Since 2008, the federal government and the Federal Reserve have spent some $3 trillion to secure the financial system and prevent a second Great Depression. What did all this money buy us? A really expensive life jacket.
The economy did not collapse. Growth, while low, has returned. Unemployment, while high, is lower than it otherwise might have been. Institutions and companies that otherwise would have been destroyed are still around, because the government owns or controls them. We own Fannie Mae and Freddie Mac at a cost, so far, of $145 billion. We own AIG at a cost, so far, of $182 billion. We own GM and Chrysler—and bailed out GMAC and Chrysler Financial—for a cost of around $80 billion.
The economic, social, and political consequences of allowing private actors to suffer the consequences of bad decisions were deemed by the government to be too great. So, because too much debt was at the root of the problem, the government stepped in and transferred the debt from the private sector to the public sector. It helped that many of the private actors who received government support also had political connections. Not all of the bailed out institutions were private companies, of course. In order to prevent the layoffs of public employees that would result if the states balanced their books, the federal government stepped in with aid. And Fannie and Freddie existed in the gray world between public and private.
The life jacket kept the economy above water. But staying afloat in the sea is not the same as reaching the shore. It would be silly to suggest that the current economy is desirable, or that the underlying imbalances have been worked out. Yet the administration is in the unusual position of doing exactly that. When Treasury Secretary Timothy Geithner wrote a New York Times op-ed last week with the headline “Welcome to the Recovery,” it was hard not to laugh. When President Obama visited Detroit on July 30 and pronounced the auto bailout a success, his words and demeanor seemed disconnected from reality. Of course the government will be able to preserve manufacturing jobs in the Midwest if it spends tens of billions of dollars on two companies. But what’s the larger price to be paid, in debt and taxes and misallocated resources?
What the Obama administration doesn’t want to acknowledge is that the life jacket has become a straitjacket. Remove it, and more people will lose jobs and livelihoods and health insurance. Maintain it, and the mounting public debt, combined with the sense that the economy is split between government insiders and everybody else, will provoke a political backlash. It would be easier to remove the jacket if the private sector were leading an economic boom. But that isn’t the case. And so the economy is in twilight. The government props up what blogger Arnold Kling calls “unsustainable patterns of specialization and trade” because it is (understandably) afraid of unemployment.
It isn’t supposed to be this way. In an efficient economy, failed companies would die, state governments would balance their books, and the housing market would be rid of government intervention. In an efficient economy, the pain during a correction would be sharp, but also swift. The truth is we’ll never know, because we don’t have an efficient economy. We have a zombie economy.
The zombie economy is filled with unproductive entities that exist only through government life support. The government uses the zombies not to make money, but to promote an agenda. In the zombie economy, where some firms with connections get help while others do not, politics matters more than prosperity. Government cheerleads for specific interests and pits one group of Americans against another. The short-term benefits of the undead economy are visible and touted as signs of success, while the long-term costs are ignored because they haven’t yet materialized. But one day they will, and future generations will pay the high taxes and high interest rates that the zombies will leave in their wake.
Consider the auto bailout. Desperate to trumpet an economic accomplishment, over the last week or so the president visited GM, Chrysler, and Ford plants. This is the first time in six years that all three domestic auto manufacturers are in the black, which Obama attributes to the government’s ownership stake in GM and Chrysler. (Taking credit for Ford’s success is a stretch, since it didn’t accept government assistance. But that hasn’t stopped Obama from trying.)
It’s true that GM and Chrysler’s government-backed bankruptcy helped change some of the domestic auto companies’ worst practices. It’s also true that, in recent months, business has picked up. But the auto bailout didn’t change the fact that these huge companies have been making a lot of cars that Americans do not want to buy.
Indeed, it may make that problem worse. In July, when Obama visited a Chevy plant, he test-drove a Chevy Volt, GM’s plug-in hybrid. Obama likes the Volt because it’s environmentally friendly. But it’s also impractical and terribly expensive at $41,000. Taxpayer money, in other words, is subsidizing at great cost a product that only the wealthy will be able to afford in order to make the green lobby feel good. This is how Obama defines success?
The Volt is a perfect example of big government and big business engaging in mutual folly. It’s a boondoggle. It’s akin to an expensive weapons system that liberals try desperately to cut from the Pentagon budget. No doubt the program will continue for as long as taxpayers provide the financing. But what will happen when GM has to rely on consumer demand to survive, and all the dollars that have been invested in the Volt see no return?
Rather than working to hasten the day when the government sells its stake in these companies, Obama seems to relish his role as commander in chief of GM and Chrysler. He touts products like the Volt and the Jeep Cherokee (which has a much larger carbon footprint than the Volt and is also, perhaps not unrelatedly, a car that people actually want). He acts as a spokesman for the United Auto Workers, telling laborers at the plants he visits that if the dastardly Republicans had their way, they would be out of their jobs. He participates in propaganda exercises such as GM CEO Ed Whitacre’s April Wall Street Journal op-ed, “The GM Bailout: Paid Back in Full,” in which Whitacre used the fact that GM had paid back a single loan to the government to spread the false impression that the government no longer was in the car business. That was a lie, of the sort that is all too common when government enmeshes itself in private enterprise.
It’s unseemly. By picking winners and losers, Obama raises the question of why the government bails out some companies and not others. By gloating over the zombies’ short-term success, he fosters resentment among the unemployed who have not benefited from government bailouts—the car dealers, say, who were forced to close as part of the political bankruptcy settlement. This type of politicized economy hurts the market’s public reputation. The zombie economy is zero-sum. The man with the most ties to Washington wins. The man without them? Sorry, pops.
The rationale behind many zombie policies is a gutter Keynesianism. John Maynard Keynes famously laughed off concerns about the long-term consequences of his policies by pointing out that, “in the long run, we are all dead.” A clever line (by a childless man), but it didn’t answer the criticism that stimulus measures just delay the necessary balancing of accounts. They may keep the patient upright. But one day he will have to stand or fall on his own.
For example, take state and local governments. Over the last two decades, they went on a spending spree. They hired public employees in boom times without thinking what might happen when the economy went bust. When the lean times inevitably returned, the states faced the prospect of mass layoffs. Once again the federal government stepped in, shifted the debt upward, and delayed the painful adjustments necessary to make state and local budgets sustainable. According to the nonprofit ProPublica, more than $58 billion of the 2009 stimulus bill went to aid for state and local governments.
That was only the beginning, however. This week Congress is expected to authorize an additional $26 billion in aid. Chances are that won’t be enough either, because state and local revenues won’t be able to support overextended state and local workforces until the economy is booming again. Unfortunately, no one has any idea when that is going to happen—and even then, it’s likely the states will just go back to binging.
Not every state behaved irresponsibly. But those that did became the equivalent of zombies, dependent on the federal government for sustenance. The debates surrounding aid to state and local governments follow a familiar pattern. Critics of unconditional aid are routinely caricatured as heartless or cruel. Ask why government is favoring one class of occupations over others, and you will be called anti-teacher or anti-cop or anti-fire fighter. Government spending, you will be told, is the best form of economic stimulus—even though the trillions that already have been spent have brought nothing but doldrums. The message from Washington is that the status quo must be perpetuated. The message is that the zombies must not be allowed to die.
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).