recession

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Actual News and Outer Space

The ridiculous and unedifying spectacle that has become American politics has finally separated itself entirely from planet earth. It has moved off into space in order to discuss – I use that word because I cannot come up with a more appropriate one – issues that it feels are important. Those of us who remain behind have to deal with actual news. Real things. Problems that exist here and not entirely in the fetid minds of ideologues and lobbyists.

So, in that spirit.

I trust you all noticed the recent spate of news from some of our big companies. They seem to be entering another round of firings. Cisco, Lockheed Martin, and the late lamented Borders are all planning to fire thousands of workers later this year. Poor old Borders has fallen victim to a combination of ill advised expansion and the sea change in book selling. It was doomed to fail eventually. As testimony to the extent of the changes it faced in its business: it failed to find a buyer when it offered itself up for sale at bargain prices. It now is being liquidated. Cisco’s case is more interesting: it is making decent profits and has no compelling need to cut back. More importantly, it is one of the more outspoken leaders of the push to get a tax amnesty for all the cash big business has stashed away in various offshore tax avoidance schemes.

As you may recall there has been a concerted effort in Washington to give big corporations tax relief on their cash they hoard offshore. Their tax avoidance lawyers and accountants have been so successful that many of them have billions hidden around the world. Cisco alone has $30 billion sitting abroad. The demand for routers and networking equipment in the Cayman Islands must never be underestimated. Apparently all three local inhabitants spend freely – about $10 billion each.

Anyway, it is just a bit ironic – as in totally tone deaf – for Cisco to be announcing layoffs and thus adding to our unemployed and the cost of unemployment, at the very same moment it is flaunting its offshore cash hoard, and its desire to extract a tax cut so that it has an “incentive” to repatriate those funds. I can hear the obvious next words coming from the lobbyists mouth: if you give us amnesty we will bring back our hidden cash and invest. That will create jobs back here in the US. We should be rewarded for being good citizens and creating those jobs, so how about a tax break on investment?

The problem is that our politicians always fall for this rubbish. Instead of closing the tax avoidance loopholes, they cave in whenever they hear the magic words: “new jobs”. They overlook those old jobs. The ones cut to make way for the new ones.

But back to the news. Job cutting seems to be back on the agenda. Why?

This is the season for businesses to start their planning for next year. They are looking at the prospect for sales and not seeing much improvement. Since the CEO’s and other executives are paid to keep profits rising, even in years of bad sales, they turn to cost cutting as the most obvious way to ensure their bonus pool targets are met. Since demand is flat or weak, they have every incentive to fire more workers. They are being rational within the game they play.

That they hurt the economy is not their problem.

The people who should be worrying about the economy and how to offset the self-serving actions of our CEO’s are in Congress. And, as I noted earlier, they are off in space somewhere worrying about problems like the debt ceiling, deficits, and the national debt, none of which should be on their short term agenda. And should not get back on the agenda until we have pumped up demand.

Instead – do I need to say this? – reports from outer space tell us that our Congressional leadership has decided to compound our economy’s problems and throw us into cost cutting mode in government. So not only is the private sector – the place where this crisis all started – settling down into more cutbacks, but the public sector is as well.

Enquiring minds are thus led to ask: from whence will the recovery emerge? If the entire economy is moving back into contraction, where exactly will growth come from? Or is that too earth-bound a question?

Nuttiness is an attribute best exhibited in fruit cakes. Not in national economic policy. Someone should let Congress know.

Only don’t write to Washington. Address yourself to outer space.

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Dispelling The Rubber Duck Theory

It’s hard to tell. The problem with a stagnant economy is that when news is announced there is a tendency to yawn and go back to sleep. That condemns us to further stagnation, but, as I have argued before, our elites have thrown in the towel. Either they don’t care, they haven’t a clue, or they are happy with what’s going on. Perhaps a bit of each.

