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

Is The Internet Bad For The Economy?

Since the earliest days of Amazon.com I have been buying shelf loads of books from this innovate Internet business every year.  Then I stopped going to record shops and bought my CDs from them too.  Later on I bought running shoes, electronic gadgets, printer ink, and anything else that was convenient.  I buy a lot more books because of Amazon.com’s heavily discounted prices, no state sales tax and free shipping on orders over $25.  Now that the economy has taken a fall, I’ve got to wonder if my buying habits helped in knocking it out?

None of my favorite bookstores have gone under, but they’re struggling.  All my old record stores are dead.  So is the place where I bought my running shoes.  And all the small computer shops I used to visit have disappeared.  My state is hurting from low revenue, mostly gotten from sales tax rather than an income tax.

I buy a lot of audio books.  Audio books used to be $25-150 on cassettes and CDs, but I get them for $9.54 each at Audible.com as a digital download.  I never would have bought many titles if I had to pay the old prices, but if retailers now sold them for $15-25 a book, and Audible.com didn’t exist, I would buy 3-4 titles a month.

I used to buy 2-4 CDs a week.  Now I buy none because I pay $120 a year for unlimited listening on Rhapsody.com.  I used to buy a lot of software, but most of the programs I use today are free.  My wife and I used to collect DVDs, but now we have Netflix.  We used to pay for photo prints to give to people, but now we email copies.

I’ve got to ask:  Is the Internet hurting our capitalistic system?  I love the Internet.  I would never want to give it up.  But survival in this world depends on economic activity.  And comfort and security depends on everyone having a job and the economy doing well.  A 2% rise in unemployment, which we’ve recently experienced, has brought fear and misery.  What will 10% do to our sense of well being?  Do you remember the early 1980s?  People are talking about this financial crisis being the worse since the Great Depression.  1932 had a peak of 25% unemployed.  I have no way of imagining that level of bad times, and I don’t think anyone under 95 can really remember what it was like either.  We really don’t want to go there, and need to consider doing almost anything not to.

We all need to be conscious of our economic impact.  Spending frugally, staying out of debt, making careful purchasing decisions, and all those lessons financial advisors taught us might not be the right thing to do right now.  Would spending a few dollars more for each book and paying the sales tax be a better choice for my local economy than ordering from Amazon?

This afternoon my wife and I wanted to watch a movie together, but there was nothing on at the theater we wanted to see.  So we thought we’d go by Target and buy Kung Fu Panda.  It was $19.99 plus almost $2 in tax.  I could get it from Amazon for $15.99, a savings of almost $6.  But we decided to wait a couple of days for when it comes in via Netflix.  The rental cost would be less than the tax, thus saving over $20.

We didn’t buy Kung Fu Panda.  We just didn’t feel like spending $22 for something so trivial in these economic times.  If Kung Fu Panda would have been on sale for $12.99 we would have come home with a new DVD.  I wanted to help the economy, and considered a 4 DVD set of Dexter Season One for $17.99 plus tax or a 6 DVD set of Northern Exposure Season 6 for $14.99, both of which seemed like excellent buys, but I’ve been spoiled by Netflix.  Why buy something to own when I only expect to watch those shows one time?

See, the Internet has turned me into a bad consumer.  It’s saved me a lot of money, plus it’s more efficient because I don’t have to maintain a physical copy of something that would clutter up my house.  But I’ve deprived a local business of income, took jobs away from the local economy, and reduced the tax revenue of Tennessee.  My gain is a loss for my community.

Either we have to design an economic system with the efficiency of the Internet in mind, or we need to go back to our old ways.  I’m reminded of an old science fiction story.  I can’t remember the title, but it was about a future where the poor had to consume on schedule, while the rich were free to consume as needed.  An example, the poor had to change their shirts several times a day to keep production up in shirt factories. 

Do we really want an economy where people need to buy DVDs rather than rent so more people will have jobs?  Or buy a new gas-guzzling SUV every three years.  I’m sure you get my drift.

Well, the answer might be yes.  If we want to keep the old economy going.  And we might until they invent a new economy.  This is all very hard.  What if you could buy a car that would last 300,000 miles, and used little or no gas, being mainly powered by solar panels on your garage’s roof.  What does that do to GM or Exxon?  If environmental technology, ET, becomes just as efficient as information technology, IT, what does that do to the economy?

What if I took the money I saved by using the Internet and spent it on renovating my house with local labor, buying from local suppliers, but with the goal of making my home more energy efficient?  Will that help the new economy, or just delay the death of the old economy?  I already bought a new SEER 16 HVAC that’s saving me hundreds of dollars a month on energy.  That’s $9300 that went into the local economy, but now my monthly nut to the utility company is smaller.  I could start spending money on insulation, better windows, better appliances, and all of that will add to the economy.

Eventually, I’ll have a very energy efficient house, and I’ll start putting much less into the economic system.  It’s like switching from buying DVDs to renting them.  At some point being efficient leads to less economic activity.

