Renovate the Old Economy, Don't Rebuild It
Posted on The Next Big Thing: October 21, 2008 6:56 PM
You hear a lot of talk about rebuilding the U.S. economy, and it obviously needs some help. But I wonder if we ought to make some changes as we rebuild. The old structure doesn't seem that desirable anymore. When we rebuild, how about some renovations at the same time?
For example, the old U.S. economy wasn't very environmentally sustainable. The good news about our current predicament is that the U.S. generally emits substantially less carbon into the atmosphere when it's in recession. So maybe we shouldn't come out of it until we figure out how to stop this pattern.
Our old economy was based heavily on consumption by—of course—consumers. Economists are saying that consumer spending is all that has saved our economic bacon over the past couple of decades, and now we've cut
back. The good news about this is that consumers have been spending their way into severe hock, so stopping that overspending is positive. Consumers have even resisted spending their economic stimulus checks. We need to save more to pay off our credit balances, finance our retirements, and send our kids to college. The bad news, of course, if that consumers don't spend we don't reinvigorate economic growth. So how can we stoke a consumer-driven economy and save at the same time?
We can't. It's no accident that China and Japan, for example, have been both producer-driven economies and nations of savers. We have to slowly shift back to being a producer-driven economy. It will be difficult and painful, but we have to spend less and produce more goods and services that other economies around the world want to buy. We also need to replace these other economies as investors in our own economy.
This probably means that the U.S. government needs to identify some key industries that it will nurture as the potential big exporters of the future. There used to be many objections to this sort of "industrial policy," but perhaps now that much of our financial system has been nationalized, such interventions will seem relatively mild. We're already investing in the automobile industry, for example, although I'm not sure that's our best bet for future exports. Tom Friedman is probably correct in saying (in Hot, Flat, and Crowded) that environmental technologies would be one of the best possible industrial policy investments for the U.S.
Another attribute of the consumer-driven economy we've built is that we have generally taken the proceeds of our productivity in—you guessed it—increased consumption. This is unlike our European cousins, who have cashed in productivity for leisure. Americans work some of the longest hours in the world, and we don't even have enough time to watch the cool flat-screen TVs we've bought. My guess is that we'd all be happier and more relaxed if we started trading increased productivity for increased time on the beach.
There are many other aspects of our new economic house that need to be renovated, but that would take a book, not a blog post. There need to be more regulation, greater investment in human capital, increased transparency and understandability, better health care at a lower price to the society, and so forth. None of these transitions will be easy. I don't envy the members of the new Council of Economic Advisers!