I am the leader of the world’s most populous country. The export-driven model that has driven our economy is in trouble due to a sharp contraction in other countries. We are investing a great deal in domestic economic stimulus, but I am not sure it will do the trick. What else can we do?
Baffled in Beijing
For one thing, you could rescind the one-child policy. That will produce an immediate economic boom. Your people save about half their income, more than anyone else in the world. They need financial assets because they will have no children to care for them in old age. With unemployment rising, precautionary saving will increase. Now that world trade is shrinking, your people should be saving less and spending more. No amount of government spending can replace voluntary spending by individuals, as your counterpart in Washington is about to find out. Family formation is the wellspring of demand. It is also the wellspring of human happiness. It is cruel and oppressive to stop your people from bringing children into the world, quite apart from the harmful economic consequences, and restoring freedom to families will do wonders for political stability.
A life-cycle malfunction
Recently, I became the chief executive of the world’s only hyperpower, and inherited a terrible economic recession from my predecessor. My advisors tell me to spend a trillion dollars on public works and other government programs, and another trillion or two bailing out financial institutions. They tell me that I have to do this to stop home prices from crashing. Will this get the economy moving in time to get me reelected four years from now? And if not, what else should I do?
Worried in Washington
You’re in more trouble than you think, but there’s a silver lining: the crash of home prices is the best thing that could happen to your country. Let me explain.
This is not a business cycle, but a life-cycle malfunction. The baby boomers imagined that home prices would keep doubling every 10 years, and that one day, each of them would sell his house to his neighbor and retire. This silly idea contributed to a bubble in home prices. America’s personal savings rate was zero for the past 10 years, because as long as home prices were rising Americans did not think they needed to save. Now that home prices have collapsed, the boomers are short 10 years’ worth of savings and are desperate to catch up. If everyone saves rather than spends at the same time, of course, the economy will shut down. As I warned your opposite number in Beijing (see above), no amount of government spending can replace voluntary spending by households.
Your problem is that nervous retirees are making most of the decisions, rather than young families. The trouble is that America is getting grayer. People with young children are spenders rather than savers. Young people take risks, and old people buy insurance. Your country needs more children. Demographic dearth is the root cause of the economic crisis. Too many aging people tried to accumulate too many assets, and created the biggest asset bubble of all time.
Lower home prices make it easier for people to start families. The housing price crash transfers wealth from old people to young people. That’s exactly what you want to happen.
Rather than spend a trillion dollars to keep overpaid construction-union members busy in infrastructure projects, offer enormous tax cuts and subsidies to young families. Increase the per-child deduction to $20,000, and let low-income taxpayers deduct it against payroll taxes. Subsidize mortgages for families with children.
And if you really want to send a message to America, propose a constitutional amendment to reverse Roe versus Wade. Making sex a contact sport rather than a part of life that includes marriage and babies was the beginning of the problem. It’s not enough to tinker with tax incentives, although that surely will help. Americans need to change their own outlook about life. A pro-life Democratic president with a family friendly economic recovery plan would be unbeatable.
Wait for a real war
I am the defense minister of a small country in the Eastern Mediterranean. Terrorists are shooting missiles at our cities form adjacent territory, and we have sent the army in to stop them. Unfortunately, they hide behind a densely-settled civilian population and we cannot root them out without killing civilians. The international community demands that we stop our military operations. But the rockets still are coming. What should we do?
Jittery in Jerusalem
Where do your terrorists get the rockets and other weapons? Whatever country is supplying them has given you a casus belli under international law. What are you doing about Syria and Iran?
In fact, your position is ridiculous. You have gone along with the hypocritical stance of the international community towards Syria, ignoring its terrorist activities and related acts of war in the interests of “engagement” and “peace.” It isn’t only the provision of weapons to terrorists. As Joshua Hammer wrote in the December edition of Atlantic Monthly, “The investigation into the 2005 assassination of the Lebanese prime minister Rafiq al-Hariri is nearing its end – and a trial in international court looms. Insiders say the trail of evidence leads, ultimately, to the regime of Syrian President Bashar al-Assad. But having spent three years fearing for their lives, the investigators are now grappling with a different fear: that Western concerns about regional stability will prevent the naming of the biggest names.”
If you really wanted to sanitize this adjacent territory, you would have to conquer it again and eliminate the terrorists. You have every right to do so, even at the expense of many civilian casualties, but we both know that option isn’t on the table.
In September 2007, you destroyed a Syrian nuclear reactor reportedly built with North Korean help, but chose to keep the matter quiet and negotiate with the Syrian regime. You can rummage around Gaza all you want, but it won’t do you much good in the long term.
I suggest you read Sir John Keegan’s History of the First World War, and in particular his observation that if Austria had attacked Serbia immediately after the assassination of Franz Ferdinand in July 1914, the world community would have understood and general war would have been averted. By temporizing for weeks, Austria gave France, Russia and England time to prepare for war. You had your opportunity to attack Syria last April (Please see Ehud Olmert on the Damascus road, April 15, 2008), and you had your best opportunity to attack Iran’s alleged nuclear weapons installations before the inauguration of the new American administration.
The trouble is that you don’t want to take casualties, or take risks, for that matter. You preferred to pursue the phantom of a separate peace with Syria to the certainty of a military victory that might cost a few thousand lives in Israeli cities. With a new administration in Washington, your options are limited for the time being.
My advice is: bide your time and look for the next opportunity for a real war.