Today’s news fits this pattern. The weekly report on new claims for unemployment assistance is dismal. Claims rose, not massively, just a bit. By 9,000 to be exact. That gets us back up to the 429,000 level, which is terrible for an economy this far into a supposed recovery and with the amount of slack we have. Something dire is wrong. And the reaction from officialdom? Yawn. Oh, and the data for the week before last was adjusted – upwards. That had the effect of making last week’s increase smaller than it would have been.

Meanwhile, sales of new homes fell 2.1% in May. That’s not quite as bad as analysts were expecting, but it perpetuates the long gloom in real estate.

Let me see what else is going on?

The activity index in the New York Fed district slipped back.

Consumer confidence is all over the lot, but generally people remain in a sour mood.

Long term interest rates are low, which under normal circumstances should encourage borrowing in the interest sensitive parts of the economy, but having no effect because households are still nervous about the future and need to cut debt even more.

The list goes on.

Every time we read a bad or weak report someone tries to brush it aside as an exception. Hence the current notion that we have hit a temporary lull in an other wise decent upward path.

As you know I have a problem with that line of reasoning. We have had far too many of these exceptions. So many that they are no longer exceptional. They are the norm. During the crisis there were plenty of analysts who argued that the depth to which we plunged implied a very rapid recovery. I call this the rubber duck theory: if you hold a rubber duck under water it will shoot up whenever you let go. The idea being that the original buoyancy is unaffected by being held underwater, and will re-assert itself as soon as the downward pressure is removed.The problem is that our economy was not a rubber duck, or if it was it now has a gaping hole in it so that original buoyancy has been drastically changed by the crisis. Our particular duck on water and is not bouncing back.

We all know why this happened, so let’s not repeat ourselves.

The general point being that our economy has been re-engineered significantly in recent decades, and so its bounce back capability has also been altered. This was, I think, an unintended consequence of the massive re-structuring of the past three or four decades during which we kicked away many of the institutional supports and frameworks that provided buoyancy. We shifted risk onto household shoulders by reducing wage growth while adding burdens like rising health care and education costs; reducing privately provided retirement security; increasing job insecurity; and allowing asset price bubbles. These all came about due to the opening up of the economy and the general deregulation program begun back in the 1980’s. In the face of this shift of risk onto those least able to sustain it, we not only slowed growth in good times – the trend line of the 2000’s was much flatter than the previous decade – but we altered the economy’s ability to recover. One of the most notable aspects of recent decades is the enormous lengthening of the employment cycle. The time it takes to recover back to the previous employment peak after a recession is now radically different from the early post war decades. We have introduced a lot of ballast into that rubber duck.

So instead of recessions being short and dramatic perturbations in an otherwise steady rate of growth, they have become longer and longer spells of disturbance. We have surrendered a great deal of wealth as a result. And more worrying, we may have shifted the long term trend line downwards as well. After all an economy with heightened risk is one with less overall confidence, and is thus likely to move more cautiously.

That’s where I think we are now. The average person is having to absorb much greater risk in their ordinary life decisions. Their day to day finances are more precarious. Their job outlook less upbeat. They see no end to the rising cost of health care and education – two of the biggest cost for most middle class families – and their prospect for decent pay increases seems like a dim memory.

Many of my colleagues apportion a lot of the blame for our malaise on the accumulation of debt that now needs to be paid down. I se that pile of debt a symptom not a disease. The deeper problem, as I have said many times before, is the imbalance in the share of productivity benefits accruing to wages or to profits. Previously, in our more regulated and institutionally more rigid economy, there was a more equable balance. Post deregulation, and in the aftermath of modern management techniques – both of which are grounded in a common economic theoretical basis – that balance was lost.

This led to the shift in risk I mentioned; to a surge in profit at the expense of wages; to a heightened privilege for capital owners; and to a diminution of labor. Since the vast majority of families provide for themselves and their futures through the provision of labor to the economy, it was inevitable that the social engineering of the Reagan/Bush era would alter the way in which the economy bounces back from any shock it endures.

