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The CORE of the Economy

May 11, 2012

The Core has been mentioned on this blog before, but I never expected to use the movie as a metaphor.  In the story, the Earth’s core has stopped rotating (caused, of course, by the US government), wreaking havoc on the magnetic field, Ozone layer, and weather, not to mention the imminent extinction of humanity and everything else on the planet.  The plan?  Drill to the core and release atomic bombs at strategic points around the core, causing a propagating wave to get the old ball spinning again.

Sounds like our economy, doesn’t it?  I was discussing one of the “atomic bombs” in a previous point and Kelly rightly took me to task for ignoring the other bombs.

What we have is a stalled economy.  The three a-bombs are Government, Industry (for- and not-for profit) and People (mostly the middle-class and upper-class).

To get the party started again, Government must encourage Industry and People; Industry must be ready to expand and put People to work, and People must spend, spend, spend like the American Way.

So, why don’t they?  People love to spend, Industry loves to sell, but uncertainty paralyzes everyone.  Take me, for example (it is my blog, after all).   I have money in saving, some credit card debt and a mortgage Aquaman would love (underwater for you non-Super-Friends aficionados).   Dave Ramsey says I should keep a grand in savings and use the rest to pay off debt and THEN build savings back up.

I’m not willing to do that right now.  While I’ve got money coming in, I’m not confident my contract will be renewed or made permanent despite noises to the contrary.  So we spend tightly, save as we can, and hope for better times ahead.  I’ll start spending when a company hires me permanently.  Problem is, they’ll only hire if I start spending.  Catch-22.

Where does stability and confidence come from?  Assurance that the biggest A-bomb, Government, isn’t going to blow the other two bombs up by putting an even greater burden on companies and people than already exists.  Government won’t lower taxes or assure they won’t rise, though, for fear the tax revenue will drop, which it won’t if the other bombs denote correctly.

What we got here is a Mexican stand-off (that isn’t racist, is it?).

That’s what the election is about, nothing else.  Not who should be allowed to marry who, or who respects women and who’s a Democrat, not whether you’re Mormon or Black (oh, wait, that one will still play).  It’s who will bring confidence back to government?  The lower-class get it’s confidence from entitlements, the middle and upper from jobs.

Companies can probably do okay if they had faith that taxes would be a known quantity, which means if the Democrats could be trusted to set a standard and stick to it, they could break the standoff, OR if the Republicans get the Executive and Legislative branch, the companies will take the risk and start the cycle (people can’t unless they’re pockets are lined with money and confidence good times will stay that way).  As usual, government and companies are the keys.  Regardless of who gets in, cutting spending to the point of pain and suffering is required.  I’m not sure either party gets that.

We need a military visionary who can keep things formidable while drastically cutting costs; a new, non-interventionist foreign policy, and domestic tightening of the belt.  Let’s have the government get out of research.  Really, aren’t we advanced enough for the time being?

Ironically, I think the only other thing that could get things going is a radical new technology that captures the people’s hearts and that has huge repercussions FROM THE PRIVATE SECTOR.  It can’t be an alternative energy (though that would be cool), unless the distribution channel exists or can be rapidly deployed.  It would have to be something similar to the transition from transistors to printed circuits. Any ideas?

Here’s hoping things go boom.

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5 Comments leave one →
  1. kverdeck permalink
    May 12, 2012 12:46 pm

    I’ve been a bit distressed, as usual. As much as I appreciate Obama’s support of gay marriage, I don’t like how much of a focus it’s become. As a nation, certainly as voters, we should be far more interested in what’s happening in boardrooms than bedrooms. Though I’m sure Jamie Dimon and the rest of the honchos at JP Morgan Chase are grateful for the distraction!

    One of the talking heads I most appreciate these days is Paul Krugman, I’m sure I’ve tossed a link or two from him at you. His argument all through this economic crisis has been that we need MORE government spending, not less, and I am inclined to agree with him. Our debt is a looming problem, yes, but as a percentage of GDP it’s actually not bad–certainly not as bad as it’s been in the past–and since it’s debt-to-GDP ratio that causes concern, it makes sense that we should focus on getting back to a healthy level of GDP growth, which thus far we have not.

    Europe has been valiantly (and painfully) trying austerity measures, hoping that they’ll somehow cause what Krugman calls the Confidence Fairy to show up and get businesses and consumers back to spending, making up for the pullback of gov’t money. But that’s a delusion, and the evidence indicates as much. Austerity has the opposite effect of what was hoped–it historically always has, and there’s no reason to doubt it always will. Further, at least as far as the U.S. is concerned, almost NEVER have we been able to borrow money as cheaply as we can right now. In fact, with rates so low it’s almost to our profit to borrow money right now, and that’s exactly what we should be doing. B-b-but, conservatives say, we already tried a stimulus package under Obama and it FAILED! Well no, it didn’t–evidence suggests it did help at least prevent things from getting even worse than they did, but the main problem with the stimulus was that it was far too small to create a significant and lasting impact.

