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Economic Adjustment

February 17th, 2009

For the past several months, Sarah has been making noise everytime a new labor statistic comes out showing new job loses… and every time I reminder her to look at the unemployment levels from 1982, numbers we still haven’t exceeded. My argument essentially boiled down to, “Yes, things are bad, but they have been much worse and this country is, if nothing else, a country of survivors.” I liked my argument for its simplicity and optimism. It seemed like the right thing to believe in the Obama era. Recently, I’m not so sure I’m buying it anymore… and it’s got me worried.

Let’s proceed from here with an admission. When Phil Gramm said America was suffering a “mental recession”, I nodded my head in agreement. Not to say I didn’t see the political stupidness of saying that, but the basic premise of his statement rung true. Americans have long been prone to mass-hysteria and group-think. One can find dozens of historical instances in the last century, and more than a couple in just this past decade. Our mass media is designed around “crisis coverage,” so it is in their economic interest to report bad news, churning up a frenzy of media consumption. This behavior is also old as time. Given these known historical trends, it wasn’t hard for me to believe this was all more of the same.

But a few things this past week have got me concerned that this may be the real deal. Not that the evidence of a recession wasn’t already clear as day, but that this recession may be very different than past recessions and be of the sort that we don’t just bounce back to the “way things were” in a few years.

The number one reason for my change of heart is consumer credit. Since the 1970s the primary growth sector of the American economy has been consumer goods and services. Not heavy industry, not business-to-business services, but goods and services targeted at consumers. Trouble is, if the only part of the economy that really grows is consumer purchases, what is fueling the other side of the equation? In other words, where are the consumers coming up with the cash?

Long has the American consumer been warned about the dangers of too much credit card debt, with its predatory interest rates and cyclical minimum payment schemes. But what you didn’t hear about is what would really happen if, all of a sudden, every American was jolted out of our cheep credit induced stupor and started living within our means again? It turned out to be a its own little reverse prisoner’s dilemma. So long as it was only individuals kicking the cheep credit habit, the system survived… but if too many of us got religion at the same time, the system would crash out.

Of course, we didn’t so much get religion as the preachers stopped preaching. But the effect was the same, and suddenly Americans were no longer able to buy all the stuff they couldn’t afford before. No more giant houses (or remodels), no more high end electronics, no more cars with bad gas mileage. Without credit we could only buy what we actually needed, and it turns out we didn’t really need that much.

In mentioning this to a work colleague a few days ago, he remarked that our economy is based on bubbles. Which, on reflection, is absolutely true. The past thirty years wasn’t just powered by consumer credit, it was also powered by the rise and spectacular crashes of market bubbles. Most recently the housing bubble and the technology bubble before. These seemingly robust engines of growth lead us into a false sense of economic security, encouraging even more borrowing. To say nothing of the overly aggressive leveraging seen in Corporate America.

The colleague went on to say that all we are doing now is looking for a new bubble. The Obama Administration is betting on public works, and it might just work in the short term. But it’s just another bubble, and when it bursts, we are back where we started… maybe worse. That’s not to say the Administration’s plan isn’t the right move for today, but ultimately we need to figure out an economic equilibrium that doesn’t rely on someone (whether it be average consumers, corporate entities, or the government) going massively in to debt.

To achieve that sort of change we are going to need a major economic adjustment of the sort that we haven’t seen before. Which is why, unlike before, I’m a bit worried.

probonogeek Politics

  1. ethan
    February 17th, 2009 at 19:09 | #1

    I’m predicting that the .gov plan works: Cheap, clean energy and modern infrastructure will make it possible — even desireable — to start producing in goods right here at home again. In 20 years, our economy will shift away from the production of mostly luxury goods and services and back to producing real things, particularly technological manufacturing.

    The bottom line is that we can’t keep borrowing money from nowhere and spending it on nonsense. We need to actually produce more stuff.

  2. probonogeek
    February 20th, 2009 at 13:27 | #2

    Sounds good to me… I hope you are right.

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