The most interesting moment in the press conference was when NBC's Chuck Todd asked the president if deeply indebted households should use their stimulus money to save or spend. That is a difficult question for a politician to answer and it forms the crux of the issue. (Obama acknowledged that saving was a good idea now, but then gave all the reasons we should spend.) The correct answer is indeed "save" and the data shows that that is exactly what Americans are doing now. This is a good thing. For years now, we have seen Americans binge on unnecessary luxuries by taking out home equity loans and maxing out credit cards. This led in 2005 to the first negative annual savings rates since 1933. We were living beyond our means and now is the time to pay the piper. That means, save. But saving doesn't "stimulate" the economy. It just pays off the sins of the old one.
Another interesting data point came from the Department of Labor on February 5th when it was revealed that labor productivity shot up in the fourth quarter of 2008 by 3.2%. This was primarily due to layoffs, but nonetheless, the fact remains that American workers were able to produce more valuable output per person/hour than the year prior. Again, that is a good thing. But it doesn't produce jobs, it reduces them. In the long run, productivity generates higher wages, although most likely for fewer people.
So Americans are producing more and saving the rewards of that production. This is incredibly heartening for the future of our country (I have long advocated for a progressive consumption tax to replace the income tax precisely to incent even more savings). But it is also the exact opposite of what the stimulus plan seeks to achieve. The stimulus plan would throw millions of people back to work, and sad to say, most likely produce less per worker/hour. It would also seek to get Americans spending again by "increasing consumer confidence." Today's bank bailout plan will "get credit flowing again" so that Americans can spend even more. All of this can feel good in the short term, but does not dig us out of our long-term hole.
I remember reading about an episode from the campaign trail in 2000 when Al Gore was speaking to a group of factory managers at a plant in Ohio, I believe. He started talking about how plants like this one can produce good jobs for Americans. A reporter standing in the back of the room overheard one of the managers say to the other, "He just doesn't get it, does he? Our goal is not to increase jobs, it is to reduce them."
Harsh, true. But this is capitalism. Producers seek to maximize output from the minimum number of inputs, including labor. No IT or plant manager ever installed a computer or robot in order to increase the number of workers he or she had to hire. The idea is to do more with less, and the result is "jobless growth." In this scenario, there are two winners: the equityholders who receive the economic rents from the produced goods and services, and the shrinking working population, who enjoy higher wages. The losers: everyone else.
But what if we could make all workers more productive, you ask? What if we can squeeze out high productivity from more workers? A nice thought, but it runs smack into one difficult economic reality: there actually is a limit to how much stuff we need. To be sure, there are great swaths of this country and this planet that do not have enough of what they need. Standards of living can always be raised. (This, in fact is a good argument for opening up trade; of course, the stimulus bill may end up doing the opposite by imposing "buy American" clauses). But still, there is a limit. If everyone in the world loved bananas and would ideally like to eat one each day, then the maximum demand for bananas would be six million bananas per day. Producing 10 million bananas would do nobody any good. Likewise, does the world need infinitely more HDTVs and SUVs? No. Does producing more of them "stimulate" the economy? In the short term, yes, because induced demand ends up putting more money in the pockets of the owners of those companies and the people who produced the products. In the long term, no, because Americans would simply be borrowing even more money (mostly from China, who inexplicably keep buying our debt) and going deeper into debt to purchase more. At some point, the piper must be paid.
America has been drunk on debt for the better part of a decade and President Bush, the ex-Andover cheerleader, sat next to us at the bar, chanting, "Drink, drink, drink!" Lower interest rates! Loosen credit! Buy more houses! Buy more cars! Spend more, save less! This is all we heard for years. Even today, there is talk about "housing stimulus"...both Democrats and Republicans, along with the president, want to reduce mortgage interest rates further, free up credit for borrowers, offer incentives for first-time buyers, and most perniciously, "keep people in their homes." I have news for you: a massive chunk of these people, including the ones that are most in trouble, don't own these homes, by any reasonable definition of the word. The banks do, and they overpaid for them. An interest-only loan with no money down means the resident is a renter, not an owner. There are millions of these out there. And many families can't afford the rent. Well, in most parts of the world, when you can't afford the rent, you move to a cheaper place. But not here. Our housing stimulus is meant to simply reduce the "rent" across the board, by reducing the interest payments. Problem solved! Everyone can live large again! Any chance Congress can reduce the price of TVs? How about cars? I have my eye on a sweet Lexus. (a hybrid...I'm saving the environment...everybody wins!)
