Recovery and Growth
by Win Wenger, Ph.D.
The free market, with its pricing mechanisms as inducements and inhibitors, acts as a Directory. As a Directory, it steers people and resources toward more and more valued, productive uses and away from uses which are less rewarding.
There are, however, problems with those mechanisms, problems which today go largely unrecognized. We've known since the very inception of the free market of very major categories of economic activity where what is rewarding to the provider runs seriously counter to broader public interests—but, to date, our methods for countering such effects have been clumsy and costly and eventually counter-productive.
We also observe another key problem, without whose solution the developed economies of the world are condemned to stagnate or worse. We see that costs of traffic commuting, and high costs of land, work their way through almost all sectors of the economy to raise the costs of and pinch out the emergence of small and new enterprises. New enterprises normally are our main source of economic growth.
Nearly all the developed countries are at or near an economic ceiling, for these same two reasons: of higher costs in choking traffic and expensive land. The developed countries presently face an extended prospect of recurrent economic crashes, weak recoveries and mounting unemployment. To restore major avenues for real economic growth, we must find some ways to effectively reduce those costs and thus make it easy again to launch new enterprises, whether these are independents or whether they are adventuring programs from existing firms.
Among our several suggestions and recommendations, we propose that developed nations now should make major new investments in infrastructure to clear out costly traffic choke points, and to make inexpensive land much more accessible to the centers of population and of economic activity. We will suggest in this present brief, among other possible measures, one move which addresses the major cost problems of both land and traffic. Several additional options also appear to be worth examining.
Three major ways to restore a vital economy:
Let us look at three basic problems:
The main source of substantial new economic growth, time and again, is by the activities of new enterprises. Costs of problems 2 and 3 pinch out the emergence of new enterprises and therefore pinch out new growth. Once we understand Problem #1, we understand conditions where some form of intervention in the marketplace is required in order for critical problems to be solved.
Problem #3 is definitely not the Land Rents Law theory of 19th Century American economist Henry George, because land values are not the only factor controlling what is happening. Other factors obviously figure in, but whatever else is going on, Problems 2 and 3 are now hugely expensive factors driving up other costs and especially the costs of launching new enterprises.
Yes, high labor costs and benefits are also a factor, but not the main one: a comparison of Japan's and America's economies demonstrates that. Japan's labor costs and benefits were far behind those in the United States when the recession of the early 1990s hit, but Japan was way ahead of everyone else in the skyrocketing rise of land values. It was Japan that has suffered its "lost decade" of recession, stagnation and lost growth in its economy. Now the rest of the developed countries appear to have entered into a possible stagnant "lost decade" and worse.
Indeed, the rising cost of housing, and the daily loss of billions of dollars of man-hours to sitting in traffic jams, is a major driver in the escalation of labor costs and benefits. For many reasons but especially for reasons of escalated land and traffic costs, the costs of launching and housing a new enterprise have become literally prohibitive. It is suggestive that so much of the last surge of real economic growth was digital, through the Internet.
If there is to be a saving grace to all this, we can expect an even higher proportion of such real growth as occurs in future to be through the Internet, though that, also, is pinching out with rising costs of mail and deliveries, and of unpoliced fraud.
Looking a little further back in history, a major part of America's enormous economic growth this past half century was due to the massive investment Dwight Eisenhower's administration initiated in traffic infrastructure. That, perhaps, was undertaken because successful contemporary military generals, and in this instance the former commander of the US-led Normandy invasion, had to be extremely conscious of logistics. This infrastructural "surge" brought very broad, and initially inexpensive, regions of the American countryside within immediate convenient reach of concentrations of population and economic activity.
Japan has made some move in this direction. Every city has gone very three-dimensionally vertical in its handling of traffic, and it almost seems as if every hill has a tunnel burrowing through it; but they have not yet done enough to keep up with their traffic problems, much less get on top of them. More has to be done—indeed, more strategies must be applied—to bring cheap land close to costly land and immediately accessible to main concentrations of population and economic activity.
