Society As Ignorance, Fear And Courage
Edward Harrison at Naked Capitalism explains why Europe is destined for another recession in the near future. They are replicating the mistakes that led to the Great Depression being “Great:” everyone is going to cut government spending and try to increase exports in the context of a fixed currency regime. The analog between the EU now and the world in general during the Depression is as close as can be.
In order to avoid a recession — or worse — the trade deficit countries must cut back on consumption and increase exports, while the trade surplus countries need to increase consumption (either privately or through increased government spending) while decreasing exports. If this does not happen, austerity measures in the deficit countries will lead to a large decrease in GDP, make it harder to service debt and collapse demand. This in turn will make exports plummet in the trade surplus countries, bringing them into a depression as well.
The United States and China are in the same situation since China is pegging to the dollar and adjustments therefore have to be made through output instead of also being buffeted by currency movements. Michael Pettis, who has a great view on the ground, has long warned that China has continued their GDP growth by plowing into investment for export, which will come back to bite them. The US needs to cut deficits, but that must accompany a trade surplus or we too will be at risk for a depression. As long as China refuses to adjust, our hands are bound and we are going to be in a worse position. If China won’t adjust that we should decrease trade with them and have buy American provisions. [As a quick aside, Smoot-Harley wasn't so bad for the US because trade restrictions are always that bad, it was bad because we were a major trade surplus country and we were trying to prevent adjustment in the worst way possible.] This will create a mild depression, something we should do with with open eyes, but the alternative is a far worse depression down the road.
This leads to a couple of points. Much of our trade deficit is caused by energy imports and developing domestic energy production is key to being able to right our ship around for long term prosperity. We also need to build up our manufacturing base in order to have more exports and — if our trade partners refuse to adjust — more domestic consumption. I’m going to be blunt: you cannot be pro-growth, anti-deficit and free market, not when our trading partners are refusing to allow adjustments. That is an impossibility as a decrease in deficits will lead to a collapse in growth without accompanying adjustment. The same goes for Germany. They can complain all they want about their spendthrift trading partners but the fact of the matter is that they are just as responsible for the situation as Spain, Greece, Italy, et al. This is because they have had an export driven economic model and now refuse to adjust. If things turn sour Germans share the blame as well.
The second point is that this is the real message of Keynes. Keynesian thought is not that the government should always step in to cover a demand gap that is lower than the theoretical “natural rate” (which is entirely nonsense) but that governments must take coordinated action to resolve fiscal and trade based imbalances. I am not sure why his thought has been bastardized, although post-Keynesian economists like Steve Keen argue that they are the most true to the original ideas, and it was neo-Keynesians like Paul Samuelson that corrupted the message by trying to make it overlying “scientific” and enabling governments to take the feel good message of increased spending during all downturns. Based on what I’ve read of Keynes and Keen, the latter is absolutely right in his assertion, and I have no idea how major Keynesian economists like Paul Krugman can not understand what is so explicitly stated about the importance of trade.
The final note is that this all looks so clean and tidy on paper, but readjustment is an extremely painful process. In part because of our economic ideas and in part because of human nature, we always “over optimize” our systems. This means that we embrace positive feedbacks: for example a trade deficit country can buy a lot on credit and the citizens can have more stuff, which in turn creates policies that increase the deficit, which has companies make decisions based around a consumer economy and eventually the entire economic system is built around consumption. The flip side happens for exporting countries who put off consumption but build up massive reserves that they confuse with being “wealth” (I recently posted a Pettis explanation of why this is not so). This over optimization means that too much is at stake to protect the status quo, because people become incapable of imagining how things can be different. Jobs are destroyed and investment is lost, but perhaps more importantly, psychology of the masses must completely change. This readjustment both economically and psychologically is obviously non-trivial, and even with proper economic theory, I believe that once we get as imbalanced as we are currently that it is an impossible task to rebalance without major social upheaval. However, rebalancing must occur eventually, lest it lead to complete collapse, usually through war.
