With respect to government culpability for the financial crisis, the primary lesson that people have taken away seems to be that the executive and legislative branches were just negligent and did not regulate businesses enough. That is, while business was actively at fault, the government was merely too passive.

It is true that there were certainly specific areas in which the existing incentives created an economically unstable condition, and regulation (and 20/20 hindsight) might have negated the problem. For example, the recently proposed legislation to require loan originators to keep five percent of the loans they make on their books is probably a good idea for new regulation. After all, a major part of the problem was that those who madeloans had no incentive to ensure they were good loans because they were selling them off in securitized form as the ink was still drying on the paperwork. This meant that their only incentive as to make more loans, not good loans.

However, I don’t think we should be quite so quick to conclude that the government’s only role was in failures of omission. The government has long supported the notion that virtually everyone should be homeowners. They supported and implemented policies that facilitated a move toward a greater proportion of home-ownership, and, in doing so, they too are culpable for a condition in which there were way too many people without the incomes to be homeowners who were buying homes.  Until a year ago or so, many people would have thought this a laudable policy, but seeing the effects of having so many people owning homes they cannot afford, we must recognize that the government should not have been supporting housing ownership in the manner it did.

Why is this distinction between active and passive culpability important? My worry is that we seem to be in a period in which people just want government to get off their duffs and be active, and we may not be conscientious enough about whether they are actively doing the right things. No one can say the Obama Administration hasn’t been bold in its policies, but whether it turns out to have been smart in them remains to be seen.

To be frank, I am a little terrified about the idea of a $1.8 trillion deficit for the year. A budget deficit of well over 10% of the entire Gross Domestic Product (GDP) is nothing to take lightly. I certainly hope President Obama will be true to his words to engage in deficit reduction at some point, but I am afraid that like the Republicans, without facing legislative opposition, he will go just as hog-wild as they did. The President certainly has lofty goals, but they all come with price-tags attached.

On a recent trip to Budapest, I snapped this picture on Margit Circle not far up the road from the the Margit Island Bridge. This is a popular thoroughfare on the Buda side of the Danube that leads to a massive multi-level shopping mall and to the  Moscow Square transit hub that is of modern design, yet, at once, appearing out-dated. At the time, I thought the picture conveyed an interesting theme or moral, but I was not certain what it was. Two buildings with structurally identical facades – ornate moldings,  faux columns, and window arches – but conveying completely different images. One is the color of cow dung from grass-fed cattle, is marred by chipped and peeling paint, and has a coating of grime and soot clinging to the paint that dares remain. The other is a clean white and light blue pattern with gray trim that has not yet been darkened and discolored by car exhaust and industrial plant emissions. It takes a sustained glance to realize that they are the same building.

For Ferenc Gyurcsany, Hungary’s soon to be erstwhile Prime Minister, the moral should be that one can only dress up an economy if the fundamentals underneath are sound. Hungary’s economic problems far precede the recent global recession, which is part of the reason why the Hungarians have been one of the worst hit nations in the region, and the first European nation to require outside assistance in the form of International Monetary Fund (IMF) loans last fall.

Gyurcsany resigned yesterday in the face of an economic melt-down. The outright resignation was foreshadowed over the weekend by an offer to step aside if a vote-of-no-confidence that would be held in April rejected the Hungarian Premier. Subsequently, the voice of the Hungarian people was clear in indicating that they had lost confidence in the presiding government.

Amongst the first things that one notices in examining the Hungarian economic fundamentals is that the Central Bank just decided to keep their interest rate steady at a rather high 9.5%. Hungary is so hard hit because it faces a catch-22 as a result of its recent history of excessive spending. For a country in recession, and estimates project a 3.5%  to 5% drop in GDP this year, the monetary prescription is to increase the money supply, and this is done by reducing the cost of money (i.e.  lowering interest rates.) However, Hungary has run such high deficits that it needs to maintain high interest rates in order to attract capital, and because lowering rates will lead to capital outflow and further depreciation of the Forint (Hungary’s national currency). Currency depreciation, while it may benefit exporters (but, of course, people are almost universally buying less these days), means that prices on imported goods are higher. As a globally integrated and relatively small country like Hungary relies heavily upon imports in some sectors, overall consumption is decreased, and consumption is the engine of an economy.

