What to Do?

I see very little hope for avoiding a major restructuring of the American economy. While Republicans don't seem to be capable of getting off the "tax cuts solve all" band wagon, Democrats seem unable to depart from their reputation among conservatives as "tax and spend liberals." To a large degree, there is much true in the criticisms of each party of the other, without either party having any reasonable solution.

Since Democrats appear to have the votes, whatever "stimulus package" that emerges will probably be "more Democratic than Republican."

I suspect, however, that the Democratic package, slightly modified, to pull in a few moderate Republican votes to reach the magic number of 60 in the Senate, will ultimately simply disappear into the Federal Government much as the first $350B of the $750B stimulus package of last October, simply "disappeared" into the banks.

The Democratic package does, however, have the advantage of creating jobs faster than tax cuts.
While these jobs are not the "ideal jobs" and undoubtedly contain a lot of inefficiencies, which contribute only vaguely to the "sound economy" we should be building, they will add as a stop gap solution to keep people off the unemployment rolls, maintain some degree of social stability, etc.

The sad thing, in my mind, is that neither the Democratic congressional stimulus package, not the Republican tax cut solutions do much, over the long run, to bring about the paradigm shift necessary. Neither Republicans or Democrats seem capable of rejecting the illusions, which for the most part, brought us to the present crisis, namely mindless free markets and free trade, all under the umbrella guise of globalization.

Capitalism has a well known (and positive) destructive element. As new technology replaces the old, those who deny it suffer at their own peril. As capital shifts to the latest and greatest means of production, outmoded techniques and the companies who insist on retaining them are "destroyed." Hence, Dickens's famous opening line written in an era similar in many ways to own own: "It was the best of times; it was the worst of times." For some, "change" is beneficial; for others (a textile worker in North Carolina or a UAW assembly line worker in Detroit) it may be a disaster. It is the duty of government, in my own opinion, to intervene to mitigate the pain for whom it is the worst of times.

For the certainly the last sixteen years (and probably going back to Reagan), the government has largely ignored this role. Both parties have largely put economic efficiencies, globalization, free trade and free markets ahead of national interest. This is not to say these concepts are not good goals; I believe they are. But, the trick is to arrive at them with minimal disruption to our own people, most of whom were/are middle class blue collar or first line white collar supervision, who for the most part were sacrificed on the alter of globalization.

We can continue, rightfully, to continue to pursue these goals, albeit at a slower pace and without the sacrifices...or, at a minimum, with far fewer sacrifices. We needn't abandon the goals of free trade, and global free markets; we need only to control (or regulate) the pace of the changes such brings.

A strong argument may be made to the rest of the world, which holds a great deal of our debt, that, in the long run, it will be better for the goals of free trade and global free markets, if the United States calls a temporary "time out" and puts its own house in order. That task isn't going to be easy and involves, in part, the following, with the understanding that volumes could be written on each topic.

1) Cleaning up our political system. Campaign financing, ethics, competitive re-districting, etc. Unless these things are reformed, we'll only continue on our slide to Third World status.

2) Immigration. Other than felons, those presently in prison or living on welfare, I have no desire to send people home, disrupt families, etc. We need border enforcement and some form of amnesty for those who are illegal, but have otherwise tried to behave as good citizens. That may sound incredibly naive if you are the U.S. Chamber of Commerce, or a University sociologist, but I think it may be that simple. We may continue to grant work visas in various categories (from fruit pickers to Microsoft programmers), but with revised procedures ensuring that the work visa programs are not being used to hold down wages.

3) Wall Street. Following the Great Depression, the Glass-Steagel Act separated investment banking from commercial banking. One essential reason was that investment banking is what it says it is, namely it facilitates deal making. By eliminating the distinction, investment banks moved first into insurance and then into the underwriting of the deals themselves, continuing to take enormous commissions for a) the initial advice regarding a merger or acquisition and b) the financing of the merger or acquisition. This is like expecting a vacuum salesperson to recommend that maybe what you really need is just a broom.

The recent economic crisis has really not separated the two. Now we have very few investment banks and the few big names (Morgan Stanley, Goldman Sachs) have just become commercial banks, which I suppose means that they will now take extraordinary risks with deposits and that whatever risks they take will be backed by government bailouts? I can't think of a surer path to more serious economic dislocations in the future. We need to go back to a clear division between commercial and investment banking, limiting and overseeing what each does.

Note: I've mentioned it in earlier blogs, but in some ways banks today are to a globalized economy, what John D. Rockefeller was to American industry in his day. Although Rockefeller received a lot of negative popular press, much of this was inspired by regional competitors he had effectively put out of business. Rockefeller used new "tools," largely distribution tools to take the oil industry from one dominated by smaller regional/state interests to a national and international level. Rockefeller was the positive "destructive force of capitalism" of his day. And, eventually, became so successful in eliminating any and all competition that government had to step in and break up Standard Oil. Similarly, with this economic crisis, banks may have shown that they have become too large and powerful for the ultimate good of the whole. I do not completely discount their argument that they have to be big to compete globally, but when they become "too big to fail," then they've invited substantial more government intervention, even if that intervention does not result in "trust busting."

