The life jacket the government threw to the private sector has become a straitjacket

The Zombie Economy

BY Matthew Continetti
August 16, 2010, Vol. 15, No. 45

Since 2008, the federal government and the Federal Reserve have spent some $3 trillion to secure the financial system and prevent a second Great Depression. What did all this money buy us? A really expensive life jacket.

The economy did not collapse. Growth, while low, has returned. Unemployment, while high, is lower than it otherwise might have been. Institutions and companies that otherwise would have been destroyed are still around, because the government owns or controls them. We own Fannie Mae and Freddie Mac at a cost, so far, of $145 billion. We own AIG at a cost, so far, of $182 billion. We own GM and Chrysler—and bailed out GMAC and Chrysler Financial—for a cost of around $80 billion.

The economic, social, and political consequences of allowing private actors to suffer the consequences of bad decisions were deemed by the government to be too great. So, because too much debt was at the root of the problem, the government stepped in and transferred the debt from the private sector to the public sector. It helped that many of the private actors who received government support also had political connections. Not all of the bailed out institutions were private companies, of course. In order to prevent the layoffs of public employees that would result if the states balanced their books, the federal government stepped in with aid. And Fannie and Freddie existed in the gray world between public and private.

The life jacket kept the economy above water. But staying afloat in the sea is not the same as reaching the shore. It would be silly to suggest that the current economy is desirable, or that the underlying imbalances have been worked out. Yet the administration is in the unusual position of doing exactly that. When Treasury Secretary Timothy Geithner wrote a New York Times op-ed last week with the headline “Welcome to the Recovery,â€