“We all believed in socialism because we were children of a different generation. Then I realized that if you want to irradicate poverty you don’t do it by redistribution of existing wealth. You have to create new wealth.”
— Narayana Murthy, Chairman and CEO of Infosys, circa. 2002
I’m stepping into an area fraught with politics, which I usually try to avoid as I think it distracts from the main mission of my blog, but I feel as though I need to say something because I get a strong feeling we as a country are repeating some mistakes of the past, and we shouldn’t be. The above quote is from a series produced in 2002 by PBS called Commanding Heights: The Battle for the World Economy. It explains the evolution of economic theory in the 20th century, from globalized trade (early 20th century), to Keynesian economics, to a return of free markets, and then globalization.
I hear the refrain from those in power now that “We’ve tried that and it didn’t work”, regarding free markets. To the extent that misplaced regulation caused our current mess, I agree, but a prevailing attitude I’m seeing develop among Democrats concerns me. I see what they are proposing now and I say, “We’ve tried this as well and it didn’t work.” Just look at our history. Does anyone remember the 1970s (I’m referring to President Nixon’s, Ford’s, and Carter’s economic policies)? It was the product of Keynesian ideas in a changed world that was no longer compatible with it, and they are still incompatible.
(Update 6/2/2009: I had to revise the paragraph below with updated info. since my AP newswire link disappeared)
The sheer magnitude of spending that is being proposed is mind boggling: A budget of $3.55 trillion for next year, with plans for future spending, along with projected deficits totaling $7.1 trillion from 2010-2019. That’s in addition to the $1.8 trillion deficit we’ve accrued this year alone. That’s a total of $8.9 trillion added to the debt in 10 years. To provide some perspective it took us 28 years, 1980-2008, to rack up an $11 trillion debt. So Obama is talking about increasing the debt by 81% in 36% of the time.
I could understand the necessity of setting up TARP (Troubled Asset Relief Program) to rescue the financial system while it was collapsing quickly last year, but the news I’ve been hearing lately says that even the Bush Administration overdid it a little. Now the Obama Administration is proposing a new round of TARP financing. Maybe it’s necessary, but it may backfire on us. Banks overfilled their reserves from the last TARP. They are keeping their powder dry, and have been stingy about lending. The question we should ask is why. Are they being greedy or are they just getting more conservative, trying to avoid high risk investments? Finding out which it is makes a big difference in terms of how to approach this.
I’ve gotten a sense that the election of Obama was not a vote for the future in terms of economics, but an attempt to arrest the present and reach into the past for salvation. I get a sense that we’re saying, “Stop this train. I want to get off!” It was a vote for “Remember the good old days? Let’s bring them back!” Too bad that’s a dream that’s not possible. The world has changed. It’s time to craft a new future. I know this sounds really anachronistic given that the Obama campaign used up-to-date technology, and continues to use it. The economic and budgetary solutions put forward, however, are from several decades in the past.
I’ve been paying close attention to financial analysis of our economy over the past several months. The sense I get is that we are preparing to repeat some old mistakes, and we will achieve similar results. The way I see it we can look forward to the following over the next few years:
- Inflation: caused by higher energy prices, and the classic “too much money chasing too few goods” phenomenon due to the fact that we’ve been printing money at an accelerated rate, and given the current proposals we’re going to accelerate it even more because we’re not going to be able to borrow all the money we need. I’m sure inflation feels good now, since we’ve been in a deflationary cycle. Given the slowness of government to react to any situation, and a consistently prevailing attitude of “If it works don’t fix it” (no matter who’s in power) we can predict with certainty that the government will overcorrect. Secondly, whenever the economy recovers, banks will draw from their excess reserves and increase the money supply even more. Saving will continue to be low, because it doesn’t pay to save money in an inflationary economy. Investors will put their money abroad in an attempt to increase their wealth instead of losing it letting it sit in a bank account (more on this below).
- Higher interest rates. From what I’m hearing we’ve nearly tapped out our borrowing capacity, at least with what foreign bond holders are willing to buy into. We’ll need to increase interest rates to make bond holding more attractive. This is going to have consequences for all of us. Initially we may not feel it, due to excess capacity that will be built up in the banking system, but eventually we will.
- Slow domestic economic growth caused by #1 and #2, and government borrowing crowding out private borrowing. I think however we will see a “jobless recovery”. Even though foreign countries appear to be in worse shape now than we are, if they stay true to market principles I think they will recover faster than we will, and will grow faster. Their crashing stock markets mean things are getting cheaper over there. Our current economic policies are not encouraging investment in our economy. Money will flow where it is welcomed, despite many people’s notions of where it “should” go. So I think we can look forward to a stock market recovery down the road (maybe next year), but I don’t get a sense that we will have robust job growth. The key to all of this happening is for our government and financial system to somehow untangle the derivatives mess of mortgage-backed securities and CDO’s.
- A trend towards slow, lumbering gigantism in the private sector. With economic conditions not conducive to domestic investment, and therefor the creation of few competitors in the marketplace I think we’ll see a trend towards conglomeration, and perhaps more regulated monopolies. This will contribute to our slow economic growth because these giants are not going to be too competitive internationally. If they survive it’ll be because they participate in government contracts, and they can get pretty far on their inertia alone.
- Your future is a government job. With all the government spending that’s going to take place, probably the best place to find a good paying job will be working for the federal government, or a major corporation that does government contracting. Government is not as efficient in creating jobs as the private sector is, but there will definitely be growth there. And it’ll likely be secure. Despite the efforts of past administrations, it’s been relatively rare when government jobs get cut. The federal government has grown continuously no matter who’s been in charge. It’s just been a matter of where the growth has occurred.
Having said all that I hope I’m wrong. I hope that we will come out of this with a robust domestic economy with good private sector job growth in the years ahead. I just don’t see that happening given what I’ve learned about our past history doing what we’re doing now.
Ending on a light-hearted note, The Onion discusses “Closing the money hole”. Though I haven’t seen pundit discussions that are nearly this silly (there’s expressions of muted surprise, but it’s amazing to me there’s not more alarm), the public discussion among citizens has felt pretty close to this… I haven’t posted warnings about foul language in videos I’ve posted in the past, because just about every video I post now has a little of it, and I got tired of warning people off, but there’s a bit of it here:
Edit 6/2/2009: I found this May 31 interview with Niall Ferguson and Joshua Ramo (video) on Fareed Zakaria’s CNN show “GPS”. Unfortunately I can’t embed this video, so follow the link. What Niall says agrees with what I said above. Both Niall and Joshua widen the picture of the consequences of what the federal government is doing now, and what it still needs to do. I agree with Joshua’s premise that we live in a “revolutionary time”, but I disagree with his examples. It’s true that we have “upstarts” around the world filling the void created by discredited leadership, but my point here is the solutions that are being offered, that I’ve heard, are also old, discredited solutions, but in new packaging. Unfortunately we’ve chosen something “new” that’s really not. I guess the thinking is that since one old idea apparently doesn’t work, let’s try a different old idea. Sorry, that’s not going to work either. Best come up with something new, though let’s not throw out the baby with the bathwater. Some of the old ideas still hold true. Let’s not forget what we’ve learned that works (and what doesn’t), but acknowledge that we have more to learn about how a globalized economy works.
—Mark Miller, http://tekkie.wordpress.com