Holman Jenkins is practically predicting a lost decade. The basis for his outlook is that the loss of prosperity will usher in a period of bad government policy that will exacerbate the situation by destroying confidence in the private sector.
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.
Jenkins is assuming that the Obama administration will be dragged into the quagmire that he foresees. That remains to be seen but certainly the forces are being arrayed to do just that. From his own party, to Congress, to special interest groups that see a once in a lifetime opportunity to push through significant societal changes, the powers that are going to tug and pull are going to be enormously difficult to resist. It is almost as if victory might well be defined as doing as little bad as possible. Anyway, here is Jenkins conclusion:
Bottom line: Politics is in charge — in a way that makes a lost decade of subpar prosperity more likely than not.
Somewhat on the other side is Zachary Karabell. His argument is that the unprecedented speed of the worldwide economic collapse was precipitated by the unprecedented unity of economies. Therefore, it is not beyond reason that the recovery could be equally swift. Karabell goes on to cite the positive side of what many look at as impediments to recovery. He cites relative tranquil political reaction to the problems, a consumer that may not be as bad as the press likes to portray and who is swiftly making adjustments to the new reality and corporate balance sheets that are relatively unleveraged.
The last months of 2008 will go down as one of the most severe economic reversals to date, and on a global scale. But it is foolish to assume that this period provides a viable guide to what lies ahead.
The rush to declare the future bleak has obscured the fact that no one knows the outcome of an unprecedented event. No one. The worst course in the face of uncertainty is blind faith in conventional wisdom and past patterns. The best is to stay humble in the face of the unknown, creative and unideological about solutions, and open to the possibility that as quickly as things turned sour they can reverse.
Karabell’s arguments to an extent touch a nerve with me. Conventional wisdom seems to be almost universally on the side of further economic decline and, of course, there are those on the fringe who see much worse. That much consensus troubles me and has, at least in my experience, tended to miss calling the future pretty consistently.
As much as I want to side with Karabell, I am probably more in the Jenkins’s camp at this point in time. I agree with Jenkins that there is much mischief that politics can do over the next few months and the odds are that it will be done. Obama may prove to be superhuman and surprise. I hope that’s the case. If not, then we shall see if an economy can recover in the face of contradictory policy.