Monday, January 9, 2012

The Problem with Our Economy

     I sometimes think that the modern notion of "economic growth" is fiction. The experts tell us our economy is much bigger now than it was when we were kids. Economists obsess about GDP, and whether it's gone up 2 percent or 3 percent, and measure how per capita income is higher (although not that much higher) than it was a decade ago, or two decades ago.

     But it seems to me that economic growth is based largely on accounting for things that in the old days we just didn't account for. A mother used to stay home and take care of her own kids. She wasn't getting paid; the activity wasn't counted in the economy. Now she works outside the home and gets a paycheck, and then turns around and pays someone else to look after her kids.

     We used to take in Grandma when she got old. Now we pay an Independent Living facility to take care of her. We used to fix our own cars; now someone else does it. We used to do our own taxes; now we pay an accountant. We used to save for our own retirement; now there's such a dizzying array of options that we need the experts to do it for us. A lot of so-called economic activity. But are we any better off? Maybe a little ... but not as much as we think.

     Nobody produces anything anymore. We all just pay one another to do things that we won't or can't do for ourselves. People in Asia make our cars, our computers and our Christmas ornaments. We drive people around, give people advice, process information, offer people therapy, or help them with their finances.

     This is what I thought. Then I read Boomerang by Michael Lewis, the respected author of Liar's Poker, Moneyball and The Big Short. And I discovered the problem is worse than I thought. It's true, nobody produces anything anymore. But otherwise, we all just work the system.

     Lewis is very smart, very funny and very cynical. He reviews the recent debt cycle and shows how different countries, from Iceland to Greece, fell victim in their own different ways. But the universal problem, he concludes, is that the people who had power in society, who were supposed to run things for the common good, were instead bleeding the society to death. "It's a problem of people taking what they can, just because they can, without regard to the larger social consequences," he writes.

     But he really hits a nerve when he turns his laser eye back to the U. S., and California.

     "It's not just a coincidence that the debts of cities and states spun out of control at the same time as the debts of individual Americans," he says. "Alone in a dark room with a pile of money, Americans knew exactly what they wanted to do, from the top of society to the bottom. They grabbed as much as they could. Afterward, the people on Wall Street would bemoan the low morals of the people who walked away from their subprime loans, and the American people would express outrage at the Wall Street people who paid themselves a fortune to design the bad loans."

     And I think that's a key point. He says it's not just the greedy bankers (who the liberals blame), and it's not just the greedy public employees (who the conservatives blame.) It was, and perhaps still is, everybody.

     Lewis focuses on Arnold Schwarzenegger who in his opinion tried mightily to put California on a sane financial path -- and failed miserably. "He tried everything he could to persuade California state legislators to vote against the short-term desires of their constituents for the greater long-term good of all," Lewis argues. Legislators acknowledged that the state had big problems and that the governor proposed some reasonable ideas to solve them, but they wouldn't vote for any of them because in every case a powerful interest group would get mad at them and threaten their chances for re-election.

     California has highly partisan legislative districts and voters elect highly partisan people to office. The legislators, beholden to their special interests, cannot compromise or agree on anything. So nothing gets done. The voters become disgusted. And yet, the system ended up working very well in giving Californians exactly what they wanted -- a lot of services for many different constituents and better salaries for public employees -- all without anyone having to pay for it because the government just took on more debt.

     In San Jose the problem finally bubbled over after public safety workers used union power, binding arbitration and sympathetic judges to make deals that included pay raises over 20 percent, extra pay for "terrorist training" and generous retirement programs. "Our police and firefighters will earn more in retirement than they did when they were working," said San Jose's Democratic mayor, who asked, "When did we go from giving people sick leave to letting them accumulate it and cash it in for hundreds of thousands of dollars when they are done working?"

     The result: In order to pay the pension costs, San Jose had to cut a quarter of its workforce, from 7,400 workers to 5,400 workers. The libraries were closed three days a week, and parks got no maintenance.

     How will it all end? In Vallejo, CA, when public workers took 80 percent of the city's budget for their pay packages, it finally ended in bankruptcy. Real-estate values plummeted 60 percent. Creditors settled on 5 cents to the dollar, and public employees were paid off at around 25 cents on the dollar. The fire department  was cut from 121 to 67 employees, who were left to handle 13,000 calls a year.

     Lewis is by no means one of these small-government Republicans. He is just as hard, if not harder, on the wild eyed bankers in Iceland and Ireland, and he took on Wall Street in The Big Short. He in fact has sympathy for public workers who now have to do more with less, precisely because of the government's financial problems. The irony is that those who pushed for better pay for public employees -- beyond what the tax base could support -- were the very ones who in the end caused the layoffs and cuts in services.

     What happens when a society loses its ability to regulate itself, Lewis asks, when everyone is sacrificing their long-term interests for a short-term reward? One possible outcome is that the environment will regulate us -- and the environment regulates by starvation, like farmers who fail to fertilize and rotate crops and thus leach out their land. Or ... like what happened to the people in Vallejo, CA.

     The other way is to realize what we have been doing to ourselves in this country, then come together and regulate our own activities -- when leaders will run things for the common good, instead of lining their own pockets at the public trough, and when regular people take more pride in their contributions to the community than they do in accumulating paid sick days for early retirement.


