Spiraling vortex of doom

A student in one of my classes asked how I would describe the current economic state.   The title of the post was my admittedly flippant answer.  The economy is in a spiral downward, and nobody knows when it will stop, if and how it will turn around, and what the future will bring.

I’ve blogged ad nauseum about the economy: the general state, worries about future inflation, our societal error of wanting something for nothing, and have even attempted a “best case scenario.”  And those are only a few of my economic posts, to write more about this crisis is to risk being redundant.  So I’ll repeat the core, and try to approach this differently.  The core: We’ve been living beyond our means for nearly three decades and now are in for a period of painful rebalancing.  Read the posts linked above for details.

To many people the details aren’t as important as the questions: 1) Are we seeing the worst; 2) when will things finally bottom out; 3) how will things turn around; and 4) when will things get back to ‘normal?  Alas, the answers to those questions are not easy.

Back during the intense recession of 1980-82 the US did not make the structural adjustments to the economy that were necessary to remain competitive.   Instead we let the manufacturing sector start a slow death, led by a steel industry that was decimated by that recession (the Billy Joel song “Allentown” speaks to that, as more generally Bruce Springsteen’s “Born in the USA,” each from the early eighties).   What we need to do to get out of this is make the adjustments we should have made nearly thirty years ago.  By living beyond our means through budget and trade deficits for so long we’ve made those adjustments far more difficult and costly than they would have been if we’d done them back then, and that means that this spiraling vortex of doom is likely to keep spiraling downward for the foreseeable future.  So the answer to question one:  things are going to get much, much worse before they get better.

One can only speculate on question two.   Bottoming out will occur.  I think given the stimulus plans in play it’ll be a weird bottoming out.  So much money is being pumped into the economy that things may start to seem to be improving (or the spiral downward slowing) for awhile.  But then we’ll probably shift to a period of stagflation (so lock in low mortgage rates now while you can!) where inflation alongside a continuing recession creates a “worst of all possible worlds.”   Only after that will we hit bottom, and the sign of that will be an increase in manufacturing jobs as we shift away from a service-sector driven economy.   My guess: six years, as long as terrorism, war, oil shortages, global warming, famine, or some other crisis doesn’t intervene.

How will things turn around?   Ultimately I think the government can’t do it, it’ll be market driven — the fundamentals of the economy will have to come into balance, we’ll have to produce as much as we consume.   Markets are not magic, and can malfunction either on their own or through government intervention.  Yet they do operate under economic laws based on supply and demand that cannot be ignored or avoided forever — sooner or later the system cracks.  The US has avoided the power of the market to force corrections thanks to our status as a global superpower and the world’s largest economy.  We were able to run outlandish capital account surpluses and large budget deficits without weakening the currency too much or causing capital flight.  The Iraq war was probably the straw that broke the camel’s back on our ability to do so; but at some point reality was going to bite back.

Does this mean I oppose the stimulus?  Not necessarily.  I believe it is likely to cause inflation (though stagflation is likely in any event, in my opinion — since I think the dollar is overvalued), but it depends on how it is spent.  Giving money to states and focusing on building productive infrastructure does set up a post-recession (depression?) boom in a way that just handing out checks and tax cuts does not.  So I don’t think the stimulus is a fix, I worry about creating more debt, but if done properly it might be part of a longer term improvement.

When will things get back to normal?   That’s a tricky question.  I’d argue that the hyer-consumer society of the 90s and 00s was not normal.  For students born in 1990, I would say that they’ve experienced an American lifestyle that was built on illusions.   If by normal one means the wild consumer oriented prosperity seems eternal mood of the last 25 years the answer is never.  That kind of hyperconsumer society was unsustainable and destructive on psychological and sociological levels.

But if by normal one simply means back to lower unemployment, the possibility of home ownership for most, educational opportunity and the idea that hard work can bring success — the America before 1981 — the answer is probably again not for six or seven years.   And frankly, that’s a somewhat optimistic assessment, I could see scenarios where this spiraling vortex of doom continues downward for ten to twenty years, especially if oil shortages, global unrest, global warming, terrorism and other factors start forcing their way back on the scene.

Still, most of us will have jobs.  Most families will survive.  We’ll still have lots of flat screen TVs, Ipods, Wii games, and other conveniences of the modern world.  The malls will still have shoppers, and we’ll get through this.  It’s still better than living in many other parts of the world.  But we’re in for a tumultuous ride, and it won’t be fun.

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  1. #1 by Mike Lovell on January 26, 2009 - 15:58

    So, what are your thoughts on the whole Fair Tax idea? I just started reading a book on it, so I have yet to formulate my thoughts on the whole idea, and wondered if you had contemplated the issue yet.

