Have you taken out a mortgage, invested capital or bought shares? If you have, likelihood is you lost out in the latest bust. Governments promised decisive action, the biggest financial stimulus packages in history, gargantuan bailouts: but what crazed logic is this, propping up debt with…more debt?

An I.O.U. that you write to yourself and that you yourself hold might be a useful accounting device, but it is not wealth. Unfortunately, many politicians and bureaucrats enamored with Social Security lie (the word is not too strong) repeatedly about the nature of these bonds and what they imply about the solvency of Social Security.

Citizens of representative democracies have perceived two options to improve their standard of living: 1) hard work, self-improvement and maybe luck within the market system or 2) voting for representatives that will allocate benefits (entitlements) to them. Since the end of the nineteenth century the statist, populist urges have become more irresistible. Option 2 and state control, redistribution and socialization of risk, has been the road increasingly taken by Western democracies (including Japan). Economists of the free market bent have repeatedly argued that all citizens in the long run will come out ahead if the market rather than the state solution is followed. But –excepting the Reagan/Thatcher interlude — their voices have been ignored. In the US, even the Republican Party, while it dutifully preaches the virtues of markets, has generally when in power expanded the government, redistribution and socialization of risk. As officials facing reelection, Republicans could not ignore the deep-seated populist urges of their electorates.

We like the idea of meeting violence with violence, and feel a strong urge to deny the possibility that submission or flight are our best options in an imperfect world. In what Robin Hanson calls “near mode,” of course, individuals almost always choose submission or flight in the face of physical violence. But in “far mode” - when we read a story, discuss history, or debate foreign policy - humans have a strong bias in favor of the strategy that sounds good: “Charge!”

AIER offers a devastating analysis of QE1 and QE2 with an eye toward unseen costs: “The Fed’s prolonged effort to maintain interest rates at abnormally low level has deprived savers of hundreds of billions of dollars in interest income, ultimately costing the economy between 2.4 million and 4.6 million jobs, $256 and $587 billion in consumption, and 1.75% and 3.32% in GDP growth.”

Coming to the point, the psychology of the politician is obviously quite different from that of the work-a-day producer, and it is this difference that should be explored if we are to understand politics. We Americans, who talk so much about public affairs, will never know what we are talking about until we take into consideration the phenomenon of political psychology.