In the end, we must accept that our troubles are far from over, indeed they are merely beginning. We must accept that our responses thus far have been to protect the status quo, which is making the imbalances worse, and we are quickly reaching the point where they will be too big to overcome. In the near future our banks will be too big to save. We must also accept that the debates to have are not about dollars and cents, but instead about vision and trade. It is not bad that our government is running massive deficits at the moment, a necessity due to global conditions, it is bad that the deficits are propping up a rotting model instead of building a solid foundation for a new beginning. We must also realize that in order to navigate the painful readjustment process we should focus on compassion and empathy, imagination, courage and resolve.
Musical interlude:
Tens of millions of Americans have structured their lives around the nature of the system they know, the system that must now change. This upheaval is destroying not only their security and dreams, but their entire worldview and nature of existence. This is no time for boasting or timidity: if you are fortunate enough to be well off you should actively search for ways to support the new reality and help the less fortunate. This doesn’t mean you have to support enlarging government for government is one of the worst offenders in perpetuating the imbalances, although it is highly important for keeping together the social fabric long enough to have the chance of peaceful transition. It means looking for ways to help your friends, neighbors and those that are lost in the way that best speaks to you. Increased charity, “risky” investments in emerging fields that could eventually provide millions of jobs, or even taking the “unwise” risk by jumping into a job that speaks to these aims are all admirable. I cannot count the number of times I have delivered concrete visions to highly successful and caring people, only to have them state that they fully agree with what I’m saying (often to the effect of, “This is exactly what’s needed!”) and wish that they could help, but they are too bound up in their — almost exclusively financial — obligations. They tell me to come back when I can pay them as much as they are currently making, but investors won’t give any money unless I have those types of people already on board. A deadly catch 22 that one side must have the courage to break.
We must also have the honesty to admit to ourselves that we will fail. Yes, we will fail. Our current system is unsustainable: economically, physically, psychically and spirtually. I used to be so mad at the world for not recognizing what was occurring back when it was possible to transition with relatively little disruption, and now I have come to realize that it is not only too late to have that goal, but it is human nature to play that part. I have no idea what the new system will look like, and even if it were up to one person or one group, we’d still fail because the embarking on a new path is always full of unforeseen hazards and dead ends. If we are to avoid catastrophic outcomes, we must accept that we will have great pain while groping for a new path, a process that will take a decade or two at least. As a society we’ve become so risk adverse in every facet of life, seeking to legislate, spend, invest and moralize pain and uncertainty out of the world. Regardless of ideology, false comfort in the need for certainty and hostility towards any source that tries to point out the inherent nature of reality has become the norm. But there are things worse than pain: despondency on one hand, panic on the other. Those two emotions are about to hit like a tsunami unless we change course quickly…right now the tide is still going out in subtle warning and we must not wallow in complacency until we see the wave, for then it is much too late to escape. No, the goal is not to avoid pain, which is out of our control, but to maintain dignity and resolve. Destruction and pain are not universal negatives, after all, “Shiva is depicted as “the standard of invincibility, might, and terror”, as well as a figure of honor, delight, and brilliance.”
When I talk to people that I am close with, they agree completely with this viewpoint on the intellectual level but are held captive on the emotional level out of fear of losing what they have built, both physically and socially. They know but they do not accept. I realize that it is easy for me to write this screed since I am young and have no children; I am both on the ascent in terms of my usefulness to society and do not have to worry about protecting anyone directly. I have no response to this other than that the balance of evidence suggests that inaction is leading to far worse outcomes. I’m also not encouraging everyone to drop everything in their lives (although some should because that’s who they are) and live radically different, merely to go out of their way to live by their convictions in demanding justice, compassion and courage — and to stand opposed to those that spread fear or disdain in the defense of the broken system.
