Tuesday, April 14, 2009

The Other Reset Button

On macroeconomic things, I tend to be free market enthusiast of the George-Gilderite type. As far the web goes, this school of thought is probably best personified by Larry Kudlow, Rich Karlgaard, and James Pethokoukis. Unfortunately, my team has been taking it on the chin over the course of our current economic problems. The natural optimism of this school has fallen flat, as the gap between what is and what ought to be gets clearer and bigger.

I mention this because I like very much like a post Rich Karlgaard has up in Forbes. Frankly it's a great deal more credible than some other things he's written. Though Rich makes it seem boldly contrarian, there's actually a whispering consensus that the US economy will return to positive (though small) growth in 4Q 2009 and 1Q 2010. This is in itself an important development that will have, or at least ought to have, significant consequences for how we handle economic issues in public debate. Our problems are still severe, but no longer nearly as urgent. Therefore we should engineer economic policy with a strong determination to get it right, instead of getting something plausible in operation right away.

But the bigger issue is, let's say we're in a weak recovery by the end of the year, then what? Once people have adapted to the new economic reality and stabilized their financial situation, what will they buy? Nobody knows (and that's actually quite important). We have some idea of what things might look like financially but it's all a big cipher qualitatively and aesthetically. It's uncharted territory. In Rich's case, it means tooling around Northern California in a new a $4000 bicycle, which can be rationalized to be actually cheap compared to the jet plane he's forgoing.

This is the sort of thing we have to find out for ourselves, individually and collectively. And we will if we get the chance. But there is a powerful tendency among liberals and bobos to deploy capital towards market failing but politically favored ends. If this happens our economy will stay where it is at best, or deteriorate further. A substantial part of the political dogfighting in the next year or so will be about whether this happens or not. And if so, to what extent.

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