Get
Ready for a Lost Decade
Bad times don't produce good
policy.
The Wall Street Journal, December, 24 2008
How many
times have you heard that we've learned the lessons of the Great Depression and
won't repeat the same mistakes ?
That statement is a bit of a false promise, since there was only one Great
Depression, and many, many steps were taken and not taken, with no chance to
rerun the experiment over and over to figure out what worked, or would have
worked, and what didn't.
Letting hundreds of banks collapse, destroying savings and confidence, is
one mistake we won't make again. But many want to insist, without evidence,
that more government spending would have ended the depression. That's the direction
the Obama administration is taking. Others say government did not do enough to
restore business confidence, or did too much to damage it, piling on taxes,
regulation and labor unions. This at least is firmer ground. Plenty of evidence
from history shows that actions hostile to business tend to be related to an
absence of prosperity.
But more important than these talismanic assurances about what we've
learned from the Great Depression is the mistake in assuming that, even if we
had a coherent view of what should be done, coherent polices would therefore be
implemented.
This has little relation to how policy is made in a democracy.
Policy is always bad to a degree, but long periods of prosperity tend to be
self-reinforcing since powerful interests are born with the means and motive to
preserve the status quo. That status quo may really be a contributor to
prosperity, such as regulatory restraint and moderate tax rates. That status
quo may in some respects be ill-advised, such as excessive subsidy to housing
debt.
But once prosperity blows up, the quasi-virtuous policy circle becomes an
unvirtuous one as new interest groups come to the fore to exploit an appetite,
previously weak, to impose their costly or vindictive wish lists. And even
well-meaning policy gets twisted and rendered incoherent.
It's already happening to our banking bailout. If injecting government
capital to improve confidence in banks was a good idea, it did nothing to
improve the banks' own confidence in their borrowers. Yet now that banks have
government capital, they're being pressed to lend to politically favored
constituents regardless of their own judgment about whether the borrower is
good for the money.
Or take the gathering auto bailout: Taxpayer dollars are being thrown at
Detroit auto makers to make them "viable," even as Congress imposes
new fuel-mileage mandates requiring them to incur tens of billions in costs
unlikely to be recouped from their customers -- the definition of
"nonviable."
Mr. Obama's troops palpitate with excitement at the prospect of $1 trillion
in "stimulus," though any net benefit to the economy likely will be
incidental. Al Gore has thrown out the window any unpopular carbon taxes in
favor of direct subsidies to his green energy investments. He sees the moment
for what it is -- alarm about global warming has degenerated into a pretext.
Billions will be diverted from useful purposes to create "green jobs"
that deliver no meaningful impact on climate or the accumulation of atmospheric
carbon.
Large "confidence" costs were always destined to flow from the
extreme steps being taken, even if advisable, to prop up the economy. The
federal government's alternating takeovers and bailouts of companies are
inherently destabilizing and create massive uncertainty in investors and
businesses. The Fed's shocking steps to print money and acquire every kind of
private asset and, soon perhaps, washing machines and Chevy Tahoes, may in
retrospect be seen as just the right medicine. At the moment, no rational
investor or business manager looks upon such doings with confidence in our
economic future.
On top of it all, the Madoff scandal is peculiarly demoralizing in ways
that may make its impact greater than the sum of its parts.
Our point here is that the bad policy vicious circle probably has a long
way to run. While it's still possible to entertain wild hopes about an Obama
administration, such hopes are partly self-liquidating on closer inspection --
they exist in the first place only because Mr. Obama has given us so little to go
on, except campaign boilerplate.
Bottom line: Politics is in charge -- in a way that makes a lost decade of
subpar prosperity more likely than not.
Happy
Holidays.