Politically not-acceptable

Richard Alford, Former Fed Economist:

"Asking what should have been done in 1996 or 2000 is a tough enough question because the imbalances were all smaller, but today by comparison we have serious problems. Politically and economically, there is no painless solution to the imbalances in the US. For US policymakers, it seems that even short-term pain is intolerable. Nobody in Washington wants to bite the bullet and explain the full dimension of the required change to the US electorate, so we muddle. Going back to the early 1990s, US politicians have bought support from the voters by keeping consumption on an ever rising trajectory. For at least 12 years, we've had debt induced increases in consumption and the political class optimized their behavior to maintaining that illusion of rising consumption even as the economic fundamentals worsened."

"The US population is not ready to hear that their real levels of income, assets prices and other indicia of national well being may be falling or relatively stagnant for the foreseeable future. This is just politically not acceptable. So our politicians will attempt to maintain the appearance of growth, but not address the underlying causes. Devaluing the dollar alone is not going to correct the issue. World financial markets would destabilize if they perceived that the dollar was about to depreciation enough to restore the US to external balance. They still believe that it will never happen."

There's something annoying about the whole arrogant ego-wanking of posing as a truth-teller and criticizing politicians as cowardly for not knowing what to do, when the problem is that no one knows what to do. When the economists cannot outline a good solution, politicians muddle through, because muddling through is generally best when you don't know what to do. Alford admits he would consider what to do in 2000, before Bush made the whole set of problems an order of magnitude worse, a difficult problem. So, if you separate out the arrogant, self-indulgent crap, you are left with a stark assessment of how bad a fix past policy has gotten us into.

Now there is political cowardice, and then there is political cowardice, and Alford, no doubt, knows who butters his own bread, and is not going to focus, say, on massively raising taxes of very wealthy people, although that is clearly called for, in the circumstances. But, that's not my point, really.

Bad policy brings bad results, and that is the basis for expecting a political storm when a President and a Congress embark on particularly bad policy. Now, we are working through the bad results, and the United States is a bad place, with few really good options.