Symptoms and Solutions

Symptoms and Solutions

Economic pain is slippery to diagnose, discuss and dissect. We all know there exists a business cycle and that gains and pains come with our system. We all now know that we have exited a gain period and are in a painful stretch. It is easy, common and understandable to see pain as problem and gain as solution. The deeper point is that the pains and the gains are inextricably intertwined; two sides of the same coin. The pain we are feeling today is the direct outgrowth of the gains we celebrated a few years -- in some cases months -- ago. This simple fact often hides from view and warps our policy discussions and understandings.

Today's global economic tumult is a symptom of the boom that ran from 2003-2007. In many regards it is long overdue bill for short -term coping mechanisms relied on since the 1970s. Today's downturn is not separate from the 1980s, 1990s and 2003-2007 booms. The economy (employment, prices, GDP growth, exports, imports) is reeling from American households and firms suddenly shifting toward living within the limits of their income. This creates an enormous and painful contraction because our economy had become dependent on household spending based on growing debt and "earnings" born of asset price inflation. In fact, oil demand, China's growth and so much more rested on excessive spending and optimism in American budgeting. In the third quarter of 2008, personal consumption expenditure in the US was $10.2trillion or 70.5% of US GDP in that period. If you use the CIA World Fact Book as a benchmark, US consumption accounted for about 15% of world GDP in 2008. Overspending provided the conditions of the boom. The debt, financial innovation and risk taking required, created the conditions for a global solvency crisis and painful readjustment -- the present situation.

We need a stimulus to prevent rapid and disorderly economic meltdown. We must use our time, money and pain tolerance to NOT rebuild the economic structure that is exploding around us. We must reorganize and rebalance our economy, internally and externally. We can not and should not aim to return to massive trade imbalances, huge government deficits, loose monetary policy, debt based consumer spending and rampant speculation. American employees must be paid enough to live. Government must restrain its spending to within a few hundred billion dollars of revenues -- when we are not in a generational macroeconomic crisis. The first order of understanding must be to recognize that the now ended boom times created the present crisis and are NOT the solution to it.

Trying to rebuild the macro economy we have largely had since the mid 1970s is a tempting prospect and continues to dominate policy planning. It is a terrible idea. If successful, it will only rebuild an unsustainable and crisis prone economic structure for a few more years. We need to distinguish between symptoms and solutions. The present crisis is a symptom of recent booms. Engineering -- at great cost if possible -- another such boom is not a solution, it will only postpone and intensify future pain.

The challenge of today is to rebuild a very different macro economy from the one smoldering in ruins. This will take several years, alienate some prime beneficiaries of the old structure and entail some significant pain. It will make room to rebuild the American middle class, refocus on environmental sustainability, reduce inequality and generate a solid foundation for American growth. We need a future defined by higher wages, lower spending, higher saving, greener living and more prudent and targeted government intervention on our economy. In short, today's pain should NOT send us scurrying for the false security of yesteryear's boom. We need to hunker down and build a better more balanced economy on top of the ruins of the old structures.

Comments

[Sundialsvc4]

When I submit this post, I know that it will get through. It will literally find its own path from here to the Huffington Post servers, and thence, eventually, it will find its way to you.

The Internet is a "massively redundant" data-system, literally designed (as ARPANET...) to withstand a nuclear catastrophe. It is loaded with "redundant," "inefficient," data-systems ... because redundancy and inefficiency is not what it was concerned with. Reliability and robustness were the most-important things in the Internet's designer's minds.

An economy, by and large, is the same way. You always need multiple sources for everything. You always need for some of those sources to be domestic, because "factories are surrounded by factories are surrounded by factories," and all of them pay wages. A single company is only a single node, so to speak, in that OTHER "World Wide Web." The web of commerce.

Consider the biblical story of Joseph. He refused to allow the Egyptians to eat of their Plenty, and thus they survived Want... and sustained their neighbors, as well. I'm sure that Joseph fought many political battles, even with Pharaoh's name behind him.

