Strengthening Constitutional Self-Government

No Left Turns

The Economy

I hate to whine or be negative: But I’ve gotten four emails from economists with real jobs and a hedge fund guy, all with the same message. The economy is going to get much, much worse. I have three questions for discussion: 1. Why? 2. What should people do? 3. What’s going to happen to our aging population so dependent on the performance of the stock market? It’s always possible (it’s happened before) that these experts are wrong.

Discussions - 18 Comments

Why? Inflation, about which government officials, far from doing anything constructive, seem to only be making matters worse (namely by lowering interest rates when they should be raised and by not doing anything serious about public and private debt).

Mortgage and bank failures, which not being as catastrophic as the media hype indicates, will be substantial enough to worry people and to add to the government debt (as deposit insurance expenditures soar).

Fuel prices, over which our elected officials dither, also damage the bottom line for business and individuals.

2. What should people do? Save money the old fashioned way, by not spending it. That's a smart ass way of saying simplify your life.

3. What about the aging population? No clue. The only thing I can think of is have more babies. That solves a lot of problems.

A baby boomlet may be underway. Good news on many levels.

Just look at gasoline and corn prices. Those prices will have a multiplier impact throughout the economy.

And that impact won't be for the better.

If you wanted to get your hands around the throat of the American economy, --------------------------------- and if you wanted to bring American power and influence down, -------------------------------- then all you need to do is ratchet fuel prices through the roof.

To the first question, besides the manifold possible effects of the oil problem, there is the Fannie/Freddie business about which there have been a number of recent informative pieces, including one from the City Journal yesterday. Loose loose money for far too long and government guarantees for more and more loans as one of the chief causes. There are huge amounts of capital at stake here, with the budget already under severe pressure. Add to this what we simply do not understand about the huge interdependent global economy with capital flows potentially unpredictable and economic nationalism rearing its head increasingly. Then the baby boomers are retiring en masse just around the corner. We don't know what will happen, but David Brooks is right I think in today's column that government will be needed more even if it can't just hand out money, but also we'll have to take care of each other. Good liberal arts colleges will probably stay open though, so Lawler and Jeffrey can keep working.

One more point to Julie: Bad times will probably mean more babies.

1. Why? Big government. We have saddled Americans with too many regulations, too high of taxes, and a national debt that is something like $30,000 per tax payer. As a result money is flowing from America to foreign countries in both investment and trade. Our country is less productive and more reliant on governemtn redistribution. Most of my high-school graduating class is either a low-end service worker, in a dead end factory, or (the only good jobs) working for the government. As Rousseau said, the man who works for the state is the same thing as the brigand who steals from the passer by.

2. What should people do? Elect politicians like Dick Armey and a few other hard right guys who would trim a trillion dollars out of the federal budget. Cut the federal registrar in half, cut taxes in half, the federal budget in half. Inform people that social security benefits will have no COLA. End the progressive income tax.

Privately, stop whining and looking to government. So times are tough, buy more rice and less steak, carpool, cancel your cable, but people would rather file for bankruptcy than do without these "necessities."

The aging population? We can't control this one near as much. One step would be telling people that its ok to die. At one time people weren't so obsessed with this life, and they were willing to forgo expensive medical care that might extend their life 1 year and just fold'em. Today we are vain secularists who will spend anything to capture one more-often dreary-day on this earth. What's more, people seem to think that government should pay for it. We can't all drive Hummers, and we can't all afford Hummer health care. Other than people having the guts to know when to fold'em, that's just a demographic trend that will either fix itself or not...see Julie's article, but there is almost nothing the public can do to make private individuals have and educate children.

This is really all hopeless and radical reform. America is going the way of Europe. We want someone else to make the decisions, someone else to do the work, and our biggest duty-if such it can be called-is to our personal happiness. Yay! If we can do whatever and still feel good about it, then that is true success. This attitude is taking over our country one person at a time, and the only way that will change is something like a Great Awakening to sweep people soul by soul to a different view of life focused on God rather than humanity.

While waiting, I'll be building the compound :)

Good point Dr. Jeffrey. Also I would note that contra Clint people are not as focused on money and themselves as he would have it. When folks put less effort into making money, and more effort into other motives then naturally what is maximized is something other than money. Perhaps leisure is booming. Perhaps volunteer work. A generation that goes to Iraq or decides to work for non-profits...has consequences. I am not so sure about the baby theory or the Europe doom and gloom. I also don't think the economy will ever be as bad as some people are inclined to think. If people are observant they will always be able to find good sectors.