  2. #2 by Scott Erb on January 26, 2009 - 16:03

    My wife is a CPA, and she did a graduate continuing education course where she investigated tax policies. I think she came down in favor of a modified fair tax — essentially very similar to the fair tax proposal, but more progressive. In general, she convinced me that current tax policy is absurd, full of loopholes and exceptions written for groups that can afford access to the ears of the people who make the laws. So some version of the fair tax probably makes sense.

  3. #3 by Sarah on January 26, 2009 - 19:04

    I have a friend who came up with the idea that instead of a stimulus plan the government should give everyone 18 years or older one millions dollars. She believes this would cure the whole mess and cost less than the stimulus plan. I tried to explain that the idea was short sighted and doesn’t address the real reasons for our economic problems such as lack of production (her response was that people would use the money to start businesses), etc. I find the reasons for our mess both complicated and confusing myself and I had an impossible time debating her enthusiasm for her idea (it didn’t help that the rest of the group we were in also agreed that her idea was wonderful). Can you help me out a little?

  4. #4 by Mike Lovell on January 26, 2009 - 19:12

    Out of question, Sarah…does the rest of the group happen to be about 18 or less???

  5. #5 by Sarah on January 26, 2009 - 19:24

    Actually no, they are mid forties to early sixties. Which complicated things. At the end of it I felt like I should have just kept my mouth shut.

  6. #6 by Scott Erb on January 26, 2009 - 19:25

    I believe the adult population is 218 million. Giving them each one dollar would cost $218 million, or $218,000,000. To give them each a million dollars would cost 218,000,000,000,000. That’s 218 trillion dollars. The highest price the stimulus package has is just under 1 trillion dollars. I worry that a one trillion dollar stimulus will cause inflation. A 218 trillion dollar stimulus would devastate the economy, making the dollar essentially worthless. Think of Germany in 1923 for the impact of hyperinflation. I think your friend just wasn’t doing the math right.

  7. #7 by Sarah on January 26, 2009 - 19:39

    You know, I was trying so hard to explain why just giving people money wouldn’t fix the reasons for the mess we are in. I never took the simple step of doing the math. Thank you.

  8. #8 by henitsirk on January 26, 2009 - 21:26

    Not to mention that as a nation we have little to no discipline: what’s our average personal savings rate right now, some negative number? So giving everyone a million dollars might stimulate the economy in some ways, like putting a big screen TV in every living room, but it’s not going to solve the underlying problem.

    I’ve never understood why individuals are supposed to save and budget (with a positive cash flow, obviously) and yet the nation as a whole doesn’t do that. I guess I just always look at things like a parent: what behavior am I modeling for my children? I’m not literally saying the federal government should be like a parent, but for me it’s a useful model.

  9. #9 by Scott Erb on January 26, 2009 - 22:02

    Henitsirk, You hit the nail on the head — we as a society have been living beyond our means, financing our gluttony with deficits and debt. That is the core cause of this problem, and we simply can’t afford to do that any more. That’s why a stimulus that just hands money to people is a bad idea — though investing in things that can lead to production might work (targeted investments)…though it’s still a gamble.

  10. #10 by helenl on January 27, 2009 - 03:24

    And because we, as a nation, didn’t overspend enough in December – AKA make Christmas even more commercial than it already was – it’s our fault that Circuit City and Goody’s are going out of business, right? Like they don’t still have all their merchandise to sell when we need something. If we don’t spend beyond our means, we cause the stock market to fall. LOL It’s totally messed up.

  11. #11 by Sarah on January 27, 2009 - 15:59

    That’s exactly what I was trying to explain was the problem with the million dollar give away. I must say that it didn’t go over well with my friend when I corrected her math. She pointed out that under her plan only tax payers would benefit which is not 218 million people. Needless to say I’m not going to point out that in 2007 there were approximately 137 million taxpayers which would still mean a 137 trillion dollar hand out which would do nothing to help those who are disadvantaged. This has become a bit of a spiraling vortex of doom for me. No more trying to correct other peoples great ideas. I really think it could have been an interesting debate though given the right group.

  12. #12 by Mike Lovell on January 27, 2009 - 16:06

    This has to be quite possibly the most popular blog posting on here, since i started reading!

  13. #13 by Scott Erb on January 28, 2009 - 03:28

    Hi Sarah — thanks for reading the blog, by the way! Yeah, it is amazing how enamored people get with their own theories and ideas, refusing to let go even if it gets pointed out that they’ve made an error. I suspect some of the great problems in history can be explained by that human trait. And probably some of my own life errors have been caused by that too! It’s so hard to give up what one wants to believe is true!

    Mike, the most popular blog posting in terms of hits was one where I made fun of the theories of Obama being the anti-christ. Search engines of people really into that anti-christ stuff brought hundreds of people to that post during the election. (Oh, and I love the Calvin and Hobbes bit!)

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