President Obama held his first news conference yesterday. He did reasonably well. He was serious, on point and well balanced in the optics he projected. He also managed to duck some questions designed to get him into trouble. Whether he seemed properly presidential is another matter; it's still early. He said one thing in particular, however, that caught my attention, and provides a perfect hook for my chosen subject today: "This is not your ordinary, run-of-the-mill recession."
Well yes, that's right. But one wonders exactly what he means by that, for he did not elaborate. Unfortunately, none of the press present had the brains to probe further on how the President understands and interprets the problem. They did what they usually do: Focus on personalities and superficial politics, the "who's up/who's down" method of creating what people think of as news, but which is really a form of ever so slightly highbrow gossip that works commercially, like nearly everything else in these "bread and circus" times, as entertainment. (Some of my best friends are journalists--I have to say that, of course. But you will find as this blog progresses that I am not particularly impressed--at least not positively--by what most mainstream journalists do most of the time.)
This is of a piece with what has seemed to me to be an astonishingly superficial discussion we have been having in public about the economic mess we're in. I am about to deepen it for you, you lucky dog. But be warned: This will not be a short blog.
Now, first, a full disclosure: I am not an economist--neither a classical macroeconomist of the postwar ilk nor what is now often a behavioral economist, which, it seems to me, is just a new term for what used to be called a microeconomist. A macroeconomist, in case you missed this day in school, is someone who looks at large trends and the data that describes them. A microeconomist, or a behavioral economist, is more interested in individual and small group behavior, making him a trafficker in what other social sciences have to say about human behavior, notably psychology, anthropology and sociology.
While I have never wanted to be a macroeconomist, or to know a whole lot about macroeconomics anymore than I ever wanted to be a lawyer, I have always wanted to know more about microeconomics as an aid to my main interests as a social scientist, which is best defined as political sociology, or political anthropology, perhaps. I pay attention to new books about "animal spirits"--a term once used by John Maynard Keynes himself--as a key to understanding why markets do what they do, and I am interested in what behavioral economists like Robert H. Frank, Tyler Cowen and others have to say. (These two gentlemen, I am happy to note, are recent additions to The American Interests' editorial board.) I am not interested very much in what the rational-thought model of social science has to say, because it all strikes me as so retro-positivist--Skinnerian even--and wrong, and far too abstract to be taken seriously as actual social science. But never mind methodological and epistmological foreplay: What the hell is going on out there, anyway?
Let's start with the most obvious elements of the problem and move along to the less obvious ones. We have not one but three problems, as Bob Samuelson pointed out some days ago. We have a financial meltdown and consequent credit crunch as the result some very stupid behavior on Wall Street. We also have a collapse in consumer spending, which is related to but still independent of the first problem. And we have an international economic problem thanks to the integration of the world's financial and trade markets, which is making itself felt in rising protectionism and the virtual disappearance of capital and credit from the poorer countries. These three problems have related but not identical causal patterns. So there is no one solution for the problem, because it isn't one problem.
Timothy Geithner's approach to the second iteration of the bank bailout is designed to address the first problem. The stimulus package is designed to address the second problem. As far as I can make out, nothing much is being done by governments to address the third problem, although it is true that the President did see the wisdom of resisting the "buy America" element in the stimulus package. As understandable as the idea is, for a reason explained below, it would only contribute to beggar-thy-neighbor protectionism that would make pretty much everyone worse off by dampening demand worldwide.
All of this, so far, is pretty obvious, I think. Less obvious is what caused it all. For a good while most people thought that the subprime mortgage debacle was the root cause of the problem. And this view, naturally enough, led observers to focus in on the Wall Street subculture, and the regulatory environment for it shaped in Washington. This is part of the problem, to be sure, but it is not necessarily well understood.
It is true that technology is to blame for part of what has befallen us. The speed with which transactions can be completed has enabled new products like bundled investments and derivatives to dash around madly below the radar of more sagacious observers. The top people in may investment firms really had no idea what the kids they hired were doing at their computers. So the sheer volume of bad investment decisions rose much faster than the regulatory system could detect and correct for them. It is true, too, that the incentive structures for both the bond-rating agencies and the SEC itself have been either perverse or way too lax. And it is true, further, that a market-fundamentalist ideology--that markets could be counted upon to regulate themselves--is partly to blame for that. It demobilized our sense of the possibility of error and tragedy. It made the crooked timber of humanity, to remember Kant's famous phrase, seem suddenly straight.
