It is possible that the recession has already ended. Unfortunately, even if the official numbers show that the recession is over, we still remain mired in an economy that cannot generate new jobs fast enough to reduce unemployment. The Democrats seem stuck in an unworkable dynamic; the stimulus has not stimulated and with talk of a second stimulus growing, a repeat performance is likely. The Keynesian paradigm does not seem to be working. The Republicans may have some better ideas, but probably not for the reasons they imagine. In any event, their ability to influence policy in the next couple of years is quite limited. Whenever a paradigm fails, and this recession is nothing so much as the result of a failed paradigm (though there is a great deal of disagreement on exactly the components that actually make up that failed paradigm) the greatest fear is that what comes to replace the failed model will be less robust and less effective than what has failed. A new economic model evolving from the ashes of the current structure that is less effective would be a long term disaster as millions, perhaps billions, of people find their standard of living decreasing and further billions in the lowest rungs consigned to permanent subsistence. It often seems as if the salons in Washington, Beijing, London, etc, are doing their best to minimize the chances of a more efficient economy coming into existence. Just at home, passing Cap and Trade, the Healthcare bill, and a new stimulus will all increase our debt making higher interest rates inevitable while diminishing the ability of entrepreneurs to create new businesses and new jobs. Eventually, entrepreneurial enterprise should win out but it could take a very long time.
There are a number of data points which suggest that we are experiencing a genuine paradigm shift that has not yet been well understood or well characterized. Simon at Classical Values offers some pessimism:
Something Is Missing
In Secular Decline I discussed how we can get out of our current financial troubles. I talked about Kondratieff Waves and what drives economic cycles. Innovation.
...
What we have been doing is eating our seed corn. New ideas have a profitable lifetime. And with information diffusion as fast as it is these days the lifetime is short. Which means we need more discoveries per year just to stay in one place....since the 1990s, labs dedicated to pure research--to the pursuit of scientific discovery--have seen funding slowly decline and their mission shift from open-ended problem solving to short-term commercial targets, from pure discovery to applied research. Bell Labs had 30,000 employees as recently as 2001; today (owned by Alcatel-Lucent ALU) it has 1,000. That's symbolic and symptomatic of the broken link in the U.S. business model. With upstream invention and discovery drying up, downstream, industry-creating innovation is being reduced to a trickle.It's easy to ascribe current job losses in the U.S. to the deep recession or outsourcing. Both are to blame, but neither is at the root of the larger problem, which is lack of new, high-quality job creation. We are in the throes of the fourth recession since 1981. We have been outsourcing jobs for decades, but we have always bounced back with a new industry--a blockbuster industry. Discovery drives innovation, innovation drives productivity, productivity drives economic growth. But this time it's different, and whenever the current recession mercifully ends, the U.S. economy will not respond with the same job-creating vigor we have come to expect.
So what is our esteemed President doing to counter this difficulty? Is he spending the majority of stimulus money on stimulating research. Of course not. It is going into stimulating his cronies. It is the kind of thinking you get when you have lawyers running the government. Zero sum thinking. I win you lose. And of course we got that in spades from our President with the "We won" statement.
Maybe Mr. Obama needs to read The Myths of Innovation.
He might learn that innovation is a matter of putting a lot of pieces together and that the more pieces you have to work with the greater are the options for profit. Take one idea from biotechnology, two from computer science and mathematics, and three from management theory and you get a profitable business. Which says that research on a narrow front is not going to do it.
I do not know if our basic research is starving for funds and ideas. In many areas of science and technology, we have so much new data that the only way to begin the process of discovering new relationships is through data mining, a field that is still young in its applications to such diverse fields as biology and materials science.
Tom Barnett focuses on the way in which our tax structure inhibits innovation:
Manufacturing in America: the solutions are primarily political
IN DEPTH: "Can the Future Be Built in America?" by Pete Engardio, BusinessWeek, 21 September 2009.Key quote from a former CEO: "Other countries actually pay you to create jobs. The rest of the world is chewing us up alive."
