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.