The Case For Pessimism

In response to a college dean's fears about the future of the U.S. economy, Brad DeLong claims that despite the very serious debt/currency/inflation problems facing the U.S., we are more than likely in for the soft landing: a gradual decline in the value of the dollar, with an incremental correction of economic imbalances.

It's nice to hear a smart economist like DeLong argue that a catastrophic dollar crash - with all of its attendant political, social, and economic instability - is less likely than a gradual deflating of the American economy. I'm not as sanguine as he is. Bubbles rarely pop in a gentle way, and DeLong assumes that there is enough of a manufacturing sector remaining in the U.S. for a dollar correction to help soften the blow. As far as I can tell, the wage differential with China is so great that U.S. goods will STILL be far more expensive. If there U.S. manufacturing sector weren't nearly extinguished - which it is. But he might be right and I might be wrong. I hope so.

I also view with far less equanimity the consequences of DeLong's good case scenario. The result would be a dramatic fall in U.S. living standards, far higher prices for consumer goods, and massive bankruptcies. Furthermore, balancing the U.S. budget would mean an abrupt end to America's great power status, the gutting of what's left of the social safety net, or both.

The impact of these changes, gradual or sudden, would have enormous ramifications not just in our economic lives, but our social and political lives as well. It would mean the end of America's basic optimism, which I think would forever change a fundamental part of our national character. I don't think we'd handle the fall very well. And people would be looking for someone to blame. Muslims, liberals, gays, feminists, blacks, city-dwellers, the poor, and immigrants are already targets for the wrath of the paranoid in America. Imagine if you will their number magnified by a factor of ten. When people are destitute, disillusioned, and desperate they can do some pretty wacky things.

Stay tuned.