An Economic Ice Age
Very exhausted, so this won’t make much sense . . .
The other day I “tweeted” approximately “America is in decadence; we’ve had it too easy for too long; can a nation get out of decadence? how?” Jason the Commenter tweeted back, “Let individuals face the consequences of their choices.”
I keep thinking of that as I watch the steel jaws of this recession relentlessly closing on so many of my friends (flash of Poe’s “The Pit and the Pendulum”), and I observe that we are now to be relentlessly punished for every wrong choice we’ve ever made: every opportunity we ever let go by, every reckless investment we got seduced into, every job or home value or interest rate or state of health we ever took for granted, the happy heedlessness bred of affluence and security that felt like it would go on forever. Everyone who was the grasshopper instead of the ant, everyone who was vaguely rather than ruthlessly “creative,” everyone who was stupid enough to be unlucky or wounded enough to be unsure — all who hesitated and all who impulsively leaped off the beat — will be lost.
(Well, no. Many will adapt, strip down, toughen up, and survive. But so much of what we thought was rightful entitlement — to do what we pleased, say what we thought, fulfill and amuse ourselves, deposit a paycheck — turns out to have been luxury.)
Ambiance 
Dave Schuler said,
September 3, 2010 at 8:16 am
Frankly, I doubt it. Grasshoppers have done very well for the last couple of generations and I suspect they’ll continue to do so.
However, there’s another reason. We’ve got to be careful in applying after the fact rationalizations to decisions. Five years ago the guy who scrimped, saved, and put his savings under his mattress or into a conventional bank savings account was a dope. The guy who put his savings into real estate speculation made out like a tall dog. Who was prudent?
People evaluate their decisions against several frequently conflicting yardsticks: their values, their goals, and their observation of what’s going on around them. When you make a decision consistent with your values and your goals, if your decision wasn’t founded on perfect information so be it. You’ve done what you could with the information you had at the time.
I think of the end of Camus’s The Myth of Sisyphus “The struggle itself…is enough to fill a man’s heart. One must imagine Sisyphus happy.”
wj said,
September 3, 2010 at 8:24 am
Annie, I think you have mis-interpreted Jason’s line. For example, case could be made that hose responsible for the current economic mess are not those who were unlucky or unsure. Rather, the ones responsible are those who were “ruthlessly creative” in the financial sector, and massively rewarded for their “work.”
Consider them being made to face the enormous consequences of their choice of actions. Personally. It may give you a whole different perspective on the world.
In fact, many of those who face the consequences will be those who were not responsible for the mess. But if the question is how a nation moves out of decadence, the place it has to start is with those actually responsible for creating an environment where grasshoppers were rewarded and ants looked upon as fools.
amba12 said,
September 3, 2010 at 8:48 am
Elegantly said, both. The trouble is that the people who caused the trouble frequently have the power to arrange things so that they get off scot free, while those who suffer from the fallout of their decisions often disproportionately blame themselves for their situation. And our whole culture is schizophrenic on this subject. The right tends to blame the victim (if you’re in trouble it’s your own fault — you were lazy or irresponsible or not sufficiently entrepreneurial) whereas the left tends to make excuses for people, enable irresponsibility, and encourage them to blame others and demand help.
Both are conveniently simplified for explanatory purposes, but in any given case it’s so much more complicated than either. Birth deals you a hand and then life keeps on dealing you hands, depending on what games you scheme or stumble into, And nobody’s born knowing how to play.
amba12 said,
September 3, 2010 at 8:51 am
The “ruthlessly creative” seem to be the fittest in the sense that they survive no matter what. However, like cancer cells, they may ultimately be surviving at the expense of the society that is their host.
amba12 said,
September 3, 2010 at 8:55 am
Five years ago the guy who scrimped, saved, and put his savings under his mattress or into a conventional bank savings account was a dope. The guy who put his savings into real estate speculation made out like a tall dog. Who was prudent?
I think of the end of Camus’s The Myth of Sisyphus “The struggle itself…is enough to fill a man’s heart. One must imagine Sisyphus happy.”
So much food for thought.
Adaptability is crucial as times keep changing. The trouble with blame (of self or others) is that it wastes energy and paralyzes adaptability. Put the same energy into shrugging (I mistyped “shruggling” — a word whose time has come!) and saying, “OK, so now it’s cold. Now what?”
PatHMV said,
September 3, 2010 at 9:18 am
Many seemingly innocent people are facing the consequences of others’ bad decisions, that’s true enough. But one of the reasons that everybody is suffering for that is because there’s been so much centralization, both in government and in the private sector, in the past decade or two. Partly this is due to government regulatory costs which may small operations relatively more expensive, per good or service sold, than larger ones and part due to natural economies of scale and the amazing productive power of modern factories and computers.
