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The Bright Side of the Economic Turmoil
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Oct 12, 2008 - 10:41:59 AM

THE CRISIS HAS FORCED THE U.S. TO CONFRONT ITS BAD HABITS


(HealthNewsDigest.com) - New York — “Amid all the difficulties and hardship that we are about to undergo, I see one silver lining. This crisis has—dramatically, vengefully—forced the United States to confront the bad habits it has developed over the past few decades. If we can kick those habits, today’s pain will translate into gains in the long run,” writes Newsweek International Editor Fareed Zakaria in the October 20 Newsweek cover, “The Bright Side” (on newsstands Monday, October 13).

In his essay, Zakaria looks at the economic crisis and writes about the lessons that can be learned to get us on the right track. “Since the 1980s, Americans have consumed more than they produced—and they have made up the difference by borrowing,” he writes. “Two decades of easy money and innovative financial products meant that virtually anyone could borrow any amount of money for any purpose. If we wanted a bigger house, a better TV or a faster car, and we didn’t actually have the money to pay for it, no problem. We put it on a credit card, took out a massive mortgage and financed our fantasies.”

“At some point, the magical accounting had to stop. At some point, consumers had to stop using their homes as banks and spending money that they didn’t have. At some point, the government had to confront its indebtedness. The United States—and other overleveraged societies—has now gotten the wake-up call from hell. If we can respond and change our behavior markedly, this might actually be a blessing in disguise. (Though, as Winston Churchill said when he lost the election of 1945, “at the moment it appears rather effectively disguised.”)

In the short term, Zakaria writes, all the solutions to the current crisis require that governments take on more debts and larger obligations. “This is inevitable and necessary. But that doesn’t mean we should, as some noted economists advocate, stimulate the economy with more tax cuts . . . A far better stimulus would be to announce and expedite major infrastructure and energy projects, which are investments, not consumption, and therefore have a much different effect on the country’s fiscal fortunes. (They are not listed separately in the federal budget, but that’s just bad accounting.)”

In the medium and long term, we have to get back to basics, Zakaria writes. “Households, for instance, should save more. Governments should put incentives in place that make such savings more likely. The U.S. government offers enormous incentives to consume (the deduction of mortgage interest being the best example), and it works . . . 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 the risks and costs of these instruments. Moving in this direction would be good for families and for the government as well.”

He writes that the financial industry itself is likely to shrink, “and that’s not a bad thing, either. It has ballooned dramatically in size.”

And this crisis will stop the “misallocation of human and financial resources and redirect them in more-productive ways. If some of the smart people now on Wall Street end up building better models of energy usage and efficiency, that would be a net gain for the economy.”

“A new discipline would benefit America in a more general sense, too. Ever since the collapse of the Soviet Union, the United States has operated in the world with no constraints or checks on its power. This has not been good for its foreign policy. It has made Washington arrogant, lazy and careless. Its decision making has resembled General Motors’ business strategy in the 1970s and 1980s, a process driven largely by a vast array of internal factors but little sense of urgency or awareness of outside pressures. We didn’t have to make strategic choices; we could have it all. We could make blunders, anger the world, rupture alliances, waste resources, wage war incompetently—it didn’t matter. We had more than enough room for error—lots of error.”

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