4) Education - It begins and ends here. Whatever the reason (unions or too much decentralization via school districts), education in America is not keeping up with the rest of the world (or at least much of it). Unless we figure out a way to substantially fix the system, it won't matter how many jobs are created, if our "graduates" or drop-outs are too dumb to fill them. This is an issue of enormous cultural and economic ramifications. For every value-positive reinforcement provided by our entertainment industry, there must be at least 10 or 20 negative reinforcements, because "that's what sells." This is not just a "black issue"; it extends equally to the entire community. Although I completely support public education, I have sympathy for the pro-voucher and home-schooling adherents.

There is another area of education, seldom, if ever, discussed: the tendency to equate social science progress with scientific progress and expect the same results. Paul Volcker, along with others, have pointed out that a prime cause of the present economic crisis was the faith responsible people (from CEOs to Alan Greenspan - my words, not Volcker's) put in "economic engineering" in regard to risk management. It may sound "elitist," but I suspect than as education becomes more universal, it in fact, losses some of its "quality." This is a topic worthy of a volume to itself.

5. Redirection - This involves the "pause" in free market, free trade and globalization processes noted above. And, both politically and economically, this may be the most difficult to really achieve. I think one begins by re-defining capitalism and economics as a sub-set of society as a whole. If you are somewhere near the top of the economic strata, it may be very difficult to disassociate the two...democracy and capitalism. But, if you are closer to the bottom than the top, it really doesn't matter much where or how your income is coming to you, as long as you have enough for subsistence. An individual, out of a job and facing foreclosure on their home, doesn't care too much about "the big picture" and how all of the pursuit of these principles (free trade, free markets, globalization, etc.) will "eventually" be better for him or her self. The perspective of that individual is that for him or her there may be no "eventually." In this, rigid adherence to some theoretical economic principle, which is not working for most people endangers capitalism itself and ultimately democracy.

Big Government...and by that I mean really Big Government, where say 75% of the work force is employed by government, may be unwise economically over the long haul, but if that is the only choice people have between eating and starvation, between employment and unemployment, that's where they'll turn and economic theory be damned.

In sum, without middle class jobs, and as a result of those jobs, less concentration of wealth, and a more equitable across the board tax burden, I don't see how tax cuts per se help create a sound economy. Where would the additional investment capital go? I would suggest that the answer to that is that without substantial redirection of the economy as a whole, into another category of overvalued assets (this time probably commodities). That, coupled to the end of the great Ponzi scheme called "loose credit" and we are in store for substantial long-term unemployment, less tax revenue, failing entitlement programs and a great deal of social unrest, perhaps as long as a generation. And, that's the "good news." Worse, it is more likely that the American electorate would turn to someone with "quick fixes." Scrap our international commitments, cancel our foreign debt, and throw out Congress - in other words, the quick and easy short term solution of a dictatorship.

The point is that I really see no reasonable alternative toward embarking on a new economic direction aimed at restoring a substantial American middle class and that any alternative to doing so places both democracy and capitalism at high risk.

I am not suggesting we do this overnight. It took 20-30 years to get rid of most of our manufacturing industry and it will take as long or longer to bring it back. And, during that period, one would hope for improvements in basic infrastructure, health care, and education whereby it would not be necessary to bring all of it back. What is required is not necessarily "manufacturing" per se, but an economy based on well paying middle class jobs and one not dependent upon increasing debt via credit. It is possible that with vast improvements in education, a genuinely self-sustaining post-industrial economy would work. However, post-industrial "service" economies tend to be heavily reliant on intellectual property rights, which are acknowledged internationally. I don't think we have this yet. The nature of the New Economy or post-industrial economy is essentially "non-physical." It is a lot harder to be "cheated" if your wealth, say 50% of it, is based on big, heavy, expensive "stuff" (e.g. factories and machine tools) than on a single computer disk, the contents of which can be shifted anywhere in the world in milli-seconds.

Note: Of course, that was the beauty of over-valued American real estate. It couldn't be transplanted. But, that scam seems unlikely to return. I see no alternative to the international acceptance and policing of intellectual property rights as the foundation of a genuine post-industrial economy. We were stupid to have given away our manufacturing capability prior to securing those rights.

In closing, I think it possible to pursue multiple economic goals simultaneously. Step #1 is maintaining employment, even if it is through direct government employment or government contracted employment. Step #2 is an overhaul of oversight and regulatory functions, both domestically and internationally. A re-emphasis on creating a self-sustaining domestic economy does not preclude further progress at arriving at international standards for accounting, the intellectual property rights noted above, etc. Step #3 and Step #4 are simultaneous, overhauling our educational system and the creation of well-paying, immovable domestic jobs, such as in alternative energy, health care, etc.

Next Time: Evaluating the Service Economy: When is a service job genuinely value added and when is it just make work?

P.S. Before I forget it. Re. CEO Compensation. The United States has the highest executive compensation in the world. Comparing the lowest company salary to the top, Japan is something like 20X, Western Europe something like 40X, the U.S. is somewhere around 300X and rising. Why has no one asked our CEO's to take pay cuts "in the interest of making us more globally competitive?"