We are a country that has maxed out its credit card at Bloomingdales and is now being offered, courtesy of Congress and the president, 75%-off sales on everything in the store. We'd be losing money by not buying!
Back to my original metaphor: alcoholic America, it is time to sober up. Hair of the Dog is more fun, but not a long-term plan for success. Yes, there will be a hangover (fewer jobs, more productivity, higher savings, negative economic growth). This hangover could last years (just looking at mortgage debt levels, one could argue the bender started way back in 1998, so 2-3 years of penance is not a relatively high price to pay), but we will feel a heck of lot better when it is over, and more capable of being productive. Giving an alcoholic another drink so he or she doesn't feel so miserable does not nurse the drunk to health; it just prolongs and worsens the inevitable hangover and prevents the person from doing anything useful. Similarly, fiscal stimulus for the sake of short-term job growth and increased consumer spending doesn't fix anything long-term either.
In the meantime, while we nurse our hangover, we need to focus instead on three crucial areas, so that we can prosper as a nation once we're back on our feet:
- Investment in New Forms of Energy, Science, Technology, Education and Infrastructure: This is the only part of the stimulus package that I support. It is being sold as a way to put Americans back to work, but the resultant jobs are really a byproduct of something much more important. Simply put, these initiatives can increase US productivity, increase energy security, and protect the global environment. Unlike in my banana example, the world is severely undernourished in these areas...there is excess demand, so let's figure out a way to produce more supply.
- Entitlement Reform: You've heard it a million times: Social Security and Medicare are going broke. Again, we are accruing massive debts to the poor, elderly and ill that we will never be able to pay off if current trends continue. Particularly in health care, we spend more each year, outpacing inflation by 4.9%/year since 1965, and our health standards are declining. This is unacceptable and a massive looming crisis.
- Wealth Redistribution: There, I said it. As I noted above, increased technology leads to increased productivity that ultimately reduces the number of jobs required to adequately serve global demand. I acknowledge, again, that there are massively poor parts of the world (and here at home) that could use more goods and services, and that is an excellent argument for lower trade barriers and improvements in global distribution and logistics. But there is no avoiding the fact that as Americans become more productive, the economic rents will accrue disproportionately to equityholders and the remaining workforce. A larger number of people will be left out each passing year. We need to think long and hard about how to take care of these people, while also providing incentives for them to become productive members of society. Back in the 1950s, people dreamed of a world where robots would do all the work and humans would live a life of leisure. Well, it may not feel like it (especially today), but that era has already dawned. I don't stuff memos into interoffice envelopes for a messenger to pick up anymore; I send an email. That messenger job has been eliminated. I don't hand a five-dollar bill to a toll collector at the Midtown Tunnel; those jobs have been reduced by EZ-Pass. A switchboard operator doesn't connect my phone calls. And so on. There are countless other examples and there undoubtedly will be countless more as technology develops. So, what, as a society, would we have the ex-messengers, ex-toll collectors, and ex-switchboard operators do? Certainly, education and job training are part of the answer, but will that cover everyone? We will need to answer this question sooner rather than later; my suspicion is that more wealth redistribution, in the form of higher taxes on the wealthy, will end up being the unavoidable answer. Hey, it beats wealth restribution in the other direction (see "Tax Policy, George W. Bush" and "Bank Bailout, 2008").
So, there you have it. Years of high savings and productivity, but low or negative economic growth. Followed by a structurally sound economy that produces more with less. The equityholders and workers earn more thanks to government investment in education, infrastructure, energy, science and technology. At the same time, a higher percentage of their wealth is shared with the elderly, sick and unemployed. Nevertheless, the owners and workers still net out ahead and live better than ever. Those that aren't working live modestly, but enjoy a safety net, and are incented to join the ranks of the working. Energy security is enhanced, people live longer and healthier lives, and the planet doesn't suffocate on burning fuels. I don't know if this is a socialist or capitalist utopia, but it sure sounds better than what we've got.
