What Have We Lost?
Recommending Roger Altman’s Foreign Affairs essay on the economic crisis, Steven Walt says “Altman draws the obvious but still under-appreciated conclusion that when a country loses trillions of dollars in wealth in a short period, is in the grip of a serious recession, and has dim prospects for a rapid recovery, then this will inevitably impose certain constraints on how much weight it can swing abroad.”
I think it’s important to draw, on a conceptual level, a distinction between the loss of trillions of dollars of wealthy and the serious recession. What happened wasn’t like Japan in World War II where we lost vast wealth because somebody blew it up and now we don’t have it anymore. Insofar as lost wealth is due to prices for things having been too-high before the crash, we never really had that wealth. And insofar as lost wealth is due to prices for some things now being too-low as a result of the atmosphere of panic, we still have what we have. These price collapses have real effects on individuals’ well-being, but they don’t imply anything about the country’s overall ability to do stuff.
What’s real are three things. One—the recession. We have lots of people now with the ability to do useful work and the desire to do useful work, but nobody will pay them to do anything. And we have lots of tools and machinery with the ability to do things that aren’t being used because there aren’t enough employed workers to use them all. We haven’t lost the capacity to do stuff, but we aren’t doing as much stuff. Two—the misallocation of resources. We imported tons and tons of capital over the course of the last expansion. But an awful lot of that capital didn’t wind up going to stuff that enhances our ability to produce goods and services in the future. Instead, at best it went to making it the case that people live in somewhat larger homes than they used to, and at worst it went to building homes that nobody wants to live in. This is a bigger deal than lost notional wealth—it’s a lost opportunity. Instead of an overhang of factories or broadband cables or railroad tracks that we could try to put to use, we have a supply overhang of square footage. Last—the skills mismatch. To get back to fully employing our resources we need to shift to a situation in which fewer people are building houses, fewer people are selling financial services, and fewer people are building cars and, instead, more people are doing other stuff. But all the people working in those industries have developed skills (”human capital”) that’s to some extent sector-specific and the tools and equipment involved also have some level of sector specificity. Switching from building strip malls to building bridges involve some loss of usefulness in terms of people’s skills. And switching from financial services into elsewhere in the economy may involve leaving a lot of experience behind.
But all that said, the point is that beyond the recession, all our losses were really losses we were already incurring before the crash—people were doing stuff that wasn’t as valuable as they thought it was at the time.
33 Responses to “What Have We Lost?”
Register
RSSLogin
Topic Cloud
ArchivesBlog RollAbout Matt YglesiasContact Me
Donate
January 9th, 2009 at 3:17 pm
This may be the most insightful post you ever made.
January 9th, 2009 at 3:18 pm
1. Spell Walt’s first name right, at least once.
2. Credit your images.
Both are a matter of basic respect for others.
January 9th, 2009 at 3:18 pm
Eh, who cares. I’d rather do useful things at 70% efficiency than stupid and ultimately destructive things at 90%+ efficiency.
January 9th, 2009 at 3:20 pm
The Bush Administration’s grand strategy was:
Invade the World
Invite the World
In hock to the World
How is Obama’s grand strategy going to differ?
January 9th, 2009 at 3:23 pm
Instead of an overhang of factories or broadband cables or railroad tracks that we could try to put to use, we have a supply overhang of square footage.
Long-term, is this really so awful?
Ohnoes, too much housing!
Gonna be a lot of fun watching McMansions converted into multifamilies, though. Snob zoning FAIL.
January 9th, 2009 at 3:24 pm
Insofar as lost wealth is due to prices for things having been too-high before the crash, we never really had that wealth.
Well, no, we did have it insofar as everyone thought we had it, because they treated us as if we had it and acted accordingly. Your wealth is really only the consensus estimate of how much everyone else agrees you have.
January 9th, 2009 at 3:27 pm
I’ve got to admit, I usually cringe at your economic posts, Matt, but this one is 100% spot on.
January 9th, 2009 at 3:28 pm
MY, you seem to think that all that was lost was paper gains on houses. What about people who lost $40 of their retirement accounts, etc.?
And what Stefan said.