On the surface it may appear that we introduced, or encouraged, flexibility by reducing structural blocks to change in the economy. And in those odd models some economists use such flexibility might appear to enable the economy to adapt more easily to shocks. But in fact the opposite is true. Those structural blockages were actually shock absorbers from the point of view of the average household. They mitigated the damage. By removing them, far from increasing adaptability, we have had the reverse effect: we have made the average household less capable of withstanding shock, and therefore we have made them more risk averse.

That risk aversion is the current drag that is dispelling the rubber duck theory.

To get our bounce back we need to re-introduce some of those structural and institutional supports to provide a framework within which average families can plan their futures with confidence. Then they can save and spend in a way that sustains the economy at a higher level of activity.

One last thing: privatization is just another word for piling more risk onto the already burdened shoulders of average families. It sounds nice, if that’s what you like, but that extra risk will reduce, not increase, the degrees of freedom households have to spend. The current proposals to reduce or eliminate Social Security and Medicare are nothing but a massive attempt to add to the burden that households have to bear. Arguing that they will have additional choice is specious. People only have choice if they can afford to exercise such choice. Additional choice without additional income is a cruel hoax. If wages don’t rise to compensate for this additional risk, all we achieve is to add more ballast to that rubber duck.

At some point it will simply sink.

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Historic Fog

Ugh.

The numbers are just horrible. We have wandered off into the desert and will not return for years. Here’s why:

  • Household debt is still way too high. It is well down from its peak of about 130% of disposable incomes, and is now “only” 115%. But that compares with an average of around 75% for the last few decades of the last century. Something tells me that we are still retrenching furiously. That undermines aggregate demand. That is why underemployment is a feature of the economy we will not eliminate any time soon.
  • One result of the retrenchment is the lack of consumer spending. America is a consumerist nation. It has built its economy around private consumption. But we have never seen such a prolonged period of practically zero growth in consumption as we are currently living through. This is a first for post-war America. Our elites have no answer. They are fumbling. All their policies fail to match up with the historic fog we are in. We have had thirteen straight quarters of weakness in consumption, and while those debt levels are where they are households are likely to keep a tight lid on spending.
  • Savings are deplorable. Despite the retrenchment and the reduction in spending rates, households are having a hard time saving. Yes the savings rate is up somewhat from its derisory levels during the years of illusion, but it is less that half what it was back in the latter part of last century. And things are getting worse: one of the great shifts of the decades of illusion was the movement of risk from businesses and government onto households. The shift from defined benefits to defined contributions is one example: it exposed millions of households to a risk they had never shouldered before and are not well equipped to deal with. As the baby boomers approach retirement they are realizing how short they are in terms of invested cash. With the slump in home values depriving them of wealth too – albeit paper wealth – this is the first American generation since World War II, to be faced with an urgent need to save instead of spend. An unintended consequence of privatizing all that risk is to bring upon us the end of the consumer boom. By putting the onus onto their employees, businesses have reduced the spending power in the economy and thus cut their sales prospects. That means the endless short term focus on profit is going to end up as a longer term loss.
  • The shift of risk to households would have been ameliorated had wages risen to compensate for the risk. But they didn’t. Businesses have tried to have their cake and eat it too. They cut their own risk by trimming benefits, but they have kept wages flat too. Indeed real wages have fallen by 1.6% over the last year. This is also historic: this is the first recovery ever, where seven quarters in wages have not risen. There is no way that consumption can rise if wages are held flat. No way, unless, that is, consumers are not inclined to pile up debt. And, as I have already said, they are not so inclined.
  • This accumulated freeze up of the consumerist spigot is having an enormous impact on smaller businesses. Not only are bigger businesses slashing costs in order to boost profits – this cuts into small business sales since they usually occupy a lower rung on the supply chain – but small business sales direct to consumers are being radically reduced. The National Federation of Independent Business, a small business trade group, has just released its survey of its members: the majority are freezing hiring in anticipation of lower sales volumes. Yes fewer are reducing payrolls too, but, for the first time in almost a year, they are not hiring either. The number one one concern amongst small business is the lack of sales. High taxes and government red tape – a perennial gripe of small business owners ranks third.

