Washington, DC, July 12, 2011 --  

America's policymakers have been leaping from one short-term fix to another since the start of the financial crisis. Now long-term problems are coming back to haunt them.

When a monthly report unexpectedly showed America's job growth grinding to a halt in June, and unemployment rising to 9.2 percent¹, it was bad news for politicians seeking a deal to tackle the nation's growing debt.

This summer's smash hit drama is the overhyped standoff between the Obama administration and the Republican House of Representatives over an increase in the debt ceiling. Republicans demand big reductions in the budget gap before they'll authorize more borrowing, tacitly threatening a default next month. Since any deficit reduction deal will require painful cuts in spending or painful new taxes, politicians know they risk a populist backlash from their constituents for either of these measures when the job market remains so weak.

Unfortunately, irresponsible avoidance of short-term pain is precisely what has guided America's policymakers on almost every decision since the financial crisis started three years ago. First, we were told, the government had to spend wildly on credit to bail out bankrupt institutions so as to prevent a collapse of the financial system. Then, we were told, the government had to spend wildly on credit to stimulate the economy and prevent a depression. Then, we were told, the Federal Reserve had to keep interest rates at zero and print money to stimulate investment and lower unemployment.

Trouble is, this do-what-feels-good approach has done nothing to address the economy's structural problems. Since long before the financial crisis, Americans spent way too much on credit and built an economy overly dependent on consumer spending. The policy response should have been to steer the economy away from spending and in favor of exporting more products and services.

But discouraging consumer spending would have been painful and politically difficult. Instead, America's leaders responded to the financial crisis essentially by converting unsustainable private debts to equally unsustainable public debts, most notably through the Fannie Mae bailout. In so doing, it encouraged the public to continue credit-driven spending through easy money policies.

Clearly, this hasn't worked. While economic recoveries typically feature big spikes in growth, the post-recession growth this time has been anemic, thereby failing to significantly reduce the unemployment rate. What's worse, even this depressing status quo is unsustainable, because it relies on the government to keep spending on credit -- more and more as time goes on, just to keep the basic formula of America's economy in place.

No matter what you think about America's Tea Party movement, at least they have managed to make an issue about irresponsible deficit spending. (Even if it has been through a gimmicky and somewhat less irresponsible engineered debt ceiling crisis.)

The public policy debate -- what drives the debt ceiling standoff -- basically amounts to picking who will be the biggest losers as America goes off its credit addiction. Will it be the recipients of government largesse -- the military, the elderly, farmers and corporate welfare queens? Or will it be the taxpayers -- the rich and middle class who already and will continue to fund the lion's share of government? Or alternately, will it be the savers -- both foreign and domestic -- as America overtly defaults on its debts or does so more subtly through higher inflation rates and erosion in value of the American Dollar?

However the pain is spread around, it will be real and far-reaching. Many Americans simply won't have as much disposable income than they used to. And for an economy that has for decades been based on consumer spending, that means that economic growth rates in coming years will be curtailed, too.

If America is to succeed economically as it weans itself off its credit addiction, it isn't going to happen though the kinds of short-term government fixes we've seen so far. America's future prosperity lies in innovation, hard work, and selling its products and services to the rest of the world. The longer policymakers seek feel good solutions while ignoring long-term problems, the more painful and drawn out the inevitable transition will be.

Related Web Columns:

Double Dip Deceit, July 6, 2010

Living Like There's No Tomorrow, November 9, 2010

Smarter Than a Spendthrift, August 2, 2009

Persistent Problems, Painful Solutions, Feburary 10, 2009

The Rise of the Mutant Beast, January 13, 2009

Stagnation's New Decade, September 16, 2008

Yawning Toward Disaster, September 2, 2008

House of Cards
The Collapse of Credit-Driven Spending, November 27, 2007

Spending Away the Dollar, September 7, 2004

Notes:

1. Washington Post, Unemployment Rate Rises to 9.2 Percent as U.S. Adds Only 18,000 Jobs in June, July 8, 2011