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Rethinking The Economic Crisis: A Clarion Call

December 4th, 2008
By MIKKEL FISHMAN

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I’ve been feeling as down as Michael and hitting my head about the common wisdom of trying to keep up consumption and asset prices. However, I’m starting to see some signs of clear-headed analysis creeping into the press and financial blogs. I will summarize the problem on a very large-scale level.

It’s not about housing prices, it’s not about complex financial instruments, it’s not even directly about our lack of savings…these are just symptoms of the real problem which is too much consumption and too little production. Focusing on all the pustules instead of the underlying infection is why things are getting bad so quickly and why our government has no strategy in place.

The real solution to our problems is very clear but very complicated to enact: we have to re-balance trade. This means that consumer nations like the United States need to start consuming less and producing more for export, while creditor nations such as Japan and China need to start making less for export and consuming more domestically. Nearly every single policy goal currently in place is trying to maintain the status quo and will lead to failure. All of the programs designed to buy bad debt or stimulate demand through interest rate cuts won’t work because the populace is too much in debt. Massive Keynesian stimulus like proposed by Paul Krugman and others will not work because it will create an even larger imbalance. The only reason why the dollar hasn’t collapsed is because it is the reserve currency, but this will not be the case for long as we are racking up trillions and trillions more in debt, and the consequences of change would be immediate and massive. As pointed out in the link, the proponents aren’t recognizing that this isn’t 1929, the US is a debtor instead of a creditor!

We have to re-balance trade.

This means rebuilding our manufacturing power. This means relying less on imported oil to fuel the economy. This means learning how to make goods more efficiently, by reducing costs through not only technological utilization but social changes to attack the spiraling costs of health care, etc. This means massive educational programs as our service economy is going to shrink greatly. This means figuring out what to do with all the malls and car dealerships and “stuff” we won’t need. This means a focused concentration on rebuilding the middle class, which will reduce the wealth disparity and allow for people to save money instead of going into debt or chasing investment bubbles which lead to mal-investment. This means fewer bankers and more teachers, scientists, doctors and engineers.

It means strong leadership will be required in order to overturn trends that are decades old, and find a new direction for the upcoming decades. It means as citizens we must be willing to make sacrifices and help those that need help, while also putting pressure on the government to make sure that our leaders have the courage and political capital to succeed.

Most of all, it means throwing out the ideological dichotomies of the past, agreeing on common goals and then arguing about the best way to achieve those goals. For too long “environmentalism/conservation” has been the opposite of “business” even though smart resource consumption is perhaps the biggest key to long term growth (e.g. here and here). Abrupt or onerous changes in regulations can cause large economic shocks that lead to an increase in unemployment and poverty, but an unregulated industry often hurts itself. Income disparity is a huge driver behind a lot of our problems, but Europe has shown that welfare programs don’t redistribute wealth in a positive fashion. We need to have a framework for meeting goals that are decades away, as well as shorter term flexibility in adjusting programs to meet those goals. Tax rates, government spending, regulations, private investment are all things that may and should change depending on circumstance. It seems like instead of our ideological differences being used to discuss the best solutions, it’s turned into disagreement about what the problems are, even though there is a lot of empirical evidence for analyzing that. There is no ideological system that is the “best” for all time periods, but there are a lot of common goals that are necessary for all ideological systems.

When I started blogging on TMV — just what, a month ago — my focus was going to be more to explain what was going on and some base math and science concepts and see if people were interested. However, with everything that is going on I feel a growing desire to become activist and use every outlet I can to get these ideas into national discourse because the cost of failure is going to be very high. I know that this is more of a hobby for most people, but I genuinely am interested in using the Internet as a forum to help discuss and form ideas and then run with them to try and get it in the national media. There is a lot of good discussion on Obsidian Wings amongst other places and, if enough people can speak together, then there is a shot of at least getting the concepts into the political scene. TMV is a potential source since it has such varied reader and authorship, so I thought I’d at least introduce the ideas here and see what happens.



This entry was posted on Thursday, December 4th, 2008 at 6:01 pm and is filed under Mikkel Fishman Background Posts, Financial Crisis, Economy. You can leave a response, or trackback from your own site.

Viewing 11 Comments

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    I must cautiously ask what qualifications you have garnered to be postulating national and international economic policy in your efforts to garner internet support for something that might or might not be the truth. Might or might not work and might or might not have the impact that you seek without major unintended consequences.

    I will refrain from commenting on whether I think your right or wrong. However its important that someone who calls upon world wide global change and ways of thinking be absolutely sure that they are correct in what they are proposing.

