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Pity the Policymakers

NEWPORT BEACH – I don’t know about you, but whenever I am in an airplane experiencing turbulence, I draw comfort from the belief that the pilots sitting behind the cockpit’s closed door know what to do. I would feel very differently if, through an open door, I observed pilots who were frustrated at the poor responsiveness of the plane’s controls, arguing about their next step, and getting no help whatsoever from the operator’s manuals.

So it is unsettling that policymakers in many Western economies today resemble the second group of pilots. This perception reflects not only the contradictory pronouncements and behavior of policymakers, but also the extent to which economic outcomes have consistently fallen short of their expectations.

This perception is evident in Europe, the United States, and Japan, where indicators of economic sentiment are deteriorating again, already-weak recoveries are stalling, and over-stretched balance sheets are becoming even more precarious. Understandably, companies and households are becoming even more cautious – inevitably making a difficult job for policymakers that much harder.

In Europe, policymakers have failed to counter an expanding sovereign-debt crisis in the eurozone’s periphery, despite many summits and programs, multiple expensive bailouts, and the imposition of painful economic sacrifices on societies. Like an airplane piloted in confusion, the European economy has not behaved according to the instructions. As Greek Prime Minister George Papandreou put it last week in his powerful letter to the head of the Eurogroup, Luxembourg’s Prime Minister Jean-Claude Juncker, “The markets and rating agencies have not responded as we had all expected.”