The Death of the Long Boom?

The housing crisis may launch a new economic experiment in big government.


If the 25-year economic boom dies in 2008, I think I will symbolically mark the time of death at exactly 23 minutes and 37 seconds into the Democratic presidential debate last night in Austin. It was at that very moment that Hillary Clinton said she would "freeze interest rates for five years because these adjustable-rate mortgages, if they keep going up, millions of Americans are going to be homeless." And the crowd cheered, and front-runner Barack Obama was silent. See, what that idea would end up doing is raising interest rates on new mortgages—about the last thing the imploding housing market needs right now. (Good luck finding an economist who disagrees with that.)

But it's not just that Clinton offered a funky idea during a heated political campaign. That is a bipartisan malady that comes every four years. (Indeed, some would argue that I should mark the time of death to back when President Bush signed the fiscal stimulus bill.) It's that the crowd ate it up and Obama (who has not supported such a move) let it slide—let slide a proposal for the federal government to massively intervene in the private economy. (If only Uncle Sam had frozen tech stock prices back in 2000.)

So take that little vignette and add to it news that the Bush administration and Congress, as the New York Times put it this morning, "are considering costly new proposals for the government to rescue hundreds of thousands of homeowners whose mortgages are higher than the value of their houses." And what we begin to see is a stunning shift in American economic policy. But the 21st-century Return to Big Government—partly enabled by the housing crisis—could go beyond that. There has been murmuring both in Washington and on Wall Street that perhaps Uncle Sam should take $200 billion or so and just buy up all the subprime mortgages. Or how about a government takeover of troubled banks and monoline insurers, as is happening in the U.K. with troubled Northern Rock?

Here is my point: America's 25-year superboom has been driven by 1) reduced regulation/more competition, 2) lower taxes, and 3) the end of the Cold War, which allowed capitalism to spread across the globe. There is surprisingly little debate about this. (As I have noted before, few economists or politicians on the left or right think we should, say, go back to 70 percent income-tax rates that are unindexed for inflation.)

Yet right now there are calls for 1) a "timeout" from free trade, 2) more industry regulation, 3) high-cost mega-spending projects for the environment, and 4) higher income, investment, and payroll taxes. Basically, a reversal of what has worked that could lead to a long-term economic funk. It is that prospect, rather than a cyclical downturn, that should really worry Main Street and Wall Street. Even if we skirt by a recession and return to growth, that growth could be way below potential.

But credit-crunched Wall Street has yet to focus on all of this, and Main Street may not care, thinking the economy is bulletproof to economic meddling and perhaps wishing for more activist feds when it comes to climate change and education. Or fearing globalization and economic volatility, average folks may vote for economic security over economic opportunity. I have certainly noticed that many of the Obama supporters who leave comments to my blog posts want higher taxes and more government spending and more government control of the economy. If they get their wish, it should make for an interesting economic experiment.