Yes, I think the Internet is bad for my old local economy, and bad for our old national economy.  What’s needed is a new economy.  It’s called a steady-state economy, one that’s not based on growth.  Is the financial crisis that has come down on us going to be the metamorphosis that we must endure before becoming butterflies in a new economic world?  Will Barack Obama return to old tricks to solve our new problems?  Or can he be Copernicus seeing the Ptolemaic economic solar system with new vision?

We can always go back to a wood-chopping, horse and buggy world.  We could turn off the Internet.  This financial crisis may force many to give up cell phones, Internet and cable TV.  Without the Internet, most people will have little need of a personal computer.  Going backwards is possible and may happen.  We may have to prop up the old economy, but is that what we want?

It’s very important that we all pay attention.  In the next few years, a lot of decisions are going to be made.  Where are you going to throw your support?  Every dollar spent is a vote.

JWH – 11/15/8

The Economics of Inefficiency

During bad economic times people seek ways to get more for their money – in other words they try to become efficient spenders.  The trouble with that thinking, it’s bad for the economy.  What we want is a thriving economy where there’s a chicken in every pot and the future is rosy.  Woefully, a thriving economy is highly inefficient.

Take saving money.  All money advisors advise people get out of debt, save a portion of their salary and only buy what they’ve saved up for – good Puritan ideals.  If everyone followed this advice we’d fall into a world-wide depression.  The economic success of all depends on everyone spending as much money as they can.  If we had a world where the only credit card spending was paid off at the end of the month, people wouldn’t buy nine-tenths of the crap that they do.  That’s a lot of people out of jobs.  And when those folks lose their jobs, even more bad things happen, and a recession becomes a growing snowball rolling down hill.

There’s always a silver economic lining, even to bad things.  If everyone was honest we wouldn’t need jails, police, lawyers, judges, counselors, bail bondsmen, mystery writers, cop show producers, and so on, as I’m sure you get the idea.  I hate the idea of crime.  Crime is the true terrorism in America.  But ending crime would be like one of those stories about a person finding a Genie in a bottle and getting a wish that turns out disturbingly screwed up.  If someone did get to make that wish and tomorrow all illegal activity stopped we’d have a whole lot of honest people out of work, and a lot of criminals previously not working, would be looking for jobs too.  Could the world’s economies handle the impact of so much ethical behavior?  I’d much prefer a crime-free efficient economy and the main way to reduce crime is for the economy to produce a lot of good jobs.  It’s a Catch-22.

The same reverse philosophy could be applied to the advice about eating right and pursuing healthy lifestyles.  If everyone ate healthy, how many people would be out of work when all the fast food restaurants went belly up?  Add in the junk food makers, their related industries, vending machines, packaging, salesmen, suppliers, warehouses, etc.  And then think about all the health care workers that clean up after we lead lives of poor healthy choices.  Sure, we’d produce a lot more sport fitness jobs, but would they make up for all the lost careers selling evil calories?

What if everyone bought the store brands instead of the big name brands?  What if everyone jettison their designer clothes and shopped at Target and Penney’s?  What if everyone wore sensible shoes and drove practical cars?  What if people gave up vanity, putting the make-up makers and cosmetic surgeons out of business?  What if everyone stole their MP3 songs and DVD movies?

Certain things in life are vital:  air, water, food, shelter and jobs.  And maybe jobs should be listed third because getting food and shelter without a job is very difficult.  Right now America is in a panic over an economic downturn and we see everything about the future through the spectacles of fear.  It doesn’t seem to matter that there’s more peace and prosperity now than at any time during all of history.

Everyone is wailing and gnashing their teeth that gasoline costs $4 a gallon.  Forecasters have been predicting that for forty damn years – so why all the tantrums?  Nor do people seem to notice that the high price of gasoline comes just at the perfect time when we need to wean ourselves off of fossil fuels because of war and global warming.  It’s a good thing.  It’s our second warning before economic hell comes to town.  We knew back in the 1970s that living off of cheap oil was like borrowing from the Mafia.  Is it so surprising they’re breaking our legs right now?  And we really haven’t had a true oil crisis, because no one is going without yet.  Wait until there are oil shortages.  That’s when they chain cement blocks to us and throw us in the ocean.  Are you ready for the day when there will be no gasoline for sale at the pumps?  Gas lines are just one terrorist act or hurricane away.

Cheap fossil fuels made for wonderful sensible things like wooden toys made on one side of the planet, practical to sell to people on the other side of the globe.  See where the economics of inefficiency come in?  We use cheap fossil fuels to move our fat asses, which desperately need exercise, around in 6000 pound vehicles, instead of vehicles, if they were efficiently designed, weighing in at 500-1000 pounds, and use renewable energy instead of molecules sequestered by the Earth millions of years ago to get carbon out of the atmosphere and allow life to blossom.

