Long Term Prospects

Long Term Prospects

There are so many people who believe that once we are out of this catastrophe things will return to normal. Delusions, I’m afraid. In short, I believe the long term prospects are as bad, or possibly even worse, than the short term prospects.

We cannot keep buying and not selling–that is, importing and not exporting. But our ability to export is all but disappearing as our ability to manufacture is all but disappearing, although (of course) many cars will still be made here, even if we lose the big three (although many of the parts for Japanese cars will probably be made in Japan).

But cars aside, how do we manufacture things when Chinese workers are paid $2 a day? The other day, I read that the Chinese are going to bypass the internal combustion engine and build electric cars. The persons I have talked to scoffed, when I mentioned this and the possibility that the Chinese will have a workable electric car not long from now that will retail for $10,000. It reminds me of 1979. I called and got statements from 20 economists (you can read this–it was the cover story for The New York Times Magazine, December 30, 1979, entitled "The Threatening Economy") that expressed "their views on how the United States can extricate itself from its economic troubles."

Not a single economist mentioned Japan, in looking ahead. Nor did I, in my commentary. And the reason, and there is other evidence for this, is that few believed the Japanese were capable of producing advanced industrial products like cars. Yes, they were excellent in making plastic replicas of the Empire State Building, sold in stores in Times Square. But cars–no way. Within a few years, there was the rust belt, the area decimated by the imports of Japanese cars.

Okay, the Chinese today are further behind, technologically, than the Japanese were then. And who knows what effect their lack of democracy will have? But $2 a day!! And even if Chinese electric cars are decades away, there are all the other products. And low wages exist elsewhere. And India, as everyone knows, is increasingly able to produce services, like read Xrays, an ability that leads Alan Blinder, a notable Princeton economist and former VP of the Federal Reserve, to believe that services of all kinds will increasingly be produced in places like India.

We simply can’t keep importing more than we export. Sooner or later the value of the dollar will fall. And it will likely be sooner, given the vast amount of printing that is taking place and the monumental budgetary deficit being created. What this means is that American living standards are going to fall as the price of everything imported increases, from socks and shirts to cell phones and sinks and anything else that someone thinks of that begins with an ess sound.

When and how far the dollar will fall is difficult to say since those we owe money to, such as the Chinese, do not want the value of the dollar to fall, but in the end too many holders of the deteriorating dollar will try to sell it before others do, and will cause it to fall. My bet is that when the mood hits, the dollar will fall like the Dow did in 1987–about 23% in a day–only worse.

Of course, we could resort to protectionism–but remember how the Smoot-Hawley Tariff Act of 1930 helped usher in the Depression. I don’t think protectionism will work now either, especially with the increased globalization that has taken place and given our genuine need for many products produced elsewhere. And politically, protectionism would be an unmitigated disaster (although we can play at the fringes–no goods produced by child labor or no goods produced by prison labor or no goods produced under environmentally harmful conditions–but these fringes can’t solve the problem).

The result of a weaker dollar is higher prices and the Fed will feel it has to increase interest rates to counter the inflation (and maybe we have no choice unless we want to face triple digit inflation every year, or worse). The higher rates will cut off any recovery, or if this takes place a decade from now, cause a recession. In any event, what I expect is endless stagflation–inflation about 5-10% a year and unemployment averaging about 8% a year–in other words, a horrendous situation.

Any hope, in my view, is a government that provides jobs–a modern WPA; aids investment–partnerships, if possible; and one that provides a safety net. But we live in a culture in which government is considered the problem, not the solution. It will be difficult for Obama and his successors to get the government to do what will mitigate these problems. Moreover, it must be accompanied by a different conception of the good life than what Americans now hold. It must be one in which leisure and simple pleasures are more appreciated than goods. Not likely.

The ending may be unhappier still. How long will the American people sit by silently accepting their lot? If what I am describing is the future, living standards may drop 10 or 20 or 30 or 40 percent over the next two or three decades. The American people are, it is true, increasingly tolerant–electing a black man president, increasingly allowing gays to marry–but this is a country in which vast numbers believe we are God’s gift to mankind. They believe high living standards are theirs by right. Moreover, this America–which is very chauvinistic--is, as often as not, characterized by dismaying political ignorance. Many do not even know there are three branches of government.

In such an atmosphere, how secure is our democracy? In the 1930's, many believe Roosevelt’s leadership prevented the Huey Longs and the Father Coughlins from gaining strength and taking over. Fascism triumphed in Italy, Germany and Spain, but not here. But economic failure has given rise to tyrants many times and in many places. Are we immune?

What a happy note to conclude on!!!