Several years ago, I heard former Governor Dick Lamm say that the biggest policy challenge of the 21st Century would be sustainability. At the time, I thought he was speaking primarily about environmental issues, but recent events suggest the word encompasses even more than that.
Of course, environmental sustainability remains a significant issue. As third-world countries catch up to industrialized nations, the problems connected with resource consumption and pollution will continue to grow.
Beyond that though, there is much more that needs to be sustained. The financial crisis is a reminder of the fragility of the world economy. Wall Street needs to prove once again that it can add value to the economy rather than destroying it through recklessly complex leveraging techniques.
Closer to Main Street, real estate markets need to be stabilized. The days of easy credit to homebuyers with little or no stated income are over. The relaxation of lending standards is what precipitated this crisis, which in retrospect seems utterly predictable. When you borrow money you can't repay it's a personal disaster. When a significant chunk of society does it, it precipitates a system-wide collapse.
Economists tell us that two simple, immutable laws can describe their science. First, incentives matter; second, there's no such thing as a free lunch. A return to fiscal sustainability must embrace both. As Wall Street and the White House pick up the pieces of this mess, I hope they'll keep these principles in mind.
On an individual level, the personal savings rate is near an all time low—in fact, several years ago it actually dipped below zero. The pundit class tells us that the only way through this recession is to spend our way out, and that saving cash is exactly the wrong thing to do.
I wonder. This is the same psychology that tells us we have no choice but to dig into our pockets to bail out the auto industry which has been plundered by unions and management for decades. Now we're told to ignore our personal best interests to ensure the survival of an overheated system that can only survive if people borrow more than they can pay back.
When does it end? The collectivist mentality would have us bail out every industry with friends in Washington. What is the principled distinction between car manufacturers on the one hand and thousands of small businesses on the other? The lesson seems to be this: if you're going to fail, make sure you fail spectacularly. Lose billions, not millions—make huge mistakes—then you'll get bailed out.
If we're serious about fiscal sustainability, we need to get back to the principles that made America the world's leading economy. Save for the future, don't borrow what you can't pay back. And for heaven's sake, don't reward failure with corporate welfare and bailouts.