We may be the smartest creatures in creation, but heck, we ain’t smart enough not to poison our only habitat.  When you live in the basket with all your eggs, eating omelettes every day is dangerous.

To pull ourselves out of this economic mess we need to learn to consume more while using less, a Zen koan if there ever was one.  Moving music to MP3 files is a perfect example.  Distributing MP3 music requires an infinitely small fraction of the resources it took to make and sell CDs.  The demise of the CD puts a lot businesses and people out of work, but if the music industry worked it right they could eventually create a lot more jobs.  This economic theory fails if you steal the MP3s.

If everyone had solar panels on their roofs it would require the creation of whole new industries and millions of jobs.  To feed and educate all the needy people in the world would create more millions of jobs.  To build houses that withstand hurricanes, tornadoes, floods, fires and severe weather of the changing climate will create more millions of jobs.  There is no end of jobs to be create because of need.  There is plenty of economic activity, both efficient and inefficient if you have the vision to see it.

I know a lot of Americans are suffering because of the current economic crisis, but I have to agree with Phil Gramm that part of our economic recession is a “mental recession” and we’re doing too much whining.  Hell, we’re not living in Afghanistan.  What happened to that American spirit of when the going gets tough, the tough get going?  I’m voting for Obama, but I didn’t like his quip about not needing another Dr. Phil.  We need all the positive thinkers we can get.  There’s lot about McCain that I like, and if he wins I won’t be too unhappy, but his spin-control pandered to voters rather than exploring the point I think Gramm was trying to make.

During election times all voters become beggars looking for handouts demanding that their politicians promise and promise and promise.  Politicians get nowhere if they aren’t leaders.  Of course sometimes they lead us off the cliff into places like Iraq, but didn’t George Bush take us there because he was playing off the country’s fear?  We’re living in the current economic chaos because of greed and the refusal to think and pay attention.  Do we really need brilliant hindsight to know that making house loans to people who can’t afford them is silly or owning SUVs are a bad idea when oil was predicted to run out forty years ago?

Our crazy economy reminds me of the classic science fiction story, “The Midas Plague” by Frederik Pohl, where consumerism drives the economy so much that the poor are forced to change clothes several times a day to keep up with production – because to make less would hurt the economy.  In this bizarro world, the rich get the freedom to live without being consumers, but the poor must consume like hamsters on a wheel to keep the economy going.

Who’s fault is it if we take the most powerful and prosperous country in the world and run into the economic ground because we all like to make bad choices?  For decades we have built an economy on inefficiency.  What happens to China when we stop buying all that crap we don’t need?  What happens to the U.S. if China suffers an economic chill?  It’s like “The Midas Plague,” we could stimulate the economy by forcing the poor to go into debt and buy a new HD TV every month.

Right now everyone is panicking and cutting back on their spending, but if you wanted to help the economy, you should be doing just the opposite.  Now, here’s the crucial part – your economic decision has impact.  You can make an efficient choice, or a wasteful choice.  If you buy a new HVAC that uses 1/3 the energy as your old one, then you have stimulated the economy and reduced the demand on fossil fuels, plus saved yourself some bucks.  If you fly to Paris for a vacation, you have helped the airlines, but hurt the rest of us by increasing the demand for oil.  You can’t win for losing sometimes.  But if you had the choice between flying on a plane fueled by green technology or old technology, your choice could build a new industry.

We need to cowboy up and channel our ancestor’s pioneering spirit.  We need to take responsibility for our actions.  Like the old Pogo cartoon said, “We have met the enemy and he is us.”  Whether gasoline is $2 or $4 or $7 a gallon, the choice is made by us, we set the price.  If you want gasoline to go to $7 a gallon, keep burning oil like there’s no end of it, live like the oil companies will always find new resources, use it like we’ve been doing for the last thirty years.  Keep panicking over the economy and oil prices will rise.  Keep advocating going to war with Iran and oil prices will rise.

We need to get our heads together, overcome fear like FDR taught us, become frugal like our Puritan forefathers, develop green technologies, and oil prices will come down.  If gasoline went to $10 a gallon, but we had cars that got ten times the mileage, it would be like getting $1 a gallon gas.  When gasoline was $2 a gallon we could have been driving cars that made it equal to 50 cents a gallon, but we didn’t.  We collective decided to drive cars that would force gasoline to become $4 a gallon.  Our choice – so why bitch and moan now?

The other lesson of this current economic crisis is the world changes.  We built our current economy psychology, retirement system, investment system, and all our financial expectations around the idea that the world won’t change and growth would be predictable. How stupid is that?  Our current state of economic fear is because we’re having to deal with change.  Change is as constant as time.  People hate change, but we’re the dominant species on this planet because we’re adaptable.  Humans can handle habitat change that puts all other species into extinction, but that’s at the species level.  Cultures go in and out of existence like TV series.  Because the U.S. is a very diverse culture, we can take quite a beating and still keep on ticking.  Go study your Douglas Adams and Adam Smith, and don’t panic.

Jim

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