10 March 2009

Spending Our Way Into a New Economy

Conservatives argue that Roosevelt's Keynesian policies were ineffectual because it was not until the country mobilized for World War 2 that the economy turned around. The lesson that Christina Romer, the chairman of the White House Council of Economic Advisers, has drawn is that Roosevelt did not do enough. "The key fact is that while Roosevelt's fiscal actions were a bold break from the past, they were nevertheless small relative to the size of the problem," she said. "This is a lesson the administration has taken to heart."

Roosevelt made a puny attempt at stimulus spending, whereas World War 2 did, and Obama will, make an heroic attempt at stimulus spending. This should hearten us.

What if the truth of the World War 2 economic recovery was more complex? What if it was not just a simple matter of spending more money but was from spending money in a particular way?

After World War 1, the Allies could not even make sense of German patents without German engineers and scientists. War with the Nazis, decades later, was a stimulus of a specific kind. Americans did not just spend money on factories and production. We spent money on research and development, higher education, and furthering fields like computers , cybernetics, production systems, and chemistry. Our reaction to the advances of German engineering and science was a specific kind of stimulus: it helped to usher us into the information age and helped to create the management and production techniques that helped to make American corporations dominant in the business world and the institutions most emulated across the world.

The deficit spending of World War 2 did not just save the world from tyranny. It helped to create a new kind of economy.

It is not that the U.S. is no longer an information economy. It is that the American economy is now a part of a global information economy. This has changed things enormously.

The point is not to stimulate the old Information Economy, stimulating domestic consumption and investment that it likely to go into foreign production capacity and goods in this global economy. The goal instead should be to help to create a new economy, just as we did during World War 2.

At the risk of sounding trite, it is not time to repair the garment that fits us and our time less well. It is time to create a new garment that we've grown into. It is not enough to stimulate the Information Economy; we need to create a new Entrepreneurial economy instead. We probably do need deficit spending to do this. But not deficit spending mindlessly spent on what worked in the 1930s and 40s.


Anonymous said...

Wikipedia has a nice summary of what Deming did for Japan (link). If our economy is salvageable- and I'm not at all confident that it is- his methods are the ones to emulate.

More than anything, I'd like to see a return to family-owned businesses. Even if it resulted in lower salaries and less Stuff Per Capita, I think our quality of life would be much improved.

Life Hiker said...

It's tiring to keep agreeing with you, Ron.

Obama gets it, I hope. He pointed out that new electric cars will use batteries made in Korea, not in the U.S. Ugh!

Stimulus spending on the old economy is like life support. Spending on new inventions and related jobs is like a heart transplant.

Big Al said...

ThomasLB: one of the best opportunities to see a return to family-owned businesses is to see the price of oil get back over $125/barrel. When oil prices soared last year, the cost of shipping heavy equipment/goods to the U.S. from the low-labor countries of the Far East was so expensive that some U.S. companies started to resurrect domestic production. Of course now that oil has dropped over $100 since July, it's no longer profitable, at least for now, ramping up domestic production.

Where I live, ~30 miles west of Portland, OR, we truly have a small, tight-knit community where folks do like to buy locally, and it's not just locally-grown produce. There's a decades-old family run appliance store in town that gives incredible service, including suggesting lower-cost repair opportunities when they come out to look at a home appliance not working correctly. And this same appliance store will price match, even if they're price-matching one of the huge retailers.

Family-owned businesses can and will thrive, but it is critical that for them to survive they need people willing to potentially pay a little more for some items with the realization that the higher cost is an easy trade-off when one looks at all the intangibles provided in return. And we all have to remember we are all part of one big team: we can't expect our salaries to increase in leaps & bounds every year while also expecting locally-produced retail goods prices to either be reduced or not increase. It really is a direct balance equation: if one side rises the other must fall to maintain equilibrium.