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Easy Credit, Hard Landing

The financial insights of Raghuram Rajan.

Jul 26, 2010, Vol. 15, No. 42 • By CHRISTOPHER CALDWELL
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 For his part, Rajan thinks overt welfare protections are preferable to the extension of credit as a surrogate safety net, if only because welfare programs are more transparent. 

In the United States for the past decade, any time the economy began to sputter in the slightest, the government ran around like a chicken with its head cut off trying to fix it. America thus took on its present role as the world’s “stimulator of first resort”—the life of the global party. It borrows money from abroad to stoke world demand. If we think of the international economy as a barroom, then the United States is the guy who can be relied upon to buy a round, even if he has a hard time feeding his own family.

And ad hoc remedies are no different from overt welfare in their tendency to breed unintended consequences. “Policy made in the midst of a downturn is often hurried, opportunistic, and poorly thought out.” Extensions to unemployment benefits, because they are so hard to vote against, are routinely loaded with pork-barrel spending. Rajan is scathing about the Obama stimulus, dismissing much of it as not stimulus but “a form of redistribution to fulfill election promises.”

But long before Barack Obama came to power, the United States was pursuing, through tax cuts as well as easy credit, a program of nonstop Keynesian stimulus. In fiscal terms, in credit terms, the “change” that the president is delivering consists of pursuing the same fiscal policy his predecessors did, only more so. The debate over whether the country now needs a “second stimulus package” is in this sense deceptive. We ought to be arguing about whether it is wise to prolong an era of permanent stimulus that is now decades old.

Christopher Caldwell is a senior editor at The Weekly Standard.


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