But that is not the whole story even at the level of the subprime crisis, and it turns out that the subprime crisis is not at all the source of the overall problem.
The beginning of wisdom here is that a regulatory system is effective in relation to the people it is supposed to regulate. If you have a flawed and loose regulatory system, it will still work reasonably well if the people being regulated are basically provident, patient, honest, abstemious and mindful of intergenerational responsibility as inculcated in the traditions of society's core institutions. But if you have people who are greedy, impetuous, dishonest, debauched and selfish, even a much more rigorous regulatory system will not work well. In the end the problem at this level is not about values but virtues. One would do well to recall something Edmund Burke once wrote: "Men are qualified for civil liberty in exact proportion to their disposition to put moral chains upon their own appetites. . . . Society cannot exist unless a controlling power upon the will and appetite be placed somewhere, and the less of it there is within, the more there must be without. It is ordained in the eternal constitution of things, that men of intemperate minds cannot be free. Their passions forge their fetters."
This is why, when this mess began to take the shape it did, The American Interest searched at this level not for the symptoms of the problem but it's true source: virtue, not value. So I thought immediately of Gertrude Himmelfarb and her work on the Victorians, but she never replied to my invitation to write. Neither did Thomas Sowell. Nate Glazer replied, but declined to commit to write. I had to content myself with a marvelous essay on "The End of Thrift" by Barbara Defoe Whitehead, the end of thrift being a part of the problem but not the whole of it.
I still insist that, as far as Wall Street is concerned, the real issue isn't technical or technological; it is moral in the broadest sense of the word. And that is why, too, I have commissioned Ramesh Khurana of the Harvard Business School to write on the monumental but virtually unmentioned shift in business school culture over the past thirty years. We have gone from a time when business understood its social responsibility as that of creating wealth to one that rewards and cares about only making money. These are not at all the same things, of course, but that I need even to point that out is a measure of what has happened to us as a culture.
Yes, we have to change the way the bond-raters get paid. Yes, they have to get serious over there at the SEC, start guarding the chickens rather than feeding the foxes, and Ms. Shapiro seems to understand that very well. Yes, along with Senator Levin, we have to do something drastic about offshore secrecy jurisdictions, which aid and abet the cavalier deals and selfish behaviors Wall Street has specialized in lately. But even all that will not make bankers and hedge fund operators any more intrinsically trustworthy. It will only constrain their ability to act badly within the law. Rather, the business culture itself has to change, and we have to hope that it doesn't take thirty years. We need more George Baileys and fewer Mr. Potters, if the metaphor from "It's a Wonderful Life" works for you. How do we do that? I wish I knew. I do know, however, that changing a few regs will not do the trick.
As I say, however, the subprime problem is not really the source of the mess. As most people know, the subprime bubble arose in part because an earlier bubble, the tech bubble of the previous decade, was never really popped and deflated. Thanks to Mr. Greenspan's political instincts, about which we could speak for hours, the Fed let interest rates dwell at rates that instead caused the bubble to migrate into the housing market. But even this is not the source of the problem, but only a prior second-order manifestation of it. The source of the problem, as Martin Wolf of the Financial Times has been at pains to point out now for some years, is that there was just way too much money in American banks and financial institutions, far more than could be lent out wisely.
There was way too much money to lend to the U.S. government, whose deficits were nowhere near that level. American businesses did not need to borrow so much, for the their profits were adequate for their own investment in capital. So where did it go? The banks essentially tried to bribe the money into loans to consumers using very low real interest rates. Want to buy a house you can't afford? We can make that happen. Want to extend your debt on your credit cards? Let us accommodate you. Want to borrow huge sums to send your kids to expensive private colleges and universities, so that you can keep up in the status race for the future? Here not only did banks oblige, but the Federal structures for student lending became bizarrely corrupt, and university administrations, for reasons of their own, hiked tuitions and fees way up trying to take best advantage of loan environment. Yes, you heard me right: The breathtaking rise in tuition in recent years, vastly above the rate of inflation, is partly because of all the money available to be borrowed by status-sensitive parents.
