Wednesday, December 17, 2008

A poorer country

Robert Reich makes some good points in this post about the limitations of newly-popular traditional Keynesianism. It's been bothering me for some time that so many people think that the government is going to magically inject billions and billions of dollars into the economy, and, after some unpleasantness, we'll end up back on the big prosperity growth path - six-bedroom houses and 56" TVs for everyone!

Too few are thinking about what will exist in the aftermath of this financial mess. For example, does anyone else believe that we're walking a precarious path between the inflationary printing of money and the deflationary sinking of prices, cut by desperate retailers? The money will still be floating around the system when things improve enough to start prices upward; should we be worried about massive inflation at some point down the road?

Reich doesn't address this, but he does point out two big fallacies in the common thinking:
The first assumption is that American consumers will eventually regain the purchasing power needed to keep the economy going full tilt. That seems doubtful. Median incomes dropped during the last recovery, adjusted for inflation, and even at the start weren’t much higher than they were in the 1970s. Middle-class families continued to spend at a healthy clip over the last thirty years despite this because women went into paid work, everyone started working longer hours, and then, when these tactics gave out, went deeper and deeper into debt. This indebtedness, in turn, depended on rising home values, which generated hundreds of billions of dollars in home equity loans and refinanced mortgages. But now that the housing bubble has burst, the spending has ended. Families cannot work more hours than they did before, and won’t be able to borrow as much, either.

The second assumption is that, even if Americans had the money to keep spending as before, they could do so forever. Yet only the most myopic adherent of free-market capitalism could believe this to be true. The social and environmental costs would soon overwhelm us. Even if climate change were not an imminent threat to the planet, the rest of the world will not allow American consumers to continue to use up a quarter of the planet’s natural resources and generate an even larger share of its toxic wastes and pollutants.
What this implies is that, no matter how long or deep our current downturn, we're going to come out of it a poorer nation. Obviously, this will have the greatest effect on those who are already having problems; if you've got $100 million in the bank, no catastrophe will be sufficient to make you insolvent. If you've got $1000, it's a whole different ballgame.

But Reich finds another large area in which we will become impoverished:
What we most lack, or are in danger of losing, are the things we use in common – clean air, clean water, public parks, good schools, and public transportation, as well as social safety nets to catch those of us who fall. Common goods like these don’t necessarily use up scarce resources; often, they conserve and protect them.

Yet they have been declining for many years. Some have been broken up and sold as more expensive private goods, especially for the well-to do – bottled water, private schools, security guards, and health clubs, for example. Others, like clean air, have fallen prey to deregulation. Others have been wacked by budget axes; the current recession is forcing states and locales to axe even more. Still others, such as universal health care and pre-schools, never fully emerged to begin with.
He doesn't cover them all, clearly, but people are already being affected by these cutbacks. Chicago, in which there is no more sensitive topic than snow removal (one mayor was voted out because he couldn't keep the streets plowed), has diminished their efforts due to the budget, and city-dwellers are howling. Those who have much turn out fine; they can let the driver worry about the snow, or work from home (a benefit normally available only to the managerial class). Others have more of a problem.

If you've been reading Reich for a while, you know what comes next, a defense of the idea that massive stimulus needs to be applied to these common goods by rebuilding our infrastructure. Anyone who has lived in Illinois for any time tends to be wary of these efforts (you might as well just call it the Connected Contractor Enrichment Act), but they seem better than the alternatives.

But the world will be different once the dust settles, and there's a good chance the majority of Americans will have fewer options than they expected to have. We'll still be massively fortunate compared to most people in the world, and we should realize that, but the limitations will still be a shock. We have believed for so long that our universe of choices is ever-expanding that any change is going to be shattering. That our children and grandchildren may inevitably be poorer than we are, that the American dream is finite, and that our own actions directly made that happen are going to be, I think, the defining image of this time.

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