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Maynard Muses Economics

I’m not claiming to fully understand the economic mess, nor am I advocating any simple solutions. I want to comment on a fundamental aspect of the crisis that deserves more attention.

I hate the word “stimulus”. It’s wrong in that it implies we can consume our way to prosperity. The underlying “stimulus” logic would have it that if only we go out and buy stuff, then all will be well. Doing that would give us a temporary boost, but it fails to disengage us from the path that incubated the problem. We didn’t get here by failing to consume, but by losing the balance between production and consumption.

America has been running a large current accounts deficit for many years. This means we’ve been leaking dollars into the world. It’s a situation that can’t go on forever, but it’s shown no sign of abating. If the process doesn’t reverse, then the world will own us (and we’re a lot farther down that path than most people realize).

We got out of balance for a number of reasons. One is that we did it because we could. In fact, in the aftermath of the Second World War, it was good policy to run a dollar deficit, in order to encourage the devastated nations to rebuild. The dollar was the world’s most trusted currency, so people around the world would take it due to confidence in America’s size and stability. Nobody else could make that claim, at least until the Euro came around. As dollars fill the globe, they become less popular, and other nations would rather hedge their bets. The days of the dollar as king are ending.

The rise of the modern credit economy masks our profligacy. In the recent era, it became so easy to go into debt that it seemed you were a fool not to. This is a new phenomenon, as anyone over 50 can tell you. And a lot of our perceived wealth, upon which we borrowed, was based upon bubbles…in particular, the dotcom bubble or the real estate bubble. When the bubbles deflated, as always happens sooner or later, we were left with growing debt and diminishing assets. (Bubbles are not a new phenomenon; we’ve had bubbles ever since humankind invented the economy.)

So a fundamental problem has been a lack of balance between consumption and production, resulting in a debt bubble. The economy slows when the debt bumps into limits, forcing us to limit consumption. Unfortunately, our economy is tuned to overconsumption: Too many stores and too few factories (that’s an oversimplification, but it will do for the moment). So we sought new tricks to allow the imbalance to continue, instead of accepting the correction. A “stimulus” may ratchet up consumption and keep the system running for awhile longer, but this only delays the day of reckoning, and ultimately makes it more severe.

So where do we go from here? The free-marketers (mostly on the Republican side) tend to argue that this is a natural process, and thus will naturally correct itself. I agree with the theory, but if that natural correction involves our being owned by China or Dubai, I think we’ve got to do something, and dogma be damned. But when the Democrats speak up, it’s usually in favor of some sort of protectionism and/or central planning; these approaches are economically unsound and would do more harm than good except perhaps as a short-term measure. Protectionism forces domestic consumers to buy overpriced products, while it puts the home country at an ever-greater disadvantage in international trade. The Soviet Union protected and planned its industries very well, which is why the modern Russian industrial economy is a global joke.

The current “stimulus” that Obama is demanding is the biggest pork (Tammy offers a more earthy term) sandwich the world has ever known. It’s essentially a consumption bill, a liberal’s shopping list, largely unconcerned about enhancing the nation’s productivity or efficiency.

Quite honestly, I had hoped Obama might do better than this. I knew he’d spend money, but I thought he might at least try to spend (or, as the wannabe spenders say, “invest”) it wisely. Instead he’s heading the wrong way, as George Bush did before him, but with even greater vigor than Bush.

The answer lies in the other direction. America must somehow seek the balance by producing more and/or consuming less. The government should be asking the hard questions of why it pays to move offshore, and how we can streamline our productivity and lure production home by merit rather than by mandate. We should ponder the utility of so much red tape, lawyers, micromanagement, and the general regulatory burdens. And as a nation, we’re going to have to save more, so we don’t have to borrow from the world.

The bottom line is we can neither consume nor protect nor borrow our way out of this; the government will have to put its own house in order and stop being an enabler of our own bad behavior.

These steps are politically difficult. For example, tax policies that encourage savings are regarded as favoring “the rich”, which is political poison. It’s far more popular to be perceived as making easy money available to “the poor”. But without incentive to save (and Obama’s “spread the wealth around” philosophy is a sharp disincentive to save), there will continue to be inadequate domestic savings, and thus our economic horizons become limited.

These issues will never be discussed intelligently by politicians, because this isn’t what the voters want to hear. So it may be possible that there are intelligent issues being discussed somewhere behind closed doors, but the politicians trumpet the nonsense for public consumption. I hope that’s the case, but I’m not seeing the evidence of it yet.