What Would Recovery Look Like?
A friend asks via Twitter “assuming (for sake of arg) the stimulus stops the bleeding, what replaces the actual day to day GDP lost in finance and housing.” The answer, of course, is progressive blogs. Or, actually, I think the answer is that we’ll be making stuff for Chinese people:
In the short run, of course, we’re doing some fiscal stimulus. But if you want to be optimistic and assume that global coordination of fiscal policy plus “unorthodox” monetary policy plus banking reform puts the world back on course for growth, what needs to happen then is a rebalancing of global flows of trade and money. The United States will have about all the houses it needs, so employment in the building-trades sector will be lower. But the people and resources employed in that sector are still capable of doing useful work. But American households won’t have that much capacity to consume additional stuff. Americans will need to start making more products and services that people in East Asia and Germany and the oil-exporting countries want to buy. My understanding is that the main export goods we specialize in are airplanes, defense systems, and pop culture. Presumably if the dollar crashes far enough then other kinds exports become more competitive. But while I doubt progressive political blogs will ever become a really huge industry, it is the case that the software/media/creative fields appear to be one of our comparative advantages so presumably people will need to work in those sectors. Beyond that, hope for arms races.
A return to something like full employment would make everyone feel a lot better since unemployment and anxiety about unemployments have costs beyond the purely financial. But it might take some time after that for Americans as consumers of goods to return to the levels of consumption enjoyed in 2000 or 2007. We’ll need to be consuming less as a share of income, so incomes will need to get higher than they were back then.
52 Responses to “What Would Recovery Look Like?”
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February 16th, 2009 at 11:44 am
There are a lot of things this country needs, but they are public goods, not consumption expenditures.
That’s why we need more public planning – to get those high-speed rail, health care efficiencies, water quality improvements, electric grid, etc.
Fortunately, that fits with the consumer’s need to save more and the government funding nature of the needs.
Plus, most countries now need to focus more on internal versus export markets.
February 16th, 2009 at 11:53 am
“it is the case that the software/media/creative fields appear to be one of our comparative advantages so presumably people will need to work in those sectors.”
But, of course, Matthew has been on a long and weird jihad to delegitimize Intellectual Property and thus destroy those vital export industry…
February 16th, 2009 at 11:54 am
I would second Ron; we will need to export more, especially as oil prices go back up, but the main shift needs to be from private consumption goods to public goods, and maybe some private import-substitution, particularly of domestic renewable energy for imported energy. Since most of the imported energy is oil, and most of the oil goes into liquid transportation fuels, that means electrification of transport.
February 16th, 2009 at 12:02 pm
Lower energy use. Lower consumption. Better music.
Yes! Bathtub gin! Kohl-eyed flappers in cloches! Cathedral radios!
February 16th, 2009 at 12:03 pm
Re: My understanding is that the main export goods we specialize in are airplanes, defense systems, and pop culture.
You left the real biggie off the list: food.
February 16th, 2009 at 12:04 pm
Bingo. Of course there’s also the possibility that the US could gain favorable terms of trade in whole new sectors – such as alternative energy products or green manufacturing – and use our remaining influence as the world’s largest consumer to decisively tip the scales in favor of those new sectors versus the existing ones they should supplant – by doing things like dramatically raising our energy efficiency standards and imposing a cost on carbon. We have a window of time in which we can make a market for products and services that can help avert climate catastrophe and increase our energy efficiency and independence, while at the same time positioning our own firms & workers to profit from the transition. This is complicated to pull off, but it’s a no-brainer to attempt it.
February 16th, 2009 at 12:06 pm
I think the important issue that “a friend” was getting at was the loss of income and, more accurately, wealth that has occurred. Of course, as Yglesias points out, that wealth is essentially gone (”But American households won’t have that much capacity to consume additional stuff” – this capacity came from the credit households had from the wealth stored in their houses basically), so the question becomes how do we begin to replace/rebuild that wealth/capacity. Yglesias points out that the US could produce more exports. There are other ways to build up our household wealth again; if we want to target rebuilding household wealth where it was most lost – actual houses – than we can focus on investment in things like solar panels on personal houses which would not only increase the wealth/value on those houses but also increase disposable income of those households thanks to the savings from energy consumption. There are more ideas like this that don’t require us to completely depend on looking back to our old economy (I am not saying that we shouldn’t work on producing more too, of course) but are based on new sources of income/wealth for our “new” “green” economy.