Even if we ignore the continuing instability of our financial sector – too big to fail will come back to haunt us sooner rather than later – this list of issues is not one that is easily solved. These are intractable and long term in nature. They imply a very significant shift within the economy – away from consumerism … but towards what?

Some people argue we need to pump our manufacturing up again, but this is a long term solution also and worldwide competition is ferocious. Plus it is not at all clear what we would manufacture. Does this approach portend trade wars? The imposition of tariff walls? The phrase “industrial policy” gets bandied about, but where do we invest? And, even if we back winners, who is going to buy all these domestically produced goods if we have shifted from a consumerist economy? The implication is that we are headed more towards a German, Japanese, or Chinese style export driven economy. Who, then, will take our place as consumer of last resort?

If the American economy is in a historic fog, and if our policy makers have only a set of policies built for the old style consumerist days, it seems clear that a decade of stagnation and frustration is the more likely prognosis.

And on the policy set: neither major party, no business group, and few if any academics, have yet been able to articulate anything new. They all appear to be in denial of the shifts I have outlined. Their prescriptions have all been tried and all have failed at least once. The last ten years have been a spectacular flop: we cut taxes with an historic verve only to debilitate government and produce no visible boost in growth. Wages stagnated. Profits soared. Debt became the only way most Americans kept up with rising costs. The years of illusion ended with a thud when we hit the wall and our banks imploded. The clean up, and the return to sanity, like those days after any binge, will be longer and grayer than it might have been had we recognized the pathetic emptiness of the ideas that led us so far astray.

Historic fog indeed.

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Election Dreamscapes

Scary but true: we are about to enter the next presidential election process. Yes the election is way off in the future, but the American electoral process is so cumbersome and expensive we have to get a good running start. Our bevy of candidates all have a lot of fund raising and jockeying to do. This cycle will be dominated by a race to the right. The Republicans are all hell bent on staking out extreme positions. With the possible exception of Mitt Romney that is. He seems to be the chameleon candidate moving deftly from one position to its opposite just enough times to satisfy the red meat eaters that dominate the Republican primary election process, but still allow him to appear centrist enough for those not fully infected with Tea Party mania.

I had thought that the Ryan economic plan would become the yardstick by which we measure right wing lunacy this time around. His positions are extreme enough to make him look tough enough to the crazies who fill the right wing caucus and primary audiences he has to appeal to. Plus his plan to eliminate Medicare and redistribute income upwards to the top 1% of wage earners – they are having such a hard time of it at the moment they need all the help they can get – is straight out of the dreamscape playbook that modern Republicans carry with them.

The central themes of contemporary Republicanism are all too familiar: government is too big, which means taxes are too high; if we lower taxes this will put more money in people’s pockets and unleash a wave of growth fueled by investment; this wave of growth will generate jobs and thus cure all our lingering post-crisis ills. Meanwhile, so the story goes, the massive amount of debt we have accumulated as we fought off depression is justification for severe austerity at both the Federal and State levels. The focal point of austerity being the need to get rid of all our safety net programs and thus free people up to decide for themselves how poor they want to be in retirement, and whether they want to afford health care or forgo it as being just another consumer item.

These themes are simply the result of collecting together all the sacred free market nostrums of conservative movements around the world and cobbling them together into a right wing narrative. It is the Reagan legacy writ large. The motto is simply: “the government is the problem”.

In other words, there is nothing new in any of this. Most of it has been tried piecemeal and has failed. But the truly committed seem to think that if they implement it all at once it will work its magic. For instance the Bush era was one of experiment with low taxes. It was a total flop. The economy grew, but at well below its historic trend rate of growth, employment was well behind that trend, and only profits boomed. Oh. And we rushed headlong into the mother of all asset bubbles as we obsessed over real estate.

