The New American Recovery
WASHINGTON – “Have we touched bottom yet”? “Green shoots for the US economy”? These and similar questions popping up in the business media whenever there are some stirrings here and there are justified by our entrenched habit to think within the old logic of recovery-recession-recovery that used to part of the accepted “business cycle” conventional wisdom. All recessions –we have always been told—must end. And thus, at some point, we are bound to have the good old fashioned and always dependable recovery; with new investments, new sales, new employment, followed by more money floating around, thus more spending, and the resumption of our upward march to more growth and prosperity. Right?
No. This time it will not happen this way. Because we are comparatively much poorer and have thus fewer options. Remember that we got into this epic mess mostly because, as a nation, we believed in our fantasies of endless sources of wealth divorced from our real productive capacities. Unil the dream lasted we spent and spent an imaginary wealth, while in fact we were burning all our savings, eating our capital, our future income and then some at a fantastic speed. The end of the recession will reveal a weaker, somewhat withered and still incredibly debt burdened US economy. The good news is that this is not a terminal illness. Relative impoverishment and decline of once leading sectors can be reversed. But this requires resolve, clarity of purpose and determination.
Which is to say that we can come back, yes. But this will require a convincing long term, hard nosed transformational strategy aimed at seriously upgrading skills, the rate of innovation and the quality of productive assets. It will also require a serious overhaul of public spending, both in terms of its quantity and composition. We cannot continue to accumulate debt, mostly because of the dynamics of entitlement spending and assume that this will have no consequences. New competitiveness strategies have been discussed and debated; but as a nation we have yet to recognize their urgency and we have yet to enthiastically embrace them. The more we delay action, the longer it will take to see positive change.
If we do not take meaningful action, the American economy will not come back roaring. It will come back; no doubt; but weaker, and comparatively poorer on account of the severety of the damage inflicted. For a long time we spent lavishly with borrowed money and we invested little in human capital (education) and in innovation –the only key to future growth. So, today we have huge debts, a semi-destroyed services sector and not an awful lot that can be used as a strong base to rebuild and expand. Look, for example, at the severe beating taken by General Electric, in many ways still one of the best managed global industrial conglomerates, revered as the paragon of good planning and good management.
For at least a decade, we Americans lived in a dream world in which we thought that we were far more affluent than we actually were, even though we did not produce an amount of wealth that would support that level of spending. A huge chunk of that spending was financed through borrowing, justified by the delusion that appreciating fixed assets (our homes) would generate the additional funds that we could happily spend. Then the bubble burst and we know what happened. But this is not the worst part of the story.
The really bad part is that, as the ill effects of this gigantic hangover dissipate, looking at what is left within the wreckage of failed banks and withered retailers, we discover that we have comparatively few internationally competitive economic sectors capable of generating the genuine, real new wealth that will be necessary to rebalance our books and –longer term– keep us competitive with the rest of the world. Which is to say that, while we were busy inflating a huge retail and services sector catering to unsustainable levels of consumer spending, we neglected the real stuff: education, technology, innovation, new sources of energy and all what is needed to nurture and support it. Let’s say this clearly. We shall come out of this mess. But, unless we embark in a serious long term national effort, everything else being equal, we shall come out as a much poorer, debt ridden, less competitive America.
Indeed, as the spending party was going on, as we were buying (mostly imported) stuff with money that we had not earned, we let our school standards go south, thus cheating millions of young Americans who thought they were receiving an education; while we made them ineligible to get the good jobs that, in ordinary times, will be generated by the new knowledge economy. As a nation, we spent comparatively less on R&D; while we allowed the continuing, dramatic deterioration of our infrastructure, the basic supporting system of all modern economies. In the meantime the Federal Government increased its spending thus significantly adding to our national debt. Fate had it that at the same time we also had the terrorist attacks of 2001 followed by a couple of expensive wars. While affordable in ordinary times, the cost of prolonged military engagement is clearly a further drain on resources, resulting in net additions to the debt.
To be great again America needs more than a feeble cyclical recovery that, under present circumstances, will leave behind millions of Americans previously employed in service jobs that will never come back. These people will continue to be unemployed or underemployed for many years. They shall be a dead weight on the economy and society. And beyond the macroeconomic impact we have the personal tragedies caused by severe dislocation magnified by the lack of real alternatives.
In order to lay the foundations of new prosperity, America needs a new strategy. It needs a serious, multi-year effort (at least 10 years, probably more, of sustained investments) aimed at reconstituting its human capital through serious secondary school and University reform efforts, its R&D base, its enterprises and the ecosystem on which modern enterprises depend on in order to properly conduct business. As a minimum this should include: truly high speed internet that is at least as good as South Korea’s, redoubled efforts in ICT, nanotechnology, robotics, biotech. Then it needs modernized ports that cut down container handling time and thus cost, good freight railways nodes, a new air traffic control system, a real energy plan, (can we be do better than the corn based ethanol hoax?); not to mention billions and billions of dollars necessary to completely refurbish and upgrade the national network of highways and bridges that is literally collapsing before us, as we have done so little to maintain it in the last 40 years. All this will costs big money, of course, and we are already deeply in debt. But I think that most Americans, if told the whole story, would be more willing to accept debt generated to modernize the country, as opposed to debt generated to finance consumption.