I’ve noticed a common theme on TMV for quite a while, although it’s becoming much more stark. People get into heated argument full of ad hominem about how to address our problems when discussed in terms of the status quo — nearly pointless bloviating considering that the battle lines are scorched into bedrock — but when discussing visions about how society can concretely change moving forward there is much more agreement. I know I’m not the only one that’s noticed, and why are we stuck fighting old battles instead of cooperating to form a new reality? Don’t worry, once that reality is constructed then a new politics will spring up around it and we can go back to aimless but cathartic disagreement.
Anyway, at this point I have either entered or about to enter into rambling so I should stop. I’ll have more concrete talking points at another time.
Lyrics from musical interlude: Delta Spirit, People C’mon
I’m a wandering soul
I got no place of my own
Well I got nothing to give
Well I got nothing to show for it
And I’ll be wondering all, for all my years
What I become no one could knowIf you’re feeling what I’m feeling c’mon
All you soul searching people c’monAnd I got something to say my friends
I will never lay down without a fight
And when I die it will be the day
When every one of my wrongs will be made right
Only times gonna heal my pain
Lord knows the mistakes I will make
Yeah there’ll be peace on my soul someday
Reconside I’ll be on my wayAnd I’ll be wondering all, for all my years
What I become no one can sayIf you’re feeling what I’m feeling c’mon
All you soul searching people c’mon
Oh no, if you’re feeling what I’m feeling c’mon
All you soul searching people c’monAnd I’ll be wondering all, for all these years
What I become no one could know
If you’re feeling what I’m feeling c’mon
All you soul searching people c’mon
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16 Responses to “Society As Ignorance, Fear And Courage”
“are we stuck fighting old battles instead of cooperating to form a new reality”
The real world precludes idealism and rapid “progress.” Change is not the same as improvement.
[shrug] Nevertheless, I have my order in for Bootle's latest book, which discusses the future.
Also, related to what you wonder about, and what's related to this site, and Arterial Nation and Venous Nation and the warring camps, tents, war drums, smoke signals –
it's something Dr. E. might find amusing –
consider Martin Seligman and his work about optimists and pessimists (classic libs vs. cons template).
Even though I'm temperamentally a liberal idealist I'm not advocating utopian ideals through instant change. I do think it needs to start happening very quickly though due to demographic issues, peak oil, etc that I know you see as huge problems. I am very concerned with rapid dissolution of social fabric when people realize that the status quo is going to fall apart in the coming years if there isn't an alternative vision in place for people to coalesce around. In that case people turn to extremism and ideological purity, so I actually see what I'm advocating as the moderate realistic call.
“I’m going to be blunt: you cannot be pro-growth, anti-deficit and free market, not when our trading partners are refusing to allow adjustments.”
Assuming I'm understanding Mikkel correctly…
As Mikkel says, we have to build up our manufacturing base. Unfortunately, because of the current patterns and politics, manufacturing and buying our own goods is going to cause some enormous heartburn. The unions, in particular, are going to feel quite aggrieved.
“the status quo is going to fall apart in the coming years”
Most people don't realize that, or refuse to accept that.
The societal aging is there, the sell-off of assets (bear market in the USA and elsewhere in the West) is there, the growing demand for health care is there, the growth of government and economic contraints it creates is there, the labor shortage is there, the prospect of inflation is there, natural resource constraint problem is there…this will be interesting.
We have been running massive trade deficits, meaning that our level of economic activity is built on an excess of consumption. That consumption must decrease because there is too much debt. If the government steps in to fill that consumption then it has to run huge deficits. The only way to not run deficits is to either let economic activity fall a ton, or to increase exports. Normally currency devalues to make exports cheaper and encouraging them, but all our major deficit partners (petro-states and China) peg to the dollar, disallowing that, because they are trying to maximize their exports. If they refuse to budge then free market policies don't work to correct the imbalance.