    The general problem we’re in is a liquidity trap–businesses are sitting on oodles of cash, using it neither to hire nor invest, and consumers who have savings are sitting on those as well. It’s not a problem of structural unemployment, and it’s not even a problem of confidence among corporations, and certainly not a problem of a lazy underclass preferring handouts over employment. The problem is very simply a lack of consumer demand. As you said, consumers like you and me (the middle class representing 70% of total spending) lack confidence that we’ll maintain our present conditions, let alone improve them, and the traditional source of equity among the middle class–our homes–has greatly diminished in value. So we don’t want to spend what we have, we certainly don’t want to borrow what we don’t have, and the result is a downward spiral of jobs bleeding off in all sectors of the economy. The solution to such a situation has always been government spending to jump-start the economy and get consumers spending again. After the Great Depression, of course, FDR’s New Deal programs helped things improve in the 1930s, but the real kicker was mobilization for WWII, which had the dual effects of kicking industry into overdrive and siphoning off a good portion of the male workforce into the armed forces. I don’t want another WWII, but there’s plenty for the government to spend on here at home: namely, an infrastructure that everyone agrees is in dire need of upkeep and modernization. Start kicking off those projects, put able-bodied persons back to work, injecting money directly into the pockets of the working classes, demand will increase and the rest will follow. We’ll get the engine running again, we’ll get back to full employment (read: tax revenues) and solid GDP growth, and THEN we can start addressing the debt. Doing so right now is like telling the fire department they need to use less water while a 4-alarm blaze is raging.

    I also must disagree with your point about research–we badly need more education and research, not less, if we hope to catch up and surpass the rest of the world in needed technology. No, we aren’t as advanced as we ought to be, and the first thing that comes to mind for me, of course, is green energy. Like it or not, fossil fuels are not the future–even if they weren’t affecting the climate in ways that aren’t pretty and will get worse, they simply won’t last forever and we need to prepare for that eventuality. There is a great opportunity before us to again seize the lead in developing and manufacturing everything from solar to wind to geothermal to safe and portable nuclear power generators, and make zero-emission electric vehicles the standard for commuter vehicles. But it won’t happen without government stimulation, because of the headwinds in the marketplace from the petroleum industry.

    I absolutely agree, as I’ve said, that defense and security spending should be high on the list for scrutiny and cuts. We do need a strong military, but we don’t need to spend as much as the rest of the world put together, nor do we need to spend more money forcing citizens to remove their shoes at airports than we’ve spent on the entire history of the manned spaceflight program. But just this week House Republicans signaled their desires with a vote to raise rather than cut the defense budget, and instead shred programs that the unfortunate are sorely depending on in these hard times. Neither candidate has yet put forth a plan likely to help, but I have to say Romney’s is the plan most likely to make a bad situation even worse, in every possible way.

  2. May 13, 2012 10:23 am

    Or government spending is what started this in the 1930s. True, at that time we needed infrastructure so there was a serendipitous “positive perfect storm” going on there. WWII was a shared global resources thing with us pitching in the lion’s share, but that won’t work again, clearly.

    The liquidity trap is a generalization of the whole picture. Some big companies are doing that because they aren’t in the business of R&D. Others are and the private research in green energy is far more promising than anything the government is doing. Siemens alone has made great strides in improving green engineering and power. Others are doing the same and when they get from applied science to consumer, the liquid companies will invest in them. Siemens water energy, electric car, wind farms, etc. are ample proof that the government isn’t required for this kind of work.

    If we were borrowing from an altruistic source, maybe the debt could wait, but we’re borrowing from China, who just bought their first US bank while Obama announced his reversal on gay marriage. Try telling the guy in hock to the loan shark and his leg-breaking buddy Guido if debt isn’t the problem.

    Ask former military men who are free to speak of their disdain for Obama who’s policies are worse. Personally, I’m starting to drift back to Ron Paul (of course, the military won’t like him, either). I don’t like Obama and I don’t like Romney much better. I was hoping someone would step up to head off the train wreck, but maybe I’m just in a sour mood, I don’t think these guys can do it.

    I firmly believe that we need to take a radically different approach to the problems. The see-saw of Dems and Reps aren’t going to do much of anything.

