Two years ago, the economy was seriously dragged down amidst an amazing banking crisis that spread throughout the world. The illusion created by loose credit – that housing could go up in price forever and we could enjoy permanent prosperity due to monetary expansion – was shattered by events. Reality had dawned. We found ourselves in the midst of an economic depression.
At that point in policy, we were at a fork in the road. The wise direction was to let the depression happen. Let the bad investments wash out of the system. Let housing prices fall. Let banks go broke. Let wages fall and permit the market to reallocate all resources from bubble projects to projects that make economic sense. That was the direction chosen by Reagan administration in 1981, and by the Harding administraton in 1921. The result in both cases was a short downturn followed by recovery.
The Bush administration, in a policy later followed by the Obama administration, instead attempted a tactic of dream incubation as portrayed in the recent film Inception. The idea was to inject artificial stimulus into the macroeconomic environment. There were random spending programs, massive buyouts of bad debt using phony money, gargantuan tax tricks, incentive programs for throwing good money after bad, and hiring strategies to weave illusions about how all is well.
In the movie, the goal of the dream incubation was to implant an idea into an unsuspecting subject’s head that would cause him to act differently than he otherwise would have. In the real life version of inception, the state tried to implant in all our heads the idea that there was no depression, no economic collapse, no housing crisis, no push back on real estate prices, and really no serious problem at all that the state cannot fix provided we are obedient subjects and do what we are told.
In the movie version, the attempted inception is on a time clock. The dream weavers can only keep the subject in a state of slumber so long. In the real life version, things are much messier. The headlines have spoken about the impending recovery every day for all this time, and yet the evidence has never really been there. All the stimulus really did was forestall events a bit longer, but it hasn’t prevented them.
Now, with the stock markets melting and the near-universal consensus that we are back in recession, everyone is awake. It is pretty clear that the inception did not take. The unemployment data look absolutely terrible. As the Wall Street Journal points out, only 59% of men age 20 and over have a full-time job (in the 1950s, that figure was 85%). Only 61% of all people over 20 have any kind of job now.