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Where do we go from here?
Our afternoon session at the economic bloggers forum has been especially lively. That's because we're talking about how the hell we can get out of this mess. What's the economy going to look like next year? In 5 years? In 10? Several of the people here are economists so they tend to look at history for answers.
No consensus there. Some are saying the traditional rules for recovery apply: good fiscal stimulus policy will work. Others say we have to toss the rules out the window because we've never been here before. Former Federal Reserve economist Arnold Kling, who blogs here, pointed out the difference between the labor force now and the labor force of the Great Depression recovery: He said we don't have "the type of labor force that just goes back to the factory."
Investment advisor Michael "Mish" Shedlock, who blogs here, pointed out how Baby Boomers are competing with their own children for jobs. He said this is a recession where we are relearning many things.
Then, there's the issue of what fuels the economy. For the past few years, housing (building it, buying things for it) has been a significant chunk of GDP. What's going to replace it? Internet? Alternative energy?
Since we're at the Kauffman Foundation, there was also a lot of talk about entrepreneurship. Are the President's new tax measures and our immigration policies going to hurt the prospects for small business? Should we cut the payroll tax? (That prompted a mini-debate all its own.)
Lots of questions, many different answers. The people at this conference are extremely intelligent thinkers. They have a deep understanding of the economy. It's been very enlightening.
But my favorite moment of the afternoon came while Michael Mandel from Businessweek was giving his theory for where things might be headed:
But we have to have humility about our ability to predict the economy. So, I'm going to stop talking now.
The answer is simple... most people aren't gong to like it, but it's simple. We must get back to fundamentals. We must understand that we're not as wealthy as we thought and we shouldn't expect to spend and enjoy as much as we have so quickly and easily become used to doing. That means that we must spend less and save more, do without and work at creating real value in the economy. Real value creation stems from making, converting, servicing and more directly doing tangible things which we can trade with parties OUTSIDE our own economy. Bottom line, if we don't bring in revenue from the outside, then we're loosing relative "wealth" or "economic power" relative to the rest of the global market... i.e. we're getting relatively poorer and less able to buy and enjoy the fruits of other's labor.
In the recent past, our resident brokers, financiers and snake-oil-salesmen managed to dupe many in this country, and those outside it into "investing" in bunk here. Those charlatans made out good and off with the loot, and in the process much of it trickled out into the greater US economy as they spent it and further drove up prices for limited assets. That ruse has passed, and it seems that the scam of hyped-up publicly traded stocks and real-estate is exposed. We, must wake up to the reality that we've returned to and get to work, meanwhile, we must STOP spending money (military and entitlement programs and pork) that we don't have to spend... and won't be able to pay for tomorrow either. There's no free lunch... for long anyway, but hangovers do exist, and we can't drink our way out of it.
I agree with Derek about the creation of value as the key to recovering our economy. The only inovation in our economy has been NOT in creating more value, but in finding ways to get other peoples money without earning it. Example, Turn real estate derivitives around in circles and siphoning off fees every time they go around. Or finding ways to cut what people earn to create the same or stagnanting value. The value of an honest days work is in decline. At the same time the cost of a days living is inflating.
People have less to spend and the cost of using credit is making them bury the credit card and not buy things if you can't pay cash.
To fix the economy we must get away from preditory profiteering and get back to everyone sharing in the creation of value.
Back to the topic of predicting the future...
Every time I've tried to do that, I've pretty much been wrong. As Michael Mandel does, I try to stay away from crystal balls.
There is one thing though that makes me curious: Will capitalism be so capitalist that it will let itself die before it goes into a non-capitalist temporary survival mode?
Debts and debt service payments must come down to reflect incomes. Asset prices must fall to levels appropriate to a non-bubble or pre-bubble economy. Banks must be recapitalized in order to get credit flowing. But if they were recapitalized tomorrow who would they loan to? All this restructuring will take time. Because the global economy and economic relationships are so distorted it will probably take years. In Japan it took ten years. The situation is unlike post WWII recessions and as structurally significant as the Great Depression albeit in its own ways. The Obama stimulus package will ease some people's suffering as the economy winds down but it will not prevent the slide must less "get the economy going again." Whatever that may mean it cannot mean the bubble economy of 2002-2008, nor the bubble of the mid-late 1990s. The tax breaks in the Obama package will have no stimulus effects. It's unfortunate, that Republicans impaired the package and limited its amount so they could deem it a failure in two years or at least have an election issue. So much for patriotism.