Consider also the biblical parable of the seeds thrown onto the shallow ground. They sprung up quickly and appeared lush, but the first harsh wind of adversity blew them away.

If biblical authors talked about these issues (and these follies), "well then, we're not the first."

[luziannagirl]

Right wing's George Wills just said on ABC's "This Week", regarding our economic woes that "we have to get Americans spending again".

BAHH! goes the buzzer. Wrong, wrong, wrong answer!

Mr.Wills, exactly what we don't need to do is resume feeding frenzy-spending. We don't need to go back to buying ourselves into debt by accumulating more worthless widgets we don't need, don't have room for, and that don't work right or last long anyhow. And, that often enrich those outside America's borders, to the detriment of American companies and American workers.

What we DO need to do is get each of our financial houses in order , and spend our hard-earned money ONLY on things that last and have lasting benefit. Quality goods and services, environmentally sustainable products, healthy living and quality health care, and carefully chosen charitable causes all represent spending that has value way beyond initial purchase transaction.

To heal our economy, we need more than just a quick economic shot-in-the-arm that going back to our pirhana purse ways would bring. We need a whole financial lifestyle makeover.

[JustAHumanOnEarth]

"We need a stimulus to prevent rapid and disorderly economic meltdown"

"We must reorganize and rebalance our economy, internally and externally. We can not and should not aim to return to massive trade imbalances, huge government deficits, loose monetary policy, debt based consumer spending and rampant speculation"

Just what do you think the proposed stimulus package is? Magic? No, it's going into debt, printing money, and spending it fast....before the currency debases.

People are eating up the story that we're being fed....no worries sheeple...­everything will be fine...the stimulus will save us all and not have any consequences in the long run...ya right.

[Pdubya]

Your headliner paragraph is in direct contradiction of itself, by economic principle!

We can not achieve "...We can not and should not aim to return to massive trade imbalances, huge government deficits, loose monetary policy, debt based consumer spending and rampant speculatio­n."...whil­e "stimulating" the economy.

Will we print or borrow this money?

The only way to stimulate the economy would be to slash federal spending, get rid of the fed, get rid of income taxes (they only represent 38% of our federal tax revenue), tax highly corporations that disadvantage U.S. citizens by their offshore operations, levy small or little tax to corporations that benefit Americans, return to some sort of sound money, and hold Congress accountable for balanced budgets and only they being the ones to coin and issue money.

Tall order, ain't it. Well guess what? We will be forced to look at this option when our dollar crashes. Our other option will be to accept a global or regional currency based upon the same model: fiat, printed currency centrally controlled by private entities. Except this time, it will be on a larger scale by international bankers - even more so than now.

I opt for the former.

http://www.youtube.com/watch?v=2XkabcSkpOA&eurl=http://www.dailypaul.com/

Credit comes from savings, not more credit.

You've identified the problems very well. But you fall short on describing "stimulus". That word can only be implemented by two bodies: the Government or The People. One doesn't work.

[Erdgeist]

As Dr. Rave Batra has, I think proven, you can lay our economic woes on the unintended consequences of "free-trade", i.e., off-shoring and labor arbitraging, which began in 1973.

I agree with your premise that "We must use our time, money and pain tolerance to NOT rebuild the economic structure that is exploding around us." To be sure, the economic structure we need NOT rebuild includes free-trade and supply-side economics (i.e., the trickle-down theory).

We have to swing towards a new economic program of strengthening the demand side of the economy and insure a recrudescence of domestic manufacturing -- not shipping jobs to China and elsewhere. This means that that needs of the nation must come first -- not the needs of individual corporations.

[Realization]

The current downturn and need to rebuild is, in fact, an opportunity. One top priority has to be to eliminate the trade deficit and rejuvenate U.S. manufacturing.

