Light at end of economic minefield?

by Frank James

Rudolph Penner, a former director of the Congressional Budget Office, now an Urban Institute fellow, has a piece in which he likens the nation's economic situation to a minefield with many potential dangers all around:

As we wind our way out of the minefield, we are being pushed along, perhaps carelessly, by public policy. Monetary policy has never been as aggressive. Bank reserves are exploding, thus laying a foundation for massive amounts of money creation. The stimulus package passed in February dwarfs anything ever seen. And that was on top of a package passed last year.

The Fed Chair, Ben Bernanke and White House Chief Economist, Christy Romer, are much admired scholars of the Great Depression. Bernanke learned of the perils of letting the money supply fall and Romer learned that stimulus should not be withdrawn too fast, but did they learn their lessons too well? Will they know just the right time to withdraw reserves and end the stimulus, or will we eventually be afflicted by runaway inflation?

Perhaps the biggest mine out there has been laid by fiscal policy. The Obama budget for 2010 and his stimulus program, combined with recession-depressed revenues, enhanced spending on safety net programs and a generous appropriation for 2009 will create an eye-popping amount of debt. The Congressional Budget Office estimates that Obama's policies will increase the debt by 90 percent between 2008 and 2012. The Congress is balking, but much of the increase is already baked in cement. Who will buy all this debt and at what interest rate? China, our biggest foreign creditor, is worried, and so, most likely are other would-be investors. Even if buyers do not go on strike, we know that the interest bill on our debt will soar and become a budget problem by itself when interest rates return to normal.

So sticking with the minefield metaphor, it would appear that to Penner's way of thinking it's unavoidable that we can avoid stepping on an economic landmine or two, particularly the one represented by explosive interest costs stemming from the nation's monumental debt load.

Despite that, however, Penner ends on a surprisingly positive note.

Another excerpt:

In summary, we are condemned to live in interesting times. There has never been an economic situation quite like this, and there has never been a policy response quite like this. Consumer and business confidence has fallen through the sub-basement. But take heart. Our economy has recovered from worse situations without much help from policy, as in the early 1890s.Although this is often referred to as the worst recession since the Great Depression and it will be the longest, I am not yet convinced that unemployment will exceed the early 1980's peak of 10.8 percent...

You have to hope Penner is correct. But so far with this recession it seems like the pessimists have been more right than the optimists.