February 16th, 2009 at 12:08 pm
In the short run, of course, we’re doing some fiscal stimulus. But if you want to be optimistic and assume that global coordination of fiscal policy plus “unorthodox” monetary policy plus banking reform puts the world back on course for growth, what needs to happen then is a rebalancing of global flows of trade and money.
If we engage in some debt forgiveness, we can skip the part about consumption going in the tank.
Americans will need to start making more products and services that people in East Asia and Germany and the oil-exporting countries want to buy.
Or we can rebalance by buying more stuff for ourselves. Of course, we could also return to inventing and building new stuff and the people in the building trades (and all the other trades) can sell new, better stuff to replace the old shoddy stuff that sucks, like the coal plants, and the crappy rail and all the electronics that are good, but not quite good enough.
But, of course, Matthew has been on a long and weird jihad
This would be from Petey of course, who has been on a long nd weird jihad to do everything Republicans want so we can have national healthcare. Not to mention the jihad against the supposed trust fund babies.
to delegitimize Intellectual Property and thus destroy those vital export industry…
Well, gosh, Petey, it seems like an awful lot of intellectual property consists of finding ways to use monopoly rents to raise costs and forestall physical (that is, real world) progress, so that trust fund babies can continue to live high off the hog without producing anything.
It’s like you’re the king of the own goal or something.
max
['More money for rich people! Confederate rich people!']
February 16th, 2009 at 12:19 pm
Petey: US patent & copyright law are pretty good at promoting the development of innovative ideas, but can be pretty awful at speeding their development into new products. [e.g. As i understand it (from friends who work in the field) one of the biggest hurdles to implementing a lot of alternative energy ideas is squabbling over competing IP claims.] I’m also not sure it makes a lot of sense to keep IP laws governing creative arts shackled to those that govern innovative sciences if the underlying economics of the two fields are basically dissimilar (which i think they increasingly are). i don’t know if Matt’s on a jihad or not, but it’s certainly not weird to be concerned about that.
February 16th, 2009 at 12:23 pm
GM is the leading foreign automaker (in sales) in China, and Ford is also very strong.
The US is a major manufacturing country for mining, agricultural, and construction equipment (which is part of the reason Washington has never been thrilled about the prospect of industrialization in Latin America).
If you start punishing China for artificially devaluing its currency (as opposed to say giving US manufacturers big tax breaks and covering some of their labor [as in benefit and pension] costs) who’s to say other developing countries won’t do what China (and before that) Japan did? And if you disallow currency manipulation generally what makes you think that wouldn’t inhibit industrialization in countries that would benefit from it?
The more important point though (alluded to by the reference to GM and Ford’s Asian divisions above) is that even if there is a significant re-valuation of currencies (making the yuan among others closer to market value) the dollar is still going to be worth more and US firms (especially big ones) are going to make stuff for particular markets in those countries or regions. It costs less money to make stuff locally and regionally than ship it (especially if it’s big and heavy) across the world.
February 16th, 2009 at 12:30 pm
You can throw out economic growth on the post WWII model. That’s over.
In order to try and bring it back the US Treasury is being bankrupted by Olympian scale borrowing and the Fed, the central bank, is ballooning its balance sheet with worthless or badly damaged assets. So too every treasury and central bank in the world.
Some treasuries are no longer able to borrow. Certainly not in the open market and help from the World Bank, IMF or EU is evaporating as well. Iceland managed to get a bit of help. Eastern Europe is desperate for more. Their currencies along with Russia’s are in collapse. Korea had a failure today in borrowing for its treasury. Ireland is near a fiscal and monetary crisis, and the UK too. Need it be mentioned that all private banks in these places are in crisis.
It’s not quite a chicken and egg question if the crisis is centered in the private banking systems or the national central banks combined with national treasuries that are the cause of this crisis. Just know they are so entwined that from a practical perspective their fates are joined. So too the US of course. China and Japan are slightly different animals but Japan just reported a 12% annualized drop in its GDP.
