An Economic String Theory For America

There are three distinct and big questions that people need help with to get a grip on what is happening in the US today and its effect on them.

First, what further bad could happen in financial markets? Second, how long might it take for the economy to seriously turn and recover? Third, what prescription can be applied to the country to stimulate as early a recovery as possible?

There is currently a sense and hope that the stock market may be making its lows now. If that were likely, the prospects for the underlying economy could be seen in a more promising light now too, as the stock market [with the aid of hindsight] has always been a leading indicator. But hindsight is not yet available. And, one cannot rule out a further drop if and when earnings across the board are down in 2009. Sorry! But, we really do have to deal with reality.

If our national wealth contraction moves even lower, additional questions arise about how long the economy may lie fallow. There is a basic principle to bear in mind. Markets must clear before they can resume normal levels. Today we see something like 12,000,000 "endangered" houses, where the value of the mortgage exceeds the value of the property. It is unlikely that new housing starts can begin to get back to near normal levels of around 1.4 million units annually until a large proportion of the 12 million "endangered" units stabilize in value or have been absorbed by stronger owners or refinanced. And, demographics are not helping either. Even the experts today have no idea how long that could take. But, it may take, optimistically, 3-5 years?

So now we have a grim couple of thoughts to deal with -- a loss of more of our national wealth AND the prospect of an economy that may take another 3-5 years to clear and begin to recover.

Granted there is an instinct to curl into a fetal crouch and put our hands over our eyes. But, in fact this is the very moment for us all to stand tall, yell whoopee and charge!!

Our challenge and opportunity is very clear. We must push and pull hard on the string which leads to rebuilding and modernizing our whole national infrastructure. While we have been gorging on misleading free lunches of cheap loans for housing and no money down on new gas guzzling SUVs and unlimited credit card spending for exotic vacations and Gucci bags, the world around us has been crumbling down. Our bridges, tunnels, railroads, schools, hospitals, new energy sources and other outdated transportation systems have been languishing for a long time because they did not represent exciting investment opportunities.

Now, as long as we are going to have to wait for the economy and financial markets to recuperate, our opportunity is to fix up the world that will surround us when things have turned for the better. It almost seems that some divine providence may have visited our present predicament on us just to create the opportunity to address the needs of our national infrastructure. So we should not think about the plans for stimulation of the economy as some distasteful castor oil medicine we must endure. We should be yelling hallelujahs of thanks for the opportunity.

It may not be long before almost 1 in 10 people are out of work. When that happens, almost everyone will know someone who IS out of work and a lot of people will begin to think that they may be the next. So we all should welcome the biggest "public works" packages in history. President-elect Obama has already proposed a $250,000,000,000 package. We should all start rooting for even bigger packages.

This will take a lot of new plans and methods to make such a massive scale of spending work well. The purpose is not to enrich lucky contractors. The purpose is to create a lot of jobs for engineers, architects and ordinary people who roll up their sleeves and make it all happen. We may need some new entities like the Reconstruction Finance Corporation from the 1930s. We should be open minded and creative in how to do all these exciting new projects. And, the ultimate purpose is not to just create jobs for a recovery but to remake the world we will live in when the recovery arrives.

So let's feel good about tightening our belts and buckling down to creating our new future. On this flight "we will have a good time."

Frank A Weil--Chair and CEO Abacus & Associates, Private Investments, 147 E 48 Street, NY 10017, NY - [e-mail]-- 212 230 9801

Comments

[Sursum]

Thank you, Mr. Weil, for pointing out any possible silver lining to this mess. Let's get started building the new American economy. (And nab the robber barons while we're at it!)

[DoesItReallyMatter]

In past economic depressions, the economy was generally in a transitional state, like from agrarian to industrial, industrial to mass production, etc. The financial tools generally did not exist to make these transitions smoothly, let alone efficiently. Today we are again transitioning, but into what? In times past the farmer could go to the factory, the laborer, with training, to a profession. Where do we go now? All sectors are collapsing in unison. We are now a "service" economy, when services can no longer be afforded, the whole thing falls off the tracks, which leaves us no viable long term options.

[Erdgeist]

Some things that won't work. Sending more U.S. manufacturing jobs to third world countries. Allowing U.S. corporations to continue to labor arbitrage. Letting U.S. corporations evade taxes to the tune of a 100 billion a year. Not bringing back the 90% tax bracket on incomes over a million dollars a year. Not using a traiff on imported goods as a means of paying off the National Debt which could generate between 400 and 800 billion a year. Not cutting back on military spending.

[Paul]

Build a mass transit system.

It will put people to work and free them from the necessity of going into debt just for basic tranportation.

Buying a new car costs something like $8K/year - that money could go directly into the economy if we had a decent mass transit system.

We could also shrink military spending - what happens in the middle east would no longer be relevent to our national interest.