Whatever else is going on, for us to correct these two factors, of traffic jams and of expensive land prices, will very strongly tend things toward substantial new economic growth.
The Free Market system as a Directory
Let's take matters from the top, with Problem #1, reflecting some considerations of the pricing mechanisms of the free marketplace as a Directory, which within certain limitations steers people and resources toward more productive uses. Within a given range of conditions, it is widely agreed among economics-related professionals that by far the most effective, flexible and efficient mechanism for steering people and resources toward more and more productive uses is the pricing mechanism of the free market.
If a good or service is valued more highly, people are willing to pay more for it; and this attracts people and resources into higher-paying uses and away from goods or services which are valued less and whose provision is therefore deemed less productive of value. The free market system became one of the earliest examples of our still-building understanding of how self-governing systems work; and these understandings, in turn, have profound implications far beyond the economy. So, within a given range of conditions, the free market is, as they say, "a very good thing."
One trouble, however, is that we've made the free marketplace into a religion, and that has blocked our perceptions in two ways. Some can see no wrong with the marketplace and reflexively oppose any attempt to modify its actions. Some, in response to many instances of wrong outcomes in the marketplace, see the market as the enemy, compared to other, alternative methods of provision. At best they are impatient of, and see, the marketplace as a distraction away from getting done more directly and immediately the things which so badly need doing.
Especially these two opposed ideological religions, with the free market as God in one camp and Satan in the other, have ruinously blindered the perceptions of most economists. Adam Smith's The Wealth of Nations concept of self-governing systems was clear and completely on target in demonstrating how, within a given range of conditions, the pricing mechanisms of the natural, free, ungoverned marketplace steer people and resources, like an "invisible guiding hand," away from less productive and toward more productive uses and in directions which serve the common good working toward improving everyone's well-being overall.
Smith was clear and specific in defining the range of conditions within which the free marketplace works positively and constructively. He was likewise clear and specific in defining the boundary conditions, outside of which the free market mechanisms become deranged and work destructively instead of positively. We have addressed a few of these boundary conditions in the article, Mixed Economy, and in our free online book, Incentives As A Preferred Instrument of Corporate and Public Policy. Mostly, these boundary conditions feature situations known as "externalities" and "indivisibilities."
With cost externalities, much of the cost of what people do is felt largely by other people not privy to the action. An example is pollution, which is largely felt downwind or downstream of the factory while the owners and decision-makers live upstream and upwind. Too often it is worth their while to take an action whose costs to others make that action deleterious to society as a whole.
There are also benefit externalities—e.g., the benefits of your shoveling snow off your particular stretch of sidewalk are felt mainly by other residents and users of your block—just as you benefit from their clearing their sectors of sidewalk. Since people other than the shoveler are getting most of the benefit, the inclination is to forgo the labor costs of clearing your stretch. Others feel the same inclination, so everyone around the block loses accessibility unless snow clearance is somehow constrained by laws and government overriding our freedom.
Another of these boundary conditions is that of indivisibility, where you cannot divide up the costs in clear accord with where the benefits are going. How do you divide out the costs and charges for an immunization program, for example, that heads off a public typhus epidemic? Or what charges should be levied on St. Louis for the costs of defending Pearl Harbor in Hawaii?
We are no Adam Smith. Nor is this brief article a book with room in it to explore everything relevant, so we refer you to look to Smith's The Wealth of Nations for source discussion, definition and characterization of the other boundary conditions outside of which the free market's "invisible guiding hand" mechanisms work destructively instead of positively and constructively.
We will, however, note here as especially relevant to our times and to our recent panic and economic meltdown, one more of those boundary conditions. When times are turbulent or in rapid change, as in an emergency, the market's pricing mechanism is largely steering people and resources in directions different from and in many instances destructively opposite to that of more productive and/or beneficial use. Those prices no longer reflect either the costs of production nor of provision, nor do they reflect an intelligible pending future.
And with such prices as there are, people on the whole no longer know how to read them accurately, even if they are able to respond to them, which in many instances they no longer can. So prices run amok and unrelated or poorly related to the economic realities at that time.
