Amid the financial chaos and economic uncertainty that has rocked world
markets, I can see one silver lining. This crisis has forced the United
States to confront the bad habits it developed over the past few decades.
If we can kick those habits, today's pain will translate into gains in the
Since the 1980s, Americans have consumed more than they produced and have
made up the difference by borrowing. Two decades of easy money and
innovative financial products meant that virtually anyone could borrow any
amount for any purpose. Household debt ballooned from $680 billion in 1974
to $14 trillion today. The average household has 13 credit cards, and 40
percent of these carry a balance, up from 6 percent in 1970.
But the average American's behavior was virtuous compared with government
behavior. Every city, county and state has wanted to preserve its
proliferating operations yet not raise taxes. How to square this circle? By
borrowing, using ever more elaborate financial instruments.
Local pols weren't the only problem. Under Alan Greenspan, the Federal
Reserve refused to inflict pain. Russian default? Cut interest rates. The
economic slowdown after Sept. 11? Cut rates. Whatever the problem, the
solution was to keep money flowing and goose the economy.
In 1990, the national debt was $3 trillion. It is now $10.2 trillion.
If there is a lesson to be taken from this crisis, it's an old rule:
There is no free lunch. Now, debt is not a bad thing. Used responsibly, it
is at the heart of modern capitalism. But hiding mountains of debt in
complex instruments is an invitation to irresponsible behavior.
In the short term, governments must take on more debts and obligations to
resolve the crisis. But that doesn't mean we should stimulate the economy
with more tax cuts, as some economists advocate. That would only keep the
party going artificially. A far better stimulus would be to expedite major
infrastructure and energy projects, which are investments, not consumption,
and have a different effect on fiscal fortunes.
In the longer term, we have to get back to basics. Government should put
incentives in place that make saving more likely. The U.S. government
offers enormous incentives to consume (the mortgage interest tax deduction
being the best example), and it works. We have the world's biggest houses
and the most cars. If we were to tax consumption and encourage savings,
that would also work. Regulations on credit card debt should be revised to
ensure that people understand their risks.
Paul Volcker has long argued that the recent financial innovation simply
shuffled around existing resources while contributing few real benefits to
the economy. Such activity will now be reduced significantly. Boykin Curry,
a New York fund manager, points out that "30 percent of S&P 500 profits
last year were earned by financial firms, and U.S. consumers were spending
$800 billion more than they earned every year. As a result, most of our top
math PhDs were being pulled into nonproductive financial engineering
instead of biotech research and fuel technology. Capital expenditures went
into retail construction instead of critical infrastructure." The crisis
will stop the misallocation of human and financial resources and redirect
them in more productive ways. If some of the smart people on Wall Street
end up building better models of energy usage and efficiency, that would be
a net gain for the economy.
The U.S. economy remains extremely dynamic. Even now, the most surprising
data continue to be how resilient the economy has been through the recent
shocks. That will not last if the panic persists, but the economy's
underlying virtues would help it recover quickly from a recession. The rise
in emerging-market economies, which have been powering global growth, will
not vanish overnight, either.
In the short run, there has been a flight to safety -- toward dollars and
Treasury bills -- but in the long run, countries are likely to seek greater
independence from an unstable superpower. The United States will have to
work to attract capital and must organize its fiscal affairs. We will have
to make strategic choices. We cannot deploy missile interceptors along
Russia's borders, draw Georgia and Ukraine into NATO, and still expect
Russian cooperation on Iran's nuclear program. We cannot denounce Chinese
and Arab investments here and the next day hope that they will keep buying
T-bills. We cannot keep preaching about democracy and capitalism with our
own house so wildly out of order. Instilling discipline will be painful for
a country used to having it all. But it will make us much stronger in the
The writer is editor of Newsweek International and co-host of PostGlobal,
an online discussion of international issues. His e-mail address is