without addressing the causes of the crisis. To Congress: Slow down. Make sure you understand the causes of the financial crisis and the potential solutions before you burden your children and your grandchildren with another trillion dollars of federal debt. Your present course is best described as fiscal child abuse.