Wednesday, December 21, 2011

Avoiding the Sour Notes

Imagine if the band got together for the Christmas and just sat around. Afraid of possibly playing the wrong song or the wrong note, the musicians put off their music-making until it was too late to play anything.

That is what this year’s economic policymaking has been like. The United States urgently needs to add renewable energy capacity, end tax subsidies for unproductive activities like residential construction, find out what kind of financial threat is posed by derivatives, reduce the burden of health care costs on workers and employers, and rebuild its transportation infrastructure. These issues have been looming for at least 7 years, and are needed before the economy can be restored to a semblance of health, yet not all of the basic, first-day steps have been taken yet. Instead, Washington is paralyzed in endless arguments over unrelated or even counterproductive measures. Congress, for example, voted yesterday to phase out unemployment compensation, a move that will probably just be undone next month.

And, according to Nouriel Roubini, the situation is no better in Europe and China. Leaders there too are politically paralyzed and are responding to economic imbalances by kicking the can down the road. This may not work in 2012, he warns: “If the world’s biggest economies continue to play the same game and try to kick the cans further down the road for another year, the cans will become bigger and heavier and eventually hit a brick wall.”

It was the same situation in the lead-in to the Great Depression. The stresses and imbalances were obvious. Political leaders, afraid of hitting a sour note, stood by and did nothing. And citizens and pundits essentially sat back and waited for the king to fix everything — an attitude that you might have thought had gone out of style in the 1700s.

Given the current political pressures, governments cannot be expected to solve the problems the world economy faces. It will require individual action. The countries that wait for their political leaders to fix things will be the ones that have a hard landing in 2012, then fall behind as the new global economy begins to take shape.