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Thinking More Clearly About
“The Economy”

 
by Win Wenger, Ph.D.
 

We normally think of the economy as a vast aggregate of interrelated activities productive of the goods and services which some people at least are willing to trade value for in order to obtain. What results from that picture is an inchoately vast entity whose disturbances and incidental twitches seem incomprehensible acts of God, which no one can do anything about except to hunker down and hope to weather the extremes.

Another definition of the economy might be more useful to us. - The current productive arrangements into which our various productive activities have been directed. Directed by what? Because our activities are so interdependent, arrangements are so enormously complex that most developed societies have found it more useful, most of the time, to let prices and wages be set by the marketplace and let these, rather than more direct government intervention, determine how and when people work and spend and productive resources are employed. What makes this concept more useful is the consideration of a major role of the economy and THE major role of a free market pricing structure. These serve as a directory...
 

A Directory Steering People and Resources Into Productive or More Productive Uses:

That is the major role of a free market pricing structure. For some sectors of economic activity, that is so much more effective than direct governmental handling that the “free market” becomes a religion to many of our economics professionals. We forget that free market pricing structures work rationally or to our benefit only under stable and broad-based conditions. Broad-based as regards enough of the population having some disposable wealth, so that our vast productive engines have markets which can purchase their products. Stable in that people and firms within that economy can make fairly reasonable long-term decisions.

Neither of these conditions now hold. Home foreclosures and a general collapse of credit, combined with a massive avalanche of job losses, have sharply curtailed the production of wealth, which in turn adds further to the avalanche of home loss and job loss which in turn sharply reduce still further the production of wealth.

The economy is no longer serving its key function as a directory which is steering people and resources into productive or more productive uses.

Think in terms of the economy as such a directory, and we need no longer be completely mystified by what’s going on, or stare blankly into the headlights of an onrushing seeming Act of God like a deer caught in headlights on a nighttime highway. The problem redefines itself into two more manageable parts:

  1. How do we prevent more of the mechanism from disintegrating which was steering people and resources into productive activities? And

  2. How do we supplement, and/or restore, what’s left of the economy’s role as such a directory?

An Answer to the First Question:

Looking at the first: we definitely have to intercept the imminent collapse of America’s Big Three automakers. A sudden added load of three million more unemployed would immediately make the recession six times deeper and more expensive and that much harder to work our way out of, and the longer-run and spill-over consequences would be worse. There are, however, problems with such a bailout:

  1. Some recipients of the first major bailout have diverted the funds from their intended use and added billions of dollars to their CEO compensation packages.

  2. By treaty, the USA is among the nations agreeing not to subsidize the exports of their various industries. Even as a loan, billions to GM, Ford and Chrysler can be seen in some regards as an export subsidy and sanctionable unfair trade policy.
For the latter, we need to negotiate special - and temporary - and probably reciprocable - waivers with our respective treaty partners.

For the former, we definitely need to impose conditions, to preclude diversion of our finite taxpayer resources.

We also need to impose another condition. A very important condition which strikes at the very core of our huge trade deficit - basis of most of our recession, for which the bubbles were only triggering events. A condition which gives a huge, if temporary fix to our energy problems. A condition which greatly improves our national security, and greatly reduces the chances and incidence of war. A condition which reduces - though it doesn’t cure - humankind’s deleterious impact on the environment.

I speak, of course, of imposing the condition that the auto maker recipients of these vast taxpayer investments (these certainly should be investments and repayable loans instead of just handouts!), spend not one cent of them on the further production and sale of gasoline engines.

Flex-fuel, electric, hybrid, and other alternative fuel vehicles, yes, and some of the bailout should go to encouraging these. Flexfuel provisions on an otherwise standard car add only $100 to that car’s costs. Such a move will mean that enough market opens up - in the USA and elsewhere - for alternative fuels becoming available everywhere that all sorts of resources will come out of the woodwork to provide that, and all our various fuels for the first time will be in competition with each other, with resulting permanently low prices.

Right now we are cringingly grateful that OPEC has let oil prices temporarily slip down a dollar per gallon from the height of their latest spike, in order to discourage the development of alternative supplies and alternative fuels. Soon as that interest is sufficiently discouraged, up again will go a new and even higher spike as we continue to be played like a fish on a hook. Isn’t there something in your gorge which rises up at such a treatment?

Also: a condition for an accepted loan or investment puts less dent in individual freedom than does the original proposal to order a mandate requiring all new cars sold in the USA market to be flexfuel or the other alternatives. See How to Free Us from OPEC for the reasons behind that proposal. The approach suggested here is, for reasons of convenience, practicality, and preservation of individual freedom to be preferred over such a mandate, and achieves the same goals.

President-Elect Obama’s website during the campaign had pledged to such a mandate by the end of 2012 - a long time to be continuing to pay out nearly a trillion dollars a year in our national trade deficit to import oil. Working through a simple condition on the pending rescue of our Big 3 automakers by means of loan or investment, not only preserves freedom but starts into effect immediately.

We will, however, as part of this package then also have to work out some compensatory arrangement with Canada, which is where most of our petrodollars are going today.

Another answer to this question, of preventing further disintegration of our arrangements for producing wealth in this country, has to go directly to the triggering event that landed us in this avalanching recession: the collapse of the real estate bubble. People in the midst of losing their homes to foreclosure, probably aren’t quite as productive of wealth in their jobs if they still have jobs as are people whose home base is secure. We of course want to help everyone, but where we for practical reasons need to focus our interventions first is on those people who still have their jobs but are nonetheless on the verge of losing their homes to foreclosure. If we can reach beyond these to help everyone, well and good, but that should be our most immediate target, in order to preserve at least some of the production of wealth in our economy.

 
Answering the second question:

That will be the subject of another letter following this one in a few days. Again we will be looking at the economy in its role as a directory steering people and resources toward productive and more productive uses. This perspective allows us to ask useful questions such as where disturbances in the marketplace like those experienced today, and shortcomings in the free market pricing mechanism which are experienced all the time, distort and damage and prevent the economy’s directing of people toward their most productive uses. This perspective will also allow us to ask useful questions as regards distribution between short-and-long-term effects, and which expenditures and which investments will in fact be most productive of future wealth. Finding answers to these questions may well not only help point the way out of this current recession but lead to a permanent stable annual economic growth rate in the teens, while stabilizing and repairing the environment and finding sooner a permanent long-term solution to the energy crisis.

Again, if any of this makes sense to you, please pass it along to at least one other person. Again, note that I have not affixed a copyright notice on this briefing.

O

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Win Wenger


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