US: Waiting for the Green Economy

WASHINGTON – The old US economy will not come back; while the seeds of the much advertised new economy, based on alternative energy and green technologies, so far have been planted slowly and sparingly. Verdict: tough times for millions of Americans are here to stay. More broadly, a reduced US economy has consequences, none of them good. Our place as world leader in innovation is in question; while our ability to continue to be a Superpower is also in doubt. This  special standing was buttressed by a level of economic strength that gave us the prerequisites to lead on international trade and finance, while it provided the cash necessary to finance an enormous and unequalled national security apparatus. No money: good bye to Superpower status.

A diminished US economy

The truth is that, unless something dramatic happens, our diminished economy will not grow enough to counter the negative drag of millions of involuntarily idled people. With a smaller productive base, for years to come we shall have to carry the dead weight of millions of unemployed and otherwise unemployable people. At the same time, our damaged public finances, stressed to the limit by our attempt to avert disaster, while spending money to lessen the pain of so many, will slow us down even further; at the same time undermining the credibility of our political leadership as competent fiscal stewards. While we really need to reverse course on public spending, doing so would entail throwing overboard millions who survive almost entirely on public largesse. Not a pretty picture.

Some good news

As we emerge from the wreckage of the real estate/financial industry/consumer excesses, (plus distracted regulators), bubble economy the picture is somewhat comforting in some areas; but mostly dispiriting. It is comforting to a degree, because we see that the economic enterprises that had some staying power are re-emerging from their near death experience. But they are doing well only after having adopted a serious diet that includes drastic personnel cuts, thus doing more with far fewer people; and after having invested in varying degrees in cost saving new IT and automation systems that allow them to be more efficient and do more with fewer people on payroll. The good news is that labor productivity is much higher, so you get more value for each hour worked by any of the floor workers and other employees.

Profits are good

Higher productivity is bound to have a positive reflection on net profits. Being more profitable, companies can stay afloat, repair their balance sheets and may be expand. From the standpoint of management, people actually employed and investors this is good. Resilient companies are competitive and have excellent opportunities to keep or expand their place in the global economy. But all this happened by shrinking the overall base of the US economy, and this includes the pool of active people. Hence massive unemployment.

Mostly bad news

All the others players who were functioning on very thin margins during the consumer and credit boom have gone under and are unlikely to get back, unless you are lucky enough to be General Motors, nicely fitting in the “too big to fail” category, and thus, epic mismanagement notwithstanding, deserving unprecedented government help. Not many of these.

In a very simple, perhaps simplistic way, this is the picture of the USA today. We have essentially created a two tier country: and the two segments are unlikely to merge any time soon.

Tier one: tough survivors

In tier one, we have a streamlined, smaller but leaner and more efficient productive base, composed of all those who exploited every possible trick, technology or devise that allows them to continue production, using less labor and/or more sophisticated, more numerically literate labor that can perform more complex tasks. It is true that much of this productivity spike is due to old fashioned overtime. Nothing especially fancy about it; and not a workable long term solution to meet demand needs. But it is also true that there has been and that progressively there will be more and more adoption of cost saving new technologies that will allow companies to perform better with fewer workers. Cisco, a leading provider of high tech solutions for business, is doing well.

Tier two: all the others

Tier two includes all those who have not managed to streamline. They are essentially either out of the game because they were part of (or fed on) the bubble economy, or are at the very margin because they did not or could not invest in innovation and productivity enhancement tools. And the destruction of so many businesses nationwide means economic devastation for millions of people who have lost their jobs because of this gigantic retrenchment and painful reorganization of the economy.

The unemployed: casualties of the massive retrenchment

Because of all this, try as they may, millions of unemployed will not find jobs. At the very least, they will not find their old jobs. In some cases, because their former employers have disappeared. In other cases, because the employers have successfully streamlined operations and thus can get by with fewer workers. And finding new jobs in different sectors is hard, because these idled workers would need to acquire and master an entirely new set of sophisticated skills in order to meet the demand of the sectors that are actually hiring.

Retraining: good in principle, tough to do it well

Retraining, in principle, is a nice, commendable concept. In practice it is hard to do and it is even harder to match new trainees with employers who actually need those skills. Besides, quite frankly, many middle aged workers are just not up to it. They would like to find employment in the sectors they know. Not finding any, they become discouraged and they withdraw from the labor market.

Streamlining of the productive base: a good thing

From an abstract economic stand point this gigantic reorganization is fine. We want to have efficient producers who do rely on higher and higher productivity and who invest in IT solutions in order to stay ahead and do more with fewer workers. These efficient, productive corporations produce real wealth and sustain the whole economic fabric. We need healthy businesses as foundation of a productive economy.