Where did this money come from? Well, China, and Japan and the Arabs mainly. The Chinese in particular, trying to propel export-led growth like the Japanese and Germans did three, four and five decades ago, have kept their currency artificially undervalued. They have done this, and prevented inflation, by soaking up export earnings in dollars and reinvesting them back into what was and, amazingly, still is, taken to be the safest place: the United States. Think of it this way: Joe the plumber goes to Wal-mart and buys some cheap piece of Chinese junk he doesn't really need but wants anyway because he saw it advertised on TV, and pays for it with a credit card; the Chinese manufacturer makes $2 from the purchase, and the Chinese government buys those dollars with cheap yuan (which the manufacturer saves or reinvests) and uses them to buy T-Bills. So the $2 ends up back where it came from, except now it is the property of the Chinese government in some sovereign wealth fund. The Fed keeps interest rates low, because it would attract even more foreign capital if it promised higher yields. And that encourages consumers to borrow more and go deeper into personal debt, and the whole stupid cycle starts all over again.
I've left out a lot, like the inflation-dampening effects of cheap goods from abroad, and I intend to keep it left out, but you get the basic idea. The basic idea is what Niall Ferguson has called Chimerica--the idea being that China and the United States formed a single economic system in which China saved and manufactured and America spent and consumed. They basically acted as our savings bank, and we provided them a market sized commensurately to their expanding manufacturing base. This led to a huge trade deficit, of course, which had to be financed, but the Chinese and others were happy to help finance it, even at low yields on their investment, to sustain American demand. And around and around and around we went until the whole arrangement simply went off the tracks, and Wolf and few others warned it had to eventually.
It is human nature that too much money chasing too few really valuable goods and services is going to eventually lead to people taking risks they should not take. Money should not sit idle; it should earn more money. And of course it's a kind of game, too, in which emotions about status and success play a role. The bubbles we've seen were the result of risky behavior at a near mass level. Ordinarily, you learn in economics class that too much money chasing too few goods and services leads to inflation, as the price of what there is to buy is bid up by raging demand. But an asset bubble is a kind of inflation, after all. As long as the money supply is responsibly shepherded, the currency will not degrade. But that only stokes asset inflation--the money has to go somewhere. But just like a currency inflated beyond the value it can actually procure is worth less, so overvalued assets end up creating what amounts to virtual, ghost or fantasy money. I am sorry that so many people my age have lost so much of their retirement savings, but they have to know that a lot of that money wasn't ever real in the first place; it did not represent real value extent in the real economy.
Of course, if in the past 16 years we had had a government that understood all this, the government might have borrowed massive funds at low rates on behalf of long-term investments in infrastructure, education, energy research and technology and a few others areas. That money borrowed would have paid off in spades had it been invested wisely--like the GI Bill did, only several hundred times scaled up. But this didn't happen. The Clinton Administration was happy that it left us with a balanced budget and even a surplus there for a while. Democrats took pride in that. They shouldn't have. As for the Bush Administration, as far as I can see it had no economic investment strategy for the long haul at all. It took a market fundamentalist view of things, an ideologically driven policy in that domain no less than its foreign policy after 9/11 was faith- instead of reality-based.
So far, I have been talking about the recession/depression (we'll find out which it is in due course) as though it were just a bigger, badder business cycle. That was the premise of an interesting article in the Wall Street Journal last week by two economists, Reinhart and Rogoff. These two scholars did us a service of sorts by comparing past recessions both here and abroad. By looking at the historical data and plugging in what we know about our own situation near the front end of the current recession, they predicted how deep and how long this one was liable to be. Very interesting.
Toward the end of the piece they admitted that this recession displays some differences with past ones, including the 1981-82 U.S. recession, the last really deep one we experienced. But, as if the editor was holding a sword and a limited word count over their heads, they only managed to mention one: global scale. This recession is global in a way the 1981-82 recession was not, so that American investors lost money not just here but pretty much everywhere. Spatial diversification no longer buys much insurance against tough times. Fine, but that is hardly the only difference.