In that case we need to create more for domestic consumption (both energy and goods) so that way can lower the trade imbalance even with a hostile trade partner. Otherwise our deficit spending will just flow to them and not change anything on the structural level…which is the primary complaint about all the stimulus thus far.
Well, I hate to say it, but I don't think we now, or will, produce enough of the higher quality or the lower cost versions to “export” out way out of the trade imbalance or the deficit anytime soon.
However, if you can get all the other “temperamentally liberals” out there to go along with it, I'll bet going isolationist would be received well enough by conservatives and libertarians to make tariffing the imports enough a workable way out of this. My one condition…….all new tariff revenue goes dollar for dollar to repurchasing debt.
Yes I agree completely on what it needs to be used for, otherwise it doesn't fix anything. You have a good point that in order to compete on exports we'd have to have such a hit to wages and such it'd never fly. That is an argument about why to keep exports focused on high value goods while creating more of the low value goods for domestic consumption through tariffs.
“all new tariff revenue goes dollar for dollar to repurchasing debt”
That's also an appropriate demand to make of an energy tax or carbon tax (other than insisting that the income tax be reduced on a dollar-for-dollar basis instead).
I love that sentiment. It's why I'm such a pain on many issues, trying to swing the conversation away from the embedded talking points and toward some more freewheeling thinking.
'Can't say that I'm real successful at it, but I'll keep trying.
Love, sunshine, and a kitten for everyone.
http://www.digitaljournal.com/article/287362
Mikkel,
That is essentially Germany's strategy. However, after being well executed for decades, the price of German labor has been bid up (to consume some of the fruits of the strategy) that it can not easily shift to a lower exports/balanced trade strategy.
Where currencies are not free to float (i.e. be devalued against each other) then:
(Linked in the NakedCapitalism post you lead off with–emphasis in the original.)
While the example uses olives, red wine, and Guiness beer, one might say something similar for the US. Assuming both the public and the private sector need to deleverage (and the do!) then the only way to do that without a devestating depression is to run a trade surplus. From the above link:
So for example, if we want the government sector to deleverage by 5% of GDP per year (collect 5% more per year in taxes that is spent), and if the private sector wants to save (i.e. deleverage) to the tune of 8% of GDP per year, then the trade Surplus that must be run by the private sector can be found:
8% (private sector) = CAB – 5% (government sector)
CAB = 8% + 5% = 13%
It has been a while since the US ran a 13% Current Account Balance. We're not going to get there by trying to restart a domestic textiles industry, or an electronics assembly industry.
We need innovation; we need much higher productivity; we need new products that the world will want to buy, produced by whole new industries. Along with that, we need some old products, e.g. oil, natural gas, coal, uranium, food, that are in demand outside the US. There's still lots of oil and gas in the US available to be produced, at high prices (i.e. oil consistently higher than $65/bbl) and lots of well paying US jobs available in producing it, e.g. drilling for oil, constructing pipelines and refineries.
We have to realize that we can't make the entire country a national park and let other nations soil their views producing the stuff and selling it to us. Developing nations have had to choose between jobs and industrial 'sprawl' forever. Many in the US thought we had developed past the need to make that tradeoff–they were wrong.
So to encourage productivity, innovation, and new technology, what do we need? Low taxes on startups, perhaps preferential tax treatment for companies that grow their US based payrolls, less oppressive regulation, lower payroll taxes and regulatory costs, more 'forgiving' environmental impact assessments, etc.
What do we have instead? Proposed “Innovation taxes” on new medical technology, higher taxes on earned income, higher payroll taxes (i.e. applied to higher incomes), more burdensome regulation, government run healthcare with 'mandated' health insurance for all (i.e. a health insurance 'tax' that is paid direct to insurance companies instead of to the government–which would then pay it to insurance companies and providers.)
Sigh. I had not thought it possible that the new crew in Washington could do a worse job of running the country than the old one, but I was wrong. THIS crew is a complete disaster in progress . . . . It feels like being on a train in the process of being wrecked. All you can do is scream.