    • kverdeck permalink
      May 14, 2012 3:24 pm

      I read earlier today about a wind turbine that makes electricity and then uses some of that juice to extract humidity from the air to make drinking water–brilliant! THAT is the sort of thinking we need. if it comes from private industry, that’s great–if it comes from private industry with the aid of government projects and subsidies (like the digital computer, which was originally inspired by the Army looking for something that could quickly compute ballistic trajectories for targeting, and all the beneficial technology we’ve gotten through the space program), I’m fine with that too. And really that’s my point, I guess–we NEED both. Private industry can’t do it all, and isn’t motivated to do it all–and we both agree that government shouldn’t do it all. Either one left to its own devices quickly spirals out of control. And in the case of green tech, we frankly have private industry eating itself–consumer demand is there if the tech could be improved and come to market so it can begin to be adopted and drive down prices–but the fossil fuel industry doesn’t want that to happen, and happens to possess the wherewithal to keep a lid on competing technology. I saw a video yesterday about how VW offers models of its vehicles in Europe that are much more fuel-efficient than what they offer here in the US–the video suggested that’s because our government maintains ridiculous emissions standards that outlaw more efficient engines just because they produce more pollutants per gallon of fuel burned, which is counter-intuitive. But it might also be because the engine is underpowered and VW doesn’t want to offer the most sluggish vehicle in any US market segment. Either way, it seems to suggest that somewhere between the government and the free market, there’s a conflict.

      Something else I don’t get, though, is how free-market capitalism only works for conservatives under certain circumstances. You mentioned the majority purchase of the Bank of East Asia by China’s largest bank as if it were a bad thing; isn’t that just the global free market at work? Should the Fed have denied the purchase? if so, wouldn’t that have been the sort of government interference conservatives despise? Anyway, that sort of thing is exactly why I don’t think we need nearly as much spending on defense. These days our economy is tightly interwoven with the economies of every other major military power. We didn’t trade much with the former Soviet Union during the Cold War years. But if we went to war with China, both of our economies would suffer, and I just don’t see that happening. And what does altruism have to do with the free market anyway?

      On a slight sidenote, I often see the notion that the US should be expected to balance its budget like every American household does. It sounds good, I agree. But the reality is very different: I don’t know about yours, but my household can’t print its own money. That makes things a bit different when it comes to our sovereign debt.

      My main point, as ever, is that when we let private industry completely run the show, we get what we’ve gotten over the past few decades. Huge companies and institutions labeled too-big-to-fail and thereby implicitly guaranteed with our tax dollars. Runaway executive compensation and golden parachutes. Trampling of consumers’ rights. Erosion of workers’ pay and benefits. Environmental devastation. Bought-and-paid-for politicians by virtue of a campaign system completely dependent on the donations (read: investments) of corporations, lobbyists, and wealthy individuals. Don’t get me wrong–I do believe capitalism is the best economic system. But only when properly regulated, and subject to the notion that what’s good for business isn’t always what’s best for society. (Which is why I think success in business does not at all equate to success in politics, as Rick Scott is proving and Mitt Romney would further prove.)

      And the effect of all this on society isn’t just the furthering of the gulf between the haves and have-nots. The effects of increasing inequality are vast, manifold, and insidious. Here’s one that might interest you, since I know you place great stock in traditional family values: with the exception of some northeast states, as inequality rises, so does the teen birth rate. Is this a matter of strict causation? Of course not, but since many of the highest inequality states are also the most conservative and supposedly most religious, wouldn’t you expect a different picture?

      I agree that things need to change, drastically and quickly, and neither Obama nor Romney seem to be the men to do it. I fear the climate may force our hand sooner rather than later, and if not that, another financial meltdown triggered by politicians the world over who would rather bicker and wring their hands than do anything meaningful, or anything that would hurt their campaign donors. I’d sure like to see some common sense at play, along with the old-fashioned notion of the Common Good. I think to get back to that, the first, indispensable step is to sever the dependency of our government on outside money, period.

    • kverdeck permalink
      May 14, 2012 3:32 pm

      Also, an interesting little read in line with my main thrust: http://www.nytimes.com/2012/05/13/opinion/sunday/fables-of-wealth.html?_r=1

  3. May 15, 2012 7:01 pm

    Limited government, not no government; state over federal except where the Constitution gives the Fed responsibilities. Research applied to military, infrastructure or exploration, okay. The loss of the space program, for example, which had a goal and tons of spin off tech is also fine. I would like to see watchdog associations to develop; they helped the real estate industry, after all.

    Teen pregnancy is related to parenting more than poverty. Yes, well-off kids can more easily prevent pregnancy, but I’d look to the parental relationship first. The articles, while interesting, are slanted, but as I’ve said, I’m no fan of Wall Street.

    I’m less concerned about China buying a US bank than I am that we’re in such straits that they could. I don’t fault China for their behavior, but ours for enabling it.

    Your last paragraph. Gold star and in full agreement (though our practice may differ… 🙂

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