January 9th, 2009 at 3:29 pm
Economics, schmeconomics.
What the FUCK is Blagojevich talking about right now? Being impeached for mammograms?
January 9th, 2009 at 3:32 pm
“These price collapses have real effects on individuals’ well-being, but they don’t imply anything about the country’s overall ability to do stuff.”
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
do stuff? What is we do anymore? Major convulsions in the markets and pension funds, etc are very harmful if as a nation a lot of what you do is just move money around and invest. What is it we produce anymore? Cars? Yeah, that’s a money maker. Clothes, electronics, computers, appliances, tools, most anything you name is mostly produced in other nations. People don’t even want medical services here anymore. They flock overseas for all sorts of operations in order to avoid domestic charges. McDonald’s is experimenting with drive thru windows with order takers sitting at monitors in India connected via phone lines. If a Malaysian could cook the burger in have to the counter in 3 minutes they’d do it and fire the local fry boy. I’m not as sanguine as you we haven’t “lost” a lot of SOMETHING in the last few years.
January 9th, 2009 at 3:34 pm
Good post. And one other thing about that “obvious conclusion”. Pretty uch everyone else in the world has also lost billions if not trillions in wealth, is in the grip of a serious recession and has dim prospects for rapid recovery. How much weight you can throw around is relative. (and there are other things, both domestic and international, that will tend to reduce the amount of weight we can throw around)
January 9th, 2009 at 3:36 pm
Matt,
Our consumption has been much higher than our production all decade because we’ve been subsidized by the Chinese, and by other foreign investors pouring money into our mortgage-backed securities of fraudulent mortgages on the assumption that they were “safe as houses.”
Our consumption will fall to equal our production, or past that because we have to pay back for our past consumption.
January 9th, 2009 at 3:38 pm
Here’s the simplest thing that Obama could do to lower the unemployment rate, raise wages, and save taxpayer dollars on medical care and the like:
Offer free transportation home to unemployed illegal immigrants and their families. It’s much cheaper for all concerned to be unemployed in Mexico than in the U.S.
January 9th, 2009 at 3:38 pm
The economy’s so bad award winning filmmaker Robert Altman is working as a lowly journalist.
January 9th, 2009 at 3:47 pm
Steve,
Has there ever been a public question to which your answer is not “Ship the wetbacks home?”
January 9th, 2009 at 3:48 pm
Not ALL wealth can be defined that way. People put real dollars into 401k’s and invested real dollars in various ways, and the collapse of the economy destroyed those dollars. Those were real savings, not just potentials, and they were real dollars before the recession. They are a tangible entity that has been stolen by those who gamed the system.
January 9th, 2009 at 3:54 pm
Steve Sailer’s sister must have been raped by a Mexican.
January 9th, 2009 at 3:54 pm
“this will inevitably impose certain constraints on how much weight it can swing abroad.””
The distressing reality for those hoping that the current economic situation would cut the U.S. down to size is that power is relative, and relative to us, most other countries seem to be doing worse. It’s tough for adversaries in Teheran or Caracas or Moscow to crow when oil is trading at $40 per barrel, and as bad as the U.S. stock market performed this year, stock markets in most other countries (e.g., China) did even worse.
“Clothes, electronics, computers, appliances, tools, most anything you name is mostly produced in other nations. People don’t even want medical services here anymore.”
Steve Duncan, before this recession started, American manufacturing was booming. We still make lots of stuff here, including Boeing airplanes, John Deere tractors, Otis Elevators, Carrier HVAC systems, GE jet engines, Sikorsky helicopters, and plenty of products from smaller manufacturing companies you haven’t heard of. The difference between today and a few decades ago is that our manufacturing sector is much more productive and higher tech, so it employs a smaller percentage of our workforce.
January 9th, 2009 at 3:58 pm
um, yes, the value lost here is a significant, tangible thing. the value of these items is the WHOLE POINT of their existence in the first place! you can’t say nothing has been lost if a society in which a product can be regularly sold for $10 turns into one where it can scarcely be given away, despite no change in the cost of its manufacture. the point that the value was (retrospectively) imaginary is a totally separate issue. I was called crazy several years ago by many on the blogs for saying that very thing – “this shit isn’t worth shit, Citigroup’s “assets” are bunk”, etc. but that doesn’t mean that nothing has been lost! what has been lost are the JOBS, retirement plans, and life savings of hundreds of thousands of people!
