The Other McCain

"One should either write ruthlessly what one believes to be the truth, or else shut up." — Arthur Koestler

‘Far More Grim’

Posted on | November 28, 2010 | 2 Comments

Instapundit links a sobering discussion of America’s fiscal problems by National Review‘s Yuval Levin:

Most of the baseline assumptions about the size of our debt assume that today’s exceedingly low interest rates continue. If they don’t — even if rates just return to the average of the past 20 years — the picture looks far more grim.

Levin was responding to a Weekly Standard article by former Federal Reserve official Lawrence Lindsey. There are limits to the neo-Keynesian fiscal and monetary games that Washington has been playing for the past couple of years. The market for U.S. debt is not infinite, and monetizing the debt (which is what “quantitative easing” is about) involves the not-insignificant risk of a Weimar-like disaster.

America’s problems have been overshadowed, and to some extent mitigated, by the much more immediate problems of Europe. However unattractive U.S. bonds may be to investors, they are still more attractive than investing in Greek, Irish or Portugese bonds, and the weakening of the euro inevitably strengthens the purchasing power of the dollar. (Although a stronger dollar hurts our exports, so it’s not an unalloyed good.)

Still, anyway you slice it, the huge deficits resulting from two years of neo-Keynesian interventions — which include, of course, the Bush-era TARP bailout — represent real reasons to be pessimistic about the prospects for economic recovery. And the fact that we’re now at risk of military conflict with an ally of China, a major purchaser of U.S. government debt, adds still more grimness to the picture. Some other reasons to be pessimistic:

If I had to bet whether unemployment a year from now would be higher or lower, my money would be on “higher.”

That would probably be enough to get me branded an economic saboteur by Matthew Yglesias, but I’m not the one who has advocated the policies that have brought us to this sad situation. I opposed the Bush bailouts (“The Bible vs. the Bailout” and “Libertarian Populism“), and I warned early and often against the neo-Keynesian approach embraced by the Obama administration: “It Won’t Work,” “It Still Won’t Work” and “The Fundamentals Still Suck.”

There is no pain-free way out of our fiscal and economic predicament. Sound fiscal policy would likely, in the short term, result in higher unemployment. But the policy path we have followed since 2008 — massive federal borrowing to fund the stimulus-and-bailout agenda — has only increased the debt overhang that is the 800-pound gorilla we ignore at our peril.

UPDATE: Now a Memeorandum thread. I wish serious posts about economics got as much traffic as a Kate Middleton upskirt photo, but we must live in the real world — which is, of course, one of the great lessons of economics. That’s the problem with liberals: They pursue policies aimed at bringing about some abstract ideal like “social justice,” instead of developing policies that take cognizance of economic reality.


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