End-of-Summer Reflections
September 5, 2012
Who dealt this mess, anyway? Most industrialized economies are trapped in a seemingly endless stretch of deficient growth. The most acute downturn in decades ended three years ago. Europe is already back in recession, America has plunged from near best to near worst in G7 unemployment rankings, Japan still experiences deflation, and the expansion rates of way too many emerging economies have slowed more abruptly than anticipated. The last thing one needs, a new external commodity price shock, seems to be brewing.
Wherever one looks, voters are unhappy and throwing political incumbents overboard. Where this has been done, conditions have not improved as much as one would like, and frustration has festered. This venting of blame ignores the inevitable web of existence shared by all advanced economies. Economic austerity doesn’t work when it happens everywhere at once. It’s sensible to plan a strategy to reduce public deficits and the relative burden of fiscal debt, but it’s stupidly self-defeating to front-load the heavy lifting of that effort as so many nations are doing. To see the explosion of fiscal red ink as a pre-meditated streak of profligate spending is also misguided. With few exceptions, ballooning public deficits are in large part collateral damage of irresponsible household budgeting. For what it’s worth, U.S. real government expenditures in the second quarter were 2.3% less than in 2Q11 and 5.4% less than in 2Q10. I like to think of the explosion of consumer debt as the original sin, and when financial markets seized up, lawmakers were confronted with an offer they couldn’t refuse: deficit spend heavily to offset the plunge in private demand or allow a worse economic collapse than the Great Depression.
So what sort of things are blameworthy? As mentioned, families in debt and the bankers that did whatever it took to promote unaffordable ownership of property are high on my list. Many analysts are urging Obama on Thursday to announce that he wishes now to endorse Simpson-Bowles because it is a fairer and more sensible plan than either the half-baked Ryan Plan or the draconian fiscal cliff, which is the default option. I would go a step further than this recommendation because a symbolic gesture of true sacrifice is truly needed now. Since housing lay at the epicenter of the financial crisis, I hope he singles out repeal of deductions for mortgage interest from individual income taxpayers. Just as many baby boomers grew up half expecting never to see their medicare and social security paybacks, they had no reason either to count on mortgage interest deductibility going on forever.
Healthcare appears to be another culprit but not exactly in the way generally understood. Better and better medical care in the 20th century knocked world population growth far off the course of its long-term equilibrium. It took about 1,250 years for global population to rise just over 30% to around 400 million and another 550 years to climb another 150% to one billion people by early in the 19th century. Roughly 125 more years elapsed for population to double to the 2 billion level in 1927, but less than 50 years passed to double again to 4 billion by 1974. The 5 billion level was exceeded in 1987, 6 billion by 1999, and 7 billion was taken out last year.
The exponential growth in people represents the demand side of the equation for all global resources including energy and water, and it’s easily outstripping a safe exhaustion of supplies. It’s not coincidental that a myriad of environmental distortions are now being felt. All matter of schemes to conserve resources and expand supply more rapidly will keep falling woefully short of the minimum needed if world population doesn’t decline significantly pretty soon. The paradox is that in individual nations, stronger population is needed to keep social programs afloat, and that’s why, for instance, the U.S. 5-to-25 year prognosis is rated above prospects in Japan and Europe where population trends are stagnant or shrinking. It’s paradoxical that the conservative social agenda, which purports to guard the sanctity of life, instead would allow only choices that looking beyond the near term endanger all matters of life on this planet.
No doubt politicians bear responsibility for current economic difficulties. They design the rules and enforcement mechanisms under which capitalism operates. To condemn politicians solely is to exonerate other causes. Moreover, it is not politicians per se but democracy itself that is at fault for attracting people at the extremes. It’s clear, too, that government in all its forms is amenable to corruption. The most serious economic policy misjudgment over the past 25 years was the creation of the euro, a roach motel for one of the world’s biggest growth and trade engines. Europe’s current political leadership is not so much responsible for this mistake as were the framers of that disaster. It’s easy to judge those people harshly with the hindsight of today, but the fact is that a great many academic economists and most market economists argued in the late 1980s and 1990s that the plan was fraught with risk. For a long time, I did not expect the merger of 11 currency to happen, that is until I realized that politics, not economics, was driving the mission. European leaders planned their empire in an Alice-in-Wonderland setting, and economic logic against the euro had scant influence on its proponents.
For all its wonderful inventions and display of human creativity, Silcon Valley also played a key part in producing the general mess among industrial economies. Without the light speed evolution of the technology revolution, more time would have been allowed to get from point A to point B. It is destiny and healthy that the gap between the industrialized and developing nations of the world should shrink. But technology has magnified the the rate of this process to a dangerously rapid pace. Without this factor, globalization would have evolved in a more orderly fashion, and environmental strains would have been less acute at this point.
Watching the U.S. political party conventions, I felt sad at how America has divided over ethnic and economic grounds, and I thought of the comparison to the era of Apartheid South Africa, where a minority of people of European descent used all possible means to maintain power over other groups. Control the political process, and you control the laws of the land. Control the laws, and you perpetuate the stratification of social and economic well-being. Eliminate government discretionary spending, and you freeze out the infrastructure that makes “free opportunities” a cultural reality and not just an empty boast. In many cases, the direct benefit to the private developer of such infrastructure simply offers insufficient profit incentive. The full benefit is enjoyed by many others. Eliminating every cent of discretionary federal spending means that many externalities will not be properly factored into economic decision-making. Where razor-sharp competition is essential, it doesn’t make sense to entrust education and healthcare entirely to private entrepreneurs. U.S. lawmakers understood this fact in the 1870s about education and in the 1960s about healthcare, and America enjoyed many wonderful years because of that wisdom.
So who dealt this mess anyway? I find the answer to be eclectic, encompassing many individuals and groups, some well-meaning, others not. In addition, many forces beyond the control of mortal man were in play.
Copyright 2012, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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