Had a great chat with BusinessWeek’s Mike Mandel this morning on the crisis, its geography, and what to do about it. Then I came across this post by Nouriel Roubini (via Naked Capitalism).
With consumption being over 71% of GDP a sharp and persistent contraction of consumption all the way through at least Q4 of 2009 implies a more severe recession than otherwise… To bring back the household savings rate to the level of a decade ago (about 6% of GDP) consumption will have to fall – relative to current GDP levels – by almost a trillion dollar.
He notes that the crisis will be longer and deeper than virtually anyone thinks. But why?
The reason is becoming clearer and clearer every day. The crisis is at bottom the crisis of Fordism. It emerged around housing – the single family home, the pivot point of Fordist consumption. It’s not that the technology and idea-driven creative economy is not productive, it’s that our complex financial system in effect over-allocated the fruits of that productivity into the old cornerstone of the Fordist economy. Instead of creating new demand for technology or better health care or new energy or flowing into savings, that productivity translated into increased demand for housing.
So the current bailouts are fundamentally flawed. Propping up the housing-auto nexus of Fordism will only forestall the inevitable. Bailing out homeowners will only essentially handcuff them to their homes, leaving them paying out huge shares of income on housing and housing-related goods and making it impossible to achieve the mobility so many will need to locate economic opportunity. On a social level, it will keep pouring good money after bad, leaving us wrapped up in the old Fordist economy, unable to generate the demand for or the savings needed to generate the new system architecture and infrastructure required to reset the economy on a new and hopefully more sustainable growth trajectory.
The only way out of the crisis is to simultaneously create demand for and investment in these new areas, in part by massively reducing the amount of consumer spending on the old house-auto nexus.
So any government investment should do the reverse of the current bailouts. Instead of propping up these older sectors artificially it should aggressively seek downward adjustment in their costs, perhaps by investing in efforts to increase the efficiency and management of housing and reduce the costs of cars, energy, and mobility. Fiscal stimulus should also focus on the growth sectors of the future. In my mind, this turns on five interrelated factors:
1) Revolutionize the housing delivery system – More rental less ownership; better construction and management, creation of new housing delivery and management systems which allow for flexibility required to shrink the journey to work and allow people to move more freely as their job, career, and lifestyle prospects change.
2) Transform transportation – Everything from more energy-efficient cars, market pricing of roads and highways, to mass transit, high speed rail, and increased reliance of bikes and walking (especially as the journey to work can be shrunk via more flexible housing tenure).
3) Alternative energy – Moving out of the carbon-based economy, shrinking energy costs, and creating new areas for investment.
4) Revolutionize the human capital system – Economists agree this is the key to long-run growth. Currently we waste more of it than virtually any other resource. We need to massively invest in human talent and creativity on a mass scale. This requires an individually oriented, creativity enhancing (as opposed to creativity-squelching). This means moving well beyond schools to flexible, tailored approaches to creative development, including a massive commitment to early childhood and fundamental from-the-ground-up remake of our educational system.
5) Any solution has to do three interrelated things – It must encourage new investment, the creation of new technologies and enterprise, and accelerate creative destruction. To do so, it must shrink the overall costs of the housing-auto nexus, freeing up capital and demand that can flow into new areas as well as increased savings. It must increase investment in and demand not just for technology but for human development, health (holistic and other), and for experiences more broadly.
Problem is: We’re doubly handicapped in getting from here to there. For one, we remain locked in Fordist mindset which sees the problem as how to reset the old housing-auto nexus. It is too early in the transformative process to perceive the full contours of the new, emergent system and to identify the core investments with real precision. Compounding this is the limits of extant theory. Economics in its current guise overvalues simple micro-models based on the efficient allocation of market systems. Of course some economists have junked this, most notably the new empiricists who believe the answer is to be found in improved models and better data. The real issue is that we lacked theoretical understanding of the dynamics of capitalist economic crises and transformation – modern-day, scientific frameworks and dynamic models based on the broad kinds of understanding advanced by say Schumpeter and Marx. This is not just an academic point; it is a terrible handicap in understanding and dealing with the current crisis and and evaluating alternative paths out of it.
The sooner we dump the talk of the bailout and get on with understanding and building the sustainable economy of the future, the better.