So if monetary policy cannot help, what is left? Unfortunately, fiscal policy prescriptions are out of the question as well. The fiscal policy prescription for a recession is to increase government spending and decrease taxation (i.e. further deficit spend.) However, because Hungary was deficit spending its heart out in the good times, it now faces conditions in which it cannot afford to continue on this path. It can’t exacerbate its deficit spending spree without serious consequences that are already being seen with Fitch’s early March downward revision of Hungary’s creditworthiness, and recent statements that the rating agency may down-rate Hungary further in the near future. Of course, the IMF would frown upon increasing government spending.

This puts Hungary in the unenviable position of having no economic policy to right its course, and it must ride it out and hope that it doesn’t go over the falls.

One of the most damaging mistakes made in policy-making is ignoring feedback loops. There is a tendency to see and act upon simple solutions without investigating whether unanticipated effects are likely to result. This is particularly true of economic decision making. Perhaps this is reflective of a general lack of economic literacy that develops between the time people (politicians included) take that obligatory sophomore microeconomics class and when they enter get into their unrelated careers.

The low income are having trouble living off the wages they earn? Just mandate a higher minimum wage. Of course, in most cases this will increase unemployment (particularly among those the law is attempting to help), and while a given person may end up benefiting from higher wages they may also be one of the unfortunate that end up with no wages. There is a shortage of affordable housing? Just put a cap on rental rates. Of course, this leads property owners to shift to alternate uses of land where possible, and possibly even to abandoning property if they can neither earn a profit on it nor, due to zoning laws, convert the property to another use. The simple solution, therefore, eventually leads to fewer housing units being available and possibly urban blight as well.

What does this have to do with the recent decision by Bank of America to pull job offers that it had made to foreign graduate students? Bank of America’s decision was the result of legislation that prohibited hiring foreign workers if a firm is accepting Federal funds and is laying off American workers. Because the bank had to lay off lesser skilled employees as a part of a reorganization, it could not hire the foreigners. I put both this legislation and many of  executive compensation cap plans in the category of ignoring the unintended consequences.

Readers of the Economist will recognize the dearth of executive talent as a reoccurring theme with regard to the  problems facing the business world today. Lately there has been an assumption that we could not have a more incompetent group of executives running American businesses. However, by limiting the pool of executive talent to which we have access to US citizens, we have a smaller base available and greater chances of having a less competent set of executives in the future.

Any plan that limits total compensation to executives runs the same risk. If compensation is not competitive with alternative employment, the most talented will go elsewhere, leaving those who cannot find alternative employment (either abroad or in other fields) to run American firms. This is not to say that capping salaries and then tying other earnings to performance wouldn’t be reasonable. This has a positive feedback effect in that it gives the executive incentive to increase a firm’s performance. There must be a value-added to executives to justify such high incomes. If they don’t enhance productivity by anywhere near their earnings, they obviously should not be earning such high wages.

I fear that there is a lot of simplified solutions going into the restoring the economy, and that we won’t know all of the adverse impacts for some time to come.

President-elect Barack a has been presenting the details of an economic stimulus package that will consist of massive government expenditures on public works and attempts to incentivize businesses to employ more labor. (As an aside, the spending on public works may just help alleviate some of the risks resulting from our dilapidated infrastructure.) While the idea of increasing government spending, particularly direct spending such as public works, may be economically sound, it will likely face some daunting challenges because the general modus operandi of our government is not to be fiscally responsible. In other words, the proclivity to run up massive debt may well bite us in the ass. 

Lack of fiscal restraint is not a trait that solely characterizes the George W Bush Administration, but rather is much more widespread. While many will point to the Clinton years as an example of when the government shifted into surplus territory and began chipping away at the debt, it should be noted that much of the money that was overflowing the public coffers was earned in a speculative bubble on information technology. Firms that weren’t making a dime had stocks that were going through the roof. The 1990’s  may be seen as a time in which monetary discipline was lacking more than one in which fiscal discipline reigned. The Federal Reserve kept rates low, and the feeding frenzy continued.   

The question is how do we pay for the economic stimulus? Obviously, taxation is out of the question. The other half of fiscal policy for combating a recession (besides boosting government spending) is to reduce taxation. A government cannot raise more revenues in a recession because increasing tax rates means that disposable income is reduced by the amount of the tax hike, and the public, which is already being thrifty, reduces its spending yet further.