Stephen Hayes said...

So much here to consider. I'll be thinking about this for a long time.

MerCyn said...

As a financial advisor it was frustrating to see so much short-term thinking on the part of the big guys as well as clients. Long-term planning wasn't as glamorous - or as profitable. Unfortunately, as you say, most people are short-sighted and selfish: the what's-in-it for me syndrome. What is the answer????

Janette said...

Tough place for me to sit.
I was a tea her who never lived in a district of big money ( our teachers still start at $35,000) often compared to teachers in district who pay $60,000 to start.
You cannot cut what was never there.
Sounds like some good reads.

Btw- both husband and I are in the new "making things in USA class. He woodworks and I sew. It is a start.

schmidleysscribblins, said...

I read Lewis' book Boomerang and thought it good although a bit superficial as he deals with only one or two aspects of a very complicated problem.

The simple truth is that we need to live within our means as a country. I am not personally responsible for anything that happened to the economy. David and I are both very frugal and live within our means, which means we have a house worth twice what we owe on it, 3 old cars all paid for, and other similar facts.

Our Congressional Rep is a spendthrift porker Dem., but I haven't voted for him in years.

Good review Tom. Dianne

Dick Klade said...

It's a little scary, but your first few paragraphs conjure up images of the Roman Empire shortly before it fell apart.

Diane is right on in pointing out the need we all have to live within our means. That may be difficult at times, but it is necessary for individuals as well as governmental units if we are to survive as a nation.

You are right on in saying we all need to get together to solve the big problems we have. Intelligent budgeting and resource allocation is not impossible. We just need to stop looking for "silver bullet" solutions to complex problems and get on with the hard work.

Bob Lowry said...

After reading this post I just put Bommerang on hold at the library: I am 38th in line! I may have to break down and actually buy this one.

If (or more accurately when) America tumbles from its lofty perch all the finger-pointing in the world won't change what you have descibed here: greed, a lack of social responsibility, and no moral center any more. No matter what happens we will have brought this upon ourselves.

Anonymous said...

Well, considering that they just released the news today that USA debt is as large as the American economy:
Which means, technically, our country is bankrupt, I say good! Let the whole country fail. And very soon, Obama is going to ask congress for another $1.6trillion dollars added to the debt, I say good for him!

We all deserve what we got. We voted for these clowns , so suffer the consequences.

Best thing to do is to get yourself out of the line of fire. Politicians think homeowners are an ATM machine. Same with employees, business owners, yada, yada, yada.

Rent, retire, tune in but drop out. Remember, it was the government, Fannie Mae & Sallie that forced the banks to loan money to the lower, poorer classes so that everyone could own a home. How preposterous! Everyone can not own a home. It's NOT a right. It's a sacrifice. The government got us into this mess. Let them sink. And now, the government can not get us out. What a joke!
Look at GM. We taxpayers bailed them out and now GM is going to have China manufacture the failed electric Volt car. Look at Solyndra? A $533 billion green failure. Look at what GE has done to this country? And Obama appoints Immelt (CEO of GE) to get Americans jobs? I can't stop laughing at the stupidity of this country.
Let the country go under. It'll be the best thing for all of us. In the interim, get out of debt, sell your home and go rent and get yourself out of the line of sight of the tax man.

Atlas has officially shrugged.

June said...

If I wasn't edging toward the sharp objects and the medications when I finished reading the post, the comments have sent me shuffling in those directions.

Anonymous said...

Too many people around the world are sucking instead of blowing ...

Anonymous said...

U.S. & China 2012 = England & Germany 1912. Stagnant and declining superpower meets emerging one. Not a pretty outcome. See also Erik Larson's "In the Garden of Beasts" (1930 Berlin), and, especially, the very prescient (1998) "The Fourth Turning", which puts past and future into a generational perspective. All of the above point to very uncomfortable times ahead, about which nearly everyone (self included) are in denial. I don't see anyone predicting economic prosperity and optimistic future. Do you?

RCM said...

“The American Republic will endure, until politicians realize they can bribe the people with their own money.”

This is a quote by 19th century french politician Alexis de Tocqueville who wrote "Democracy in America".

Does this situation seem familiar? We now have a country where, depending on their political bent, those in office will not cut social services, jobs or benefits in the public sector or subsidies to multi-billion dollar corporations because of fear of loss of votes and political donations that are used to campaign to get many of those votes.

If you are not one of the above recipients then you are probably one of the sources of the money via taxation along with 15 trillion in debt.

Of the 313 million people in our country only 69 million actually pay federal income taxes each year. If you do the math the federal debt burden on each individual taxpayer is just over $217,000 and climbing.

Tax, tax, tax, borrow, borrow, borrow, spend, spend, spend.

Out of control and blind as a bat.

Anonymous said...

Nothing will change until we get money out of our political process. We need campaign finance reform now but those needed to change the law are the same ones benefiting from it now.

Anonymous said...

what GE has done to this country? And Obama appoints Immelt (CEO of GE) to get Americans jobs? I can't stop laughing at the stupidity of this country. China Direct