Yes, at some point this year we shall touch bottom and the recovery will start. But it will not be the same as before. This deep recession is forcing us to take stock of an economy that, while (thankfully) still state of the art in some strategic sectors, is full of holes. Put it differently, the crisis and near death of the once mighty automobile sector was certainly not driven by Wall Street or by sub prime mortgages. But it may not be an accident that Detroit’s extraordinary level of management myopia and incompetence (known to the insiders for decades) was fully exposed to all only when the Potemkin Village of a reasonably prosperous America around it collapsed. It is certainly true that the crash of the US economy made things much worse for General Motors and the others. But what is truly extraordinary is that when Detroit’s leaders first came to Washington to ask for money in the Fall of 2008 they told law-makers with a straight face that theirs was a short term cash flow problem; that they had a good plan; that it was all under control. It is really worrisome that even then nobody saw (or wanted to publicly say) how badly run these companies were. It took a general worsening of the recession in 2009 to fully expose the damage and let the world finally see the appallingly bad conditions of these companies. Before their collapse, the line was that they had been unfortunately caught in the general downdraft caused by the recession, just like everybody else. Sure, all auto manufacturers around the world are in trouble; but not all of them got into this tempest already sinking under the weight of hundreds of billions of dollars of debt that could not be wished away. Toyota may not do so well; but it did not go belly up.
Leaving aside the unraveling of the whole financial system and the likelihood that its total collapse might have caused national ruin, the almost banal truth is that this is an economic crisis caused by stupendously overextended leveraging and consumer spending, sustained by lines of credit that in ordinary circumstances should not have been made available. Until the consumer believed that he could keep going, the cash registers of America were happily ringing. The wheels were turning and everybody was making money –or so it seemed. But it was a gigantic delusion, as the money spent at an extraordinary rate was mostly borrowed, with inflated home equity as the only collateral.
Now, what we have to face is that this was not about occasional excess here and there by some irresponsible people. This was a national disease that came to a halt only because credit stopped flowing. And we know the cascading effects. Mortgages not paid. Properties foreclosed. Home prices collapsing. And the simple fact that people with no cash and no credit cannot buy. Thus, all of a sudden, no more spending and the ensuing recession that will be much more painful because it will take much longer (even for the reasonably lucky ones) to get out of an extraordinary level of debt.
Sure, not all Americans are deeply in debt. Some are responsible and did not accept all the credit card offers or the home equity lines of credit cascading in their mail boxes. Some homes are paid for and thus not in danger of foreclosure. Growing unemployment notwithstanding, most people still have a job. But caution: all property values are affected by a declining market. Besides, many employed people are forced to work less and thus make less. Many are part time employees under duress. They used to have full time jobs and are now forced to be part time and this means less money in their pockets. And even the employed people have suffered portfolio losses given the collapse of the stock market. So, even the comparatively better off are not spending as they used to. Do not count on them to restart the consumer led binge.
And the impact on the economy of the millions of the worse off Americans deeply in debt will be huge for years to come. To the extent that most of them have understood the lesson and so are now willing to start paying off their debts and with difficulty begin reconstituting some savings, we can kiss good bye to a recovery driven by old fashioned, vigorous American consumer spending.
Drastic consumer spending cuts are bound to have profound consequences. Most Americans used to be employed in the services sector. And a big chunk of it was consumption or about consumption. It was retail, restaurants, entertainment, hotels, travel, package tours and all that went with it: the real estate, the suppliers and vendors, the brochure designers, the IT service providers and of course the armies of sales persons, accountants, managers, clerks, bus boys, janitors and landscape workers that supported it. It is very difficult to think that these millions of jobs lost because of deep cuts in consumer spending will come back, because poorer Americans will not be able to spend that much in the future.
And we have not seen the end of the ripple effects of this disaster. As everybody is poorer, state and local governments have much less tax revenue, thus no cash. Hence staff cuts, while state budgets deficits go higher. Only three states, that is right, just three, are projecting budget surpluses for both 2009 and 2010: Montana, North Dakota and Wyoming. Good for them, of course. But small consolation for the rest of America, where most people live. Even if we leave aside the rather extraordinary case of California and its 26 billion deficit and the consequent insolvency that forced the state government to issue IOUs instead of real money, the fiscal crisis affecting all states simply adds to the mix of factors dragging down the economy. Leaving aside the real hardships caused by cuts in services, (cuts in education spending right at the time in which we need it most), we have the hundreds of thousands of state employees who suffer salary cuts or lose their jobs thus contributing to the overall decline of consumer spending.
Given all this, if our hope is in the “green shoots”, in the rebound that is supposedly built in every business cycle of growth-recession-growth, we may have to wait a very, very long time. The lucky ones, that is those who still have equity in their homes and a job have to cut back because their 401ks have shrunk, while they need to pay off their huge credit card debt and their home equity lines. They are still going to be consumers, of course. But they will consume much less and in cheaper places. Hence the buoyant business for Wal-Mart and McDonalds. Down market is the place to go for large segments of the middle class who mistakenly believed for quite a long while that they had become rich, even though their incomes did not say so.