This leaves borrowing money, and, because our domestic propensity to save is low and many people have low or reduced incomes at the moment, this means borrowing from abroad. Under ordinary circumstances, this would not be a problem. After all, America’s current account deficits mean that there are a lot of US dollars in foreign hands, and, historically, the dollar has been seen as a low risk place to invest and a good place to weather financial storms (even ones centered in it.) However, because, even in economically good times, we don’t save or act with fiscal restraint, it may well be that confidence in dollar assets will erode. This could put the Federal Reserve in a very bad place. Foreign markets may not buy dollar assets at the low interest rates that have been put in place to fight the recession, and raising interest rates in a recession is an economy killer. While we are talking mostly about long-term borrowing, and so there may be expectations of better times ahead (no where to go but up?), I don’t think it is clear what a run up on interest rates will do.

Furthermore, even if foreigners would otherwise be willing to purchase US assets, they may be spending down their reserves in an attempt to boost their own domestic economies. Granted, China has a massive amount of reserves (about $2 trillion USD), and a fraction of that amount would go a long way in stimulating the Chinese economy. However, the combination of a need to spend these reserves and a “once bitten, twice shy” attitude toward dollar assets could spell doom for the president-elect’s plan.

I arrived in Budapest the other day, and was interested in seeing what effect the recent financial crisis might be having on the country. One may recall that Hungary accepted IMF loans of about $16 billion last month, and, more recently,  just passed a budget that will reduce the considerable government budget deficit.

As in the US, if one doesn’t watch the financial news, it is not easy to see the effect of the financial crisis. People are going about their business shopping at the Christmas market, going to work, and preparing for the holidays. As in the US, it has been reported that there is an expectation that holiday season consumer confidence might be unexpectedly high given the state of the economy.

However, Hungary faces real economic woes due to excessively high government budget deficits. Where the effects of the crisis are most notable to the common traveler are in the many strikes by government servants and contract workers who, having gotten used to the government spending freely, are upset about the austerity measures that include pay freezes, elimination of bonuses, and reduction of iron-clad job security. These are particularly prevalent in the transportation sector; with flights being cancelled, rail workers on strike, and bus drivers joining in as well. If it were not for transportation uncertainty, I would say this is an ideal time for Americans to travel to Hungary. With the dollar’s recent strengthening, visiting Hungary is much less expensive than it was in 2006 when I was last here. At that time, a weak dollar and high Hungarian inflation conspired to make Hungary more expensive than I had ever seen it.

It will be fascinating to see how this all plays out. Government civil servants and other workers relying on government expenditures have a strong lever on the economy because they are integral to an infrastructure that undergirds all economic activity. In other words, they can likely succeed in injuring the economy, but the more they do so the worse there situation becomes. If they succeed in making Hungary a less attractive place for business operations and tourism, they reduce the tax revenues that are the source of their income. It is clear that the government has to reduce expenditures, and, as labor costs are ostensibly the most substantial portion the costs of providing public services, this will involve reduction of wages, employment, or some combination thereof. This means that the government is between a rock and a hard place, and, if labor overplays their hand, they could end up in a far worse situation than they are currently facing. From a strategic perspective, an interesting lose-lose situation has been created, and such a situation creates a potential for a spiral into oblivion.

A second problem inherent to democracies, and the one most pertinent to the American auto industry crisis, is that politicians always want to boil a problem down to the point at which the blame can be laid squarely on the shoulders of the group that constitutes the smallest possible block of voters (unless the smallest block of responsible voters is the Congress itself, in which case they will gladly shift to the second smallest block.) This not only avoids alienating voters, but it also allows politicians to take a hugely complex problem and portray it as a simple one that they know an elegant solution for instantly.

A prime example of this is the ridiculous statements made by politicians implying that the Detroit CEOs were perpetrating a conspiracy to force massive vehicles into the garages of an unwilling customer base entirely for their own gain. This is not to exempt these CEOs from  responsibility. They were certainly not cutting-edge problem-solvers to say the least, but the problems was much bigger and more complex than them and there is plenty of blame to go around.