One other difference is that in 1981-82 Paul Volcker was deliberately trying to create a recession in order to wring a devastating inflation out of the economy. It was painful, but it was the right thing to do and it worked. Now, we're trying to do the reverse: We're not fighting inflation but deflation. We're trying to create not a recession but some inflationary sparks to offset the deflationary trends. One would think, would one not, that the policy measures one would take would hardly look like those of 1981-82?
Another difference is that in 1981-82 the United States retained a much larger manufacturing sector than it has today. I don't know the numbers, but I would not be surprised if our manufacturing sector today involved no more than 15% of the labor force, and it may well have been double that 25 years ago. If you go to the American Midwest and talk to people, you quickly hear tales of large manufacturing concerns having simply disappeared. Now, to stimulate an economy like the one we have today do you use the same models as those that were used 25 years ago? I've asked some economists this question. Some say it doesn't matter what the ratio of manufacturing to services is, you do the same things with interest rates, taxes, money supply and so on. I've asked others who answer that with so much of what Americans buy being imported today compared to 1982, you do need a different model. If the stimulus puts money into the hands of Americans through tax cuts, but the money gets spent mostly on stuff from China and Korea and Indonesia and oil from the Arabs, well, it seems highly unlikely that this is going to create or sustain the same number of American jobs as would be the case if all or most of that stuff were made here. Hence the reference above to the logic of the "buy America" impulse. So those economists who say the manufacturing/services ratio makes no difference do not persuade me.
And then I have actually met a few economists who I sense are telling the truth. The truth sounds something like this: "We have no idea. We do not yet have the methodological tools to generate any empirical basis upon which to give an answer. Yes we need a new model, but no, we don't have one."
If this is what the President meant by the phrase not your run-of-the-mill recession, well, that's both good and bad: Good that he realizes that we're off the charts, bad that our economic experts have no real idea what to do.
So far, we have raised the possibility that this dive in the business cycle may be sui generis and hence not subject to prediction or policy treatment based on past experience. But now it's time to go to a more speculative level. What if what we're witnessing is not just about a business cycle, the sort of cycle typically measured in 12, 18 or 20-some-year intervals? What if what we are seeing has to do with a cultural cycle whose causal power exceeds that of a business cycle, and is shaping this particular business cycle in ways we are not accustomed to perceive?
What on earth am I talking about? I will try to explain, but bear with me, please, for we need to take a few steps sideways to set the stage.
Forty years ago and more there was a spate of books and article on automation and its social impact. To simplify, a lot of people were very impressed by the sharply rising capacity of humans to design machines to substitute for human labor--machines that could do whole categories of work faster, better and cheaper than people could. Of course, assembly line use of machines predated the 1950s, but the scale and sophistication of machine tooling and automated processes really took off after World War II, and we'll not delay here to go into the sociology-of-science reasons why that was. Suffice it to say that it dawned on some people to ask the following kind of question: What if, twenty or thirty or forty years from now, we reach a stage where only a fraction of our labor force--say 10-20%--are able with the use of sophisticated technology to produce all the core products we really need: food, energy, shelter, transportation, medicine? What will the other 80-90% of the labor force do?
In some versions of the automation thesis, it seemed inevitable that Western economies would have to devise some means of collectivizing not the means of production, but the means of distribution. The basic idea was there there were core, indispensable economic functions, as described by the categories just mentioned, and everything else that was secondary, or tertiary. So if so many working Americans were not necessary for core production, how would food, shelter, transportation and the rest make it from the producers to the whole population? How would the nonessential buy it? Where would their spending power come from?
These rather old-fashioned types concluded that, well, we'll just need to give them what they need; they won't have to buy it. How will the superfluous 80-90% spent their days, get satisfaction, feel purposeful and maintain their dignity? That was a tough one, and answers varied: Arts and crafts; lots of leisure; and whatever other non-essential activities that transcended just laying around shooting pool and drinking beer people could think of. (Yes, I'm being a little glib here, but not that much. Don't believe me? Go read this stuff for yourself.)