The good news? "The U.S. is at or near the cutting edge in most of the emerging product areas."
The problem is not cheap Asian labor, rather it's that "the U.S. is losing its lead in large-scale high-tech manufacturing."
The diagnosis:
Much of the blame lies with U.S. government policy. Nations in Asia and Europe aggressively court strategic high-tech industries with generous tax breaks, cash grants, cheap credit, low-cost utilities, and speedy regulatory approval.Even when our tax breaks are factored in, the U.S. corporate taxes are among the highest in the world. Michael Moore may see this as good (taxing those inherently evil corporations), but it's cutting off our nose to spite our face.
The Wall Street Journal has an article which purports to diagnose the problem as resulting from a surfeit of labor as Chinese and Indians move into the productive middle class.
Global Worker Surge Was Behind Recession
Some say the worst recession since the Great Depression was caused by an implosion of standards on Wall Street. Others blame bad government policy that set the stage for all the pain.
What if that’s wrong, and if instead, all the troubles were linked to a surge in the global work force in the wake of globalization?
I linked to the WSJ article not because it is persuasive but because it suggests that the "experts" remain at a loss to understand how we came to this point. Before you read the article you would be well served to spend some time savoring John Opie's deconstruction of its premises:
Now, those workers apparently, nasty little capitalists like they are, saved portions of their income instead of consuming it all (after all, when they poor it was much better: they consumed everything they produced and hence were unable to shock the industrialized countries), and because there was no where for this money to go, it went overseas. Exchange rates didn't adjust to stop this, and all that money made the US go weak at the knees and forget about everything.
So, if the US economy had found better ways of spending all that money, we'd be okeydokey? That crazy idea that the US government should help people who can't afford a house buy them nonetheless didn't have anything to do with that? That the ratings agencies which confused risk with revenue (hey, they both start with "r") didn't have anything to do with that? That the idea that huge leverage was a cool thing didn't have anything to do with that?
Ever since the first machine-made goods were produced there has been the fear that mechanization would someday soon force workers out of jobs. A current iteration of the fear is that unskilled Chinese, Vietnamese, Indians, et al, will outperform and under-price our workers throwing lots of people out of work as their industries move overseas. Of course, with the speed at which technology is advancing, those overseas workers may well be replaced by locally produced, desk top fabricated goods in short order.
What is certain is that, at the moment, there is a strong case to be made that people who do not have significantly better than basic literacy and a robust math and science baseline are going to be increasingly poorly equipped for a global economy that has a surfeit of manual labor and a relative shortage of intellectual, creative, and entrepreneurial energy.
The best way to combat such fears (of permanent, large cohorts of underemployed and unemployed, once middle class, and now angry and desperate, people) is to unleash the creative energy of as many people as possible in the hope that human ingenuity will find a way to surprise us as it has so often done in the past. John Robb sees a silver lining in the current downturn (and the future downturn in the dollar, with all the downstream effects that will ensue):
The beneficial upshot of this dollar crump won't be much growth in US exports (there's nobody to sell to). What it will be is a trigger for the rapid formation of resilient communities nation-wide as we decentralize to become competitive/survive. In short, communities that physically produce food, energy, services, security, and products at the local level and share info/insight/R&D virtually on a global level will enjoy prosperity. The penalty for those communities that don't prepare for this shift are extreme -- favelaization and black globalization/global guerrillas await.
The Singularity encompasses the idea that technological advance will become so rapid that the world will become unrecognizable. This is usually understood to mean the emergence or creation of Superintelligent AI. However, our world could easily become unrecognizable long before such a development if the old models of economic functioning are broken and we fail to allow for the development of alternatives. Can the United States remain a resilient community if we continue to tie our fortunes to oil imported from the Middle east rather than drilling here at home? Can we remain a resilient community if we dis-incentivize our best and brightest to innovate?
Americans have always managed to muddle through the bad times until the good times re-emerge. I suspect we will do so again, but it would be nice if it were more apparent that our elites recognized that the times they are a changin'.
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