Obama has officially unveiled his economic team to generally positive reviews from people I often agree with (e.g. here and here) considering their mainstream nature. Both Summers and Geithner are near the top of the list when it comes to pragmatic capitalists. Summers was very influential in the Clinton Administration; he served as the Secretary of the Treasury and was on the front lines before then. Both men have been actively involved in helping to solve financial crises of the 90s and today. My initial impression is that Obama picked the two best candidates for navigating through the crisis under currently held academic assumptions. They definitely are pro-market but recognize the value of regulation.
That said, I believe that currently held academic assumptions are wrong. Fortunately, most of my argument can be summed up in the two recent posts on TMV by T-Steel and Jerry Remmers. It doesn’t matter how much of an expert you are in a field if the basic assumptions are incorrect, and I feel that modern economic studies ignore some very real and obvious truths that make proposed policies not only ineffective, but dangerous. T-Steel really got to the heart of the matter by pointing out that we are at the end of cheap credit, and so many of the ideas that Summers and Geithner hold on to will not work. Furthermore, merely stimulating the economy until credit can be reestablished — the proposed solution to avoiding the Great Depression — ignores natural principles that comprise the foundations of economics.
A good comment was left on my last post in regards to “I hate to say it, but from my perch I am desperately hoping that everything fails so quickly that we can’t keep trying to save it. At least then we will be faced with reality in a way where we can work towards something positive, instead of spending the next 30 years merely trying to pay off the excess of the last 30 and not moving forward at all.”
But I have to further confess, the portion quoted above frightens me even more. It strikes me as a fantasy to believe it can all just crash–and then we will suddenly be able to “work towards something positive”
It made me think of an analogy I feel is apt and perfectly captures my thoughts on the current economic approach.
I likened the current crisis and our response to a national disaster, where the medical response in treating injuries changes based on the scope of the disaster. When there is a large scale event with many injuries, medical teams triage the victims into those that face certain death in a short time, those that are severely injured and may get worse but not critical and those that have light injuries. In small scale disasters, most resources are spent on those that are at the critical stage and as much as possible is done to try and save those lives, even if it means ignoring the severely injured and taking a chance that some of them will become critical as well. If a person does move from “serious” to “critical,” they are reprioritized and given immediate attention.
However, in large scale disasters that completely dwarf the amount of resources available, there is a decision made to give the severely injured the most attention even if it means that all the critically wounded will die. This is because very few critical patients can make it regardless of how many resources are given to them, and by ignoring the seriously wounded, it guarantees that many people that might have been saved will die as well. It no longer makes sense to wait until the seriously wounded become critically wounded, because there are so many of them that waiting guarantees that emergencies will swamp the system.
I believe that we are in a large scale disaster but our policy makers are treating it like a smaller and isolated disaster like the type seen in the 90s in Asia, Russia and Japan. This analogy also helps explain why all these bailouts come seemingly out of nowhere, and are literally going from “we are slightly injured but ok” to “the entire system will collapse if nothing is done” within the span of only a few days. The structure of our financial system exacerbates this problem and I hope to take time to discuss it in further detail within the coming weeks. I also feel that economists have forgotten some very basic principles.
Money is now a fully abstract concept, but it represents something very tangible: production as a result of utilization of natural resources and labor. Since natural resources are finite, the more efficient we are in consuming them, the better our lifestyle will be. What we are witnessing is the culmination of a period where there was too much inefficient consumption and thus wayward destruction of many natural resources. By arguing for massive increases in debt, economists are in effect arguing that we should boost our utilization of natural resources further, even though we already have more stuff than we need and do not have the technology (both physical and cultural) to either a) increase the extraction of natural resources cheaply and/or b) produce goods more efficiently with the natural resources we can extract.
Therefore, while their models tell them to inject money into the economy in the right way and everything will fix itself, in reality there are two options: the money does not flow into increased production and therefore creates massive inflation, specifically in areas where there is not much of a glut (e.g.; food, energy and healthcare) at the expense of areas where there is (housing, cars, discretionary goods); the amount of production does increase across the board, but only by ramping up resource utilization in an increasingly inefficient way, quickly exhausting cheap resources and causing huge supply shortfalls.
In short, by refusing to recognize the limits of our resources and focusing primarily on the critically injured, our government is introducing policies that have a good chance of bringing the “seriously injured” into the “critical” category in large waves. This is a recipe for pain and suffering, and I think that if we had been spending the same amount of money constructing emergency social nets and otherwise helping the seriously injured, we would be in a position to weather any calamity. Instead we are pouring resources down the drain on institutions that are impossible to save, and have a good chance of finding the entire country on life support in the coming years.