What actually happened, of course, was different--but for some strange reason is still not well understood by a lot of Americans because, after all as the saying goes, a fish is the last to discover water. What happened was, to make a very complex matter simple, a consumer society, complete with the generation of artificial "needs" manufactured from naked "wants" via the genius of advertising. That consumer society came complete with planned obsolescence, with, for the first time in human history, whole factories making products no one really needed that were planned to break and be disposed of--thrown away. So the way nonessential workers got money to buy essentials and filled up their work hours so as not to feel completely marginal to creating social wealth and welfare was by doing things on the outer edge of necessity, but which were rarely if ever discussed in those terms.
Now, running a society and an economy this way accelerates the use of raw materials and accelerates the creation of waste. It also requires massive social delusion, wishful thinking, or non-thinking, by equating the social value of someone producing food or steel or quality education with someone working in a factory making sea-monkeys or plastic-ware. If any American from the 18th or 19th century were to somehow be plopped down in late 1950s, 1960s, 1970s America and witness how most people were making their livings, they would simply not have been able to understand what they were seeing. Take the aphorisms in Poor Richard's Almanack and they harmonize well with pre-World War II America; look at them in the context of the throwaway, fast-food culture of postwar America and they seem a kind of bad joke. Such a person, whether Ben Franklin himself or some lesser typical man or woman, would look at us and conclude that some mysterious derangement had occurred.
Now, as I say, this is highly simplified. One way it is simplified is that science and technology made more products available to people, so that "want" turned not unreasonably into "need." How about an electric washing machine? It beat the hell out of washboard and tub. How about a refrigerator instead of an ice box? How about power tools? Better automobiles, radios, record-players and medical care, in particular? It is no easy matter for anyone to say objectively where "need" stops and "want" starts as time moves on--everyone knows that. Do you really "need" a microwave oven, despite the fact that people lived well and never missed one for more than 99% of recored history? But sure, you "need" one. Heck, I have one, too.
Fair enough--it's a tough call between need and want at the margins. But beyond the margins it is sometimes not a tough call at all. Who "needs" a hand razor that vibrates? Who needs pre-packaged food full of preservatives? Who needs room deodorizers that last six months? There is simply no doubt, in my mind at least, that a great deal of demand in our economy is artificially produced by prodigious amounts of advertising in all forms, of which television was the key original delivery vehicle, and really still is. Do an experiment, if you watch television. Monitor all the commercials you see over a period of, say, a week. Write down what's being sold. Then, after a week or whatever period you choose, review the list and ask yourself: "Which of these products and/or services advertised do I really need?" Not "food", but a Wendy's double-cholesterolburger with cheese and pickles that's actually pictured and advertised. The answer, of course, will be none of them. Not one thing; not one service. If you really need something, there is no reason for anyone to advertise it, save, if necessary, to let you know it exists.
Of course, bad feelings about the throwaway consumer culture and the madness of television in being the delivery vehicle for it all have existed for a long, long time. A lot of traditional people, religious people, conservative people did not like what they saw the first time they saw it. But these were a growing minority.
It's true, too, that in the mid-to-late 1960s and into the 1970s the environmental movement, the ecology movement and the counterculture generally were all motivated by opposition to this kind of artificial economy and the social effects it produced. Lots of people warned that these social effects, not to mention the literal long-term costs of this kind of social organization, were not sustainable. Daniel Bell wrote a book in 1976 called The Cultural Contradictions of Capitalism in which he tried to suggest the mechanisms by which this system would undermine itself. (Bell was, and remains, a social conservative but also a socialist, something most people think of as sort of an odd combination but which I understand intuitively.) Twenty years later, when Bell wrote a new introduction to the book, some critics took him to task for being wrong about practically everything. Capitalism was alive and well, socialism was discredited, the American economy was going gangbusters, and so there, Danny boy, in your eye! Now who looks to be closer to the truth, perhaps--Bell or his critics?
In short, what I am suggesting is the possibility that a cultural cycle is finally drawing to an end, a cycle in which consumerism, material fetishism of all kinds (where depressed people go shopping to relieve their depression; after all, every age has its specific psychological illnesses), and disdain for or the discounting and ridiculing of traditional social restraints associated with religion are ebbing. Maybe consumer spending is down so sharply not only because people are worried about not being able to make core-need ends meet, but because ever more people are sobering up and asking themselves, what do I need all this crap and clutter for anyway?