I am jealous that Dr. Lawler knows so many people I would like to talk to, and technically speaking if I am talking I am not making money. Which brings me to Adam Smith and his brilliant point about getting paid relatively little to do a job that everyone wants to do. Dr. Lawler notes that he has a job he would do for close to nothing. Certainly you have to be of a certain mental caliber to do his line of work. But essentially I see my generation as willing to earn less money provided they get to do what they would do for free anyways.

Upon this view then I do agree with babies being a boon for the economy. Men with babies must support a familly which means doing jobs that don't necessarily fulfill them, but pay better.

In any case I recommend my own reading list, which is available for free online at www.econlib.org.

Also Clint is throwing me a fastball with that Rousseau quote, which I swear I would have memorized had I read it..depending on its context it could crash my bumper sticker Rousseau, which I should ammend to this thread by suggesting that: Babies are born free but men are everywhere in chains.

John: Perhaps my paraphrase threw off your memory (I didn't put that one in "): "A man whom the state pays an income for doing nothing hardly differs in my eyes from a brigand who lives at the expense of passers-by." The context is Rousseau's explaining useless trades that Emile will not learn...i.e. being part of the government. (Emile Book Three) It would be fairly solid bumper sticker material.

I don't think that your argument that Americans work non-profits and fight in Iraq means that they aren't obsessed with this world and themselves as I said. A person smarter than me said that Christians used to focus on loving God, but now they focus on loving man. Your examples are just showing our love of fellow man, which is always equal to our self love, for we can only love others as much as we do ourself. Nothing will change unless we love God first.

Thanks Clint, my memory of Emile would require my having taking my studies at Ashland seriously which I didn't. We read Emile in juxtaposition with Locke's On Education and the Spectator, I liked the stoic notion of habituation to cold and warm baths and always prefered Locke. I believe that I never actually read Rousseau for the class, but only afterwards for the sake of debating Steve Sparks(he comments here sometimes...but has sold his soul to becomming a lawyer!) who was enamoured with him.

To stay true to classical economics I would have to point out that Malthus says that having babies keeps people poor, and therefore makes habituating them Lockeian style to different temperatures imperative. In fact this is completely logical on the strength of Malthus's On population providing a jolt to Darwin and Darwin saying: "It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”

In any case I can continue this exchange with you Clint, or I can try to get back on the topic of the economy, or we can admit that in some sense our exchange reflects a certain malaise with reducing Human Action to ceteris paribus assumptions. We can say that following Hegel, work is repressed desire, that having all we really need we are no longer inclined to maximize wealth. I can bumper sticker indefinately, but to translate for serious economists I would have to get more modern giving a shout out to Alfred Marshall, whose birthday is comming up on the 26th of July. Marshall's great contribution(which in my opinion exists in theory in David Hume) is that of Consumer Surplus. And therein lies a few more roots for decline from a philosophical micro-economic perspective. I suggest that the drive for work and consumption is reaching up against the point where price exceeds marginal value. When this occurs people will feel less inclined to work or spend. In short they will become less "materialistic". Once man satisfies most of his material wants, as americans have, they turn to spiritual or intellectual "goods", goods that do not by and large move the sort of economic sectors that are capable of proping up the economy(they don't count for measuring GDP for example). The 60's give us the 80's and the 80's the 60's due to ideological/cultural orientations towards wealth and materialism vs. idealism and meaning directly impacting Consumer Surplus.

In point of fact so much of this is very hard to quantify, Alfred Marshall would be a lot more carefull than I am being here, but I am speculating that people that count for something in the market have this fear, in other words they aren't scared exclusively by Barrack Obama, but by the ramifications of what the re-orientation that Obama's popularity with my generation signals for consumer surplus. This general/difficult to quantify fear on the micro-economic level that my generation will shun the sort materialism that undergrids consumer surplus at a time when all sorts of other indicators look bleak is sufficient to hold down the economy. Also if we stay true to Marshall the suggestion that we should all have more babies, even if it would help the economy(which is extremely doubtful in the short run, except in so far as it would force men into higher paying/greater demand jobs)is without a doubt a long run solution, because such an injection of capital would take at least 19 years to bear fruit(and given the realities of the economy requiring a college education more likely 23 years).

John: I don't know my Hegel well, but I'd say that your are making economic sense about the acquiring of new things reaching a point of diminishing returns. There is some evidence that people are seeming to look elsewhere. However, I think we are fooling ourselves to think that this is good (in its current form). People are looking to other humanistic pursuits (increasingly pagaenism) in an attempt to feel good about the things that they have. I don't think they are honestly seeking the good as much as trying to find a patch. Materialism breaks our spiritual connection with God, making us less happy. People are seeking false spiritual connections with very strange ideas, not to take the focus off of materialism, but in order to feel good about being materialistic. That's my opinion at least.