Nor did Reagan fair any better. His supposed triumph is invisible in the context of the economy’s long run trend line. The economy merely maintained itself at around the average rate of growth. His only long term legacy was the onset of our current deficit problem, and his record as being the first peacetime president to advocate deficit spending as a way to finance the build up of government. Both Reagan and Bush left government larger than they found it, so neither can claim to be true right wingers in today’s parlance. And both increased our debt, which presumably tarnishes their right wing credentials too.

OK. I am making this last bit up.

Both Reagan and Bush occupy hero status in the whacky non-fact based world of contemporary right wing politics: apparently their reckless fiscal policies are acceptable to the loyalists even though they claim to bash fiscal recklessness. After all they laid the foundation for the current attack on the safety net. If we didn’t have those huge Reagan/Bush deficits the notion that the safety net is simply too expensive for poor old America would ring more than hollow.

So. The election is set up. The Ryan plan was looking good as the establishment right wing economic policy.

But no.

It turns out it wasn’t extreme enough for the party loyalists. It simply wasn’t whacky enough.

Enter Pawlenty.

His plan is now available for us to critique. It is patently absurd. Which means it will garner a great deal of enthusiastic support and admiration from our clueless media.

The central theme of the Pawlenty plan is the declaration that we have not been upbeat enough. We need to shoot for higher growth. He says we should build our policies around a target of 5% per annum GDP growth. Since the US has never, ever, sustained 5% growth for a decade – as Pawlenty advocates – his plan is ambitious to say the least. I agree that were we to sustain a non-inflationary GDP growth rate of 5% per annum for a long time most of our debt problems would melt away. That bit is OK with me. It’s just that his plan doesn’t get us there. It’s just a pile of the usual right wing stuff – all tried and failed – with the big difference that he doesn’t even try to pull it together into a coherent whole.

Pawlenty wants a radical overhaul of our tax code. So do I. But his overhaul is just code for slashing the top rates of personal tax, reducing the corporate tax rate, and abolishing all tax on dividends, interest payments, and capital gains. This will, he argues, be sufficient to unleash that investment boom the right wing always argues is just around the corner were we only to set capitalists free. So if you’re rich: clap your hands. If you’re poor: emigrate. The Pawlenty plan is a naked attempt to shift income upwards from the middle and poor income earners to the top. It moves money from those most likely to spend it to those least likely to spend it. So it drains demand. And there is no evidence that the rich would invest it in anything remotely useful. You can almost smell the next bubble brewing. Since the economy is not supply constrained right now: we have excess capacity, and business investment has risen from the lows it flopped to during the crisis, it is hard to see how shifting more wealth upwards would have anything other than a depressing effect on activity.

Nothing daunted, Pawlenty then doubles down on the lunacy. He advocates a constitutional cap on government spending. So any spending over that cap would be illegal. This is analogous to the balanced budget laws that are forcing states all across the country to slash services and fire teachers, policemen, and firefighters in order to restore their budgets to a balance. Only instead of slowing the economy at the local level Pawlenty wants to doit on a grand scale at the national level. Pawlenty’s goal is to cap spending at 18% of GDP. That’s lower than it has been in any recent decade. So the implication is severe Federal spending cutting. That implies a draconian reduction to GDP. Gulp.

Plus, this cap is truly absurd when we are about to enter a period of increased spending as our population ages and moves large numbers of people into their safety net years. Our per capita spending may not go up, but our aggregate spending will. We have more people to spend on. By the way the sophisticated reasoning I use to reach that conclusion is called arithmetic. So: we get rid of our programs for the elderly just as we have a huge bulge in our population of elderly. That makes sense. Conversely: we could accommodate those folks by getting rid of everything else to keep spending under that 18% cap. We certainly couldn’t afford any wars, which, surely, would upset the right wingers. And we would have no dry powder to fight off a new depression. So we would be reduced to passive onlookers were the banks to blow the economy up again. Somehow they’d have to bail themselves out next time.