January 9th, 2009 at 3:59 pm
Steve, Has there ever been a public question to which your answer is not “Ship the wetbacks home?”
He’s got two speeds; the other one is “Stop giving black people handouts.”
January 9th, 2009 at 4:03 pm
Aren’t we also still spending billions a week (or month) in Iraq and about to “surge” in Afghanistan?
And aren’t many corporations not paying their share
of taxes (if they even pay at all)?
And isn’t that billions we should have but don’t?
Haven’t we been subsidizing offshoring of jobs,
and ethanol, and many many other things that improve corporate profits, but reduce our overall “wealth” in all ways?
I’d say we’ve been transferring “wealth”
(from govt to private corps, letting private corps keep their $$, from the overall and sustained wealth a thriving domestic job market and middle class generates, etc)–
but not increasing our “wealth” overall.
And even after all this transferring, we give them more and more — no matter what they do with it.
And what used to be a giant middle class (generating great wealth) disappears.
January 9th, 2009 at 4:13 pm
Matthew is wrong.
Matthew left out that $Trillion or so lost in IRaq. Plus probably another $Trillion or so pissed away on activities in the defense sector of doubtful value.
If you piss money away on unproductive consumption, it doesn’t matter whether or not you are enjoying yourself in drunken orgies or just burning money.
What matters is that you are failing to INVEST — in educating a high tech work force, in developing alternative energy supplies, in gaining major amounts of new scientific knowledge that lets you move technology forward or in building stockpiles of needed scarce resources. The cost of foregone opportunity is higher — and much less obvious — than the cost of obvious mistakes.
We can slide back into the fucking Middle Ages more easily than we can move into a Star Trek future.
The right wing religious nuts don’t see that as a bug, they see it as a feature. If it was left up to them, half of us would still be dying at age 30 after a life of backbreaking manual labor and the other half would have died in childhood of disease.
January 9th, 2009 at 5:39 pm
“Insofar as lost wealth is due to prices for things having been too-high before the crash, we never really had that wealth.”
You hear that a lot these days, and it’s pretty lazy reasoning. In saying this, you’re discounting the value of anything that isn’t tangible.
In fact, a large majority of households have assets that are not tangible: stocks, bonds, a bank account (which is basically electronic these days). Should no household count the value of these things in it’s assets? If so, why am I putting X dollars into my 401k every year if I don’t “really have that wealth”?
Of course these things are real wealth. Tell someone who is 64 years old and just lost 40% of their nest egg that their stocks and bonds didn’t “really” represent wealth.
Some of your other points were good, but let’s leave this “not real money” thing behind. It just hints that you don’t understand economics well enough to be writing posts about it.
January 9th, 2009 at 6:08 pm
Matt said:
That’s true, as far as it goes. The problem is, the core of adding value coming from making useful physical objects and getting it to a buyer. The “getting it to” we’re really good at. The “making” part is the trouble.
DaveinHackensack (#19) points out that there is still significant manufacturing in the US. However, as steve duncan (#11) said (and DH failed to refute), it doesn’t include much of the lower margin stuff that enables the Boeing airplanes, John Deere tractors, Otis Elevators, etc, etc, to assemble their higher margin stuff… or bridges and other infrastructure, for that matter.
Hell, Boeing has been busy outsourcing ENTIRE FRACKING AIRLINER ASSEMBLIES (wings, fuselage, tail) overseas, and “just” bolting them together in Seattle.
Goddamn, it gets to the point where it seems that every other person is a sock puppet for Consolidated Outsourcing Everything In Sight, Inc.
Mining it, growing it, and shaping the first two into products is the core of adding value for a first world economy. Everything… everything, else depends on that. If we don’t have it in sufficient quantity and quality, we have to pay to bring it in. The net result is that value leaves the country, and eventually results in smaller and smaller segments of the economy having the wherewithall to pony up and sustain a first world standard of living.
I suspect that with the end of the bubble, we’re going to start finding that out the hard way.
