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What is to be done?

Those of us who are unimpressed with the effectiveness of using debt-financed government spending as a cure for the current state we’re in are often asked, OK, so what should we do instead? Would I do nothing for the people who are unemployed?

In January of 2009, I suggested this plan for recovery. I like to think it would have done a better job than what we actually did, but there’s no way of knowing. I think it’s better than anything on the table now. But suppose it’s not. Suppose it’s politically unviable or simply a bad idea. Isn’t it enough to explain that the stimulus doesn’t make economic sense?

It’s like someone going down a hill who discovers his brakes aren’t working–someone has removed the brake pedal and the rod that connects the pedal to the braking mechanism. What is to be done? Well there isn’t a brake pedal, so whatever you suggest isn’t going to prevent injury to the driver and the passengers. One of the passengers suggests whistling–he has heard a theory that the expulsion of air by the passengers will slow the car down. Another passenger tells the driver to assume there is a brake pedal and to kick the floor where the brake pedal should be. If I suggest that these theories are wrong, am I heartless? If I suggest that kicking twice as hard will just hurt the driver’s leg, is that irrelevant?

One lesson is to keep the brake pedal in place in the future. While it’s true that doesn’t any thing to help the current driver, it’s still useful information.

We are in the mess we are in because of a combination of policy mistakes–artificially low interest rates, housing policy that distorted the construction industry and the price of housing, and implicit and explicit promises to honor the losses of bad financial bets. When you do those things, you can come to a bad end. It would be great to think that the housing market and the financial sector can be repaired without pain. I don’t know how to do it and I don’t think anyone does. It would be great to have a theory of what creates confidence in the future. We don’t have a theory of what creates confidence.

Most of what we’re hearing from Wahsington is whistling in the dark.

Bring on November and gridlock. Or rollback.