Just over a year ago, I wrote about what a more resilient economy might look like (see Recovering from the Great Recession – What Might a More Resilient Economy Look Like?). I talked about a value-driven rather than a consumer driven economy. That post begged the question, though – how do we get there from here? In the next few paragraphs, I’ll try to outline an answer to that.
Before I do, however, my disclaimer. I am clearly not an economist (I’m not sure that’s a disqualification, since the economists are all over the map on how to recover!). Further, politicians will be making the most crucial economic decisions over the next few months, and they are clearly not economists (not to mention their roles in getting us into this mess in the first place).
Our national economy is in what economists call a liquidity trap. In a liquidity trap, there is relatively little investment because those with money are very risk averse. Consumers don’t spend, businesses don’t hire, and everyone looks at the economic glass as half empty. And that’s what we’re seeing right now – individuals and businesses are paying off their debts, individual debt is at levels not seen since the early 1990’s; those who can are saving at rates not seen since the 1970’s; and businesses are sitting on their cash (and not borrowing) rather than investing in new products and jobs.
The two antipodes of the debate over how to fix our economy – escape the trap – are characterized by the “Spend, Baby, Spend” school and the Tea Party’s call for government austerity. The Spend, Baby, Spend school is epitomized by economists such as Paul Krugman, who vehemently believe that our federal government should be spending more, much more, to spur demand for goods and services. This group points to our nation’s crumbling infrastructure as a place where investment would create jobs, creating demand, and facilitating economic recovery. At its core, this view sees lack of demand for goods and services as the problem that needs to be addressed.
The Tea Party-ers, on the other hand, see the size of our government as the core problem. In this view, a smaller government, with fewer regulations and lower taxes, would put money back into people’s hands to spend on goods and services, thus jump starting the economy.
You’ll notice, however, that neither view really addresses the core problem – how we get out of the liquidity trap. Or, said a little differently, how do we help businesses, in particular, become less risk averse so that they will invest the cash they are now sitting on in new equipment or new jobs. Framed this way, it seems that government spending per se is somewhat irrelevant to getting out of the trap. Recovery will come only when people have confidence once again that there is a secure future. That’s not to say that government spending is unimportant, just that stimulus spending doesn’t really seem to be the right answer.
If this is true, then what should government do to put us on the road to a resilient economy? Simply put, governments should do those things that will remove uncertainty from people’s minds and those things that will make people more confident in their futures. In this light, it seems that we need to take some of the medicines prescribed by both schools of thought to help bring us out of our national malaise.
We need to recognize that the current pace of regulation creation is creating great uncertainties for businesses and individuals. In the first two years of the present administration in Washington, we created more regulations than we did in eight years of the previous administration. Further, whether we like it or not, small businesses are already telling us they won’t be hiring in the near term because of the possible impacts of health insurance reform (and those impacts won’t be fully known until 2014 at the earliest!).
We also need to recognize that our national debt is unsustainable – if we continue on our present path, we as individuals eventually will end up paying exorbitant amounts in taxes to support intolerably high interest rates to service both our national and personal debt. We as individuals or investors or business owners recognize this and are saving at almost unprecedented rates to provide our own safety nets for ourselves.
However, we also have to recognize that the government must continue to make investments that will help us to have a more certain future. We must invest in our infrastructure – not to stimulate spending but to ensure that we can continue to move goods, people, and information where they are needed. If we don’t, we will spend far more to respond to and recover from the disasters that will expose our infrastructure’s fragility.
We also need to heed the lessons we have already learned about what went wrong and put regulations in place that address the root causes of those problems. The current regulatory framework for the financial industry has much that is wrong with it; recently passed legislation is likely to drive smaller community banks – who in the main were not at fault in getting us into this trap – out of business. This will make it more difficult for entrepreneurs and small businesses to get the capital they need to start up or expand their businesses, i.e., will make our economy even less resilient. Meanwhile, many of the more speculative financial sectors remain unregulated even though they were prime actors in our economic tragedy (and are doing nothing to help us recover).
We must provide a safety net to those of our citizens with special needs. Not because of their vulnerability but as an investment in their future and in ours. The safety net should be focused on outcomes – for example, living healthier and more productive lives – rather than means, for example insurance. Just as with our physical infrastructure, if we don’t make these kinds of investments we will spend far more to respond to and recover from the human tragedies that will result.
I don’t think it requires a rocket scientist (or a Ph.D. economist!) to see a path to recovery. It only requires a clear recognition of where we are as a nation, and then some common sense actions to move to where we need to be. We have to cut government spending and the pace of regulation, but we also need to invest in ourselves and take actions to prevent us from falling in the same trap again. At its core, we have to restore our confidence in ourselves if we are to recover. Neither school of thought, neither political party, can or will be successful unless they grasp this simple truth – this is the only path to economic recovery and greater national resilience.