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The Good News: Bad Policies Can Be Changed

12:00 AM, Sep 17, 2011 • By IRWIN M. STELZER
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One of our great misfortunes is that all of the world’s leaders seem to have a stake in proclaiming that the end of the world is near. President Barack Obama is touring the country telling audiences that unless Congress passes his new jobs bill -- the word “stimulus” is considered too laden with memories of past failures to be usable by the president -- we will almost certainly collapse into another recession. Republican leaders respond by saying unless the president changes his policies or, better still, the nation changes its president, we will fall ever further into debt, with living standards spiralling downward. In Europe, the powers-that-be are saying that unless Italy, Greece and others change their profligate ways, and German chancellor Angela Merkel keeps her nation’s purse open indefinitely to provide a Berlin backstop, the eurozone will collapse and with it the international banking system. And World Bank president Robert Zoellick returned from China to tell those of us here in Washington that the world has entered “a new danger zone with little running room… Unless Europe, Japan, and the United States … face up to responsibilities they will drag down not only themselves, but the global economy.”

Obama crowd

Zoellick's news was best of all. He was making an important point: The fault is not in our stars, but in ourselves. Our problems stem not from any intrinsic flaw in free market capitalism, nor from some historically determined collapse of Western economies, but from terrible policies -- made by man, and capable of being undone by man.

In America, these policies have resulted in a progressive reduction in living standards, or at least in a failure of those standards to continue rising. No longer do Americans confidently believe that each generation will live better than the next. Indeed, many parents are finding that the next generation is returning to share bed and board with them, either because they can’t afford their own places, or to share in the cost of their parents’ upkeep. The number of Americans between the ages of 25 and 34 living with their parents rose to 5.9 million this spring from 4.7 million before the recession, or from 11.8 percent of that age group to 14.2 percent.

Last year was the third successive year in which household incomes fell and, adjusted for inflation, now stands about where it was 15 years ago. Worse still, the typical full-time male worker now earns (again, adjusted for inflation) no more than he did over 40 years ago. Some 25 million Americans are looking for full-time work, and official forecasters are saying that situation is unlikely to improve very much in the next year or so. The deficit-to-GDP ratio is unsustainable, the total accumulated debt is now at a level that scholars say will stifle long-term growth, an increasing number of families are being evicted from or simply abandoning homes they can no longer afford, a new round of layoffs is underway in the financial sector,  the earnings outlook for American manufacturers is deteriorating, and retail sales are stagnant.

Meanwhile, for the first time, an American treasury secretary felt it necessary to sit in on a meeting of EU finance ministers (technically, Europe’s Economic and Financial Affairs Council, or ECOFIN), and flew to Poland to share with his European counterparts the wisdom of an administration that has presided over the first-ever downgrading of American debt. This, after German chancellor Angela Merkel and French president Nicolas Sarkozy had traders riveted to their screens awaiting the outcome of a conference call between them and Greek prime minister George Papandreou, the result of which was the reassuring statement that all agreed Greece should somehow honor its obligations and stay in the eurozone. Just how that is to be accomplished is left for another of the meetings in which eurozone leaders specialize.

John Maynard Keynes, perhaps one of the generation’s greatest economists, famously wrote, “Practical men, who believe themselves to be quite exempt form intellectual influence, are usually the slaves of some defunct economist.” Including him. President Obama thinks he is being a loyal Keynesian when he proposes borrowing some $447 billion to create jobs, mostly in Democratic states that have been so profligate that they are over-borrowed, out of cash, and laying off teachers and firemen. Never mind that there is no way of knowing whether that is what Keynes would have recommended for a heavily indebted country that had tried a similar program only to find the unemployment rate rise rather than fall.

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