Thinking about Fred Thompson’s economic message from earlier today, I’m a little worried that not many political figures have echoed his diagnosis of a national “borrowing, spending and consuming binge” in recent years. People look at a recession as a dip from “normal,” and our concept of “normal” was probably wildly skewed in recent years. Many Americans spent everything they had, spent more from easy credit, and put away little or nothing for a rainy day. The personal savings rate by quarter only exceeded three percent once this decade; since 2005 it exceeded one percent only once.
The housing bubble heavily fueled the binge; when you see the guy down the street flipping his house and making $250,000 in two years, massive home equity loans seem downright reasonable. (I was among those in the market for a house from 2006-2007, and so in checking property tax assessments in the Northern Virginia area, the housing bubble was crystal clear – the estimated value of a house is not supposed to increase six figures from year to year, particularly as supply is expanding.)
So we’re left with competing stimulus packages, and Thompson describes the plan to distribute money by dropping it from a plane being dismissed because of concerns about some people having larger rakes than others. The various stimulus packages sound only marginally less silly; basically, they’re all variations of either borrowing or printing more money and putting it in the hands of people and hoping they spend it in a way that spurs economic growth. If Americans take their stimulus and buy more flat-screen televisions manufactured in China, how much will our circumstances have changed? We’ll still have home-flippers underwater, still have unemployment creeping up, still have domestic automakers on the verge of collapse, still have dramatically reduced 401(k)s; the only difference is that we’ll be watching the bad news on CNBC with much better picture quality.
In the end, all economic activity amounts to taking something and adding value to it. You take a bunch of metal, glass, and plastic, and turn it into a car. You take a bunch of coffee beans, milk, and hot water and turn it into a cappuccino. You take a bunch of chemicals, and turn it into medicine. You take paper and ink and turn it into a magazine.
In the past decade, we’ve seen two bubbles that stemmed from a perception of exceptional value being created when, in fact, the value was ephemeral. The run-up in Internet stocks was paper; with a few exceptions, the dot-coms created little value (or the value was fleeting) and that value, like their stock price, was easily wiped out. The run-up in housing prices was a number on paper (or the sales price number of the house down the street). The value of that real estate was only what a buyer was willing to pay for it, and once those buyers disappeared, the real estate lost its value and was easily wiped out. (From these experiences, we can conclude that a sure sign of a bubble is the number of people vehemently insisting, ‘no, you don’t understand, this time, it’s different.’)
In the latest edition of Uncommon Knowledge, Peter Robinson and his guest Peter Thiel, president of Clarium, made a point about possible limits to growth in our modern economy:
Thiel: It may be a service economy has ultimately less growth. So if you have a factory that’s making widgets, you can imagine a factory that’s making ten times as many widgets, if you get more automation per worker. If you have a restaurant, it’s harder to imagine a waiter or waitress being ten times as efficient as a waiter or waitress was 100 years ago.
Robinson: The best Starbucks barista can only squeeze out so many espressos per hour.
Thiel: There’s less volatility in a service economy, but there’s also probably less growth.
If you want the economy to grow, you have to be able to create goods of value and then sell them, either here or abroad. We don’t have the manufacturing economy we used to; we may or may not have the knowledge economy we need. A little while back, Rich explored the challenges of trying to generate economic growth through infrastructure improvements. (A shame, since I suspect a major impediment to growth is the difficulty of getting from point A to point B in regions of the country choked by traffic.)
The housing boom generated a lot of growth in the construction sector, but occupancy rates suggest it will be a long while before we see demand for additional residential housing construction. Obviously, in a recession, consumer spending on all kinds of goods drops – cars, luxury goods, groceries, entertainment, etc.
During the campaign, Obama talked a lot about “green collar jobs” – a nice idea, but not jobs likely to be generated in the coming year – you can’t build a solar-panel factory overnight.