The first ring of responsibilty out from the small group of auto executives is Congress and the Administration themselves. Economists have been saying for years that if you want to change people’s behavior with respect to buying smaller cars, being more fuel efficient, and being willing to switch to new fuels you should put a much more substantial tax on gasoline. The problem is that there are societal costs, call them “pollution” and “dependence on foreign oil”, that none of us pays for when we fill up at the pumps, and, because of this, we consume more than we otherwise would. The beautiful part is that you could give some or all of the tax revenues back to voters as a lump sum rebate and you would still get some substitution away from gasoline (because gas is still relatively expensive when compared to all other goods) while reducing the degree to which you are making people worse off. However, what were politicians doing instead? Showing  a decided lack of courage, they were falling all over each other with plans to make gas LESS EXPENSIVE (drawing down the strategic reserve, eliminating the current gas taxes, etc).

The buck does not stop with the Congress or the Administration, however, there were additional  factors at play. While politicians making soundbites, perhaps most vocally Nancy Pelosi and Harry Reid, might have you think that the car company managers were simply ignoring trends toward smaller vehicles for their own personal gain, there was an additional factor at work – one constituting the second ring of culpability. Because of the extreme fringe benefit packages demanded by labor unions, the only cars these manufacturers could make profitably were the huge monstrosities that, let us not forget, adorn many a driveway in suburbia (mostly because they don’t fit in the garages which were only designed to fit two 12-passenger vans and a pet rhinoceros.) There may be a few mini-Michael Moores out there saying that the car companies, as a jobs program, should not have been worried about making a profit, but most reasonable readers will recognize the need for a business to turn a profit. How could a Toyota plant in the American South make a profit producing smaller cars at a virtually identical wage rate? Because, while the wages were similar, the Detroit fringe rate was more than double that faced by the Toyota (or Honda, Hyundai, or Suzuki for that matter). Again, while I wouldn’t expunge CEOs of the sin of greed, they were not the only ones with their hands wedged into the cookie jar as the train derailed.

However, the winner of the prize for crashing the American Auto industry, and the third ring out, is… the American consumer. For one thing, the idea that US consumers secretly wanted small cars while big ones were being foisted upon us is ridiculous. Americans want cars that can be seen from outer-space, and that could crush an M1-A1 Abram’s tank like a monster truck crushes a Pinto. Yes it is true that when gas gets expensive we may have buyers remorse, but when it’s cheap we consider how we might build and addition, install bunk beds, or apply for our Suburban’s very own zip code. The car companies knew that under ordinary circumstances the US customer base wants behemoths, and had to judge whether high gas prices that curbed this appetite was permanent and worth re-tooling for. Additionally, we keep voting in the policy makers who take the path of least resistance around issues rather than getting to the heart of them. We are suckers for reassuring words over bold action.

Melt Down on Wall Street

During the early 1930’s, the output of the US economy dropped by nearly one-third, and about one in four people who would like to have been working were unemployed (with many more under-employed.) This event makes all subsequent recessions pale in comparison. The question of interest is whether it could happen again? One way to consider the question is to examine the causes of the Great Depression. I don’t think this is the right approach and may lead us to draw false conclusions. If the question is whether history could repeat itself because the causes of the Great Depression realigned in the present day, the answer is probably no. However, could the perfect conditions for a catastrophic collapse in economic output be created in an entirely new way? That remains to be seen, but should not be dismissed summarily.

A number of competing explanations have been offered as the cause of the Great Depression. Like any catastrophic event of that magnitude, it was probably formed in a perfect storm of multiple exacerbating factors. While many the proposed factors contributed to the magnitude of the economic decline, most were not individually sufficient to cause the problem. Factors such as a severe draught that devastated agricultural output and the Hawley-Smoot Tarriff Act that resulted in reduced exports as countries began to retaliate helped to make the Depression as severe as it was, but were not at the root of the ailment. The heart of the story has to do with a new and inexperienced Federal Reserve Bank (Fed) making a chain of mistakes. The first, and arguably most critical, mistake of the Fed was  contracting the money supply because they noted that banks were carrying a lot of reserves above and beyond what they were required to by law. The Fed thought that the excess reserves were a sign of inflation (i.e. there was too much money chasing too few goods), and they reduced the amount of money in circulation. The truth of the matter was that banks were holding excess reserves to stave off panic-induced bank runs. This meant that the contraction in the money supply could not have been at a worse time when people were already beginning to be leery about investing.

