What are we leaving our children?

A lot has been said and written about the massive debts we are running up in an effort to stem the economic crisis. The constant complaint is that these debts will be a burden to our grandchildren.

What I think is being overlooked is what we will be leaving our grandchildren if we don't deal with this economic crisis effectively.

In the late 80's and early 90's, Japan went through the same kind of property bubble we have gone through. The Japanese government, afraid of debt, did not move strongly enough. They started a few, very large stimulus projects and propped up the banks, but did not reform them. They did this over and over, putting patch on top of patch, but never dealing with the fundamental weaknesses of their structure. The result has been a period of no growth, followed by very slow growth. As a result, the children of the generation in charge when the bubble burst have inherited a massive debt and inflexible, ineffective system that no longer has the power to respond strongly to the current situation. They dribbled out unused airports and unnecessary bridges, spending slowly what might have worked if they had spent it all at once. They kept zombie banks operating, sucking money from the economy and not passing it on in the forms of loans.

Back in the Second World War II, our government created a massive (for the time and the value of the dollar) national debt. But we won the war; the problem the money was spent on was solved. As a result, we could leave it behind and turn our attention to building our country and the world. So massive debts will not harm our grandchildren provided we solve the problem we ran up the debts to deal with.

That is so important I will say it again: massive debts will not harm our grandchildren provided we solve the problem we ran up the debts to deal with.

As I see it, whe have these choices:

1. Intervene massively and solve the problem, leaving our children free to turn their attention and effort to growth and innovation.

2. Intervene ineffectively and fail to solve the problem, letting it grow until it paralyzes the economy, locking our children into a paralyzed, ineffective system.

3. Do nothing and hope that the invisible hand of the markets will cause everything to work out--without regard to how long it may take for the invisible hand to do its work or how much people may suffer in the interim. And I am not talking about inconvenience in the interim; I am talking about real suffering--hunger, homelessness, and a permanent underclass lacking the very basics to benefit from whatever good outcome the invisible hand may, possibly, produce. Along with the high possibility that the Keynesians are right in this: the invisible hand will not work at all in this case, because when we finish our fall, it will have nothing to work with.