It’s becoming increasingly clear that this recession is different. An economic contraction after a financial panic is a wealth recession, not an income recession. Households and businesses had borrowed too much money, acting as if they were richer they really were. The de-leveraging necessary to restore a sound economy, however much we and the politicians who appeal to us would like it to be otherwise, will be a slow process. All of the public policy ideas that want to hasten this re-set, like stimulus packages, require the federal government to offset the de-leveraging of private enterprises and citizens by leveraging its own sovereignty more and more aggressively.
It’s pretty clear that isn’t going to work politically, since Americans are growing more and more apprehensive about federal deficits already scheduled to be very large because of the baby boomers’ retirements. It may also be counterproductive economically, since the idea that the federal government can and should borrow as much as it wants as long as someone is willing to lend, puts the full faith and credit of the U.S. government at risk, or at least in play. Fixing the economy with more government borrowing is reassuring — until it isn’t. When financial markets get the faintest idea that sovereign debt is also a heavier load resting on thinner ice, the panic can spread very quickly.
Every problem is a nail when your only tool is a hammer. The Obama administration did not want to let the economic crisis it walked into after the 2008 election go to waste, and it used classic Keynesian policies to restore aggregate demand . . . and sweep in as many items that had been languishing for decades on the Democratic party’s to-do list as it could. The arguments that we would be better off now if the 2009 stimulus had been much bigger refuse to acknowledge the possibility that the unique features of our current economic situation have rendered such initiatives expensive irrelevancies. There may not be policy measures available that substantially improve our economic situation or hasten our recovery. The overarching policy imperative is to do no harm, to avoid mistakes that make a slow recovery even slower or more uncertain.
— William Voegeli is a visiting scholar at the Henry Salvatori Center at Claremont McKenna College and author of Never Enough: America’s Limitless Welfare State.