How do we get out of this mess?

The first step: Find the polices that aren't working, and replace them with ones that acknowledge market failure

By , Guest blogger

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    A broker works in a trading room in Paris, Thursday, Aug. 11, 2011. Worries over the debt problems afflicting a number of European countries as well as the US have knocked confidence over the global economic recovery and triggered turmoil in financial markets around the world. Can we stop the downward spiral?
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I’m sitting here with a strong cup of coffee perusing the terrible headlines in the WaPo—here’s everything above the fold:

U.S., European Markets Plunge Again

An alarm bell for an America in decline?

Recommended: Could you pass a US citizenship test?

Confidence in government is crushed after debt crisis [with an amazing graph showing a 45% decline]

Democrats, nervous about 2012, want Obama to be bolder

[then there’s this little forward-looking item:] Asian markets retreat: …Thursday morning session down nearly 1.3%…

How did we get into this mess and how do we get out? Those are big questions for a man who is only partially caffeinated. But here are some thoughts:

–Politics and politicians matter: If you elect people who believe the government does not work, that government is always the problem, never part of the solution, they will work tirelessly to make their beliefs come true. A 45% decline in confidence in gov’t is a badge of honor to them, corroborating their ideology.

–The “America in Decline” theme doesn’t resonate with me, but we’re going through as wrenching a period as I can remember. Much of the recent damage is self-inflicted but over the longer term, as negative trends—income stagnation, inequality, weak job growth–took hold, policy makers have mostly watched from the sidelines mumbling about self-correcting markets and market forces and market blah-blah-blah.

–Dealing with the structural, i.e., longer term, problems like inequality, globalization, the quality of jobs, retirement security, and sustainable health care is truly challenging. There are often no known or obvious answers. You have to try different ideas, like research on cost effectiveness in health care, pro-manufacturing policy re globalization, better labor standards (e.g., higher minimum wages) and education policy to push back on income inequality and wealth immobility.

But solutions for the cyclical downturn in which we’re currently and intractably enmeshed in are known, obvious, and becoming more so every day. Paul Krugman not only writes about them tirelessly, but he and a few others, myself included, have pretty much been describing how things are going to unfold if we keep getting this wrong (economy stuck in neutral, high joblessness, little job growth, low interest rates, weak core inflation, too little investment). That should be a very convincing sign that we are right.

Obviously, there’s a lot of noise pushing the other way, but it’s no wonder that “confidence in government is crushed” when policy makers fail to pursue known solutions at best and aggressively push the other way, toward recession-prolonging austerity, at worst.

How do we get out of this downward spiral? That’s the theme of pieces I’m writing for the Atlantic, the next one of which is forthcoming.

Briefly, we flush out the bad ideas pervading our policy process.

We replace them with ideas based on the recognition of market failures—failures that are much more pervasive than the current model is capable of identifying.

We back out and implement the policy measures implied by those new ideas, all of which will call for more activist, “bolder”—as the headline above puts it—measures from an adequately funded, efficient government that has the confidence of a lot more than 26% of the public.

We evaluate the results on the simple criterion that if the economy is not working for most of the people in it, it’s not working. If GDP and productivity are growing, yet middle incomes are stagnant and poverty is rising, it’s not working. If so, we start at the top of this list until we get it right.

Wow, that coffee’s really kicking in…I’d better get to the office and start working on that new paradigm!

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