Our point here as to what has been misunderstood or ignored
Our point here is not intended as a criticism of the free market. The pricing mechanism of that masterpiece of self-governance, the free market, is sheer genius as a way to get things done effectively and efficiently, on a scale which supports and makes existence possible for today's great populations and greater complexities of sustenance and operation.
Our point here is, instead, that there are limitations outside of which the market acts ruinously instead of positively, and others are reflexively indifferent to the remarkable virtues of the free marketplace, even within these boundary conditions; so as power oscillates between these two different sets of blinders, the best opportunities in both instances are ignored and wasted, and we all are bearing the costs of this "externality."
Without the blinders, it would be the most natural easy question in the world to ask at this point, "How might we extend the conditions within which the free market serves accurately as a Directory and toward general well-being?" But so many of us are so blindered on either side of this issue that this question won't even seem intelligible to them or make any sense; it has already slid right off them as gibberish. So that makes the prospects of a useful answer to that question appear problematic.
For a partial possible answer, though, anyone still reading this brief we hereby refer to the Mixed Economy article, to our Incentives book, and to the original Wealth of Nations by Adam Smith. Within those boundaries, the free marketplace is head and shoulders above other ways for getting things done.
What has been misunderstood or ignored by the many who have made the free marketplace their positive religion is that there are boundary conditions, which we ignore or fail to notice at our peril.
Two general ways to improve the long-term economy
with regard to Problem 1:
Here we will mention a suggestion or so as examples of how to lower costs and raise effectiveness for new enterprises, laying the bases for substantial economic growth, generally and in times of emergency and change.
For a wide range of economic conditions within the boundaries, the free market is by far the preferred mechanism for getting things done, and for steering people and resources toward more valuable and productive uses. Outside those boundary conditions, the market goes awry both as a Directory, as the most efficient way to progress and produce, and as regards its "invisible guiding hand" aligning private with public general interests and well-being.
In the first year or so of a given project or "mission," governments and agencies often attract high-minded people into idealistic and sometimes wonderful service—but in a year or so, matters become a routine job under conditions which soon result in yet another bumbling, inefficient and costly bureaucracy.
One proposed recourse: use incentives to the private sector as a major offset to economic-involved activities which entail a high proportion of externalities and/or indivisibilities. Tax activities which levy external costs. (—And, where possible, provide temporary incentives to change factors in those activities which cause those costs.)
Provide incentives against taxes in support of activities where benefits spew out beyond accounting, so that the providers of those benefits themselves receive some benefits from what they are providing. President Obama's proposal (September 21, 2009) to invest 3% of gross domestic product in research and development, with an emphasis on basic research whose benefits spread unpredictably everywhere and unaccountably—and mainly through incentives rather than direct government provision—represents, if enacted and carried through, a truly great start on what needs to be done.
Even by itself alone, that action would make at least some respectable real economic growth likely for the United States, and will have a similar benefit for any country and economy where implemented. In conditions of emergency and rapid change, we should be ready to temporarily intervene in the marketplace to correct obvious wrongs and to end or forestall panics.
Those provisions and interventions must be temporary, however. Restore the normal workings of the marketplace as soon as possible and then sunset the new agency or office. Every agency of government should develop stand-by contingency planning for emergencies, not only the military and FEMA, so we aren't caught short as we were in 2008, with much of our trillions of dollars in interventions wasted and much of the rest not yet providing the effects that were intended.
Note, by contrast, the instant blow-through success of the recently concluded "Cash for Clunkers" program, which at least temporarily restored our auto industry, backbone of America's national industrial economy. Incentives work. People respond to them. Incentives are much less expensive to the public treasury—and to taxes—than if the intervention is wholly through government actions and administerings. There are a good many ways to make certain that incentives are on target and do the job intended—please examine some of them in Incentives As A Preferred Instrument of Corporate and Public Policy.