For an example, see Iraq during the embargo years. Hollowing out in grand style.
January 9th, 2009 at 6:17 pm
Re: But all the people working in those industries have developed skills (”human capital”) that’s to some extent sector-specific and the tools and equipment involved also have some level of sector specificity.
The above is most true of construction workers and their tools. Auto workers and their machinery could, in principle, be put to work building other durable goods. And finance workers and their “tools” (mainly computers and other office gadgets) can be put to work in a wide variety of industries.
January 10th, 2009 at 5:11 am
That’s one of the areas where Matt’s pretty mainstream. You don’t find too many people arguing that we really need as many people employed in the auto industry as we have today. There’s too much global capacity, and even when developing nations start to drive more, they’ll also be ramping up their own domestic production.
January 10th, 2009 at 8:08 am
Re: although I actually think the case is weak with respect to finance (the top executives and a few other people in finance may have been overcompensated, but I actually don’t think were was a huge excess of ordinary employees in finance).
In specifically mortgage-related areas, yes, there was over-employment. But I agree that in general there probably was not. I recall reading an article at the outset of this mess that predicted lower job losses at the major banks than in the 2001 downturn based on the fact that they hadn’t gone on a hiring binge in this decade.
January 10th, 2009 at 9:44 am
I understand and agree with what you are saying in terms of “human capital.” Nonetheless experience is rarely wasted.
Granted to some degree specific skills will be lost, however, they do not have to be discarded altogether. They can be applied in different ways that serve other purposes.
To what degree or to what extent is hard to say. What we do know is that people have solved complex problems outside their realm of expertise and skill. Complex problems do not always require complex solutions. Sometimes a simple solution will do.
Skills and experience adapt to changes in unexpected ways. While demands dwindle, their usefulness evolves.
January 10th, 2009 at 10:08 am
Let’s say your 401K has lost 30% of its value this year, but if you can buy your retirement home for 40-50% less, and other things costs less, you haven’t really “lost” that 30% in savings. Of course overall prices have not declined 30-40% yet, but they probably will eventually. And, you can already shop around for a lot of things at 30-50% off, assuming you still have a job and an income. Odd thing happened to me–my health insurance premium actually went down as of January 1!
January 10th, 2009 at 11:20 pm
Some of the commenters are missing the distinction between price and value. Just because the stock market tells you one day that you could sell your stock for $100/share, it doesn’t mean that everyone’s stock is actually worth $100/share. If everyone tried to liquidate their stock holdings at the days price we would quickly see why not. Prices get out of control in environments where everyone’s selling or no one is selling.
As to the state of the American economy, who exactly is it that you think is passing us by? Europe is pretty much a haven for second-rate banks and pharmaceutical companies that make their living selling us overpriced drugs because we can’t figure out a decent insurance system. The economies of most developing countries are built on extracting and refining resources to sell to us so that we can make higher-margin finished goods. What Chinese company is threatening Microsoft, Intel, Oracle or IBM? What Brazilian company is stealing share from 3M, Caterpillar, or Boeing? Do Americans and Europeans want to buy clothes, music and food from Russian companies in the same way that the rest of the world wants to buy Coke, McDonalds, and all the rest of our products? Our companies exploit labor costs in other places, but the profits flow back to the USA.
It’s easy to talk yourself into the idea that rest of the world is so much better, but if you try to find really innovative and growth-bound corporations headquartered overseas you quickly run out of options. I would love to find some overseas investments because I think the US economy is done growing and the dollar is bound to weaken with our expansive monetary policy, total lack of budgetary discipline, and huge trade deficit, but what do other countries have that can match the strongest US-based multi-nationals?
January 12th, 2009 at 6:57 pm
This thread is long dead, but having come back to it, I wanted to address this:
To do what, perchance? To fuel a few more McMansions, a bit more upscale merchandise spending (for largely imported goods? At issue is that capital is flowing to the top income brackets, while the vast majority of Americans are cut out of the flow of investment, production, and spending.
Another problem is that many – if not most – of the overseas operations of American multinationals are in fact mostly or wholly owned by local business interests. The Americans provide the specs and buy the results… glorified import/export brokers.