One of the reasons housing boomed so much is because of the favorable tax treatment given to mortgage interest income. Another reason is because the FHA, Fannie Mae, and Freddie Mac, all components of the government in one form or another, took such a HUGE presence in the market. With all the incentives and actual loans themselves concentrated in those few areas, any bad things that happened was inevitably going to be disastrous, because the same mistake would be repeated not in just a few hundred or a few thousand financial transactions, but several million at once.
We need to consider adopting policies to reverse some of this centralization, to reduce the risks of these types of single-point-of-failure catastrophes. Yes, if we reduce government regulation of, say, the financial markets, we may see some increase in individual cases of fraud on investors, but my strong suspicion is that those frauds would be much more isolated cases, and not lead to the massive systemic crashes we’ve recently seen.
amba12 said,
September 3, 2010 at 9:31 am
I enjoy reading Nassim Nicholas Taleb, author of The Black Swan, whose work is all about “robustness” — distributing risk to avoid massive systemic crashes. His contempt for academic economists and spinners of exotic derivatives is especially enjoyable.
Maxwell James said,
September 3, 2010 at 11:28 am
The way you asked the question is interesting to me, because it’s not just about the economy. Decadence reflects not only decline and stagnation, but also self-indulgence, which is a cultural judgment.
To that extent, as a culture I think we’re already on our way out of decadence. Savings are up; spending and personal consumption are down. People are being thrifty because they have to be. That’s what recessions are for, so to speak.
The problem is that our economy is structured in such a way that abstemiousness is inimical to growth; 70% or so of it is based off of consumer purchases. The fundamental rule of economics is that to create value you have to have a transaction between parties. Thriftiness and DIY values lead to stagnation in such a context. We have to find ways to encourage entrepreneurship as well, which means lowering barriers to entry in many industries, and particularly looking for ways to increase our exports.
Pat is completely right that our continued propping up of the housing market is a big part of what is inhibiting necessary changes. I understand why they’re doing it – no one wants a double-dip, especially incumbent politicians. But the notion that the government should continue encouraging housing as an investment is dangerously short-sighted, especially given what we have just been through. That’s why I favor strengthening the safety net in other areas – including health care reform – so we can begin untying regulatory approaches that are clearly doing more harm than good.
amba12 said,
September 3, 2010 at 1:36 pm
So true — the paradox that consumption grows the economy, yet so much of the consumption that fueled the boom times was based on debt, on people spending way beyond their means, piling up unsecured credit card debt, and using their houses as a supposedly endless supply of collateral. That had to end.
It’s interesting that you propose a combination of conservative (deregulation) and liberal (social safety net) solutions. It seems that the latter would require higher taxation? For which deregulation might compensate to some degree? What about the regulatory burden that conservatives complain the health care reform bill imposes on small business?
Maxwell James said,
September 3, 2010 at 3:40 pm
That’s because I’m a left-libertarian (popularly called “liberaltarian” nowadays – I hope the concept sticks but the word doesn’t). I believe in entrepreneurship with a strong safety net. Higher taxes are fine by me up to a point; what really gets in the way of startups is excessive regulatory burdens. I prefer regulations strong but simple – i.e., a carbon tax instead of cap and trade.
What about the regulatory burden that conservatives complain the health care reform bill imposes on small business?
I think you’re referring to the new 1099 requirements that are part of the legislation. I agree they’re massively stupid. I think the health care bill accomplishes important ends, but includes a lot of legislative sausage that is inevitably a product of our governmental system. And it does not end the work of reforming health care, not at all.
Icepick said,
September 3, 2010 at 6:13 pm
Higher taxes are fine by me up to a point; what really gets in the way of startups is excessive regulatory burdens. I prefer regulations strong but simple – i.e., a carbon tax instead of cap and trade.
Give that man a cigar! Also, taxes are excessively complicated at the moment, which effectively act as regulatory requirements.
amba12 said,
September 3, 2010 at 6:22 pm
Maxwell: I’m liking this, with the proviso (I know you agree) that the best safety net is jobs. Retraining credits and extended unemployment benefits in the meantime. Where are you on WPA-type projects (which needn’t all be heavy construction!) to keep people working in times of high unemployment? Too bureaucratic? A lot of people might prefer to have something useful to do than just to collect unemployment. God knows there is work that needs doing, but the process of organizing it might be way too unwieldy and centralized. Could states do it?
realpc said,
September 3, 2010 at 7:31 pm
We don’t control the economy, it controls us. The experts pretend to know, or think they know, but they don’t. I don’t think they can do anything meaningful to improve things, and their interventions are more likely to be harmful than helpful. They just feel they should look like they’re doing something.
But our economy is powered by inventions, and inventions come along whenever, and can’t be forced. It has to be something big, like trains, planes, automobiles, the web. Not just another new iPhone.
