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The Zombie Economy

The life jacket the government threw to the private sector has become a straitjacket.

Aug 16, 2010, Vol. 15, No. 45 • By MATTHEW CONTINETTI
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The same is true for Fannie Mae and Freddie Mac. One can argue over the degree to which they contributed to the financial crisis. But one cannot deny their involvement. Yet the two institutions continue to suck up taxpayer dollars. They’ve faced few consequences for their actions. The Obama administration claims it will support reform of Fannie and Freddie next year. But that is the political equivalent of saying you’ll go on a diet after Thanksgiving. Meanwhile Washington has heaped policy on top of policy in a desperate effort to keep people in homes they cannot afford. On August 5, for instance, Fannie announced that under its Affordable Advantage program, a buyer can obtain a mortgage with—this is not a joke—only a $1,000 down payment. From autos to spending to housing, the zombie economy is characterized by a fundamental lack of seriousness.

We may have to get used to it. The economists Kenneth Rogoff and Carmen Reinhardt have found that it takes a long time for economies to recover from financial crises. It took a decade for America to recover from the Great Depression. It’s been two decades since Japan’s real-estate bubble burst, and their economy is still in the doldrums. Twenty-first-century America may be no different.

The parallels may extend beyond economics. Japan’s Lost Decades have been accompanied by political upheaval, with governments rising and falling quickly and entrenched parties suddenly collapsing. It is not unreasonable to imagine something similar happening in America, with the electorate lurching from one party to the other as it struggles with the consequences of sluggish growth and debt overhang. 

Neither party has thought through what the political consequences might be if America is at the beginning of a lost decade or decades. The Democrats are content with the zombie economy. It offers them the opportunity to meddle with industry, to build up the welfare state, and to engage in their passion of dividing the pie over growing the pie. The Republicans, meanwhile, have yet to offer an alternative beyond straightforward opposition to the Democrats. That may suffice to win the November elections. But it spells trouble in 2011, when the public will hold Republicans as well as Democrats responsible for unemployment, taxes, and the deficit.

The good news is such an agenda isn’t too difficult to figure out. It begins with a simple imperative. Kill the zombies.

Matthew Continetti is associate editor of The Weekly Standard and the author, most recently, of The Persecution of Sarah Palin (Sentinel Books).

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