The Pawlenty plan would be hilarious were it meant as a spoof of the Ryan plan, which was merely ridiculous. Unfortunately I fear that it is meant a serious entry into our political discourse. In which case we can expect other Republican candidates to try to one-up it by being even more outrageous. I expect Bachmann to pray to ask for divine guidance as to what her GDP target rate of growth should be. I also expect it to be insane. As for the rest: they are such a motley crew of free market magic and libertarian advocates, that I shudder to imagine what they will offer up.

Meanwhile Romney will flip flop furiously in order to confuse us such that none of us understands what his policy is. I expect him to have advocated everything and nothing all at once by election time.

Such is our political malaise. We seem headed into the most vacuous, policy bereft, campaign in living memory. The right wing has wandered so far off the reservation that nothing remotely sensible is likely to emerge to challenge the pablum that Obama serves up.

That’s a shame.

Obama needs to be held accountable for his timidity and overly bureaucratic response to the crisis.

One last point: if there is a discernible theme emerging on both sides of the political aisle, it is that we need supply side solutions. That’s unfortunate, since we have a demand side problem. This means we will not be making any attempt to fix what truly ails us.

Hence my continued expectation for a long period of stagnation

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Now What?

After the steady drip of weak to bad news over the last few days – and weeks – today’s rotten employment figures from the government are no surprise. We are entering the summer on a decidedly down note. The much hyped recovery of last fall and winter is dissipating and turning into exactly the mucky and unsatisfactory stagnation I feared would develop.

We could have, and should have, avoided this. But here we are.

First the numbers:

The US economy added a paltry 54,000 jobs last month. That is the smallest increase since last September, and well below the widely expected figure of 125,000. Remember that the ADP report last Wednesday, that report showed an increase of 38,000 in private sector payrolls, was so rotten that the original expectation was cut from 175,000 to 125,000. So the pundits totally underestimated the mire we have walked into. Pundits are usually off target: they tend to overshoot on both the upside and the downside, but this miss is testimony to how difficult it has been for our Wall Street and business elite to embrace the current weakness. Their market magic has a tarnish to it they just don’t want to admit to. Worse still: the unemployment rate ticked up to 9.1% ending its decline from the peaks at the worst of the crisis. Remember that much of the gain has not come from job generation so much as from people leaving the workforce. This exodus has pushed workforce participation down to very low levels which debilitates the economy by withdrawing potential productive resources – experienced workers – from our capacity. It used to be that the US had higher participation rates than other industrial countries. It now lags.

At this stage of a supposed recovery a jobs figure of this nature is awful. It spells trouble ahead. And it speaks directly to our accumulated policy failure. It isn’t as if we have not been aware of the problems in the job market. They didn’t just pop up from nowhere. This is a longstanding and insidious issue that our leadership has chosen to ignore. They hoped, presumably, that magic would solve the problem before they had to become further involved. The mistake was made at the inception of the Obama regime when he fell for the argument that policy should stave off the worst and that magic would then do the rest. I used to pin the blame on Larry Summers, but let’s now spread that about a bit more. The entire crew failed.

The issue now is: what do we do?

Now what?

Not a lot, seems to be the answer.

I have repeatedly beaten the drum about our dysfunctional politics. This is where that toxicity bites hardest. It may be that our elite can see the problem. How can they not after numbers like these? But the persistent need to run for election and, worse, to raise cash to support a campaign, implies that there is no respite from political cut and thrust. There is no time for policy debate or implementation. There is only time for political to and fro. The margins between our election seasons have been blurred to nothing. Contemporary politicians are in perpetual election mode. Not only does this numb and confuse the voters, but it prevents discussion and compromise. Or, rather, it makes those things highly unlikely. Inaction is thus preferable if it produces an election advantage. Even if it makes matters worse within the budget or the economy.

