Whoops (cont.) or the continuing meltdown of the US economy

The financial crash has a simple cause and a simple solution

Posted by Jerome a Paris on March 16, 2008 - 10:01am in The Oil Drum: Europe

...I hope I'm wrong, but as we begin to see loud calls for bailouts (unfair, as they reward the bankers that created the problem in the first place, but, you see, the alternative is worse), the availability of a ready-made outsider scapegoat is likely to be irresistible.

And yet, the fact remains that the problem is not who provided the credit, but the fact that it was provided in such large amounts.

Because that sea of debt had one real purpose: hide the fact that income for most are stagnating.

I never tire of posting this graph of the "W economy", because it summarizes in a nutshell what happened: growth happened, but was not shared widely. Thanks to wage stagnation, made possible by the threats of outsourcing and offshorization, and by consistent policies over the last 30 years to deregulate and liberalise markets, starting with labor markets), the fruits of growth have to a large extent been captured by a very few - but this has been hidden because consumption was propped up by readily available debt and the apparently growing virtual wealth of homeowners.

The problem is that, while a lot of that growth was illusory (and is now unraveling), the wealth re-allocation that took place thanks to it was very real, and, in particular, the mechanisms ensuring that an ever grower share of the pie get into a few privileged hands are still in place, and will bite even more harshly as the pie shrinks.

In short:

The middle classes got a shrinking share of a growing pie, apparently staying somewhat ahead.

Now, they are about to get a shrinking share of a shrinking pie.

The current economic consensus - that of "labor market reform", of "unsustainable liabilities of Medicare", of "protectionism is the ultimate danger" -is that of those that think that economic prosperity is correctly summarized by the value of the Dow Jones Index. That consensus has not really worried about income inequality, and has seen increased leverage as a sign of ever more efficient financial markets rather than of a bubble. That consensus is part of the problem, not part of the solution.

And you see that all the currently proposed remedies are focusing on ways to make the pie be (or rather, look) bigger than it can - more money injections, more cheap debt, more support for the financial sector.

They are the problem, not the solution.

Too much debt and not enough income was the problem.

And the solution is simple: stop debt (this is happening on its own anyway). and boost income.

How do you do that when there isn't enough money around?

By creating real activity rather than the highly-leveraged money-shuffling 'arbitraging' kind.

And, as it were, there is a sector that is "real" and has an urgent need for action: infrastructure, and in particular energy-related infrastructure.

A plan that focuses on a few simple things:

• massive public support for energy efficiency refurbishment of existing homes;
• a massive, New Deal rural-electrification-scale plan to build renewable energy assets and the corresponding grid infrastructure;
• a similarly massive plan to develop smart public transportation, both locally and intercity;

Spending the money currently wasted in Iraq on these 3 things alone would provide a real boost to the economy in the sectors that actually need it, would reduce oil&gas consumption and carbon emissions, and be an actual investment for future generations, as opposed to the current drain on the future that's been engineered via debt used on mindless consumption of junk.

Add in plans to boost the minimum wage (especially in the relevant sectors) and tax imports of carbon-rich goods, and you'd have a pretty damn good economic - and geopolitical programme.

The problem is the most of America's population has been living, by design, above its means. It is kept dependent, fearful and distracted while problems are pushed into the future and, coincidentally, a happy few profit handsomely. This was not sustainable and, indeed, it is crashing down around us. The good news is that the solution to this financial crisis will also go in the right direction to solve the even bigger problems of global climate change and resource depletion. And hopefully, economic hardship will prove to be a bigger motivator for action than anything else.