But this is the good news. That is this is about the segment of population that has enough resources left to climb out of the hole and overtime regain some solvency. And what about all the others? The millions of often not especially skilled unemployed who have lost their home and have a pile of debt? Can they come back? Some undoubtedly will. Never underestimate American resilience and ingenuity.
But millions more will not. They have been swept away by the end of bubble financed spending and they have no place to go to. And we know that retraining and personal professional reinvention is very difficult even in good times, while growing sectors like health care have a limited absorption capacity. Not all sale clerks can be recycled as nurse assistants.
This being the picture, if we agree that a cyclical recovery can repair only a part of the damage, with the net impact of millions of Americans impoverished and virtually out of the game, then we need something more drastic. America needs huge investments in productive sectors and basic retooling. But, for the moment, we do not see an agreement on a broad, truly understood and nationally embraced growth strategy, founded on education and innovation.
President Barak Obama seemed to have arrived in Washington swinging. He had the dream team of the brightest minds who had the big ideas and the new, bold, long term strategies. But, as we all know, governing in a still fractured and ideologically divided democracy is not easy. And things turned out to be worse than anticipated. The recession is worse than they thought. Unemployment is higher then they forecast. The national debt is growing more than they anticipated. The financial crisis absorbed a lot of energy, and then there was the GM and Chrysler bankruptcy, and so on. But now –whatever the reasons behind the choice of priorities–the focus is on social initiatives, such as health care reform. Whatever its merit, and it does have merit, health care reform inevitably will end up costing more than planned, with fewer savings than now forecast. And spending greater then anticipated, as in most large scale social services reforms aimed at expanding reach, is practically inevitable, even with the best of intentions.
Health care reform is laudable as it is about improving social conditions, (and consequently the economic conditions of many); but in the short and medium term, even if we (optimistically) assume that there will be savings for the national medical bills down the line, it will do almost nothing to improve American competitiveness.
In the meantime, the other legs of the stool: education reform, and a vibrant, aggressive new high tech and energy policy that may be able to spur both a reconstitution of human capital and US competitiveness do not get sufficient support. There is support; but not the dramatic, “national effort” type of support that would convey the unmistakable decision of a nation bent on rebuilding a competitive economy.
It is true that, all things being equal, we want a private sector-led renaissance. So, it is up to the private sector to do its job. But it is also true that the private sector has taken heavy knocks and suffers shortness of breath right now. Besides, even in good times, the private sector operates within a system of public policy incentives created by government. The Obama administration came along with Big Plans for the economy. But, beyond putting fires out, and this was a necessary precondition, we have not seen the Big Plans in action as yet.
And let us not forget that, even before Obama, the government, contrary to popular belief, always played a significant role in shaping our economic future. Indeed, here in America, the “Sanctuary of Private Enterprise”, government, through its enormous procurement, regulation, taxation policies and so on had a huge impact on the economy. Washington can decide to support more or less basic science and R&D in diverse fields with impressive consequences. Let us not forget that the NASA led July 1969 moon landing that we are rightfully celebrating now, on its forty year anniversary, was a gigantic “public works project” that employed at some point hundreds of thousands of people, supported by hundreds of billions of (today’s) tax payers dollars. The US government led this effort.
Going forward, the network of the Department of Energy National Laboratories, (Los Alamos, Sandia, Lawrence Livermore, Oak Ridge and others), can have more or fewer resources to spur innovation and cross pollinate with universities and corporations. The same applies to NIH, (National Institutes of Health), NIST, (National Institute of Standards and Technology), run by the Department of Commerce, and the National Science Foundation. Likewise, if the Pentagon decides to support jet fuel made from renewable resources, this policy change, by itself, would create the biggest single customer for some new technologies. Ditto for decisions by federal agencies (and state governments, if they followed Washington’s lead) to switch their vehicles fleets to natural gas or to retrofit all their buildings in order to make them energy efficient. True, some of this is being discussed, planned and even done, as we speak.
But only some of it. Piecemeal. We do not have large, clearly articulated, recognizable national goals, themselves part of some sort of a “National Competitiveness Strategy”, by necessity led by Washington, that we can all sign on to and that may be able to energize the major retooling that America has to undergo in order to be competitive, prosperous and –most of all— in order to be reaffirmed once again as the choice destination of innovators and entrepreneurs from all over the world who see America as the fertile ground for their ideas and their industry.
President Barak Obama has a tough job; tougher than most of his predecessors. But he was elected because he was the candidate that wanted to discard the old ways; the candidate who truly understood the urgency of radically new approaches. Only a few months into his job, President Obama still enjoys a huge reservoir of favorable public sentiment. It is time for him to spell out the vision that will help America go back and do what it does best: create opportunity for most and a superior environment for innovators and entrepreneurs. Otherwise, the recovery produced by the “green shoots” will be feeble and America as a whole will be diminished.