The world economy's condition is so weak that this year global consumption of electricity will decline for the first time since 1945. Using a defibrillator as large as the sum of money being thrown at the U.S. economy will somewhat quicken its pulse. But a patient cannot become healthy attached to a defibrillator. If the economy relapses, three causes might be: protectionism, refusal to allow creative destruction, and rising long-term interest rates.
The Smoot-Hawley tariff of 1930 ignited reciprocal protectionism that suffocated global trade and deepened the Depression. The cap-and-trade legislation passed recently by a House committee is Smoot-Hawley in drag: It contains provisions for tariffs on imports designated "carbon-intensive" -- goods manufactured under less carbon-restrictive rules than those of the proposed U.S. cap-and-trade regime. Eco-protectionism is a recipe for reciprocity.
The administration's deepening involvement in designing and marketing automobiles through two crippled companies ignores this truth: Capitalism is a profit and loss system, and the creative destruction it produces is supposed to clear away failures like Chrysler, freeing up capital for more productive uses.
Recently, Standard and Poor's noted that Britain's ballooning need to borrow might cost the country its AAA credit rating, which would raise its cost of borrowing. Britain's deficit this year is expected to be at least 12.4 percent of GDP. America's is scheduled to be more than 13 percent. Years of such government borrowing might crowd private sector borrowers out of credit markets and raise long-term interest rates.
Trillions of dollars of capital are being allocated sub-optimally, by politically tainted government calculations rather than by the economic rationality of markets. Hence the nation's prospects for long-term robust growth -- and for funding its teetering architecture of entitlements -- are rapidly diminishing.
The president's astonishing risk-taking satisfies the yearning of a presidency-fixated nation for a great man to solve its problems. But as Coolidge said, "It is a great advantage to a president, and a major source of safety to the country, for him to know that he is not a great man." What the country needs today in order to shrink its problems is not presidential greatness. Rather, it needs individuals to do what they know they ought to do, and government to stop doing what it should know causes or prolongs problems.
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