I don't know if that's really so. Maybe I am giving the typical American way too much credit for straight thinking. I probably am; most Americans, I am sure, are spending less because they're frightened of losing their job. But what if it is so, or what if one day not too long in the future it becomes so? What are the implications for American recovery from this mess we're now in, and for the future of the American economy?
One implication would be that a lot of the jobs now disappearing in nonessential (or downright harmful) sectors of the economy will never come back, and should never come back. So assuming we don't move to collectivized means of distribution (which would be a bad thing, to be sure), what will new and useful jobs look like?
It's not up to me, you know. But if it were, I would not be shy about making a few suggestions about the kinds of long-term investments America ought to be making.
One would be to revitalize American agriculture--make it far less capital-intensive and agribusiness-oriented than it is now. I could imagine a new Homestead Act of sorts, where the Federal government revises the old "40 acres and a mule" formula, and gets more distressed and socially stranded Americans back to the land, an expanded agricultural extension service there to help them learn best practice in growing food and animal husbandry. There's nothing wrong and a lot right with producing high quality food, and that looks to me like a major export bonanza lies ahead, as well. (I could go on about the environmental damage created by agribusiness and the political distortions its lobby is responsible for in Washington, but I'll set that aside for now.)
Another would have to do with education, the development of the highest quality human capital being the best investment any society can make in its future. And that's very labor intensive. It also means that we should open our doors to smart, creative entrepreneurial talent from abroad. We don't do that well anymore; seems we'd rather let in, or allow to stay, immigrants capable only of being gardeners, maids and bedpan emptiers. Boy, is that stupid.
Then, as everyone knows, there are new jobs in green energy paths. I love when people talk these days like this is something new. There hasn't been a new concept here in 40 years, though there have been some new technical breakthroughs. We could have done this sort of thing decades ago had the Congress any guts or foresight, or a President who made it a top priority. We've had no such thing, of course. Maybe we do now, however.
We can skip generations of technology in infrastructure development, too, and also in medical technology. Lots of high human-capital input jobs there.
And I believe that any truly liberal society also needs art, craft, music and literature. These are not superfluous to core economic functions; they inspire them in the first place.
If I try hard enough, I can close my eyes and see America several decades hence as a healthier, wiser and better society, with many more farmers and shepherds and teachers and artists and musicians and writers, and lots fewer advertising executives, K Street consultants, TV salesmen and repairmen, and fast-food "restaurants."
Of course, I have to close my eyes to see this America, because as far as I can tell it's all just a dream. Look at where we are with this stimulus package, and the debate over it. There is little to nothing transformational, in any sense, about what the President and the Democrats in Congress have proposed. And the Republicans, lord love a duck, are even worse right now: There is nothing too short-term for them. They want the stimulus package to be even more short-term than it already is! These are supposed to be real conservatives? Do they even know what word means?
Final thought for today: Maybe we're not talking just about a business cycle, or even just a culture cycle. Maybe we're talking about a civilizational cycle that involves the whole world, or most of it. We've had periods of globalization before, though less fully planetary in scope. There was the "other" gilded age of the late 19th and early 20th century. There was, it can be fairly argued (though I don't have time to describe it), the fairly well integrated Euro-Mediterranean culture of the high medieval era (say, late 12th to mid-14th centuries). There was also the integrated world of late classical times, say early 2nd to mid-4th centuries. None of them lasted. The earlier two were destroyed, you will be amused to learn, by pandemics (Justinian's Plague and the Black Death, respectively) enabled in part by climate change, and wars that erupted from the social chaos that followed. Note also that both World Wars I and II followed sharp economic downturns that followed in the wake of heightened material expectations.
Does that mean I expect this sharp global recession to kindle major wars, or be attended by a civilization-scale pandemic? Oh, I'm just a magazine editor; how on earth would I know? Barack Obama is the President. He's the one who understands that this is no run-of-the-mill recession. He's the one who needs to know. Does he?
Next up, several blogs describing my ill-fated but never-ending presidential campaign....