Borrowing money is borrowing from future income and borrowing to consume is to a large extent taking away from future demand. It is impossible to conceive that either will be popular or sometimes even possible in the foreseeable future numbering in years. There is no economic model extant which provides for the system to operate without consumption growth. The economy will not die or a new Middle Ages are not probable but ‘growth’ as we understand it is now history.
February 16th, 2009 at 12:39 pm
it seems like an awful lot of intellectual property consists of finding ways to use monopoly rents to raise costs and forestall physical (that is, real world) progress
Any quantifiable source for that, or are you just goin’ with your gut?
As i understand it (from friends who work in the field) one of the biggest hurdles to implementing a lot of alternative energy ideas is squabbling over competing IP claims.
It’s not impossible that US patent law should be be substantially streamlined, but anecdotal assertion from “friends who work in the field” does little to persuade me.
February 16th, 2009 at 12:48 pm
“i don’t know if Matt’s on a jihad or not, but it’s certainly not weird to be concerned about that.”
It certainly is of weird to (correctly) be saying that the way out of America’s economic problems include more IP exports while being an implacable enemy of reasonable IP rights.
The cognitive dissonance startles.
February 16th, 2009 at 12:58 pm
But being an enemy of UNreasonable IP rights is consistent with this view.
Well, as it happens, I am also opposed to unreasonable things! Thanks for clarifying the issue.
February 16th, 2009 at 1:01 pm
Well, this post is headed in the right direction, instead of assuming that, somehow, in some abstract way, the “market” will right itself.
I’d suggest that Solow’s residual – which is basically the fruit of education and R and D – will still account for 50 percent of American economic growth. What that means is that the government, far from cutting aid to states, should be flooding the zone with money for research in all kinds of topics, from nano-tech to green tech, alternative energy to better ways of integrating computer networks and medicine. One of America’s great strengths, perhaps the greatest, is a top line system of universities that have expanded into little research kingdoms. There is no way to predict outcomes here – money spent on an english progam might produce hit movies, intenet entertainmen, etc. Money spent on the business department might produce quant geniuses who sink the economy into the shit. But money should be spent on a liberal basis with no micromanaging to see that it is “efficient”.
There is a paper by Alexander Field (2003) I was referred to on the Economist’s View site that discusses the techno change eras in 20th century American history and makes the point that one of the most fruitful was the thirties. Private R and D accelerated dramatically between 1933 – 1941. Why. Feld makes an interesting comment:
“Ever since E. Cary Brown’s 1956 article, it has been commonplace to downplay the significance of public investment during the Depression as too small in relation to GDP to have “made much of a difference” in returning us to natural output. What this point of view obscures is the likelihood that although insufficient in terms of its influence on aggregate demand to compensate for the drop in autonomous private spending, public investment nonetheless had significant impacts on the supply side.”
Exactly! The delusion that chasing after high yield is going to give us long term economic growth was the most destructive part of our late unlamented bondage to fresh water economic orthodoxy. Although the Neo-libs still aren’t over it, and will still mouth the mantra of how the private market is the most efficient allocator of capital until they die and their ashes are stuffed into Fred Hiatt’s empty port wine bottle collection. The mantra is a joke. Everything depends on circumstances and the location of the business cycle. Private R and D should be encouraged by the Federal government by means of … yes, using the Federal government’s power over the banks! Because, contra Larry Summers, bankers suck at running banks. They function best when they are actually providing credit that stimulates the residual. They haven’t done that in years. The government could do it much better. And should – one of the benefits of nationalizing the biggest banks and letting the govenment run them.
Big government today! Big Government tomorrow! Big government forever!
February 16th, 2009 at 1:19 pm
Please understand I was mocking Petey, who embedded “reasonable” in the statement I quoted.
Whoops, missed that whole exchange
Therefore, there is no inherent contradiction between Matt being a critic of certain U.S. IP rights schemes and Matt thinking it would be a good idea to increase U.S. IP exports.
Actually, Matt’s phrase was “the software/media/creative fields,” which Petey confusingly expanded to “IP,” which expanded to a broader discussion of patent rights and innovation.