    Your proposal is a contraction of consumerism while we embark upon expansion of production. Yet the variables in play make this highly undoable when your model fails to take into consideration a contraction of wages and benefits to become competitive. Or do you fully understand what you are asking?
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    "This means that consumer nations like the United States need to start consuming less and producing more for export, while creditor nations such as Japan and China need to start making less for export and consuming more domestically. Nearly every single policy goal currently in place is trying to maintain the status quo and will lead to failure."

    I've tended to think that domestic production and consumption need to be re-balanced, but you're absolutely correct (and something which I haven't really concentrated on since the economic situation is global), on a larger scale there needs to be an international re-balancing. Though I don't think we need to actually reduce consumption... but that doesn't mean that I believe the rate of consumption needs to keep up with the rate of production.

    On a global scale, I've said commented before on here that I think the US needs to become a leader in green technology and then export to other countries. I think China had an opportunity to build their infrastructure in a more efficient manner (green friendly) since they were a developing country. But they've lost that chance. Hopefully the US will retool and export.
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    How does it "fail to take into consideration a contraction of wages or benefits?" Switching as proposed would cause massive deflation and it's true that wages would fall more than the price of necessary goods although probably not as much as discretionary goods, so yes standard of living decreases. This is what happened during the Depression.

    The government would also probably partly default on debt (through negotiation with central banks) and the dollar would drop against other currencies as it wouldn't be supported as rigorously, but interest rates would remain low for domestic investment. Again, this is what happened to the debtor nations during the Depression. This would encourage borrowing to invest for productive purposes and allow the government to refinance domestic debt, making the long term liabilities look slightly better.

    The government can offset some of the deflationary effects by doing infrastructure projects, social welfare and providing manufacturing support through direct printing, although the aim wouldn't be to counteract deflation totally (unlike the current amount of printing they are doing).

    The investment into export producing industries, the relative lack of domestic buying power and the import demand destruction would all play a role in rebalancing trade. Standard of living would be reduced and gradually get better based on how successful we are in switching to new sources of energy and other forms of technological productivity increases. I won't lie, the "plan" would take many years if not over a decade to get daily standard of living back to what it is today. Also, everyone retiring within the next 10-15 years and is counting on asset values would pretty much be screwed. I'm not sure how to address that at this point, it is something that would obviously be extremely important to think about (and goes to show why basing retirement on leverage asset value isn't smart national policy).

    The other alternative is the current path, which is to try and prop up asset values and keep consumption very high...continuing to have massive trade deficits as our resources would be spent on consuming instead of restructuring the economy. Click on "it is the reserve currency" link for a graph of that. Let's say we can print our way out of the current crisis and without even much inflation as it just counteracted some debt going bad. Then what? We'll have tens of trillions out in the world and will have so much debt that our economy won't be able to grow fast enough to actually pay it off...either that or the money gets invested in things and creates massive inflation. In either case, our future standard of living would decrease rapidly and we would have spent all the resources on that instead of doing antyhing about the situation. Maybe people retiring in 10 years would be OK if they got lucky, but the rest of us would have little chance.
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    StockBoy -- I'm going to take the view that reducing global consumption is a must due to resource constraints. I find it incredible that economists don't pay more attention to this, but there is no way that the US/western Europe can continue to consume so much AND have China et. al increase domestic consumption significantly. I've been reading some research papers that talk about natural resource utilization and how it relates to long term growth and have to say that Prof. Stiglitz has some very pointed critiques about how it is disastrous not to take this into account.

    Green tech -- and I'll expand the typical energy technology to include recycling technology -- is the key to being able to keep consumption up. I am in favor of a lot of ideas that rely on biological components for next generation electronics for the simple fact that there ain't a lot of the rare earth metals that we need to make our stuff...something not commonly discussed. I agree that green/bio tech and similar things hold tremendous potential for export. I guess a word other than "manufacturing" should be used because that implies textiles, cars and the like. Sure I think we need to make more of those (well the first not cars) so we can partially meet domestic consumption, but calling for a restructuring of the economy isn't saying we're all going to be working in sweatshops.

    The more I'm reading the more it is becoming clear that trade imbalances/disruption are the root cause of the vast majority of historical economic crises even though the specifics are different. Economic downturns that are primarily due to domestic over investment can cleanse themselves out easier, but policy reaction that may work for those will actually make things worse if there is a major trade imbalance. I guess the trick is trying to figure out what the difference is. They are talking about possibly every major country except China actually contracting next year (and China will contract on a real basis if you consider how much they have to expand to support their population) which was theoretically impossible based on their models of recession. That's because they relied too heavily on looking at domestic dynamics and not trade dynamics when trying to make the model...and that's exactly what governments are doing now.
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    "The government would also probably partly default on debt (through negotiation with central banks) and the dollar would drop against other currencies as it wouldn't be supported as rigorously, but interest rates would remain low for domestic investment."

