Economic Update

Every so often I put forth an economic update which essentially says the same thing and probably bores the hell out of the few who read it. So warning: there is more of the same. That is, in brief, the short run prospects are bad and the long term prospects even worse (probably). [Keep in mind that economists are known for being able to be excellent predictors of the past.]

Short run: but how short is short? The interesting question is whether the recovery will continue long enough so that a new peak will be achieved, after which any downturn will be termed a new recession. If, however, the downturn occurs before the new peak, what we then have is a double dip. At the moment, we have at least two prominent economists predicting a possible double dip: Dr Doom, Nouriel Roubini, (who when I last read him a few weeks ago gave the possibility of a double dip at about 25 or 30 %. (Roubini was regarded by many as a crank in the late 1990's, because he was predicting dire straits after the bursting of what he saw as a dangerous bubble, but is now regarded as a prescient genius.) But there is also Robert Shiller, of Yale, who is giving hints he expects a double dip, but not in the very immediate future. Shiller, in my view, is at least Roubini’s equal as prescient genius–see his cleverly-named book, “Irrational Exuberance”--in that he not only predicted dangerous consequences from the bursting of the dot-com bubble, but also–early on–saw we were developing a dangerous housing bubble.

Paul Krugman (PK)is perhaps less daring but possibly more pessimistic. He fears we are in for a Lost Decade, the phrase used to describe the decade of the 1990's for the Japanese, one of stagnation after having more than forty years of fantastic growth. (And as PK notes the decade that followed was not that big an improvement.) For Krugman, it is a fear that the problem before us is not inflation, but its opposite, deflation. If prices actually fall, buyers hold out on their purchases in order to get whatever it is they want–cheaper.

People like Krugman, Roubini and Shiller see a frighteningly weak recovery. To be sure weak recoveries have been the recent pattern–there was one after the recession of 1990-91 and 2001. However, in time the first of these recessions led to a boom–in the late 1990's unemployment fell to 4 %--while the second did not. Playing into contemporary weakness are the basic factors: exports are not strong, in a world where our wages are high, as well as a European world that is literally shaking in its boots, even if the weakest–the PIIG’s (Portugal, Ireland, Italy and Greece) and Spain–do not buy that much of our exports. It is simply that a weak world economy is never good for economies in general and exports in particular.

Investment is low, not only because banks are reluctant to loan (or don’t have the funds), but also because one of its biggest components–construction (of houses and commercial real estate)–is in the doldrums and will undoubtedly remain there for a good while.

Most important is consumption, but here we have deep fears (though these rise and fall) along with less ability to borrow against houses or even borrow as much using credit cards. What is needed is a second stimulus, since the first was too small (even if it sounds big–at $787 billion it was far below what Christina Romer (the woman who heads Obama’s Council of Economic Advisers) was calling for, which was $1.2trillion. But politically a second stimulus is dead as a doornail.

Given all this, it is not surprising that the prestigious Organization for Economic Cooperation and Development (OECD) is predicting that a year and a half from now, approximately, unemployment will still be at 8.4 %. Krugman–whose blog I highly recommend–is unhappy with groups like the OECD, because they are calling for higher interest rates (fearful of an inflation that does not exist) and others are calling for a reduction of the deficit. If either monetary or fiscal policy (or both) veer towards tightness, then I think “1933–here we come.” Fortunately, so far, Bernanke is resisting this pressure, but good policies have a way of being driven out by bad thoughts.

Some think the economy has recovered more than it has because the stock market has recovered more than expected. Why it has done as well as it has I am not sure of (and don’t read stock market studies), although I suspect it ultimately relates to the fact that the corporations listed on the exchanges are able to substitute cheap labor from China and elsewhere for American labor and thereby end up making more profits, even if none of this shows up in improved unemployment rates, lessening of the length of time workers are unemployed or significant improvements in the hiring of workers entering the labor force, even those who graduated from college. In any event, one should always separate the financial data from the real economy, when one evaluates how an economy is doing (although in the end, of course, there is a correlation of sorts.)

The long run situation is of course fuzzier. Who knew there were automobiles before there were automobiles or computers before there were computers? Who knows what lies ahead? But I do think, even given this ignorance, there is still something to be said. We need a huge improvement in our infrastructure. We need a huge improvement in our pre-college education. We need a huge improvement in our environmental programs. We need, in short, a huge improvement in our Federal government at a point when politically people are more anti-government that they have been in decades–or perhaps in my lifetime (and like Jack Benny I am an older 39).

In short, we are becoming ungovernable (a national version of California) at a time when we need to be increasingly governable. To solve our future problems we will need to spend and tax. In the end, I think it could be argued that many who hate government have enough pet projects–earmarks in their states, disaster relief, farm supports, and so forth, that increased Federal spending remains a possibility–although I fear much of this sentiment can be Reagan-ish, in that he had no trouble saying government was the problem but increasing military spending by many billions and there’s where the increases may take place. But whatever possibilities exist on the spending front for infrastructure–bring back Ike and his highway program (concealed as a necessity for defense)–or education and the array of possible environmental programs–more wind power, more electric cars, more use of solar power, more conservation (including insulation and energy efficient public transportation), it is clear we are reluctant, as a culture, to give up gasoline and oil, coal, and the overuse of products that use energy. But even more upsetting, we are a something for nothing culture, like Greece. We want this and that but we don’t want to be taxed for what we get.

The possibility of a good economic future requires changing age-old habits. I suppose there will come a time when it is realized there are limitations of how we utilize our power to get what we want–Iraq and Afghanistan will help move us in the right direction, one hopes–but will there come a time when we are willing to transform ourselves into what we are not. That is, can we live more simply, live without gas-guzzling (or perhaps without cars at all in places like Manhattan), live without endless numbers of energy-using products? And on top of this are we willing to be taxed at higher rates to pay for what is needed–health and education.

If your answer to these questions is that we can make the changes needed, then we have a potentially successful economic future. If, however, you think, like me, this is a transition we cannot make (or cannot make in the degree needed), then our long term future is weak, if not grim.