With regard to the original “software/media/creative” area of IP, I would generalize Matt’s general position as expressed on this blog as pretty close to “information wants to be free” absolutism. And I’d agree with Petey that such a position is ludicrously incompatible with Matt’s expressed desire to see that sector of the economy expand.
February 16th, 2009 at 1:24 pm
“But being an enemy of UNreasonable IP rights is consistent with this view.”
I was opposed to the late 90’s copyright term extension to keep the early talkies from going into public domain, DTM.
But Matthew is, of course, arguing a much more destructive and nihilistic position on IP, essentially that it should be abolished in practice.
Then he turns around and (correctly) argues that IP exports are a key to our future.
As stated, it’s a bit of cognitive dissonance.
Matthew spends so much time arguing for the dissolution of various US manufacturing and non-manufacturing export industries that it’s a bit startling to see him argue for exporting. I thought we could all live off of trust funds.
February 16th, 2009 at 1:25 pm
“Actually, Matt’s phrase was “the software/media/creative fields,” which Petey confusingly expanded to “IP”
Well, all three fields do depend on IP protection…
February 16th, 2009 at 2:05 pm
12: Rapier, you are losing it man. Economic collapse is quite possible, but economic growth is also still possible. It’s human capital that ultimately drives growth.
February 16th, 2009 at 3:11 pm
Recovery needs to be based on Americans providing something that internal or external consumers want. It would help if the product we provide takes advantage of a uniquely American competitive advantage. After all the dust settles from this economic calamity, America will still hold one strong advantage over other nations: we have a wealth of high quality educational institutions. These institutions can drive the creation and marketing of products in three areas that will be in great demand over the course of our lifetimes. Two have been mentioned above already: IT/technology, and alternative energy. A third industry that the US can/should be dominant in is biotechnology.
Regrettably, alternative energy and biotechnology both require long-term, strategic financing- a commodity that is in short supply and poorly trusted at the moment. Overcoming our collective psychological aversion to finance after the current crisis will be one of America’s greatest challenges in the short-term future…
February 16th, 2009 at 3:35 pm
This is actually a subject I’ve pondered a lot, as a youngish guy trying to establish a safe career path. I currently work in the entertainment industry, which is already seeing a lot of work transferred to Asia (Sony, Rhythm, and other major studios have opened big studios in India to do a lot of the grunt work to save money). My hope has been that while Asia has been producing a lot of technically-proficient people who will work for cheap, it seems that the actual creative decisions aren’t anywhere close to being outsourced.
I’d be interested to hear Matt’s take on this — especially in light of the impending economic reordering that this depression will bring. Will the US continue to be the hub of entertainment business/creative decisions that it currently is? If not, which nationality should I be trying to marry into?
February 16th, 2009 at 3:37 pm
The answer is that no, that shit ain’t coming back, Matt.
February 16th, 2009 at 3:46 pm
“Will the US continue to be the hub of entertainment business/creative decisions that it currently is?”
Well, with smart policy decisions, it will be. Which is why Matthew’s anti-IP jihad seems so destructive to me.
“If not, which nationality should I be trying to marry into?”
Euro citizenship is always a nice fallback option to have.
February 16th, 2009 at 3:56 pm
My guess is that we’ll be paying down our national debt with resources like timber, minerals, and fresh oil. Drill baby, drill (and send the oil to China to service our debt).
In the end, I think it will about what the government of China wants.
February 16th, 2009 at 4:59 pm
Re: Borrowing money is borrowing from future income and borrowing to consume is to a large extent taking away from future demand.
Why didn’t the immense WWII debts (not just ours, but every combatant nation’s) leave the world mired in poverty for decades?
February 16th, 2009 at 5:41 pm
What does it matter that Ford and GM sell well in China when those cars are MANUFACTURED IN CHINA.
Since the start of the free-trade with 3rd world countries took off in the 70’s, we have seen nothing but economic decline in terms of real wealth for the middle-class in this country.
But hey – I do not want to be labeled a “protectionist”, i mean, that would imply actually saving jobs, concentrating wealth to the middle-class and avoiding a world-wide economic calamity whereby those who consume slowly lose purchasing power as they no longer produce, and those who produce to not earn enough to make up for the lost consumption. Brilliant f’n model folks.