The other, more general suggestion is to use incentives to encourage the free market to involve more in those economic activities which bear greatly on our economic future. America's rate of long-term investment has been at or near the bottom for more than a decade, and we are feeling some of the cost of that diminishment. Infrastructure is definitely part of that, as are improvements in our methods and in our institutions of education and training.
Meanwhile bear with us, both of our remaining readers who are still reading this brief, because there are two other key points to address, and there is possibly more that we can do about those two points.
Reason #2 as to why the developed nations
have largely topped out
All the developed nations are now in prospect of running painfully into economic ceilings and then falling back into panics, recessions and depressions, from which they recover only slowly and partly before bloodying their noses on a ruinous invisible barrier and recoiling into yet another round of economic miseries.
We in the developed countries may still realize some actual economic growth. Most of that will only be through expanding trade with some of the developing countries, unless something like the plan to boost research investment through incentives, announced by President Obama on September 21, 2009, is actually implemented, in which case we might actually experience some real growth despite ourselves.
Meanwhile, our main economic growth depends upon our solving both the traffic and the land-price problems. Moreover, nations which are developing rapidly now, as they take on the characteristics of the developed nations, themselves are likely to stall out for the same reasons that we have stalled out. As things stand, it seems that the "lost decade" of Japan's economic situation has very much become the future of the rest of us in the developed world, or eventually becoming even the lost century, unless we solve these issues.
Japan hit these two major causes of this economic ceiling barrier a little sooner and a little harder than did the rest of us. A personal note: this writer's recent teaching visit there helped him greatly to clarify his observations on this issue, an issue now strangling his own and every other developed nation.
On our way into Tokyo from the airport, we spent 2-1/2 hours in slow and blocked traffic. Hey, this writer lives near Washington, D.C. He has known the daily joys of Route 270 and the Capitol Beltway whose rush hour is most of the day—where you are lucky when it takes only one hour to cover the distance you could normally cover in 5-10 minutes when there's no traffic. Such conditions are notoriously reported also for New York City, Boston, the whole state of California, and most major city areas.
You have felt that cost of sitting in that traffic. Some of you reading this have even speculated on the total cost in terms of man-hours spent by everyone that evening or that morning, sitting in that particular traffic jam. The cost each DAY is well into billions of dollars. Each DAY. In each of the developed countries and major regions therein.
In common to both the 2nd and 3rd major problems—of traffic and high cost of land—
Before we treat with how this wasteful expenditure and cost of man-hours hangs over us as a barrier to most real economic growth, let us look at the main impact which both this traffic issue and the land price issue have, which has dragged us down with that barrier.
History shows us that the vast majority of major real economic growth—indeed, nearly all of it—comes from new enterprises, especially small new enterprises. These are quick ways for society to respond to wide fields of changing possibility. Some enterprises fail, but some succeed, and the growth of the latter propels the economy forward.
Whether you are a prospective independent small entrepreneur hot on an idea, or instigator of a project from within an existing large firm: Whether or not you get to launch and go with your new endeavor is largely determined by your costs in doing so. If it's too expensive for you to launch and go ahead, the possibilities your effort might have made will never bear fruit. If conditions make MOST such enterprises too expensive to launch and go with, real economic growth pinches out.
What's left for developed nations, then, is recurrent bashes into their ceiling, lapses into increasingly deeper recessions, weak recoveries and then falling back into even more painful lapses.
So what is it that is driving up costs which makes more and more otherwise worthy new enterprises too expensive to get started? There has been a lot of talk about greed, some of it valid, and a lot of talk about costs of regulation (though we've recently seen also some of the costs of the lack of regulation), and a lot of talk about cost of labor and of various mandated and contractual benefits which add greatly to the cost of labor—and some of that talk also is valid. But a huge part of that general cost of labor and of labor benefits is simply a passed-along portion of the costs experienced by labor (and by management and other staff)—down the hours of wasted productivity every day commuting to work through slow traffic and traffic jams.
Likewise passed along is the other great cost....
