Creative Class

Felix Salmon points to Julia Ioffe’s TNR story on Nouriel Roubini, zeroing in on the long journey back to recovery.

Given the right changes, perhaps the United States can develop with the productive long view in mind, and maybe its human talent can be spread more equitably. “When you have more financial engineers than computer engineers, you know that the brightest minds have gone into something where, probably, the margin was excessive,” he had told me earlier. “Maybe some of these bright people are going to do something entrepreneurial, more creative, or go into government. I think that’s actually a good change. The transition is painful, but the result may be good.”

Salmon’s comment is spot on.

[O]ver the long term, I’m optimistic that the redeployment of US human resources away from finance and into the real economy is bound to be a good thing. But in the medium term, the process of “scaling back and turning inwards” around the globe is going to be extremely painful – and is far from over. Or, to put it a more familiar way, things are going to get worse before they get worse. Only very slowly and very painfully might they start to get better — and it’s not going to happen any time soon.

The thing that strikes me most is how very long it takes for economies to reset themselves during crises. Recovery from both the Long Depression of the 1870s and the Great Depression of the 1930s took the better part of two or three decades. Both required not just a new wave of technological innovation, the creative destruction of various industries, and new modes of government economic intervention, but were premised upon a whole new “spatial fix” – the rise of the “modern” industrial city after the Long Depression and suburbia’s rise after the Great Depression – to set in motion broad new patterns of consumer spending and demand which could power longer-run growth. My own father was just eight in 1929, my mother three, when the stock market crashed. They left Newark for a close-in working class New Jersey suburb in 1960 – three full decades after the onset of the crash.

Governments and central banks certainly have better monetary and fiscal policy tools at their disposal now and are more adept at managing economic downturns. Still, I fear it will be a much longer road to full recovery and a new normal than most people expect.

Nouriel Roubini straightens the record:

I work very very hard and I also enjoy life. My home is also partially a cultural salon where I host book parties, debate and election night events, independent film screenings, live music nights, theater/performance acts, fashion shows, dinner parties and even plain old fashioned dance parties.

I have this professional Dr. Doom nickname but I am quite a cheerful person with a few close friends and eclectic group of friends who, like most New Yorkers, are members of the creative class. The innovations of lawyers and bankers can be as creative as those of visual or performing artists, at times too creative you may say given the current financial meltdown. So I live life to its fullest. To paraphrase Seinfeld; anything wrong with that?

Larry Summers (via Calculated Risk) says a key objective of economic policy must be to:

…address the problem which has, frankly, gone unattended for much too long of declining house prices.

Calling planet earth… Housing prices – according to even a cursory reading of say the Case-Schiller Index – have a long, long way to come down, and until then the economy simply cannot be reset for growth.

We won’t recover until we move beyond the fictitious asset bubble economy, as Nouriel Roubini outlines:

For the last 30 years the US has been growing fast only during periods of asset bubbles that eventually burst with significant economic and financial costs. The 1980s real estate bubble went bust in the late part of that decade leading to a severe banking crisis for the Savings and Loan banks, a credit crunch and a severe recession in 1990-91; next the 1990s tech/internet bubble went bust in 2000 leading to the 2001 recession; massive monetary and credit easing – as well as lax supervision/regulation of mortgages and credit – led to another housing and credit bubble that has now gone bust creating a severe financial crisis and recession.

The current monetary easing may lead to another bubble but we are somehow running out of bubbles to create … We need to create an economic system that is less prone to bubbles and more likely to lead to sustainable stable growth.

For the last few years the US has overinvested in the most unproductive form of capital – residential housing stock that increase utility but not labor productivity – and not enough into physical capital that increases the productivity of labor.

Also we overinvested in the financial sector, a corollary of the housing boom … And having a country where there are more financial engineers than computer engineers or mechanical engineers means a misallocation of human capital as well.

So we need to create a growth model relying less on housing/real estate, less on finance and less on having the brightest minds of the country going into financial services rather than into the production and innovation of new and improved goods and services.

Amen.

Remember your economics courses in college? Dull, dry, and you were always trying to figure out what the theory and mathematics had to do with reality beyond what you learned from the world that, in most cases, supply and price were inversely related? So much of the rest of the courses seemed to be simply unrelated to the real world.

It amazes me that these economists are always quoted in the newspaper talking about the economy, when many of them know so little about the economy. Outside a very few of them such as Robert Schiller, Nouriel Roubini, and a very few others had the slightest idea in 2006 or 2007 that we were on the verge of an economic catastrophe. For a wonderful critique of economics see Yves.

This brings me to a larger question: can a discipline that cannot predict be a science? If a science suffers a massive failure, would you not think that there would be significant questioning of the practice and theory? As Yves asked, would you trust your health to a doctor whose record of failure to diagnose serious diseases was nearly 100 percent wrong and with such a record saw no reason to change? Why would a “change” agent/leader fill all the important positions with uncritical and probably unaware acolytes of the failed paradigm?

To put it in the language of this blog, economists may be creative, but it is in the production of dangerous fiction (for those that have lost significant sums in their retirement accounts, “pornography” might be a better term).

Can economics be salvaged and what will it take? What say you?

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.

Dr. Doom, Nouriel Roubini says the worst is not over: A real financial panic is coming, and governments will be forced to shut down the financial markets for a week or more as the economic crisis deepens.

“We’ve reached a situation of sheer panic … There will be massive dumping of assets … hundreds of hedge funds are going to go bust … Systemic risk has become bigger and bigger … don’t be surprised if policy makers need to close down markets for a week or two in coming days.”

Uh-oh. He’s been a lot more right than wrong.

That is what Nouriel Roubini is calling it. He predicts widening financial contagion across the banking and financial systems, and a prolonged U-shaped recession of the US and global economies. Don’t count on deposit insurance, he says, the FDIC will go broke. Interestingly, he sees this as a signal of the demise of three other key pillars of post-war American life – the end of America’s global empire, the unravelling of the Bretton Woods global monetary system, and the decline of the suburban way of life. Martin Kenney calls for a global New Deal. I agree. It will also take a new global spatial fix which can overcome the limits of spiky globalization and provide a workable alternative to the McMansions and SUVs suburban model- not just new models for housing but for stimulating consumption in ways that bolster the creative economy.