We are not going to see the same chain of events transpire this time. For one thing, while the Fed was new and nieve at the time, it is now headed by one of the foremost experts on the Great Depression, Ben Bernanke. This means that, while he is certainly capable of making any number of new mistakes, he is exceedingly unlikely to make the same ones that were made by his predecessor beginning in 1928. Second, while bank runs played a crucial role in the Great Depression, these devastating events seem less likely in an era in which we have the Federal Deposit Insurance Corporation (FDIC). With the federal government backing deposits (as long as you remember to divvy your money up into accounts of less than $100,000 each), panic-induced mattress-stuffing seems less likely.  

Can the levee break? That is, might people lose faith that the FDIC will be able to fully back their deposits? The government ultimately can make sure it is able to back these deposits because it has the unique solution of printing more money. Of course, just printing money is inflationary (the given amount of money you have is less valuable), but inflation fighting is not the major concern when one is trying to pull the country out of a deep recession. There is always a potential for panic if a critical mass of people pursues what they think is their individually optimal result, but is, in reality, a collectively devastating result. The situation is like the one described by Rousseau in his story about the Stag Hunt. In the stag hunt analogy, a tribe is trying to catch a stag to feed the village. They do this by encircling the stag and moving in from all sides, and by the time they get close enough for the stag to bolt from the trap it is nearly enveloped leaving no gaps in the circle to allow a route of escape. However, the challenge arrives in the guise of a rabbit that is quietly nibbling grass. Seeing the rabbit, one of the hunters is left in a quandary about whether to stick with the plan and end up with a possible feast (or possibly nothing) or follow the path that will, with greater certainty, provide a little something for himself and his immediate family. However, pursuing the rabbit almost ensures a disastrous outcome for the tribe (i.e. the stag will have a gap to run through.) Moving from analogy to the issue at hand, if enough people follow the “sure bet” of pulling their deposits, the loanable funds are removed from the system and the collapse is made imminent.

What are the elements of a modern day perfect storm? It appears that the core is that people are scared to invest their money because they don’t know if the institution in which they are putting their money is going to go belly up because it is holding a lot of bad loans (i.e. highly likely to be defaulted upon.) This basic story is often the route to economic crisis. The Asian Financial Crisis of the 1990’s was at least partially the result of the fact that people were investing money in those economies hand over fist. With so much money coming in, banks began to make loans that were progressively less sound. The Czech Republic had issues in the 1990’s, during their transition, in which the same people who were making loan decisions were the ones coming in control of most of the privatization vouchers. This created an incentive for them to make loans to firms that were not really creditworthy. Just as in the US, things seem really rosy until the defaults start to cascade. In the US, a profit incentive was created to make dubious mortgage loans, which were then packaged up as debt instruments so that there was little transparency- particularly because the rating system was broken as well. While it may not come down to everybody going to the bank and pulling out every dime they have, as they begin to reduce 401K contributions and otherwise reduce investment the vicious circle is born.

Beyond this central cause there are a number of potential exacerbating factors.  The share of consumption going to energy has risen considerably (meaning that individuals and firms have less to spend on all those other consumables that they used to buy.) We are so heavily indebted that there is a risk that foreigners will lose faith in dollar denominated assets and will engage in a massive sell off, and, in a related story, the system is so globalized that a crisis in the US could well be internationally contagious- meaning that there will not be a foreign cushion to loss of domestic consumption while foreign countries are experiencing their own recessions.

The fear at this moment is that people just wont see the whole picture. People are rightfully angered by the actions of people who were smart enough to know that the profit motive they were following could not end well, but put the whole economy at risk by collectively doing so anyway. However, there seems to be a sentiment, even among some Congressmen, that they should be allowed to go down with their ship. This would be an excellent notion if we were not all on the same ship as they.

On Wealth...

The first class session of almost any introductory economics class is spent in contemplation and elaboration of the three word mantra of the discipline: “RESOURCES ARE SCARCE.” From this readily understood concept follows the idea of opportunity cost, which is the inescapable truth that every decision to consume is also a decision to forgo something else. In short, we cannot have it all. And so it goes; all of economics, from the simple idea that increasing the supply of a good decreases its price to complex constrained optimization models, follows from that core truth that resources are scarce.