I agree with your ends, I don't agree with your assessment of cause. There are definitely regulatory issues that hamper innovation, and protect the status quo (although subsidies and government contracts do more damage in what I'm interested in) but I don't believe that government is the primary limiter. In my personal and secondary experience it's that with a few exceptions the people in charge of the purse strings for existing business are short sighted megalomaniacs that refuse to change anything at best or complete idiots at worst. On the investment side it is filled with short term oriented super risk adverse strategies looking for guaranteed payoff like they have experienced the last 30 years simply due to increasing leverage and debt. Those days are gone but they haven't appreciated this yet.
I've heard first hand that many different companies only consider proposals where they can turn a profit in less than two years (and the majority of startup funding wants their investment back in 3-4 at most). You can't do anything ground breaking in that time, it's ridiculous. I've talked to people in the know and convinced them I could save hospitals 10-20% of their total operational cost and was told that the idea sounded very feasible, but since I projected it would take five years to implement nobody would do it regardless of soundness. That is complete insanity.
It's not insanity if the future is so uncertain that no one knows whether important boundary conditions will have changed before the payoff is achieved. Having said that, I've done some work in health care and experienced the mindset you describe. It's one reason I no longer work in the industry.
Other industries that are driven by the profit motive manage to overcome long lead times to the payoff, even in the face of considerable uncertainty. Deep water oil exploration comes to mind. Chevron hit what they think will be a major field in the deep water Gulf of Mexico last year. It will be five years or more before they see a penny of revenue from it, and they will need to invest hundreds of millions of dollars into infrastructure to produce and transport the oil to shore. They have no trouble investing now for a delayed, and uncertain payoff in the future. (And consider the decisionmaking involved in deciding to build a new nuclear power plant in the US.)
My assessment of the health care industry is that it is populated largely by people who distrust the profit motive; instead they are motivated by “helping people”–and feeling good about themselves because of it. Sure, there are profit oriented professionals and organizations in the industry, but the industry culture is not profit driven, political demagogery not withstanding. As such, the cost benefit analysis becomes a secondary factor, and personal and professional risk becomes a primary consideration.
Even outside the Health Care industry, one can not escape the culture of the times in which we live.
Chuck Prince–he of the dancing quote, leveraged CitiGroup to the point of failure, and made fabulous profits doing so, right up until he blew up. However, consider what would have happened if he had been a more cautious and conservative leader. He would most certainly have underperformed his company's peer group financially and would soon have been replaced by someone more “risk tolerant”, who would then have done in his place the same things that he actually did.
The multi-decade declining interest rate, low inflation environment created conditions where certain types of people and decisions were rewarded, and people who fit those times rose to the top. Well, the environment has changed, and until the 'crew change' in leadership and decisionmaking positions is completed, we will have people in charge who are best suited for an environment that is no longer there, and won't be back for generations, if ever. Bad (for the new environment) decisions should be expected.
Yes I agree that regulatory uncertainty is a big problem in industries like health care and one I didn't realize until I was getting face to face time with people that had to deal with it. They said that the heavy regulatory burden had the unintended side effect of stifling innovation not because it was overly restrictive, but because no one would move forward on a new idea until the regulations were in place, just in case. A big problem now is that they know a bunch of regulations are down the pipe but don't know what, so everyone is sitting there paralyzed, which again has adverse long term effect because that means that regulations are written based on what is expected to work (and of course special interests) rather than codifying best practices.
“The multi-decade declining interest rate, low inflation environment created conditions where certain types of people and decisions were rewarded, and people who fit those times rose to the top”
This is very succinctly what I'm trying to say and an issue that cuts across both government and private industry. The whole point of the post was trying to argue that individuals that see this environment change should focus on their own actions and decisions, and collaborating with like minded individuals rather than expecting the larger environment to change first. That requires personal risk and courage yes, but I think is affirmative even in failure.
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