June 30, 2010

By Holman W Jenkins Jr.

Right now, the U.S. path leads from debt to deflation to stagflation. There’s got to be a better way.

A debt crisis starts to mend itself when lenders admit their mistakes and take their losses. A government “bailout”—that incendiary word—can be helpful if taxpayers don’t assume the losses themselves, but merely use the government’s credit to stabilize lenders so they can meet their own obligations during the period when their profits must go to filling the hole.

By that standard, the U.S. committed a pretty good bailout—but not perfect. Money unwisely has been thrown at homeowners to delay defaults and prevent housing markets from clearing. New rules have been imposed on credit-card rates and fees that banks complain hinder their ability to manage their consumer debt exposure.

By and large, though, bailouts that merited the curse word, where taxpayers have been the suckers taking losses, are limited to the mismanaged cases like AIG and the politicized ones like the auto companies and Fannie and Freddie.

True, an unforgiving post mortem might also conclude Washington made the crisis worse before making it better. Lehman hardly makes a sympathetic rescue target—but then none do. And damage to the economy and employment probably would have been less if Lehman had been propped up.

Now, this half-won victory is in danger thanks to Europe, right?

Yes and no. The story goes: Having overdrawn its own credit to save the global private sector, Western governments now are losing the confidence of their own lenders. It started with the Greeks, but the Spanish and Portuguese are considered bets for default, etc.

This is a misleading narrative in one respect. Whatever the private sector’s role in helping to trigger the timing of the government credit crisis, it was coming anyway, thanks to the developed world’s unaffordable welfare states.

So far, though, we aren’t getting a good bailout from Europe, as in a realistic sharing of the pain of their common mistake between the Greeks (and perhaps others) and their lenders. Instead, European taxpayer money is being thrown on the fire in a pretense that insolvent governments will somehow be willing to raise taxes and cut spending enough to pay back every dime.

Nobody believes this: Nobody doubts some kind of debt restructuring (read: default) is ahead. Europe would be wise to get on with it, even if it means roping the EU central bank into a Fed-like role of printing temporary money to keep the banks liquid and trusted by their own creditors.

But now we come to the binary debate between the pain caucus and the free-lunchism of those who believe governments have great scope left to borrow and borrow, stimulate and stimulate. Both are lousy alternatives. Neither is sustainable; both work against the essential goal here, to restore confidence to private sector investors and employers.

Example: Instead of arguing over deficit spending, how much better if the G-20 governments had left Toronto pledging flatter tax systems? Tax codes everywhere are full of mountains and valleys and shifting loopholes that distort investment, reward gaming, and discourage saving. After reform, rates may be lower but revenues higher. Is it a tax cut or tax hike? Who cares?

Likewise, what if the G-20 members had credibly committed to raise the retirement age and shift the co-insurance rate (out-of-pocket share) of their health-care spending under their social security programs? Cutting retirement subsidies might be advertised as “austerity,” but middle-aged and younger workers are kidding themselves now to imagine their promised benefits were worth the paper they’re written on. Expecting to work longer for a retirement that is actually secure rather than chimerical—is this “austerity” or a reason to celebrate?

Read more at: http://online.wsj.com/article/SB10001424052748704103904575336812620632500.html?mod=WSJ_Opinion_LEADTop

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