This being said, we, particularly in the developed world, have done a miraculous job of reducing the sting of scarcity by increasing the size of our proverbial pie in leaps and bounds. We have achieved this through a number of channels that mostly come down to increasing our productivity. We can have more stuff because we earn more money because we are more productive, and, because we are more productive, there is more stuff out there to have. While you would never know it because we are amid a political season in which both candidates are trying to convince middle-class America that they understand how tough we have it as a means to persuade us about how many chickens they, as President, could personally put into our figurative pots, the standard of living and quality of life in America (and the developed world more broadly) is, by both historical and global standards, phenomenal. In fact, by a whole range of measures, we’ve got it better than ever (well, maybe not better than say a few months ago.) I encourage people to read Moore and Simons’ “It’s Getting Better All the Time” (http://www.catostore.org/index.asp?fa=ProductDetails&method=&pid=ELEC-0064). While I would not deny that the book does occasionally engage in dubious uses of statistics, the authors’ general thesis that, across a wide range of criteria, our quality of life has been rising is indisputable in most of the examples presented.

and Poverty

So how are we more productive? Technological advances are a patently evident cause of increasing productivity. Concepts like Moore’s “Law”, which states that the number of transistors on a microchip will double every two years or so, demonstrate an almost inexorable march of technological progress. The vast number technological improvements involving such areas as transportation, communications, medicine, and even the streamlining of processes by which we make things or provide services have had a major influence on the size of our expanding pie.

The gains of specialization, also the subject of early economics lectures that usually somehow involve Robinson Crusoe, are also a source of increased productivity. We have been riding such gains at ever diminishing levels of granularity throughout the course of our history as a species. In the move from hunter-gatherers to farmers, a few were able to make the food for many. This freed up the many to do other things, and allowed them band together in villages and cities. The process of urbanization led to synergies and efficiencies that further filled our coffers with wealth. We are still taking advantage of specialization, now on a global scale. There are people whose understanding of a infinitesimally small piece of the universe is vast. Some such people derive their entire income, often times a lucrative income at that, from expertise in the minutiae of a thing that can only seen through the eyepiece of a microscope, and whose implications are both narrow but still vastly wealth producing.

Unfortunately, not all of our means to become unshackled of the burden of scarcity are so virtuous as technology development, specialization, or collaboration. In America, we have also increased the pie by spending more than we have earned. The government, of course, has set an incredibly bad example by divorcing its decisions about how much to spend from trivial considerations such as how much revenue they accrue. As a nation, we run deficits with the rest of the world by buying far more from abroad than we earn by selling abroad. Through the “miracle” of credit, many individual households have also managed to follow the example set by the government’s lead, and spend substantially more than they earn. Of course, individuals can’t do this for anywhere near as long as the government can, and eventually something gives. When it gives, it does not necessarily do so in isolation, because lenders see defaults and panic (often justifiably) that they will be the next to be burned. Of course, there is nothing inherently wrong with credit, but, the unwise us of it appears to be addictive.

The point of this essay is that it is unclear how long the pie can be expanded, and, if it isn’t indefinitely, then we need to be ready for a new paradigm of economic life. In the long long-run, I don’t know the answer to this question. The universe is a vast (and presently expanding) place, and it seems that other consumers of its resources are, at a minimum, rare- if not altogether non-existent. Of course, we will be shackled to this planet by the limits of our technology for the foreseeable future, and the physical limitations of overcoming the vastness of space in a manner that is both cost- and time- effective may be forever insurmountable.

In the shorter-run, however, we can expect that we will bounce up against our limitation to expand the pie now and again. In fact, our current financial predicament can be seen as a hang up in one sector’s attempts to expand their pie. One of the few inevitable truths in life is that all progress produces not only winners but also losers. As Ralph Waldo Emerson observed: “Society never advances. It recedes as fast on one side as it gains on the other.”