[ShakeYourComplacency]

" American employees must be paid enough to live."

Why isn't this shouted on all the sunday news programs and on every radio station? What was just an embarrassed whisper for workers such as ourselves, should now be discussed in full reality. No, we're not paid enough to live on, and the government hasn't cared one bit. The paycheck does not cover the bills. Expensive health care? No problem, tell americans to charge it. Rising prices on goods and services? Charge it. Maxed out your card? Get another one, then file bankruptcy. Still need to stretch that dollar? Tell americans they can stand in line at box stores like Walmart, and buy cheap goods from China that poison us and fall apart a week after you buy it. Good union jobs gones? Manufacturing gone? No problem, tell americans they just need to get a second job or third job. (And guess what we did - unemployment was low!). Can't afford to buy a car? Lease it. I could go on and on. Bottom line is that we're paid nothing, and if you're counting on us to drive the economy, good luck.

Government knew exactly what was going on and did nothing because the rich were just getting richer, and stuffing campaign contributions in their mailboxes.

And who else would complain about all of that? Certainly not journalists, who were all consolidated into mega corporations at this point, and joining in on the top 10 percent of wealth and control.

[kenstremsky]

We have to worry about high unemployment. We also have to worry about high inflation.

The federal government might not want to have individuals and businesses pay the social security tax for the next 2 years on wages below $30,000 a year. This may give many people more money to spend and help them reduce their debts. This may help many businesses have more money to spend, reduce their debts, and increase the probability that they will stay in business. Many businesses might fire fewer workers. Many small businesses might hire more people. If unemployment significantly increases, many more people will not be paying into Social Security and Medicare. I discuss social security more on my profile and a lot more on my website.

Businesses need capital to stay in business. The federal government should stop taxing interest from savings accounts, dividends, capital gains, and estates. Businesses especially small businesses may have an easier time obtaining loans and investments for hiring workers and plant and equipment.

If the capital gains tax is increased, expect any increase in government spending to not do much of anything because Americans and foreigners will be discouraged from investing.

I graduated from the University of New Hampshire in 1992 with a BA Degree in Political Science and a minor in Economics in 1992.

I ran for United States Senate in 2002.

I have discussed many ideas dealing with our economy after some columns on http://www.newgeography.com

Sincerely,

Ken Stremsky

[joebaggadonuts]

Krugman lays out program. http://www.rollingstone.com/politics/story/25456948/what_obama_must_do/print

Whatever direction we take is dicey and likely to be painful. I am glad that we have finally (almost) installed a bright leader as president.

[Pdubya]

Krugman is of the Rubin ilk. His economic policies are akin the the Fed or steroids. Seriously.

Where will this money come from? Printed or borrowed? The rate of growth from a stimulus will not put a ding in our deficit or protecting the value of our currency.

[themodernleader]

Max. Thank you. This is an intelligently written argument that is not heard in the leadership of the right or the left. So far, the billions squandered on bank solvency has disappeared into a black hole and will re-emerge later as rampant inflation. Obama's program is a hodgepodge of gimmicks and handouts with a few meaningful jobs.
We are squandering our credit. Once the lenders shut us down, we will begin to appreciate the value of selflessness, frugality, producing versus consuming and sacrifice as national virtues.

[mikekopac]

Watch all those with power and money purchase Real Estate (all those empty condos) in Florida

Wait 7 years...now watch all these rich folks get richer buy selling these assests for 3x they paid to the vast numbers of boomers that will retire there(remember not all those that will retire in 7 years got hurt by Wall Street...lots have defined benefit state pensions)...God Bless America

[philistine]

I agree with your opinions completely. The devil is in the details, however. The influential people who led us into this mess are already influencing the direction of the response to jump-start the boom-bust cycle again. They like instability, because they find opportunity in market turbidity, greed and in others' misfortune. Let us all hope that wiser heads will prevail, and market stability becomes our policy goal once again.