And we always had, and always will have, bubbles. And they will make some people rich and then they will crash, and our economy will limp along until the next bubble starts inflating.
The real estate bubble was different because the experts really thought real estate was safe, and could never crash. The supply of land is finite, while the population constantly increases. Therefore the price of land must always go up.
That is what they really thought. And the clever new derivatives were considered perfectly safe, based on the most tangible thing imaginable — sections of earth.
But,, of course, the only new and different thing about the real estate bubble was its magnitude and the force of its collapse. So here we are again, where we have been many times before, and it’s just a new version of the same old old story.
And something will be invented that is not only cool and fun, but actually useful and worth having, and the roller-coaster will be on its way up once again.
Ron said,
September 3, 2010 at 9:21 pm
Aren’t there tons of scientific projects that need HUGE amounts of plug and chug basic data gathering? Astronomy….geology…and…DNA analysis? Couldn’t we have the Feds fund such projects? We could mention tangible benefits to the results…and even tie the idea into HealthCare. It could be a project of national pride. If Obama were the FDR they sell him as, he could do it!
Yeah, it might be considered make work…the WPA was said to have stood for We Piss Around.
But employment and science all at once!
Maxwell James said,
September 3, 2010 at 9:46 pm
Icepick: Also, taxes are excessively complicated at the moment, which effectively act as regulatory requirements.
Too true – the 1099 requirement in the ACA being a perfect example.
Amba: the best safety net is jobs
There was a time when I would have agreed with that without even thinking about it, but nowadays I’m not so sure. In some ways that seems reminiscent of the Fordist compromise between big govt, big corporations and big labor from the 1930’s, and I’m not at all sure if the Fordist model still holds. Dave Schuler has written a lot about this, compellingly arguing that it may be too rooted in the past.
The lingering unemployment we’ve seen in this recession, combined with resurgent productivity levels (and corporate profits at least in some sectors) suggests that a lot of laid off people had been redundant for some time. If we look at jobs as a safety net, then we’ll have the kind of society that tries to create jobs even when they’re not needed. That’s a big part of why I think healthcare coverage should be completely divorced from the employment market (and why moreover I’d be willing to entertain the notion of a guaranteed income for all citizens).
Similarly, I haven’t made up my mind about WPA style projects, & don’t know if I ever will. They’re a lot more tangible and appealing than the sort of indirect spending that has characterized the ARRA, but I have no idea if they’re actually any better. And certainly make-work can be kind of silly – yet at the same time, I wonder how much tourism and marketing income has been generated for South Dakota by Mt. Rushmore.
I like the logic of Keynesian stimulus but its efficacy seems completely impossible to prove one way or another (I don’t think the states could ever pull them off on their own, though – they simply don’t have enough revenue-raising power). Ultimately I think stimulus projects are necessary in a recession because people have a strong need to see the government doing something. But I’d prefer to see the government also taking much more active steps to address the structural problems that led to the recession in the first place.
amba12 said,
September 3, 2010 at 10:25 pm
a lot of laid off people had been redundant for some time
Are they redundant? Or simply expensive? Look how precipitously service has declined since motivated, educated humans have been dumped out of companies and replaced by bots and indifferent, resentful minimum-wage slaves reading scripts . . . or by motivated, educated citizens of Bangalore.
I’ve just been reading stories suggesting that cutting payroll is not in the interest of the real health of companies. It’s often just a cheap shortcut to increasing profit margins so shareholders will look at the bottom line and award the CEO a bigger salary and bonus. The companies that have cut the most jobs have the highest executive salaries, averaging $12 million. That is not necessarily because they have become more efficient and innovative. In many cases it’s because they’re squeezing more productivity out of fewer frightened workers clinging by a thread to their jobs,
Ron said,
September 3, 2010 at 10:47 pm
It’s odd how language conditions how we express problems…Amba, like you, I balked at the idea of people being redundant….and yet I do understand the drive to keep costs low!
wj said,
September 4, 2010 at 1:21 am
A collection of rants:
The missing piece that made real estate into a bubble was that, while land is finite, the bubble wasn’t in the land. It was in the stuff built on the land — which was much less limited. Not to mention that land itself is not exactly in short supply. Yes, there are limited amounts in certain places. But an increasing amount of work doesn’t require the employee to be physically present. (That’s what makes outsourcing service jobs overseas possible. But it also makes it possible for me to live a couple of hundred miles from where my office would be, if I had an office at my company’s HQ. And at that, I chance to live closer than most people inthe company. But it also means that I’m cheaper to hire than someone living ina dense urban environment. Not as cheap as osmeone in India, perhaps; on the other hand, a actually have experience and know what I’m doing. Which, sadly, a lot of IT folks in India do not.)