The present story goes like this. Wall Street was hurting because everybody had begun to use automated brokerage systems and did not need to pay full-service brokers big commissions. The financial people looked around for a way to make money. They saw an ideal solution in an apparently robust housing market. They figured they could borrow money and then buy up these mortgages for houses that were steadily gaining value. But loan originators on Main Street as well as those on Wall Street saw the potential for greater gains to be made by selling more homes. So they started to make loans that were less and less sound. This culminated in the ultimate act of stupidity, the NINJA (No Income, No Job or Assets) mortgage. Of course, the inevitable chain of defaults began. All these mortgages were bundled into tradable instruments whose value, because of dubious rating practices, were completely opaque in there aggregated form. There was a period of hot-potato that ultimately resulted, like a game of musical chairs, with a series of firms caught in a vulnerable position. Currently, the government is proposing to buy these bad debt instruments because no one trusts the financial system. People don’t want to buy stock or bonds, and a few are probably considering stuffing their money into a mattress for fear that their bank will go belly up.

I suspect that the next couple decades will be interesting times. We will continue to try to reduce the effects of scarcity, while it remains our ever-present nemesis. We will want more, but we are likely to run up against some major barriers due to resource limitations, technical constraints, and the impact of the emerging economies’ development. 

In essence, we are a greedy and materialistic species, but I don’t mean that necessarily in the pejorative sense with which it comes across. The world as we know it is the result of our desire to have more and to live more comfortably. What would a world look like in which people were largely non-materialistic? It would probably look like some aboriginal societies that are still living what we might consider a pre-historic existence, and which too many of us feel we must bring indoor plumbing and electricity immediately. (By Emerson’s formulation, these people may not have advanced, but neither have they receded. I think it might behoove us to show a little respect, as the majority of our healthy and well-educated society couldn’t survive a month living as these people do - as masters of fire, water, food, and shelter.) Alternatively, such a society might look like Tibet before the Chinese invaded, which, by the way, probably looked a lot like Tibet 100 years before, and, had the Chinese not barged in, would probably look the same today. I am neither saying such people got it wrong because they are not as technologically advanced as the Western world, nor that the developed world is inherently evil because it has operated from a striving for ever more.  I am saying that, while materialism has a bad name, advances in health-care, science, philanthropy, technology, and our society, itself, are integrally linked to it. To decry materialism while advocating the need to spread modernity to the far flung reaches of the world is inherently nonsensical in my quasi-humble opinion.

So what of our next couple decades? We may experience distopia or utopia depending upon how events unfold. I believe the answer will hinge upon how we handle a number of problems for which we have only just begun to experience pain, but which could become much worse if managed poorly. First, we need to produce enough energy to meet world demand, but we cannot do it in just any old fashion. I don’t know to what degree global climate disruption truly exists or is a threat to humanity, but it does seem to me that, if there is even a low but significant probability of a catastrophic planetary disruption, that we would want to play it on the safe side and find a path forward that reduces carbon emissions.

Second, there are a number of huge nations that are in the process of becoming huge economies with all of the environmental and resource consumption ramifacations that arrive of that fact. The impact of Chinese and Indian demand on global petroleum prices has been frequently discussed, but it is not the sum total of the effect which these economies’ growth will have on the world. Of course, they will be increasing the global productive capacity and making consumers with the financial resources to consume, but it is in those areas in which resources are not easily substitutable and for which supplies are limited that the pinch will be felt.

Of course, there are countervailing forces as well. As emerging economies become more developed and urbanized, we can expect birth rates to drop. Thus, these societies will make gains from bringing their population growth rates down. However, the time scale over which that has a significant impact is not immediate. There may be other feedback cycles that will also have a positive influence, but the problems they must overcome are substantial.

A lot is riding on technology development and sound public policy (which does not necessarily mean painless public policy.) If we cannot keep expanding the global economy like a balloon, which only breifly and occasionally recedes in a recession, then we need to change our way of looking at the economy. We must realize that there are inevitable opportunity costs. For example, we cannot reduce global poverty without increasing energy  and other resource consumption. If we want electrification rates to be 100% globally and all the world to be linked into a global information infrastructure, we cannot ignore that there will be a trade off in resource consumption and waste production. If we are so constrained, we must not only think of expanding the pie, but of making each morsel count, to curb our averice, and to be innovative in how we think about development. If we can outpace such developments through technological development and favorable happenstance such as declining population growth rates, we still need to think about how to proceed in the immediate future.

b gourley