February 16th, 2009 at 5:45 pm
We have been played for fools by China, with support from right-wingers who could care less about the long-term implications to the middle-class and left-wing zealots who could care less about the American middle-class if the benficiary is a poor Asian.
Either way, the blue-collar worker of America (who used to help sustain the rest of us working in white-collar industries) are now gone. Maybe the one good point coming from all of this is all of those white-collar workers who used to complain about Union jobs and complain that unskilled labor didn’t deserve a decent wage can commiserate in the coming bread-lines, as we do not really need so many mortgage brokers now, do we.
February 16th, 2009 at 5:50 pm
Duncan Bisson:
Hate to break it to you – but the idea that America can corner IT and Biotech is ridiculous. China and India are cheaper for conducting research.
How many times do you people need to realize that under the current worldtrade paradigm, almost anything can be done overseas, for cheaper. Until that ends, technology has essentially allowed all of us to be at competition with someone living in a concrete hut. Chew on that.
February 16th, 2009 at 6:15 pm
Mr. Yglesias has narrowed our difficulties to the need for “doing useful work”.
That is definitely a start, for I hear a lot of economists telling me, right now, that the way out of this mess is to go ahead and do useless work.
Of course, the reason I do not buy the argument that drunken bankers caused this problem is that if the problem was simply drunken bankers, then Mr. Yglesias would already know something more identifiable than “useful work”.
February 16th, 2009 at 6:17 pm
Is it accidental that Matt’s picked a picture of Shanghai without the relatively new World Financial Centre building, one of the tallest in the world? If so, it’s a strangely poetic coincidence…
February 16th, 2009 at 6:33 pm
“There are a lot of things this country needs, but they are public goods, not consumption expenditures.”
This theme appeared in a couple of comments, and at this particular moment I think it is true.
February 16th, 2009 at 8:14 pm
“Americans will need to start making more products and services that people in East Asia and Germany and the oil-exporting countries want to buy.”
How about coal? We have plenty of it, and China uses plenty of it.
February 16th, 2009 at 8:49 pm
Fred,
the problem with relying solely on mineral extraction to support your country is the fact that technology as eliminated much of the labor necessary. If all you needed was medical care specialists, teachers, and natural resources to build an economy, then many a 3rd world country could have pulled themselves out of poverty. But you need a fully integrated economy, which is something we do not have.
February 16th, 2009 at 9:35 pm
Brad,
A) Who said anything about relying solely on mineral extraction?
B) You overstate the impact of technology on the mineral extraction industry. It’s not run by robots. Lots of guys with hard hats get paid well working in mines, on oil rigs, etc.
C) Another big export industry for the U.S., one which employs a lot of highly-paid, white-collar employees, is drugs and medical equipment. Lefties hate this industry too, for some reason.
February 16th, 2009 at 9:57 pm
Exports did not suddenly take a dive just prior to the crash. Probably the thing that crashed us, is also the thing that prevents us from being an efficient exporter.
February 16th, 2009 at 10:28 pm
In a post-recovery economy, the very concepts of “jobs” and “employment” should play a much smaller role. We should rethink the amount of commodity price that currently consists of embedded rents (including both oligopoly markup and rents on “intellectual property”), the amount of current production that goes into subsidized waste, and the relatively minor fraction of current productive capacity that is actually necessary for our current material standard of living when things like planned obsolescence, unnecessary administrative overhead and artificially long supply chains are taken into account.
What we come out with on the other side should include the production of a much higher share of total use-value in the household and informal economies, using spare capacity of ordinary household capital equipment most of us already own. Some of this will take the form of microenterprises producing for barter as well as cash, outside of the licensing and “safety” codes whose main function is to impose mandatory minimum levels of overhead on small producers. The manufacturing that does survive will be rescaled to serve local markets, using general purpose machinery in short batches and frequently changing between products on the Emilia-Romagna model.
Put it all together, and we might be working 15-hour weeks, producing a major part of our total consumtion outside what is conventionally called the “job.”
February 17th, 2009 at 12:56 am
Economic depressions are good for cooperatives. I just wonder what it would take to purge the memes of business management from the people trying to start them.
February 17th, 2009 at 7:23 am
Why does a progressive blogger use a term like “Defense systems” when the perfectly non-euphemistic word “Weapons” is available?
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