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.