Social devastation and hopelessness

But, in practice, this retooling and retrenching revolution entailed the shrinkage of the economic base. The dead wood was cut off. There are healthy survivors; but there are far fewer jobs then there were before the meltdown. The base of the vibrant, productive economy has become smaller. And this means massive social and economic dislocation for millions. This outcome feeds, among other things, the prolonged real estate crisis; still, (and who knows for how long more), a veritable wet blanket on the whole economy.

We know the story. People with no jobs do not pay their mortgages. They lose their homes. This adds to the already massive inventory of foreclosed properties, while depressing overall prices, thus reducing the equity of all the other owners, thus feeding a widespread sense of anxiety which discourages consumption etc. etc. Obviously, unemployed people do not have discretionary money. They cannot buy things, thus slowing down a machinery until recently predicated on buoyant consumer spending.

Will more lending help?

This is the altogether uninspiring picture. True, enough, the ripple effects of the financial crisis include the virtual freezing of lending by local banks to small businesses. At least some of those who are denied credit, or who need to go through more and more hoops in order to get some, belong to the “good business” category. These would be companies with viable products. With new credit they could invest, expand and absorb at least some of the massive unemployment. The Government is trying to fix this, by providing incentives, guarantees and what not to small banks so that they will reopen the credit spigots, thus oxygenating the whole system.

No miracles in sight

But, more broadly, even with more normal business credit standards and more lending to otherwise reliable customers, it is unlikely that we could quickly go back to a more palatable 4 or 5% unemployment rate. Very unlikely. And this is because the aftermath of the crisis revealed that large swaths of the US economy were either marginally productive, or catering entirely to an unsustainable level of consumer spending. We know that that level of consumer spending will not come back, as people are trying to rebuild their near zero savings; so employment in those sectors will never go back to pre-recession levels. As for the sturdy survivors, the steady diet of efficiency related investments, strategic adoption of IT and automation means that, even with increased business volumes, they will not start hiring on a massive scale any time soon.

Unemployment: here to stay

Which leaves us with the unpleasant reality that high level unemployment is here to stay. Millions of Americans will not get their old jobs back; nor are they well positioned to get any kind of new, decent income employment. Sure enough, through time tested gimmicks, such as expanding public sector jobs, it is possible to absorb at least some unemployment. But, long term, these remedial actions translate into a heavier tax burden and/or increased public sector deficits, (witness California or New York). More public debt will be the net outcome of policies aimed at supporting otherwise unnecessary workers and not much else.

New sectors coming to the rescue?

The only hope, if dim at this point, is in the substantial development of new economic sectors that may require significant numbers of workers. Assuming proper training, growing new industries may provide at least a partial solution to the massive unemployment problem. Much has been said about the new green economy, renewable energy and the like. But we do not see a lot of it; because the incentives to invest in it are not as significant as they should be.

Green economy? Not yet

A recent The Wall Street Journal report indicated that even in communities where one would assume a high degree of philosophical conviction and widespread eagerness about “embracing” and ultimately buying energy savings technologies, progress is minimal or unremarkable. People do not spend money to make their homes or businesses more energy efficient. They do not weatherize their dwellings. They do not buy more energy efficient appliances. They do not even buy fluorescent bulbs. And why not? Who knows exactly why. But a simple explanation is that the cost of conventional energy derived from fossil fuels is still too low. Green sentiments aside, people do react only to very substantial price increases. Otherwise, they tend to do nothing or postpone decisions. And so, the vaunted new market for new green this and that, while potentially very significant, is not quite there yet.

We should tax carbon

So, for the new green economy to materialize, either we wait for higher prices, driven by the increasing global competition for finite carbon based fuels; or we engineer demand for alternative products by taxing carbon. This way the Government can speed up the process of adoption of new technologies. This would of course be extremely controversial, and it would have to be timed in an exquisitely competent manner. The critique against taxing carbon, (whatever the modality for achieving this goal), is that raising the price of energy would raise the cost of doing business and thus it would depress all economic activities. And this may be true if this change over were done abruptly. Not a welcome development, in times of crisis.

Difficult balance: how to tax carbon while introducing cost-effective alternatives

However, if higher carbon prices would go hand in hand with the introduction of cost effective alternatives, this shift would not be so disruptive. We could indeed create entirely new industries, while freeing ourselves from the straightjacket of dangerous and increasing dependence on imported carbon based products. The benefits deriving from this shift are manifold: new employment creation, improved balance of payment; improved national security; and the development of cost effective, environmentally friendly technologies that the whole world, not just the US, badly needs.

Is this ever going to happen? Who knows. And, even more importantly, even assuming that the intent is there, who knows at what speed we shall be able to progress. In the meantime, sadly for them and sadly for the larger society, millions of redundant workers will stay idle.

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