Ironically this is not a problem of bad politicians. It is a problem of a bad political system. Which makes it far less likely to be resolved. Americans are raised to believe in the supremacy of their system. They deny that the cause could be systemic, so they over react to the people – the politicians – within it. Hence the recent volatility of voters and the attraction of extremist solutions. This kind of systemic breakdown is not unusual in history, and it may not be fatal in this case, but few expected America to fall towards banana republic bickering, corruption, and outright ineffectiveness so quickly after the apparent victory of the Cold War.

It isn’t as if we don’t know what to do. We have the policies. We have the ideas. We simply cannot act. On one side of the ledger we have leaders too frightened to act because it would open up a political disadvantage. On the other side we have leaders who are ideologically predisposed to the destruction of the economy as we know it. It’s a tussle between radical social re-enginering – the Republicans – versus clinging onto the status quo – the Democrats.

It is bizarre to watch and listen to policy discussions – or what passes for policy discussions – that are full of the very ideas that caused the Great Depression and almost devoid of the ideas that solved it. It is as if we are determined to repeat the errors of the late 1930’s. Presumably the average voter is unaware of this. They see and hear only what they take to be current ideas. But that is not so. The similarity with 1937 is uncanny. The arguments are almost identical. Yet the last few quarters have been an excellent real time test of the clash of ideas that dominated the 1930’s, albeit in updated form. At every turn the successful ideas, back then, have worked once more. At every turn the failed ideas, from back then, have failed again. But those failed ideas keep on being surfaced and pressed forward.

It is as if our entire economics and political elite has gone through a determined and thorough effort to forget what was successful. The reason for this voluntary amnesia is that an implication of the successful ideas is that governments and institutions are critical to economic success. Critical. Since this is unpalatable to an elite raised on market magic – both parties to varying degrees, with business, and the academic mainstream as well -they would prefer to forget and plunge us into the abyss as if this were a totally novel set of problems. It isn’t. History is repeating itself. Unfortunately we have failed to learn from it. So we are doomed, or appear to be doomed, to repeat it. At least in some form.

I realize that there are those who argue we have learned. I agree only to the extent that the ideas still exist and are available. What they ignore, and what I put a great emphasis on, is that the context into which those ideas have to be placed in order to have effect has regressed.

Within the narrow confines of economic theory the ideas exist. In the much broader context of an actual economy, replete as it is with complex interplay between institutions, technologies, knowledge, culture, social networks, and the variability of geography it is much less obvious that those ideas exist any longer. Indeed I would argue they have been thoroughly expunged.

When a country falls prey to its own success and eliminates diversity of thought, as the US has done with its obsessive belief in capitalism, it opens itself up to failure. Indeed, failure becomes inevitable. It becomes a one trick pony. So when it is confronted with a change in its environment, its ability to adapt is impaired. Possibly fatally so. Maybe be not in our case, but perilously close to it.

This is why I decry systemic efficiency: it implies that future problems will mimic past problems, so that all we need to do is to solve for the most effective way to deal with those problems. And then forget everything else. In business this is called a niche strategy. The notion is to locate a niche in the market and then optimize against it. That’s fine as long as the niche exists. The risk is enormous, however, if the niche goes away. The US has become a niche player: all it knows and can do is market magic. If that doesn’t work it drifts as if there isn’t anything else to do.

I advocate an alternative: keeping a balance. I believe we cannot know the future sufficiently, so we will always need to learn new things. That means, inevitably, that what we know today is not enough. We need to remember what worked and when. And we should never, ever, fall prey to the notion that a monoculture is a stable strategy for survival. We need to avoid the arrogance of assuming certain knowledge.

Nature, and in our case the economy, has laughed in the face of that arrogance before.

It is laughing in our face now.

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