Rearview Mirror Economics

I had a chance to learn about the nature of macroeconomics last semester. My professor explained on the first day of class, economics is like driving an 18-wheeler in the deep fog with the windshield blackened, without a speedometer, or a map. On top of that, the only way you can figure where you’re going is by the rearview mirror. Out of that, very smart people known as economists seperate themselves from the rest of us in asking, “where are we going?” Our best answer as a nation is, “I don’t know.” Whereas the likes of Bernake or Greenspan can at least provide an approximation or a sense of where we are heading.

So if you ever find the news, “Recession since late 2007,” a bit aggravating, I empathize. It has to do with that rear-view mirror analysis. The uncertainty of the future is quite daunting. Greenspan famously expressed that his been in the business forecasting for 50 years and its hitting average has not gotten better. It’s no shocker economics is still quite the social science.

When people angrily express that the government does not know what they are doing, they are kind of right. Nobody does. But top economists at least have some tools to figure it out. The whole Hack Paulson freely giving bailouts to banks without strings attached, then in turn, the banks wrongfully spending on jets and retreats, pisses off an already angry mob. On the other hand, rescuing the banks was under the pretense of doing something or the system would have imploded. That would mean deep shit.

Paulson’s actions as politically motivated towards self-interest is something I don’t buy.  If he chose to save banks based on kickbacks, then wouldn’t we be in far deeper shit? Bailing out the banks, To Paulsons and Bernake’s judgment, may be wrong, were in the interest of the nation.

Our capitalistic system with all its flaws is the best of all other systems, after exhausting all others in our history. Its a money making system. It brings material wealth to society, and provides regular people to escape a Hobbesian destiny.  I find it funny when people hang on to the tired ideas of communism. After the failure of the U.S.S.R., reforms of China, the flip of Latin America, and liberation of the Raj in India, central-command economies bottom line is not distribution of wealth, but of poverty. I am hard-pressed to buy into their arguments because when asked if they grew up poor, typically the answer is no. So the anger is coming from somewhere else.

There is an assumption that the market does not serve the public interest. That it merely serves the interest of shareholders and executives. However, consider, the market is to serve the consumer, ultimately, in order to serve the shareholders and executives desire for profits. As a consequence, the market serves the public at large.

Of course capitalism needs taming and direction. It’s a force that has no bounds in understanding itself. Instead, people and governments place boundaries to contain our darker impulses and encourage our better ones. It is like directing the flow of water. Water as the economic activity and the pipes as regulations, direct the flow. Tightening the piping means shutting off the water; loosening it too much, you get Recession 2008-present.

I flipped schools of thought on economics two years and I continue to refined it. My school of thought is whatever works. I am interested in solutions getting out of this mess, not ideologies.

Connect the Dots.

There is a certain amount of admiration for the Europeans and the EU for that matter. They have a social safety net that protects their people from poverty, ignorance, illness, and injury. The welfare state, established shortly after War World II, was meant to keep dictatorships at bay by keeping their population educated, healthy, working, and taken care of in their young/late years. It’s what I want. But it has trade offs.

In recent decades, the EU has suffered from relatively high unemployment. It varies from nation to nation, but around 7% is a conservative estimate. According to Alan Greenspan’s Age of Turbulence, there is a relationship between their social saftey net and unemployment. Let’s connect the dots.

Mr Greenspan asserts the flexibility or rigidness of an economy is in relation to governmental regulation and intervention. Flexibility in a economy is advantageous as it gives way to creative destruction of inefficient industries and reallocates resources to more efficient businesses. This in turn, helps an economy to move and adapt to harsher or encouraging market environments. For example, the dot.com burst of the late 90’s gave way to a more robust Web 2.0. Mozilla Firefox and iTunes replaced AOL and Napster’s place in market dominance.

The destruction of World War II demanded all of the labor force of each nation to be placed into work in order to reconstruct Europe. Nations, ” worked through the backlog of reconstruction demand that buoyed its economy. Demand was easing of and economic growth slowed.” Inefficient enterprises pushed through and the creative destruction process kept at bay. Tough economic changes could not be implemented for fear of the pain that comes with removing inefficiencies and redeploying of resources.

The nations of Europe developed stronger unions during it’s reconstruction years. In partnership with the government, the unions sought to protect their jobs. As a result it became very costly to remove employees, and if a downsizing was in the air, strong backlash from the unions would prevent further actions. For example, recently France had to deal with their transportation sector. The unions followed through with their strike and President Nicolas Sarkozy bent to pressure. Back to square one.

So if it’s costly to remove employees, than why the high unemployment?

Economic and job growth. Old Industries that are obsolete and inefficient absorb resources and lessen productivity of a nation’s GDP. The pie grows slower. But demand for jobs don’t; it’s in step with population growth. So if old jobs can’t go through the creative destruction process due to costly obligations of the social safety net visa vie taxes or regulations, new jobs can’t develop out of the ashes of inefficiency and obsolesce. Loosely saying, AOL and Napster would never gave way to Firefox and iTunes. (If Napster kept it’s place in the music market, why purchase songs from iTunes? I understand Napster’s fall was legal in nature, but it’s fall provided a power vacuum to fill.)

The bureaucracies are like slow 800 lb gorillas that are asked to fluidly dance and improvize with the markets. Demand is simply not met efficiently. Whereas free-market enterprises are like great comedy acts, where improv is part of the deal.

Free Market Capitalism is awesome in creating a bigger pie. Wheres Socialism and Command Economies aim to redistribute the wealth. Granted in their good intentions, but if you have the same pie from 10 years ago with more people want to piece, eventually somebody is not going get a piece. We call that not having a J.O.B.