No Rational Exuberance

One of conservatism's tasks is to discourage irrational exuberance—or any other kind of exuberance, for that matter. Today this task is not demanding because anxiety about the sagging economy and surging government debt is broad and deep.

Since the recession began in December 2007, Congress has passed two stimulus packages ($168 billion in February 2008 and $787 billion in February 2009), and last month the House passed a $154 billion jobs bill. The economy has been growing for more than six months. Yet job creation is sluggish.

Today's unemployment rate is 10 percent; the underemployment rate—the unemployed, plus those employed part time, plus those discouraged persons who have stopped looking for jobs—is 17.3 percent. Almost 40 percent of the unemployed have been so for seven months or more—which is not surprising: Congress continues to extend eligibility for unemployment benefits, apparently oblivious to the truth that when you subsidize something you get more of it.

There is no precedent for what the nation might be beginning to experience—a torpid recovery from a steep recession. Since World War II, the average growth rate in the first four quarters after a recession ended has been 6.6 percent, and then 4.3 percent for the subsequent five years. In 1982, the unemployment rate reached 10.8 percent; in 1983, the average quarterly growth was a sizzling 7.6 percent.

Today, Americans are still paying down their debts that fueled consumption between 2001 and 2007. Nevertheless, household debt is still 30 percent above what it was a decade ago, so deleveraging has a long way to go. And 23 percent of homeowners with mortgages are still underwater—the value of their houses is less than the amount owed on the mortgages.

The residential-real-estate sector triggered the recession, which now may bring a convulsion in commercial real estate. A quarter of a trillion dollars of loans must be rolled over in each of the next few years. Megan McArdle, business editor of The Atlantic, explains why many of these loans will go bad:

"Take a property that was worth $100 million in 2007, when it was financed with a four-year, $70 million mortgage. That's a reasonably conservative 70 percent loan-to-value (LTV) ratio. But if the building is worth only $70 million when it's time to roll the loan over, keeping the LTV at 70 percent means that the owners can now borrow only $49 million, and have to come up with tens of millions to pay off the original loan. Worse, as the markets tighten, lenders tend to want to see a lower LTV in the deals they finance."

With prolonged high unemployment predicted, consumer spending is paralyzed by caution. With Washington experiencing prolonged hyperkinesis, businesspeople are paralyzed by uncertainty about what the rules and costs of commerce are going to be. What would a cap-and-trade carbon-control regime do to energy costs? What will be the costs of whatever the Environmental Protection Agency decides to do on the basis of its "endangerment" finding that carbon dioxide is a pollutant? What will health-care and tax costs be? Money cannot be free forever, so someday interest rates are going to change. Starting from zero, the change will be adverse for many people.

And for the federal budget. Rates of 5 to 6 percent would require 20 percent of tax revenues just for debt service. In 2015, interest payments on the national debt will require a sum equal to one third of income-tax revenues ($533 billion).

There is excess capacity in office space (in Manhattan, square footage equivalent to 920 football fields, according to The New York Times), malls, apartments (5 million are vacant), and in shipping, etc. But the economy, dependent on government-manufactured demand, is like an athlete on performance-enhancing drugs. Writing in Barron's, Vitaliy Katsenelson compares the economy to an injured athlete who takes steroids in order to keep competing. They exaggerate the athlete's recovery and mask the pain, but require steady doses and produce dependency.

The 1990s were the stock market's best decade since the Depression; the 2000s were the worst. The 2010s? Today, talk about a "new normal" often includes gloomy references to Japan's "lost decade" and a possible American future of protracted slow growth.

The administration, however, projects deficits three times larger than the post-1945 norm, interest rates less than one half the norm, yet growth 10 percent higher than in the booming 1980s. That is irrational exuberance. But nowadays there is no other kind.

George Will is also the author of One Man's America: The Pleasures and Provocations of Our Singular Nation andWith a Happy Eye But . . .: America and the World, 1997—2002.