Far too much of the debate over economic policies for the next decade ignores a central, sobering reality: We simply can't afford another decade like this one. And while Washington politicians tell us that Wall Street is mostly to blame for our continuing economic woes, no one should believe them.
In 2000, American taxpayers owed $3.4 trillion to Washington's creditors; the figure had actually declined by $300 million from the previous year. By 2009, national debt had more than doubled — to $7.6 trillion, Federal Reserve data show. When adjusted for inflation, federal debt is up 78 percent, even before factoring in Social Security and Medicare obligations.
Government hasn't confined its profligate borrowing to the federal level. The inflation-adjusted state and local debt burden is up 53 percent since 2000, to $2.3 trillion. As for the private sector: The financial industry and the citizenry lent and borrowed so much that they bankrupted each other. Despite massive debt write-offs in the past year, financial companies and the people to whom they lent money still owe $30.9 trillion, up 56 percent since 2000 after inflation.
What did we get for all of that borrowing? Debt didn't create personal wealth. The average American is worth $174,000 today, down from an inflation-adjusted $200,000 a decade ago. It didn't create modern infrastructure. The nation's roads, dams, and the like are in worse shape than they were a decade ago. Yes, technology is generations better than it was ten years ago. In 2000, we didn't even have iPods, let alone iPhones. But successful areas of the economy have thrived not because of recent government policy but rather in spite of it. It's a testament to the power of market forces that the marketplace has been able to produce such amazing innovations despite 25 years' worth of distortive government policies in finance, for example. Since the Eighties, Washington has bailed out lenders to too-big-to-fail financial firms, thus providing a subsidy to uncompetitive enterprises in one industry that those in other industries don't enjoy. Washington has also directed investment into housing at the expense of more productive industries.
But market forces can't withstand massive government interference forever. We have much less room for error today than we did ten years ago — so it's important that we get the prescription for growth right.
Macroeconomic policy will succeed best largely at what it doesn't try to do. Washington should therefore stop pretending that free markets caused the financial crisis, and that this justifies greater government control of the economy. The financial crisis was the result of government policies that didn't support free markets but instead subverted them. Specifically: Financial regulation didn't keep up with financial innovations.
If lawmakers don't fix financial regulations to allow markets once again to discipline Wall Street, a future financial crisis will overtake Washington's ability to rescue banks, investment firms, and insurance companies. Then, the nation will experience the full force of the economic disaster that the politicians have tried to avert this time around. By that point, America will have spent a few more years piling on debt and making its economy globally uncompetitive through Washington's blind support of one powerful industry at the expense of others.
Government should stop trying to direct where, how, and on what terms investors deploy their capital. Today, Washington is pushing Detroit to invest in more environmentally friendly technology — but maybe start-up auto firms could do this better if they didn't face unfair, government-subsidized competition. Washington wants to create "green jobs" by supporting "green technology" — but maybe the best green technologies are those that don't require tremendous amounts of labor. A similar problem is visible in the housing sector: Washington is borrowing hundreds of billions of dollars to prop housing prices up — even though lower housing prices would allow Americans to invest more of their own wealth on something other than monthly mortgage payments.
So what should the government do, with all of the time and money it will save by not running banks, insurance companies, car manufacturers, and housing-finance agencies?
Washington should spend some of that money to create the public infrastructure that the private sector needs. Without modern airports, roads, and mass-transit systems, employers and entrepreneurs will increasingly find that their own productivity gains aren't enough to overcome the productivity deficit created by aging infrastructure. And they'll create jobs elsewhere.
By helping markets to discipline financial actors and letting people choose their own investments, Washington would limit its role in the marketplace to creating a level playing field on which job creators could flourish. If politicians fail to do this, a decade from now they will be discussing not whether to hike takes again but by how much. And we'll all be hoping that America can withstand the extra burden, as failing government policies do even more to blight the prospects for economic growth.
Nicole Gelinas, contributing editor to the Manhattan Institute's City Journal is author of After the Fall: Saving Capitalism from Wall Street — and Washington.