We need to make something!

I wrote this in August of '07:

"So today we find ourselves where the two humors of government and enterprise are out of sorts. Our state has ceased to invest in its people and places with the vigor that made us competitive, and our enterprise is at the beginnings of producing either inferior or non-existent products. Over the past month the world's stock market has plunged across the world as we are coming to the startling realization that the past decade's growth has been leveraged almost entirely on credit, with all production stemming from what looks increasingly like bad debt. This is really bad. We're good at spending money but we just don't make anything anymore."

...the only thing that's changed since then is the disharmony between government and the private sector. All of the sudden they seem to be getting along just fine. The public may not be comfortable with a $700 billion bailout package for financiers, but this is not the same as bailing out your screw-up brother for the fourth time. Without credit, we've got nothing. Without the credibility of the dollar we are (at best) a well-to-do banana republic.

The bailout is not such a bad thing in itself.

First of all, most of the $700 billion is good debt. In those bundles of mortgage-backed securities are many, many 30-year loans, and even adjustable mortgages where people are on time every month. Imagine what would happen to those securities if credit dried up, and those same people lost their jobs as employers' access to capital disappears. Most of that $700 billion will come back to the treasury; compare that to the potential losses in revenue if everyone is unemployed, no one pays property taxes, and foreign creditors start getting behind the Euro.

Second, moral hazard is an issue, yes, but even your screw-up brother can be coerced into straightening out. Tough love isn't the only way. Consider the bailout a girlfriend who your brother gets pregnant, and who wants to move in and settle down. It's a gamechanger, especially if she makes him get a job and stop going to poker games and online betting sites in the Caymans.

Third, the American taxpayer is the only group aside from the IMF that could come close to fronting this kind of cash, and it is the only entity that has the authority to enact real, enforceable reforms.

The biggest problem to me is around restructuring our economy to produce more than it consumes. We've all had in the back of our minds for years the latent fear that American buying power is leveraged entirely by credit, as opposed to people getting paid more for the value of their work and then choosing to reinvest that money back into purchases at WalMart and CarMax. It's like our whole system of production revolved around trading baseball cards.

It's not enough for the American consumer just to consume. That much is clear. We've got to make something, and make something the world needs. Anything else is a shell game. The rest of the world now sees the risk in predicating their own growth prospects on the US Treasury. Any rational producer of goods and services abroad must be scrambling to make sure their assets are diversified.

There needs to be investment in our education, infrastructure, health care system and of course, our industrial base. All of those areas attract business, foreign and domestic. Think of all of the American entrepreneurs just waiting to take a chance on their million dollar idea if only they could get a loan, hire 5 well-educated employees and provide them and their families with good health coverage. It is time for economic policy to work from the demand side for a while. Government doesn't need to front the costs of all of this investment, but it has a role in creating environments conducive to the success of American firms and American taxpayers alike.

Our greatest strengths are our optimism and our inventiveness. Government has a role in actively supporting both of those virtues, and coordinating them to serve the maximum number of people possible. Tax incentives, R&D grants, and even direct state investment in private enterprise are legitimate roles of the state. They also help to ensure that it is the American people who benefit, and not just the highest bidder in a game of market warfare.

The government can be a nag and a drag, but it keeps things from getting out of control. We need it just as much as the screw-up brother needs someone to tell him what to do.

To do nothing is an option, but it is a stupid one. To do nothing places ideology above seeking the best possible solution to a difficult problem. This crisis will not be without its losers. I think we're headed for some austere years, but that's OK. I think we needed it, and I think we'll come away as the dynamic, prosperous nation that we pride ourselves to be. Doing nothing is not enough, nor is just repairing the credit market. We've got to repair America. We've got to do everything.