Thursday, May 14, 2009

The light at the end of the tunnel...

Time doesn't permit me to develop this theme fully today, but we need to begin to think about what will happen after this recession/depression is over. There is a tacit assumption that the only realistic options are V-shaped, U-shaped, or W-shaped, with only a very few even contemplating the possibility that L-shaped may be far more likely.

We have just lived through a series of booms that wildly inflated our expectations of what we should expect from our economy. And it's possible that there is a "true" level to which we will revert, and it may not be the big-growth model that we assume. It could well be that the lower leg of the "L" is where we should have been all along, that the inexorable nature of the logisitic curve has finally caught up with us, and that we will sink into a prolonged low-growth mode.

What does a computer programmer cost? $50-60K, because that's what we're used to paying? Well, no, they're goods like anything else, so the real answer is, whatever the market demands. Increasingly, we can get perfectly serviceable programmers for $10-15K, so that de facto becomes the cost. To assume that the "American premium" will somehow maintain that big a differential is darned naive. (Substitute "manufacturing worker" or any other movable profession and the argument is the same.)

But, if we pay our computer programmers less (or employ fewer of them), there will be less money floating around for purchases of consumer goods and the like. One could argue (and many have) that displaced programmers will move on to work that is at least as lucrative, but that seems increasingly unlikely given the kinds of jobs that look like growth professions (solar panel installers? wind turbine makers? home health care providers? None of these seem like the stuff of upper middle class aspirations, no matter how necessary they are).

It is possible that Americans are simply overpaid with respect to the rest of the world, that our wages and prices are simply too high in a globalized competitive world. That may be due to historical precedent that is no longer relevant, but it's hard to argue that it's sustainable.

And, in a global sense, there's probably nothing wrong with that. The United States is likely due for a readjustment in light of world market conditions; maintaining the status quo is unwieldy and, quite possibly, unfair and exploitative.

But it does imply a change. Many want to think that we'll just move over and share the top step with billions of others, but that probably can't happen in a world of finite resources. The rise of others will mean some fall for us. It doesn't have to be catastrophic, but it will require some rethinking.

This might seem deflationary, if wages and then prices fall to something closer to world-acceptable levels. Every economist will say that that would be an utter disaster, that it would change our financial landscape in all kinds of unpleasant ways. And that may be right, leaving us only two options. We could inflate our currency; nominal wages and prices would stay roughly where they "should" be, but there would be all sorts of consequences from that, most unpleasant. Or we could see a massive fall in the dollar, as we equalize our wages and prices through foreign exchange. We would see a huge increase in exports, and some industries would find the U.S. labor market more attractive. Since the dollar is the world's reserve currency, there would also be some mighty nasty results from this.

There are a number of mechanisms which might counter this trend somewhat, but I don't see them being sufficient to stem off the larger problems that come from equalization. I hope so, of course, but I can't be too optimistic.

Tim Duy, via Mark Thoma, has an essay that seems slightly more positive, but leaves us, in the end, with at least some version of what I've outlined:
Bottom Line: The economy looks to be turning a corner relative to the downward cyclical force of last year. But this is only a partial victory, as the factors that that started us down this path - namely, a debt-supported consumer spending dynamic - remain in play, and will likely remain in play for years, arguing for a long period of slow growth, punctuated by short-lived bursts of positive data. In such an environment, and considering the importance of government support to sustain financial stability, the odds favor continued policy easing. Those looking for a more positive scenario are pinning their hopes on either an unlikely rapid return to past patterns of consumer behavior, an unlikely rapid evolution in patterns of economic activity that are not consumer dependent, or a decoupling of emerging market economic activity from the US (which could pose a different set of policy challenges).
Brad DeLong believes that we will be sustained by something that has blinded us, so far, to the extent of our problem, the handcuffed dollar-holding foreign governments:

The next generation, therefore, will see a very interesting dance. Call it reverse finance colonialism? Call it something. Foreign governments will be seeking high-return assets for their enormous portfolios without selling dollar-denominated wealth. Consequently, they will have to focus on U.S. corporate securities. With such large-scale investment comes ownership and with ownership comes control. No government will want to play the role of passive investor, with the attendant risk that its partners will tunnel the wealth out from under its grasp, leaving an empty corporate shell.

So what is likely to come to pass is not the socialism feared by the Right—at least not ownership of the means of production by the U.S. government. Instead, it will be ownership of U.S. companies by foreign governments—and on a scale we’ve never before seen.

Can anything stop this progression? Yes. A collapse of world economic growth—which would create a very dangerous and angry world. Or a sudden return to thrift on the part of American consumers—so that we can finance the industrialization of the rest of the world rather than having them finance our consumption. But neither is likely.

That will leave Americans confronting a new and unprecedented phase of globalization. Government agencies in Beijing, Dubai, and Brazilia will have a large financial interest in everything from the health-care policies of American factories to the compensation packages of corporate executives and the apportionment of seats on corporate boards. And their interest will matter: They will, after all, be the people who have the money—just as Americans were the people who had the money in the years after World War II.

So we'll be able to sustain our lifestyle to some extent, but only at the price of becoming financial captives to the countries that can prop up their bad investments only by throwing more money into the pot. I'm not sure DeLong follows his own thinking quite far enough, but it's difficult to see a way in which scenario ends well for anyone.

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