Bring On the Market Vigilantes!

Will Wall Street enforce budget discipline on Washington?

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Here are some interesting questions: Can the next U.S. president hike taxes when so many countries are cutting theirs? Can the next U.S. president boost spending despite a big current budget deficit and huge upcoming entitlement liabilities? Can the next U.S. president put up barriers to trade and outsourcing without driving American companies offshore? Can the next U.S. president reregulate the American economy without also driving companies offshore?

And overarching all those queries is this megaquestion: Won't global stock and bond investors punish the equity and fixed-income assets—not to mention the currencies—of countries that attempt to run high-tax, high-regulation, high-debt, protectionist economies? (This is the very point raised by the always perspicacious Larry Kudlow during my spot last night on CNBC.)

My answer: Yes, the global investor class—the worldwide stock and bond market vigilantes—certainly will. And voters will undoubtedly notice in time. But that doesn't mean governments can't do terrible damage before folks figure things out. A wrong-headed approach to healthcare reform would be very hard to undo, for instance, just as it has so far been impossible to reform Social Security despite its obvious fiscal problems and relatively simple fiscal fixes.

And think about the opportunity costs. Instead of gearing up the U.S. economy to compete with rising Asia, we might spend a few years or more experimenting with the sort of policies that led the economy to near ruin in the 1970s—and then a few years more trying to undo them. (Richard Nixon once said it would take a genius to wreck the economy. Not really.)

The answer to a final question may be crucial: What will Americans be voting for next November—problem-solving bipartisanship or a sharp move to the left and dramatically larger and more interventionist government?