The quickest explanation of why we are in such a huge economic contraction/retrenchment is this: the real estate bubble of the aughts gave more equity to consumers in the form of rising home prices. They turned this equity into cash to fuel their spending. Now the bubble has burst, consumers have more debt than their homes are worth, and so they have cut back on spending and don’t plan on increasing it until they pay off debt. I’m avoiding how the bubble got inflated, who was responsible, etc. for simplicity. It’s boiled down two pretty much one thing: too much debt.
There are really only two policy solutions to this problem. The first is inflation to erode the nominal value of this debt. Not just price inflation, wage inflation too so people take home more money and therefore their debt payments become a smaller percentage of their income. The second solution is some kind of debt forgiveness program. For example, mortgage cramdown in bankruptcy proceedings is a very easy one. I thought up another one today, this one a program to help underwater home owners refinance their mortgages. Say a person had a $160,000 mortgage on a home now worth only $135,000. No bank is going to refinance that, so the program would be for the bank to refinance the $135,000 and the government to kick in the other $25,000 to cover the original mortgage. That $25,000 would be a loan from the government to the homeowner, which would be forgiven if they stayed in their home for 7 or 10 years or whatever. Again, simple, relatively easy to implement, and effective.
The problem with these policy solutions is that they are not fair. To be specific, they “reward” people for buying too much how, being careless with their finances, and so on. To a certain extent, this is true. So understandably, many people who feel they made responsible choices with their money would not be thrilled about programs like these. Remember, the original Tea Party rant was Rick Santelli going off on just such a mortgage bailout (Once again, I’m going to sidestep the Tea Party issue for now). I bet that if such a program were polled, it wouldn’t receive majority support, although I may be mistaken.
Just because it isn’t “fair”, however, doesn’t mean it shouldn’t be done. As Paul Krugman and other economists point out, economics is not a morality play. The free market does not reward the virtuous and punish the wicked (incidentally, this is why believing in free market absolutism without any moral structure laid upon it is ridiculous). What we should be concerned about is not trying to be fair, but trying to get the economy moving in the right direction again. Fairness can wait for a bit, at which time it certainly should be addressed.
I consider myself to be pretty fiscally responsible (unlike this Tea Party congressman — sorry, couldn’t pass that one up). I don’t have any debt other than my student loan, and I stayed away from the housing market on purpose when I thought it was in bubble territory. I’m not going to get any direct help from a plan to reduce consume debt. However, I will get indirect help from a better economy, which is the point of programs like these. I’d rather live in an unfair world with 5% unemployment than in a world where the wicked are punished with 9% unemployment and foreclosures.