    Perhaps you do understand what your asking.

    I have a better solution. Why dont we as a nation PAY OUR BILLS. Instead of looking for the easy way out.

    Retooling is not the responsibility of government. It is the responsibility of industry if they want to compete. The only role of government is that regulations should be in place to insure what happened under both Clinton and Bush do not happen again.

    Examples. Years ago the TV was alive with "Is it live or is it Memorex?" Poloroid commercials. Today those commercials are gone as is the industries they represent. Kodak has quit making film, leaving that to Fuji. Memorex no longer makes cassette tapes etc.

    The problem has not been that our industry has failed to change. The problem is that change is happening faster then our industry can change.

    Please understand the entire problem before you only address a part of it. By the time Memorex gets tooled up and in full swing in producing Cassettes, the technology has changed to DVD discs. Camera' have gone from needing a tripod and a burly man to lug them around to something that fits in your phone that you put in your pocket.

    Technology my friend. That which you indicated you wanted to talk about most is what is our leading enemy right now. It is why Bill Clinton basked in the glow of the Internet boom only to leave office just as it was exploding to why GWB Basked in a strong economy only to see it explode.

    Technology is our friend and our enemy. The companies that look ahead, become flexible and make forward looking decisions are the ones that will thrive. Those that do not will fail.

    That is your problems.........Defaulting on our debt because its hard to pay your bills is no answer. Not for anyone, governments especially.

    Thank you.
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    I think we DO need to pay our bills, but we are quickly reaching the point where it is impossible from a theoretical standpoint. It has been well observed that the rate of real productivity changes due to technological and social advancement is capped at around 3% a year over long periods of time. Sure productivity can look like it is growing faster based on taking on debt or getting more labor, but those options aren't available to us.

    This means that once we get enough debt that the interest payments are greater than 3% (and really that is pushing it because growth itself can barely go above 2% for long periods in advanced economies) of GDP then it is impossible for us to pay it off with leading to slow but major reductions in standard of living. We are very close to hitting that point and will in the next year or two I would imagine. This is what the problem is for many emerging countries and Germany after WWI for instance. It is well recognized that at a point it is better to have negotiated debt reduction because there is a much greater chance of getting it paid off. The only other option that countries take (and something our academic leaders will talk about I assure you) is to create inflation to try and pay it off, but that never works.

    About technology, I don't believe that the government is good at determining what technology to adopt, but I do believe the government is good at creating an environment for technological production that they aren't doing currently. This includes both educational and economic incentives, as well as increased spending for basic research and a very thorough and needed reworking of patent law and copyright law. A lot of it is also not direct government action but just leadership that creates an environment where scientists, engineers and the like reassume a stature where kids want to grow up and be in those fields into of everyone being a lawyer or in the financial industry. Also I do think that the scientific professions need to retool themselves from the inside to be attractive to a wider audience.

    Also direct infrastructure improvement -- especially in our power and internet grid -- would be a big help. And low cost loans to install renewable energy sources may as well.
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    There are many ways to deal with debt. The best way is to pay our bills. To cut government spending and to raise taxes based upon the ability to pay. A national sales tax would be the best. This money used exclusively to pay down the debt.

    5 percent would garner about 250 billion dollars in paid down debt which in turn would lower the interest payments on the national debt.

    Restructuring debt would be acceptable if the debt was restructured to only address interest payments. Those bonds that were sold at 6-8 percent need to be retired and restructured to the more reasonable 2.5 percent range saving an estimated 56 billion dollars per year in interest payments. These two areas alone could retire 300 billion dollars of debt per year and in 25 years the debt could be retired, but at a sustainable growth of 2.5 percent the debt would actually be reduced in about 18 years.

    Given of course our nation ever figured out how to balance a budget and stick with a balanced budget.

    Infrastructure? That is our industries job. We have an infrastructure that is calculated to be on the order of 350 trillion dollars. There is no way the government is going to address this. The government is about making industry and business a thriving entity that will rebuild and retool as necessary to keep up with the changing of times.

    That is why the greatest thing our government can do right now is to be shrewd and astute in regulating and making the climate agreeable to business, not penalizing and antagonizing them into contracting to meet stricter guidlines.
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