[DuganS1]

We have that mass transit system called Amtrak. The problem is that not many people use it and the govt run company loses money like a sieve. Do you think it makes sense to build more things that people don't use and don't make money? Don't forget that if it doesn't make money, it will be a new govt liability infinitely into the future.

[Pearlswan]

Check out the mass transit system in Europe. People use it. It is fast. It is efficient. Amtrak is a dinosaur compared to the European mass transit rail system. California just got voter approval to build a high speed railway between San Francisco and Los Angeles. Amtrak is a joke. If we intend to build the infrastructure of the next century, we need to think outside the box and get off the same track we have been traveling down for so long. Let's bring our new technologies to the planning room and build a whole new transportation system for America rather than building one on top of the crumbling and cracking infrastructure at present. That's the way to go.

[DuganS1]

I may not be understanding the context behind the "demographics not helping" the housing situation, but one positive spin on home construction medium term is that we have the biggest number of Americans approaching peak years of household formation since the Baby boomers. This will help absorb a lot of that inventory. Also the folks that have ARMs resetting soon appear to have been saved, except those far under-water, because the Fed has gotten LIBOR down to extremely low levels and the refinancing rates vary depending on LIBOR. I also don't understand the comment about our infrastructure "crumbling". Investment in infrastructure this decade, in fact, has been higher as a percentage of GDP than the 1990s or the 1980s (I think 3.6% vs closer to 3%). Investment since early 2005 has been at very high levels, particularly on schools, hospitals, roads, water treatment facilities, etc. Railroad investment is all private and RR companies spent a lot of money earlier this decade and I've heard nothing about problems with capacity. RR companies also have the best balance sheets they've had in decades so they are certainly capable of making further investments if they find it necessary. Bridges and electrical grid are two areas that need serious investment, but the others are not in nearly in the poor shape many for some reason seem to believe.

[cam]

Accepting your point that investment in infrastructure has been high (3.5%GDP), one must ask what proportion of that investment has been dedicated to refurbishment and maintenance as opposed to new development, feasibility studies, etc.

I have responded to another post of yours regarding the failings of the freight rail system:

http://www.huffingtonpost.com/raymond-j-learsy/opecs-noble-cause_b_151961.html?show_comment_id=19017420#comment_19017420 .

[WASanford]

HuffPost's Pick

Frank, I don’t think that either the stock market or the financial markets are relevant any longer. Here’s why. The supply side idiots have managed to all but destroy demand. You know the other side of the economic coin? The part where the little guys play by buying the stuff that the supply side makes and peddles to them? How are they going to hold up their end when their credit cards are all maxed out, they’re upside down in their mortgages and facing foreclosure, and they’ve been laid off from their jobs?

There’s only one possible result of this; deflation. Prices will fall (they’re already doing that) until the whole economy goes down the drain. Someone needs to wake up and find ways to help those little (and apparently invisible) folks who toil at the bottom of our economy, because our economy can’t work without them.

Detroit’s problems are a good example of this. Folks have been blaming poor leadership by GM’s and Chrysler’s CEO’s or excessive compensation won by the UAW. They also claim that these auto makers aren’t completive. But they are wrong! Wherever you look, there is a dearth of customers. No matter what the product is, there’re few who can afford it.

[DuganS1]

Financial obligations for renters are actually relatively low. And "consumer debt" obligations for home owners has been trending down since 2002 and is at the same level it was back in 1998. It's mostly the homeowners that bought near the peak of the housing cycle that are over-extended and once we can settle that problem with bankruptcies, refinancings, time, or home price appreciation, the US consumer will be fine. The housing problem just needs more time to sort itself out. Bernanke has helped a lot by getting down LIBOR. Now we need that stimulus package pronto to reduce job loss.

[KillTheMessenger]

Deflation does not necessarily mean that the economy goes down the drain. It does mean, however, that the most successful companies will be those who automate and increase their efficiency. Those who do not, will succumb. We went through this every one or two decades in this century and every time we come out more efficient and stronger. Currently, of course, the US is as inefficient as they come. But that's an opportunity and a challenge, not a threat. We can achieve much higher returns on efficiency investments than any other country because of our inefficiency, not despite.

The automobile industry in the US has been suffering from mismanagement for decades. Please look at the charts. To pretend that this is a short term problem brought on by missing credit is a disservice to the industry.

[cam]

You point an idyllic picture - provided those efficient automatons that companies are staffed with start purchasing the stuff that other automatons are making. You see, there is no such thing as a "consumer economy". If you bend the definition of "economy" enough to admit a consumer sector then there is no such thing as a sustainable consumer sector much larger than 50% of the economy. In essence, consumers can only consume as long as they produce enough to pay in kind for their consumption.

Credit overerreached its equity some time ago in the US. The only way the economy can recover from its excesses is if we can somehow expand productive employment. Automation is indispensible in much of technology, but it would probably be better to employ people where we can in the short term until we can expand our economy in new productive areas and wean ourselves from our debt.

In other words, we need to start thinking seriously about employing people productively and paying them enough to consume their production.