Are We Living Through an Economic Paradigm Shift?

 

Because of the economic crisis of the last two years, people and businesses are cutting back on their spending.  Our economy is based on consumer spending and I’m now talking to a lot of people who have sworn off spending like the used to when they lived heavily in debt.  On the news there are reports of companies sitting on large cash reserves.  Some economists had hoped the economy would have already turned around but consumer spending and jobs don’t reflect that.  In Detroit, the Big Three automakers are out of the red ink and into the black  by being leaner and meaner.  They are making more money selling fewer cars.

The economic booms of the past twenty-five years all coincided with an overheated economy of people spending beyond their means and investors going crazy over unwise investments.  Could we be moving into an era of caution?  In previous busts we turned the economy around fast by going back to spending freely, but we don’t seem to be doing that this time.

I notice a lot of things that might point to different trends.  Something like 80 million baby boomers are approaching retirement and they are finally realizing it’s time to save and not spend.  I know that’s how I feel.  But also, after a big economic crisis people fear insecurity and want to hang onto their dollars.  Remember how the Depression era people lived for the rest of their lives?  That generation was shocked by the easy spending of the Baby Boom generation.

The younger generations out there now live a lot more frugally than the Baby Boomers.  They often live with their parents longer, and they learn to adapt to lower paying jobs.  And they are heavily into credit card and school loan debt, so they don’t have the resources to spend freely.

The rising cost of living have made the retired generations living on fixed incomes already cautious about spending, and now that they lost a lot of their retirement capital they have to make every dollar go twice as far.

But there are other clues lying around too.  When the economic crisis hit, television, newspapers and magazines were flooded with advice on how to live with less and I think a lot of people took up this advice and now like living with less.  The most popular story at the New York Times at the moment is “But Will It Make You Happy?” about people who have downsized their life to find more happiness.  Psychologists are telling people owning things won’t make you happy, it’s what you do that does.  If this modern Thoreau like philosophy catches on it will put a huge dent into the economy.

Logic tells us if everyone lived by the best popular advice, saving money, spending wisely, eating well, this would be a tremendous shock to the economy.  To have 5% unemployment our economy has to run hot with overspending.

And look what the Internet has done to the economy.  Before the Internet there were many music stores in every city selling CDs, now they are practically gone.  People use to spend hundreds of dollars each month on their cable bills and now people are happy with Netflix.  People use to spend big bucks on software and now they want free open source programs.  Amazon is putting local bookstores out of business by underselling them, and now with Kindle, they are putting an even bigger hurt on them.  I pay Rhapsody $9.99 a month to listen to all the music I want, where I used to spend $100-200 a month on CDs.

My wife and I have always bought new cars, but we’re thinking about buying used next time because the cost of an average new car has gotten so high.

We try to spend when we can because we know it helps the economy, but we want to spend wisely, like house renovations, and we also try to buy new products that are energy saving.  The whole ecological movement is also making people spend less.

In the news pundits talk about a “New Normal” for the economy because things are not turning around quickly like economists expected.  It’s pretty obvious if we want the “Old Normal” we need to act like we did then and we’re not.  Maybe young people will, but I’m getting too close to retirement to spend without caution.  My new normal is to hang onto every buck I can, and when I spend a buck make it count.

The only solution for the government to counter this new normal is to spend like crazy to put people to work.  The New York Times is also running a story, “Defying Others, Germany Finds Economic Success.”  Germany took a different route out of the economic crisis and it appears to have paid off.  Beside spending wisely, they think they found a solution for unemployment.

Government officials here are confident they found the right approach, including a better solution to unemployment. They extended the “Kurzarbeit” or “short work” program to encourage companies to furlough workers or give them fewer hours instead of firing them, making up lost wages out of a fund filled in good times through payroll deductions and company contributions.

In my naive way, I’ve always wondered in bad economic times that instead of laying off ten percent of the population, why not just cut everyone’s pay by ten percent.  Then in boom times, pay people more.  It sounds like Germany is trying something like that and its working.

I’m not an economist, nor do I like watching all the talking heads on TV talk about the economy.  But like Bob Dylan said, you don’t need a weatherman to know which way the wind blows.  If we’re living in a new economic paradigm, then we might need to be patient.  Blaming the Democrats or the Republicans is pointless.  We need to break the old political and economic cycles.  The federal government should spend money on improving America.  That will create value worthy jobs. 

The improvements should be ones that the majority want.  What kind of infrastructure do we want?  We should reevaluate war spending.  Is there a cheaper way to fight terrorism?  Does illegal immigration help or hurt the economy?  I have no idea.  Does universal health care help or hurt the economy?  If we did away with Social Security and Medicare, millions would be put out of work, and most families would have to spend their savings taking care of their aging parents.  I think it’s pretty obvious that killing off these entitlement programs would devastate the economy and make everyone poorer.

