Cochrane begins:

Nobody is Keynesian now, really. Keynes distrusted investment and did not think about growth. Now, we all understand that growth, fueled by higher productivity, is the key to prosperity.

This may sound like a dumb question, but do we all understand (i.e. agree with) that growth, fueled by higher productivity is the key to prosperity?  Say when the media income (adjusting for inflation) for the average full-time worker is now lower than it is was in 1973?  Not to sound like a Marxist here, but isn’t Cochrane’s statement only correct depending on where one sits in the economic world?  Growth fueled by higher productivity is the key to prosperity for certain players in the game no doubt, but not everybody.  Whose the royal we here?  If it counts me, I’d like to absent myself from affiliation with this consensus.

A counterexample where growth would not lead to prosperity—say the short/medium-term prosperity is causing serious devastation to the natural wealth of the earth on which we depend and without whom we would be pretty well sunk.  In that scenario, more growth (as we currently practice/understand the term) leads to longer term loss of prosperity.

Some more Cochrane:

We all now understand the inescapable need for markets and price signals, and the sclerosis induced by high marginal tax rates, especially on investment. Keynes recommended that Britain pay for the second world war with taxes. We now understand that it is best to finance wars by borrowing, so as to spread the disincentive effects of taxes more broadly over time.

Again–do we all now understand that it’s best to finance wars by borrowing?  Especially when the borrowing can reach beyond comprehensible levels allowing for continued long past their expiration date wars?  [This seems a relevant question since today is the 6th Anniversary of Iraq War II].

All of which leads to this policy prescription/conclusion:

Neither fiscal stimulus nor conventional monetary policy (exchanging government debt for more cash) diagnoses or addresses the central problem: frozen credit markets. Policy needs first of all to focus on the credit crunch. Rebuilding credit markets does not lend itself to quick fixes that sound sexy in a short op-ed or a speech, but that is the problem, so that is what we should focus on fixing.

I’m basically with him on fiscal stimulus/conventional monetary policy but I don’t get the central problem is frozen credit markets.  [Again unless the "we" here is the world of investors].  Credit is the core problem, I suppose, if you think this debt-burdened economy fueled by growth (aka wage stagnation/increasing debt for many) can just go on forever.  And that said growth will bring prosperity down the line.  I think the current economic events are in many ways a critique of that core assumption.

If you think the primary issue is the debt bubble bursting (what Soros calls the super bubble), deflation in the short term, and then frighteningly given the amount of funny money being created by the Fed, a potential pendulum swing reverse to hyperinflation on the far side of the deflationary spiral, then no I don’t think you would think the credit crunch is the central problem.

But while Washington has been preoccupied with stimulus and bailouts, another, equally important issue has received far less attention — and the resolution of it is far more uncertain. What will happen once the paddles have been applied and the economy’s heart starts beating again? How should the new American economy be remade? Above all, how fast will it grow?

The rest of Leonhardt’s article goes through some of the next layer of Obama admin plans:  climate change (“green jobs”), health care reform as stimulus, as well as a revitalized education structure.

I have to say on all those fronts I’m less than optimistic that any of that will come to be the future, production-based, of an economy.  Assuming Leonhardt is correct that the stimulus will work (which actually I think at best it may stave off a kind of financial armageddeon), this is the central question.  All of which is a variation on Thomas Friedman’s (et. al) calls for a new domestic Marshall Plan.  Whether of a green economy, health care & education reform or all three combined.  Oh plus infrastructure spending.

As of today Iceland has gone bankrupt as a country.  Britain could well be next (h/t Automatic Earth).  I just wonder if we have reached the point where any top-down mechanisms will actually work?  Whether we are witnessing instead the death spiral of a series of our institutions simultaneously (a la Homer-Dixon’s Upside of Down).  As a student of history, I know that at certain crucical periods the old order simply dies in an often catastrophic and rather quick end.  e.g. Alexander the Great’s conquest and destruction of the previous ziggarut/ancient Near Eastern model of governance and cosmology, replaced with Hellenization and the spread of the polis.  Or the Industrial Era’s mass upheveal.  While there was talk for some of the rise of the post-industrial economy as a new stage in economic history co-arising with the Counterculture of the 60s and the dying of the centrist liberal post WWII order–and I don’t want to minimize the upheveal that period created (e.g. rise in crime, drugs, urban black holes in the West, decolonialization and revolutions in the Third World), I think we can’t compare that period to the mass upheveal of say the Industrial Era.

The question that lingers on my mind is whether we are really headed into that storm now or very soon anyway.  We often hear tales (some tall, some more accurate) about writings days before the fall of the Berlin Wall discussing the inevitable existence of the Soviet empire and communism.  And then, poof, it was pretty well gone.  The potential I think is coming for there to be a similar shift–where what will occur on the far side of the interim nonequilibrium dynamics, i.e. when a new equilibrium of some sort is established, will look radically different than what we have today.

I think there was a time for the sort of top-down led program of shifting to a new productive economy (or at least top-down aided if not led):  that period was the Bush presidency.  That period was clearly wasted.  And I wonder now if it is gone and Obama’s plans are far too little, far too late.

Update I (3 hrs later):  As a somewhat silly-actually not example of the thing I am talking about.  Talking to our children and grandchildren about how we lived through 2009, the year the newspaper (and much else died) will be an interesting discussion. Discussing with them newpapers will be like for me hearing about Model Ts or horse and buggy.  I’ve seen them (in a museum in the former case, on the road once in Amish country in the latter), but that is the kind of thing on a smaller technological-social scale.  [Although on second thought I guess newspapers aren't exactly a small deal].  How crazy will it be on a larger scale?