Richard Florida offers some insight:
The bailouts and stimulus, while they may help at the margins, also pose an enormous opportunity costs. One the one hand, they impede necessary and long-deferred economic adjustments. The auto and auto-related industries suffer from massive over-capacity and must shrink. The housing bubble not only helped spur the financial crisis, it also produced an enormous mis-allocation of resources. Housing prices must come a lot further down before we can reset the economy – and consumer demand – for a new round of growth. The financial and banking sector grew massively bloated – in terms of employment, share of GDP and wages, as the detailed research of NYU’s Thomas Phillipon has shown – and likewise have to come back to earth.
On the other hand, there is the classic question: What better and more effective things might have been done with these trillions? That’s for historians to ponder and decide. But the combination of the massively misallocated resources produced by the bubble (plus the costs of military adventures) combined with humongous bailout spending puts the US behind the economic eight-ball in a way it has not been in more than the century. Having hold on the reserve currency helps, but it cannot absolve all these compounded sins. Sooner or later the money will run out; bills will come due.
That creates a wide open structural opportunity to accelerate what Fareed Zakaria has dubbed the “rise of the rest” to accelerate. Crises are periods where the relative position of nations and regions can and do change dramatically. (Do I think the US will lose its hegemonic position: Of course not. My hunch is that the US is in the same position structurally as England at the onset of the Long Depression of 1873. It was not until the next major crisis – the Great Depression of 1929 and the onset of WWII that it lost its position [to] the United States. So worst case: The US has one more long-cycle at the top of the heap). But, just think of all the ways the trillions of bailout money could be used to build the economy of the future. And while you’re doing that imagine that some other places … that have been patiently building and conserving their resources may start to figure out how to do just that.
I don’t give a fig about the U.S.’s relative position, but I do care about the absolute level of welfare and thus the absolute level of innovation and it is here that I worry about the costs of American decline.