Issue #69
Last Update October 31, 2010
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Finance and Technology Damned by Sten Grynir December 21, 2008 Sometimes you're damned if you do, and damned if you don't. On several issues lately, cries of alarm over certain conditions turned to cries of alarm over their opposites. Sometimes the confusion this engenders is warranted, but sometimes it is an indication of a political tug of war. A few of these issues are population growth (and the related issue of immigration), federal deficits, the savings rate of the US public, and the strength of the dollar.
For decades, demographers have been warning that unchecked population growth leads to disaster. Population pressure on food, water, living space, non-renewable resources and energy grow more intense, and dire predictions of mass starvation, water and energy shortages and a decline in prosperity have been made. In response, various countries have made a sustained effort to work towards a zero population growth policy. China has its somewhat draconian one child policy, many emerging nations have pushed for the dissemination of birth control knowledge and materials. There have been notable successes, but the greatest surprise has come with the acknowledgement that rising wealth and health care result in dropping the reproduction rate to sustainable or below-sustainable levels without governmental population control efforts.
In fact, the greatest success in population control has come in the wealthiest countries. Germany and Japan are facing aging and shrinking populations. The United States is not quite at that point, in part because immigration (legal and otherwise) has to some extent counterbalanced the reduction in birth rate for native-born Americans. World population is now actually projected to peak sometime in the middle of this century. We should all be celebrating, right?
Wrong. Panic is setting in in Western Europe, and Japan is busy inventing robots to take care of the elderly when the shortage of young people hits. Even in the US there is some hysteria over the future of social security and Medicare as lowered birth rates lead to an aging population. Plus, and this may be most important, the health of our economy is based on growth, and while some growth is due to invention and increases in efficiency, much of it is merely a byproduct of population increase. Knock out population increase, and growth slows radically, where it doesn't actually come to a halt.
Government deficits is another schizophrenic area. Until recently, when the US ran a significant budget deficit (and, in a similar process, a balance of payments deficit), shrill cries would erupt that inflation was being stimulated, our currency was becoming worthless and a heavy burden of debt was being left to our children. Then, the Clinton administration not only balanced the budget, but had begun to run a surplus, potentially allowing some retirement of federal debt. Everyone was happy, right?
Wrong. Economists and financial experts, from the Chairman of the Federal Reserve on down, suddenly got cold chills down their spines: if we pay down the debt, deflationary pressures will increase, prices will drop and the economy will be in a shambles. Cries went out to find some way of getting rid of the extra money the government was acquiring, and thus prevent repayments on the national debt and economic ruin. (It turns out we were very good at this. Between the bursting of the dot- com bubble, massive tax cuts for the wealthy, and two wars, surpluses became as mythical as the tooth fairy.)
The strength of the dollar is another one of these issues. With both trade deficits and budget deficits soaring, the fear was that the dollar would slip against the Euro, Pound and Yen, making our imports more expensive and generating inflation, and perhaps disinvestment by our greatest creditor, China. As our economic problems spread to the rest of the world, however, the improbable happened, and the dollar strengthened against the European currencies, although it continues to lose ground against the Yen. Now the fear is that a strong dollar will make our goods and services too expensive for the rest of the world, putting our exports at a competitive disadvantage and putting pressure on an already depressed employment situation.
Finally, savings: for decades we have been criticized for having the lowest savings rate of any of the industrialized countries. As a result of this low (or sometimes negative) rate, investment was financed from abroad or by deficit spending, rather than from plowing back our own profits and tapping household surpluses. The same criticism was pointed at our retirement systems - we were not saving enough to fund their liabilities. Well, with the current economic disaster, Americans have begun putting something aside for a rainy day, instead of spending it for consumer goods. Once again, the economists are panicking. If spending is cut back and saving increases, demand will be reduced, further exacerbating the economic downturn and unemployment upturn. You can't win for losing, as the saying goes.
What are we to make of these contradictions? First, economists have an inordinate tendency to panic. When you think you're very smart but don't really know what you are doing, any movement is frightening, not least because it threatens to expose the limits of your competence. Second, given that we are largely ignorant, before the fact, of the consequences of our economic and social actions, we should choose the strategy that promises the greatest benefits for ordinary citizens (lower prices, higher employment, access to birth control, etc.) rather than those that would benefit the abstraction of our national or world economy. This, of course, must be tempered with experience and common sense. Third, we should, when told that our current course will lead to problems, explore what opportunities we can wring from the "problems", should they occur. You can't make lemonade if you haven't thought of what else a lemon is good for.
Perhaps a database of predictions, underlying conditions, and outcomes, would allow us to make smarter decisions and avoid panic. We have good data on conditions and outcomes; what is missing is tying these to the predictions made by economists, sociologists, and central bankers. If we did that, and established some sort of batting average, at least we would learn whom we should ignore.
New York Stringer is published by NYStringer.com. For all communications, contact David Katz, Editor and Publisher, at david@nystringer.com