Locke v. Rousseau is actually more interesting.

I don't know Hegel very far either. I don't know much of anything very far. But it seems that the holy grail in micro-economics would be understanding how exactly Culture shapes Consumer Surplus. If some people believe that materialism breaks spiritual connection with God...then technically speaking such people are not interested in the economy as the number one issue, or more correctly I suppose they do not believe that the economy should be the number one issue. Selling the priority of the economy seems a tough sell, in a time where people are increasingly telling Fund managers to invest in "ethical" businesses. If the economy was really in bad shape people would invest with fund managers who were pit bulls and willing to rob grandma. Because the more obstacles and screens you place upon a fund mannager, the fewer profitable options he has(especially if you have a lot of watchdog groups.)

Technically speaking McCain's cluelessness about the economy is not altogether unjustified. McCain knows that the war in Iraq has tremendous economic costs, he also knows that doing something about global warming has tremendous economic costs. Commitment to either cause entails making the case that the bennefits outweight the costs, which in truth means telling the american people that there is no such thing as a free lunch. But so long as the american people are willing to pay for the lunch, then there is really no way to also say that the economy in any sense that is easily comprehensible is the primary issue.

This is really Alfred Marshall territory.

It's my understanding that the mortgage crisis is the linchpin of the (somewhat) failing economy. The mortgage crisis is exacerbated (if not caused) by people not paying their mortgages because they simply can't. So it seems to me that people just need to work harder and/or cut back on extraneous spending to pay their mortgages. Is this too simplistic?

The economic forces arrayed against us are HUGE, Tsunami or Katrina-like, except they are of our own making. Coupled with our appallingly unable national political and financial leadership, our entry into a long dark economic night seems to me unavoidable. The USA is on the cusp of becoming, save for our military, another Argentina. We have entitled, spent, globalized, borrowed ourselves into an unbelievable hole, out of which we cannot inflate ourselves.

Yes. God forbid we ever attach a brain to that wonderful invisible hand of our good and great, free market economy. Let's just keep guessing and wondering. Sweet system we've got.

The USA is on the cusp of becoming, save for our military, another Argentina.

Tom, Argentina's per capita income is about a quarter that of the United States. A decline in the production of goods and services of that magnitude is only seen from wartime destruction. The declines recorded in 1929-33 were far more severe in North America than they were in continental Europe (much less the British Isles) and these were on the order of 35%, not 75%. Also, Chile had quite high ratios of external debt to domestic product twenty years ago (higher than Argentina's) but was nevertheless prosperous in the sense that production was growing rapidly, unemployment declining, and prices increasingly stable.

Argentina in 1930 was also a relative novice at incorporating the unpropertied and (abnormally large) recent immigrant strands of the populace into a stable role in the country's political order. Juan Domingo Peron and his wife took advantage of this and mobilized these populations toward their ends. With occasional local exceptions (e.g. Huey Long), America's broad working class has not been vulnerable to visionaries or demagogues (though it has been to talented bosses like Anton Cermak and Jimmy Hoffa); the black population is less so than was the case a generation ago; and the Mexican population has scant history for this and (in any case) is only about 8% of the population.

Yes. God forbid we ever attach a brain to that wonderful invisible hand of our good and great, free market economy. Let's just keep guessing and wondering. Sweet system we've got.

Banking and finance are among the more heavily regulated sectors of the economy (though less so than they were a generation ago). Students of the situation have maintained that Fannie Mae and Freddie Mac had a number of advantages conferred by their origin as public agencies and their incestuous relationship with the government during their term as private corporations, allowing them to control about 50% of the secondary mortgage market. It is hard to see how instituting national economic planning (i.e. putting a brain on the invisible hand) is an address to problems induced by crony capitalism and the socialization of risk.

Dr. Lawler,

When your correspondents said 'much worse', did they give you an idea of the size of the contraction in domestic product, the rates of inflation, and the rates of unemployment they were expecting?

Just got back in town. Lots of excellent posts. To AD's last post, their was no quantification of the "much, much worse." The comparison used was not, of course, Argentina, but Japan of the 1990s etc.
Tyler Cowen, for one, says that everything will be coming back after a couple years, and that's reassuring in a way. It's not so reassuring that the optimistic view is two years of stagflation. Let me say whar Dr. Pat Deneen would add: We Americans may be whining too much because we're not cushioned by real personal savings and we got too used to depending on stocks and real estate. This criticism doesn't apply, of course, either to the guy working at Wal Mart or to the hedge fund guy who'll make (unproductively) lots of money no matter what happens to the rest of us.

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