Reason #3 for why we've reached unnecessary "Limits to Growth"
The high cost of land, and so also the cost of such facilities as are built upon it, directly figure into the costs of starting up a new enterprise. As our rate of formation of new enterprises becomes more conservative as a result—and we forgo more and more of such opportunities as are around—real economic growth tops out.
Some have remarked how, especially in this recent recession, real estate prices have tumbled and as a result some vacant space has become available. A few have remarked that this phenomenon makes it possible for some new enterprises to start and that new enterprises starting in the vacant ruins of devalued real estate in the previous, 1992, recession was a large part of the ensuing economic boom.
But as we painfully found out, a considerable part of that economic boom, last time around, was not substantive, reflecting only inflated values and compounded speculation. From the icy, merciless standpoint of making room for enough new enterprises to create a major new economic boom, realty prices may well not have come down enough!
And even if they had come down enough to do that job, this seems to be a singularly wasteful, graceless and expensive way to move forward, throwing away almost as much value and opportunity as is created, with millions of human beings caught in the meat grinder of protracted failure, unemployment, even homelessness.
We don't have to bring down the value of existing properties in order to facilitate the creation of enough new enterprises to lay the bases for substantial long-term economic growth. There are other ways.
A parallel option: Plans are now afoot to mount turbines in the Hudson River whose current then will feed power to Manhattan. Over top of these turbine stations then will be mounted what amounts to a floating recreational park or parks. This multi-use, utilitarian "new lands" principle can be extended to many different kinds of offshore industrial and economy-related developments closely—and relatively inexpensively—related to current expensive concentrations of population and economic activities.
Highly expensive, congested Manhattan, right next to the partially abandoned Bronx, could be on a regional and municipal scale made into an example of internal colonization. Existing properties not in use for the previous five years could have their taxes raised for two years; and if that didn't trigger changes, they could be taken over by municipal or regional authority —on a scale which would enable the reconstruction of a secure, viable and "green" community a block or a sector at a time.
The Bronx is still on the NYC subway system as well. For yet another form of proposed "internal colonization" which could bring municipal costs and taxes way down for a long time, see Winsights No. 31 (July 1999), "How to Wipe Out Most Taxes in New York City and Improve City Services—at the Same Time!" Some portions of these discussions also apply to some other municipalities, not only to New York City.
Note also—anything we can do to bring down the amount of commuting we have to do through congested traffic also brings down our energy costs and greatly reduces our utterly dangerous dependence upon oil from overseas—AND our presently hopeless deficit in America's international balance of payments.
Other measures, of less value or mixed value, that we might still want to consider:
Otherwise we are condemned to recurrent economic crashes to bring land prices back down to where bargains can encourage new enterprises—so much sacrificed thereby is a wasteful and costly process—and is the phase we are in now and which Japan hit with its "lost decade" in the 1990s. As Japan has been finding, this recurrent cycle is costly, inefficient, and will have us keep on bumping into ceilings instead of permitting much substantial real net growth. We have identified three major sets of problems, seldom addressed in discussions to date, which are major keys to restoring substantial economic growth:
These and other measures should be carried through as much as possible as a series of incentives to the private sector. Until these three very basic aspects about the economy become understood, the developed nations are condemned to a cycle of economic crashes and weak recoveries, with little if any substantial long-term economic growth. (A few developing nations may achieve high growth—and in so doing incidentally resolve some of our own situation through trade—if those developing nations correct the factors which have kept them undeveloped.)
These three aspects, though, are actually simple, not hard to understand—in fact, painfully obvious and therefore usually overlooked. We've not seen them discussed because so many of our economists and economic pundits are either wearing deeply ideological blinders or have gotten lost in technical detail in ways that obscure the larger picture.
Finally, it is your livelihood, your quality of life, your career, your firm, your household, and your children who are affected by these points. If any of the three problems as cited make some sort of sense to you, you have every right to discuss it with spouse or co-worker or friend. If any of the suggested answers to these problems make some sort of sense to you, you have every right to so discuss them and share them with others. If you don't do that much, what excuse may you have later to complain about how things turned out?
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