Posted on | April 4, 2010 | 16 Comments
Since 2008, I have consistently derogated prospects for a quick economic recovery. Americans lost an estimated $7 trillion in asset value in housing bubble collapse — a loss of approximately $54,000 per U.S. home — and whatever it takes to recover from that kind of loss, it certainly won’t be quick. Furthermore, I have consistently said that the Democrats’ neo-Keynesian economic approach is doomed to failure:
- Dec. 8, 2008 — It Won’t Work
- Feb. 9, 2009 — It Still Won’t Work
- May 4, 2009 — The Fundamentals Still Suck
The basic problem is still the same as I described it when I offered a thumbnail summary of Megan McArdle’s analysis in May 2009:
The stimulus-and-bailout policies have not addressed the fundamental problems of the economy — namely, an excess of debt and a shortage of capital to spur job creation — while the entitlement trainwreck of Social Security and Medicare looms immediately ahead. By piling on new trillion-dollar deficits, at a time when the recession will result in significant tax revenue shortfalls, the Democrats are steering the economy into a stagflation trap.
Excuse me if this seems like I’m engaging in self-congratulation, but my point is to drive home a basic point: You can’t make capitalism work without capital. And the discredited Keynesian theories on which the Obama administration and congressional Democrats are currently operating overlook the brutal economic reality of the capital shortage.
Even if Americans produce and accumulate new capital at the rate of $1 trillion a year, it would take seven year just to return to the level of asset-value they possessed before the housing meltdown hit in 2007.
Political leaders are now engaged in a lot of happy-talk about recovery, engaging in psychotherapeutic mind-games evidently based on the assumption that “consumer confidence” is merely an affective mood, unrelated to underlying economic reality. Larry Summers on CNN:
“We’ve got a long way to go,” Lawrence Summers, Director of the White House National Economic Council, said on CNN’s State of the Union. “We’ve inherited a terrible situation, the most pressing economic problems since the Great Depression in our country. It is the president’s preoccupation to put people back to work.”
While acknowledging that the economic outlook is not where the White House would like it to be, Summers pointed out that the economy is doing better now than it was this time last year in terms of job growth, exports, and availability of credit.
“The trend has turned,” Summers told CNN Senior Political Correspondent Candy Crowley, “but to get back to the surface, we’ve got a long way to go and that’s what we’re fighting to do every day.”
As much as Summers tries to temper any temptation toward optimism, you see, he still insists that “the trend has turned.” That this is a political statement, and not a sober appraisal of the economic situation, can be demonstrated in fewer than 150 words:
[U]nemployment remains at 9.7% and federal officials predict the rate will stay at similar levels through 2011.
Having expended some $800 billion on deficit “stimulus” spending, Obama finds himself facing the ugly economic reality of a market prepared to downgrade the AAA rating of U.S. bonds unless the federal government engages in serious belt-tightening.
Yet another wave of financial crisis, driven by trillions of dollars of bad commercial real estate loans, looms on the economic horizon. In 2009, there were 140 U.S. bank failures; there have already been 38 bank failures in the first three months of 2010, a pace likely to accelerate as the year continues. And the traditional liberal response to this kind of problem (i.e., more deficit spending) can only be undertaken at risk of sparking a bond-market crunch along the lines of the Greek debt crisis, except on a gargantuan scale.
UPDATE: Speaking of super-heroes and economic reality, Glenn Reynolds whomps Henry Waxman upside the head with Hayek:
Obamacare was supposed to provide unicorns and rainbows: How can it possibly be hurting companies and killing jobs? . . .
Waxman and his colleagues in Congress can’t possibly understand the health care market well enough to fix it. But what’s more striking is that Waxman’s outraged reaction revealed that they don’t even understand their own area of responsibility — regulation — well enough to predict the effect of changes in legislation.
Instapundit: More powerful than a speeding locomotive!