Worthy Opinions » Downtime: What Works?

© 2009 by David Haggith

The word “depression,” which I was using a year ago, is the only thing about the economy that is gaining currency. This dismal word has now flopped off the lips of General Electric’s CEO and Great Britain’s Prime Minister like a dead fish. Another D-word, “denial,” still holds the teeth clenched when it comes to speaking the word “depression.” We only speak of that word, looking backward because no one likes to admit they’re currently depressed. It’s fine to talk about later when the wine is pouring.

Our great error right now is to think we are witnessing the burst of a real-estate bubble. We are not. We are witnessing the failure of an entire economic model that dominated for a quarter of a century. The real-estate collapse was just the first thing to go. And that’s why this is a depression. Recessions correct market bubbles. Depressions correct failed economies.

WHAT DOESN’T WORK
When the expansion of debt ends, the economic expansion built on debt ends. You cannot expand the capacity of individuals to increase debt forever just by loosening the terms and freeing up credit. Debt was not a tool in the last twenty-five years. It was the economic foundation, and it has failed. We were fundamentally unsound.

The sooner we recognize that we were chasing a phantom, the sooner we will move toward solid reality. Unfortunately, the new U.S. government talks of change, but it clearly doesn’t know how to change. Most of its recovery plan is aimed at bailing out the old economy to get it to float again. But you cannot bail out a ship that is already in Davy Jones’s locker. We need to build a new economy that is more durable model and let the old ship rest in the sand bars of history.

Instead, the government’s program aims at stimulating debt-based consumption all over again, which merely denies the reality that the economy was leveraged like a pyramid standing on its point. The upside-down pyramid has toppled. Everyone wants to run around and prop it up again, but you cannot solve a fundamental problem of excess debt, by re-expanding credit. That’s so obvious, it shouldn’t need to be said; but many don’t want the mirage of wealth that is really only debt to end.

The biggest interest cuts people have ever seen plus hundreds of billions spent on bank bailouts have accomplished nothing. That additional debt is passed to the next generation, but it gives that generation nothing in return for the bill. What does the next generation even care if Citigroup still exists? If not Citi, some other bank will ooze into the gaps. They will still have banks. We’re the only ones hurt by the banking collapse, and we want others to carry the pain. What does the future care if we suffered the pain of our own collapse? Passing our mountain of bad debt into the future may come to be seen as the most selfish act any one generation has foisted upon another, as we try to make the next generation pay the price of our failure so that we don’t have to. To feel good about doing that, we need a lot of denial.

WHAT WORKS

Let’s hope that “the government of change” did not mean putting a little change in people’s pockets with more tax breaks that are just one more bill to hand to the future so that we can avoid suffering our own failure. With jobless claims now at a twenty-six-year high, the government’s stimulus plan should focus entirely on job creation as the path to avoid suffering. “We’re talking years, not months, before we see a decent recovery in the jobs market,” said Sung Won Sohn, an economist at California State University. In a true-wealth economy, wealth is created by good-paying, sustainable jobs that give rise to the ownership of durable goods. Assets are accumulated that can be passed to the next generation, not debt. That’s actual wealth.

Only one kind of enormous deficit spending will not cripple the future — spending money now to build and repair things that the next generation will have to build and repair anyway (the creation of very durable goods). By that path, we hand the next generation the trillion dollar bill, but we also hand them more than a trillion dollars in value-added assets — new rail systems, repaired highways, new schools, etc. The debt handed to the future is offset by the cost savings that generation will experience in not having to build those things. That is the only stimulus that is fair to future generations who get to pay for it.

Both of my parents grew up through the Great Depression. My father to this day raves at how the CCC (Civilian Conservation Corps — one of the WPA-type projects created by Roosevelt) kept him alive with the only sustainable employment he could find. As the next generation, I benefited directly when I attended a high school built under the Works Progress Administration. I traveled over bridges built by my grandfather. I benefited by hiking on trails that were created by my father. The WPA produced over half a billion miles in roads, 125,000 public buildings, 75,000 bridges, 8,000 parks and 800 airports. Most of those things were so well-built they are still in use today. My alma mater was recently renovated into the most modern school I’ve seen because its essential structures were still rock-solid. And, so, it has become an asset handed to yet another generation.

REALITY TODAY

Many economists are predicting February will lose another half a million jobs as January did. I am confident February will be worse as retail and the manufacturing it supports fall apart. At the beginning of January, I predicted that those long lines at Walmart over the Christmas season meant nothing. While sales volume appeared O.K., it was only because goods were being sold at no profit to minimize losses. As soon as those cheap goods were cleared, nothing sold. Data released at the end of January confirmed that the final quarter of 2008 saw a drop in consumption of American goods and services that can only be matched by one other quarter since records began at the end of World War II.

Yet, the “government of change” is putting more of the same old pork fat in its stimulus bill when we need all muscle. Here are some examples: $335 million for sex education. (I don’t think the stimulation here is economic, unless it’s to create jobs in the world’s oldest and most stimulating occupation.) Over half a billion dollars to help people switch to digital T.V. (I suppose with so many people out of work, the government gurus figure there will be a lot of couch potatoes that need public assistance. I’m sure the future will be thrilled to know they bought T.V sets for us.) $70 million to help people quit smoking. (At a time like this, the government should realize that money will need to be spent on drinking problems.)

While some of these may be worthy ideas in good times, they are frivolous additions to a critical bill that should be nothing but lean meat in jobs that produce durable assets. Their inclusion demonstrates that the reality about depression has not sunk in, nor has the reality about the bill we are handing to the future. Some of those future people may wish a few of us had died of smoking.