Policy failure on a massive scale

By R.A. | WASHINGTON

MAYBE everything will turn out all right. One shouldn't forget that possibility. As each day passes, however, frustration grows. Leaders in America and Europe are dallying with failure on an epic scale. They are constrained by dysfunctional institutions, it's true. In Europe, the architecture of the currency union is far too underdeveloped to weather a crisis of the current magnitude. In America, the creaking machinery of the legislature is ill suited to settlement of big questions on a short time frame amid divided government. But it's no longer sufficient to blame inadequate policy responses on institutions alone. America and Europe are flailing because their leaders are failing. They seem to be too small for the tasks at hand, too petty, and too myopic.

The challenges facing Europe and America are big, but they're not mysterious. In Europe, the issues are sovereign debt, vulnerable banks, and a poorly designed currency area. It's not tricky to see what must be done. Peripheral debts should be addressed through austerity, sure. But unsustainable debt loads need to be written down. Banks should be recapitalised to prevent trouble in financial markets. Emergency funds should be bolstered to fight sovereign and banking contagion. And substantial fiscal integration must take place, including fiscal transfers to support peripheral economies while they get their budgets in order. The central bank should also stop fighting the phantom of accelerating inflation.

European leaders know what they need to do. They have been slow to do it for two reasons. First, the magnitude of the commitment necessary to save the union is uncertain, and they don't want to pay a penny more than is necessary. And second, the distribution of the costs of the commitment is uncertain, and no individual entity wants to pay a penny more than is necessary. The concerns are understandable, but this thrift is fundamentally wrong in the context of the current crisis. Euro-zone unemployment stands at 9.9%; among young workers, the rate is more than twice that level. The euro-zone economy appears to be heading back into recession. Industrial activity is already shrinking in Greece, Ireland, Italy, Portugal, and Spain. And despite Europe's most ambitious intervention to date, yields on peripheral debt are rising, and rising fastest in Spain and Italy. A real sovereign-debt crisis in Italy would pose a serious threat to the euro zone itself, to financial markets, and to the European economy. Now is the time for those who can to pay whatever it takes to save the situation. But among the euro zone's top leadership there is a stunning complacency.

In America, the situation is more ridiculous still. The economy is vulnerable. New data continue to reveal just how weak growth was in the second quarter. The economy may scarcely have expanded at a 1% annual pace. Unsurprisingly, job growth was too slow to keep up with a growing labour force, and the unemployment rate began rising again. Conditions were expected to improve in the third quarter, however. Industrial activity seemed to be rebounding, and there have been hints that labour markets might also be revving back up; initial jobless claims fell back below the 400,000 level last week for the first time since April. Markets were nearing their recovery highs.

Washington seems practically excited to stamp out optimism. Congress has spent the first month of the third quarter dangling the prospect of a full blown fiscal crisis over the heads of American firms and households. Markets are retreating, and businesses are building up cash reserves as insurance against the worst. After two years of pitifully slow recovery, while tens of millions of workers are un- or underemployed and wages flat, the government is doing its absolute best to kill the latest growth rebound in its crib. It is shocking.

Again, it's not like the correct policy path is incredibly complicated. Here, I'll sum it up in three quick steps:

1. Don't cause a major crisis.
2. Do spend more and tax less for the next year or so.
3. Do spend less and tax more after that.

See? That's really easy! If you wanted to move up to more complicated ideas, you could talk about using the opportunity of record low borrowing costs to make needed, long-overdue investments in critical American infrastructure. Instead, Congress seems determined to convince the world that America shouldn't be allowed to borrow at all, except at highly punitive rates. It might also be a good idea to confirm appointees to the Federal Reserve board who know a thing or two about how labour markets work. Instead, Congress is blocking nominees for sport, citing debasement of the currency while 10-year inflation expectations are under 2%. And while the very same legislators muse publicly about how an American debt default might not be so bad after all.

It's inexcusable. And it is a direct result of a leadership in Washington that is too small-minded to see the danger it's courting by recklessly pursuing a foolish ideological agenda.

Right now, Angela Merkel doesn't look like the leader Europe needs to spare it a wrenching crisis. Jean-Claude Trichet looks like the wrong man in the wrong place at the wrong time. Barack Obama looks like a man who picked a fight he couldn't finish. John Boehner looks to be too worried for his political future to cow a caucus apparently hungry for catastrophe.

One wants to shout at them: stop screwing around! Lives and livelihoods are on the line! Nothing good will come of a return to recession, to saying nothing of a new financial meltdown. And yet, the trifling continues. Sometimes history gives us individuals equal to troubling circumstances. Sometimes it doesn't, and the world suffers. Maybe everything will turn out all right. Shame on the leaders of Europe and America for working so diligently to ensure that it doesn't.