While an excessively complicated tax system does act as a constrain on businesses (especially new and small businesses), it does not accomplish what a well (or even only half bad) regulatory system would. That is, it has no positive impact on the behavior of businesses. All it does is make it more expensive for them to opperate. That and pretty well guarantee that, absent a huge budget for corporate tax lawyers, they will be in violation of some tax regulation or another.
Laying off people en masse is simply one manifestation of an all too common approach to controlling costs: the across-the-board budget cut. But that isn’t a way of controlling costs while sustaining the business. It is an abdication of amangement’s responsibility to look at what parts of the business, and what costs, are making money and which are not. Any time you hear a manager (or a politician) say they want “across the board” cuts, you know that they are incompetent — otherwise they would be making focused, targetted cuts.
End of disconnected rant….
realpc said,
September 4, 2010 at 7:53 am
“The missing piece that made real estate into a bubble was that, while land is finite, the bubble wasn’t in the land. It was in the stuff built on the land — which was much less limited. Not to mention that land itself is not exactly in short supply.”
I know, I never agreed with what they said, but the clever experts on Wall Street believed it. The population always increases, but it moves around, and when real estate becomes unaffordable in one place, people go somewhere else. None of that was considered by the clever experts.
Icepick said,
September 4, 2010 at 8:23 am
Too true – the 1099 requirement in the ACA being a perfect example.
I’m talking about current 1040s!
amba12 said,
September 4, 2010 at 10:36 am
I have this sense that as consumers we are hostage to lousy service — we effectively have no choice. We too must subscribe to economies of service in things like phone, cable, and Internet, and that means outsourcing and voicemailing of service. If offered a choice, we would take our business elsewhere, but cable, e.g., is usually a monopoly in any given area. And it shows.
wj said,
September 4, 2010 at 11:05 am
How hostage we are to poor service depends on two things:
— what are the barriers to entry? How hard is it for a different source to get going?
— how hard is it to find out about different suppliers? (So we find out about one which actually has good service.)
The problem with things like phone and cable is that it requires a lot of expensive infrastructure to deliver the service. Which means that, once a company has built the infrastructure, they effectively have a monopoly. At lesat until technology produces a diferent way to deliver the service. For example, laying telephone lines was too expensive for anyone to compete with AT&T. But then (after, admittedly, a long time) cellphones came along. And then the cable TV companies figured out how to provide telephone service over their lines. (And, in my area, the phone company is offering TV over its lines in return.)
Now, the issue becomes one of whether one of the providers decides to try a business model of better service. And, perhaps more importantly, whether potential customers are willing to pay a premium to get better service. From what I can see, providing better service for a price is a niche market. That is, there are some people who will pay, but a substantial majority will go for the lower price . . . and gripe about the quality of service.
On the second point, it used to be that finding out about the quality of service provided as a matter of word of mouth. f someone you knew found a good mechanic, plumber, barber, etc., they might tell you about it. Otherwise, especially if you had just moved into a new area, you were stuck taking your chances.
Now, at least there are some alternatives. There are a various internet sites where people can rate the businesses they deal with. Some have a relatively wide geographic scope — and, as a result, are mostly useful for finding out about stuff that gets sold across the company. But some are more focused, so they can cover things like plumbers and dry cleaners (not to mention restaurants). As with any evaluation, the results are far from perfect. But if you want information on some business you know nothing about, they can be a boon.
P.S. Of course the biggest monopoly supplier of services is generally the government. In some cases (e.g. schools) there may be alternatives … for a price. But in others, no options are allowed. Which is why going to your local DMV for a license can be such an exasperating experience. Hostage to lousy services indeed!
Maxwell James said,
September 4, 2010 at 2:07 pm
Let me be a little clearer about what I meant by “redundant.” Somewhere on the order of 2 million contruction workers have been laid off since the beginning of the recession. These are people who for the most part are NOT low-skill workers, but their skills tend to be extremely specialized. Some may have gotten paced out by technology, but more were simply employed in the service of a real estate bubble that was itself unsustainable. Despite the numerous efforts of the government to preserve the status quo, that bubble is not coming back, and neither are many of those jobs (or in some cases, companies). The whole thing was fueled by poor policy and poor market decisions. I would love to believe that the market will discover ways to use these people and their skills in the future – and that’s one reason why I’d like to see a market with much lower barriers to entry in most industries – but I fear that a lot of them may have just been unlucky enough to draw the short straw.
I have no doubt that plenty of companies laid off workers due to short-term thinking; I remember reading somewhere that Microsoft (!) laid off a bunch of people at the height of the recession even though the company was comfortably profitable. I think there is no ethical defense for such management practices, and I sorely hope it comes back to bite them in the ass. But if it doesn’t, we may have to concede that the Fordist compromise really is on its way out. That doesn’t mean a new one can’t be had, but it will inevitably require a lot more labor-management-government tension than we’ve seen for several decades.