We need to rethink common assumptions.  Is big government bad?   Would paying less taxes stimulate the economy?  I’m not so sure.  The federal government produces a lot of jobs, and those people who hold them spend a lot of money that create more jobs.  We know it’s impractical for everyone to work for the government.  We just need to know which jobs are best created from tax dollars and which jobs are best created from business dollars.

K-12 teachers, police, fire fighters and soldiers have traditionally come from tax dollars.  And it’s pretty obvious we have a lot more health care workers if they come from the tax dollar too.  Although it might be interesting to take a state, maybe Texas or Alaska, since they are so conservative, and do away with all civil servants and see what happens.  Would life be better if every road you drove was a toll road, and if you wanted teachers for your kids, you hired them yourself, and if you wanted protection from criminals you carried your own gun?

I’m just thinking out loud.  I’m predicting the economic recovery will take much longer than expected because new kinds of jobs need to be created.  I don’t think Republicans will bring about instant change in the new elections.  I’m guessing the economy will stay painful for a long time and that pain will shape a new economy.  Global warming started decades ago and it’s already shaping a new economy.  Over population started long ago too and the current illegal immigration patterns almost follow the laws of physics.  The same physical laws will explain the never ending melting pot of ethnic diversity.

The world’s population has doubled in my lifetime.  That’s bound to make a paradigm shift.  Too many conservatives want things the way they were when the population was half of what it is now.  That’s not possible.   We need to prepare for an economy with several billion more people, in an era of growing scarcity, and whacked out weather.  There’s no going backwards.  If we returned to the overheated economics of before we’ll never solve the global warming problem.  As it is, we’re like a bottle full of ants and mother nature is starting to shake that bottle vigorously.  It’s time to do everything we can to slow down and live cautiously.

JWH – 8/15/10

One Response

  1. A couple of things: Ordinary people aren’t spending now because they’re insecure. Unemployment is sky-high, so if you lose your job, you might well have trouble finding another. That makes people cautious.

    And the political situation encourages that, too. I’m cautious because we didn’t do enough stimulus spending to get the economy moving again. I’m worried about a double-dip recession and even deflation. But the right-wing is ranting about the deficit (ironically, because they were the ones who created it) and warning of INFLATION, and other dire consequences. Either way, people are scared and scared people hang on to their money.

    When you’re already in a recession, that’s a terrible thing. If businesses don’t have customers, they won’t hire. If they don’t hire, people don’t have jobs. If people don’t have jobs, or are worried about their jobs, they won’t become the customers businesses need. And all tax cuts will do in a case like this is give more money to people – mostly, those who are in the best shape of any – to save.

    The bubbles, though – “investors going crazy over unwise investments” – were caused by the anti-regulatory ideology of recent years, combined with huge tax cuts to the wealthy. Under supply-side or “trickle-down” economic theory, the wealthy were supposed to spend their largess on productive investments. Instead, they speculated in arcane financial instruments – and foreign stocks – and created bubbles in financial markets (and, indirectly, in real estate). And those tax cuts, which were SUPPOSED to pay for themselves, also gave us record-breaking deficits. (When Republicans are in control of Washington, though, deficits “don’t matter.”)

    I disagree that, as a general rule, 5% unemployment requires the economy to “run hot with overspending.” That’s not the case. We DO need the economy to run hotter right now, just because it’s so very cold. First priority should be to get out of this deep recession, and that requires spending (government spending, if private spending isn’t there). Once the economy is humming again, though, overspending is detrimental. All we need is for ordinary people to have jobs that are reasonably secure and pay reasonably well. Putting all of our assets into the hands of the super-wealthy does NOT work. If nothing else, we should have seen that by now!

    A paradigm shift? Unfortunately, I think America is doomed. At least, we’ve been heading down the wrong path for decades now, and we seem to be eager to continue making the same errors. America has lost its lead in education, and all we hear are tax cuts, tax cuts, tax cuts. Meanwhile, the developing world is investing heavily in education and infrastructure. We simply can’t compete with shoddy infrastructure and a poorly educated workforce. But all we care about are tax cuts, and about making sure that the very wealthiest of us get even more of our nation’s resources. Hey, if you want an education, you should have been smart enough to be born rich!

    We’ve just had the best evidence we could ever want that supply-side economics doesn’t work. So what are the Republicans proposing? Yup, supply-side economics. They are proposing the exact same policies that just drove our country into the ground. Heck, it’s been less than two years! Are we Americans really THAT stupid? Yes, apparently we are. Well, we can always become peasants, growing food for the wealthy people elsewhere in the world, praying nightly for the supernatural intervention that will never come.

    I hate to bring religion into it, but it’s all part of the whole ideology of wishful thinking. We don’t need to invest in education and infrastructure, we just have to BELIEVE. And what’s the point in preparing for the future when Jesus will return within the next 40 years, anyway (which, according to polls, a majority of Americans apparently believe). Meanwhile, if you just play the lottery often enough, you’re bound to win. Then you, too, can join the ranks of the super-wealthy. Yes, it’s the American dream, to win the lottery.

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