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Note, February, 2010: The first part of this article was written
in early Spring of 2009. Since then the jobs situation worsened
considerably with a small uptick showing more recently, most likely as
a result of the Stimulus spending. However, according to the sources I
follow, matters are quite grim underneath the surface in the United
States and Europe especially, as well as much of the rest of the world.
U.S. government policy has continued to be misguided. This is particularly
unfortunate, in my view, as I believe that the president has the qualities
of a good leader who has acted on poor information and bad advice resulting
in misplaced priorities and focus.
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WINNING THE ECONOMIC GAME: DEFENSE OR OFFENSE, part 1.
April, 2009.
Events In the last six months have caused me to spend practically every
minute of my extra time watching and learning as much as possible about
the current economic crisis as it is playing out in the United States
and Globally.
Clearly we are looking
at a possible fearsome future, especially because we do not know at all
how economic conditions will spill over into the political arena. Whether
or not such a future will come about depends on the responses of policy
makers, not just in the United States, but in a number of other countries
as well.
Poor Vision or Poor Problem Definition
If you have bad vision,
it may be impossible to focus very well no matter how much you know and
how much experience you have. This is pretty much the same thing as saying
that defining the problem badly will get you a solution that is wrong
or sub-standard. I am afraid that this is what is happening with current
economic policy. [Actually, “economic policy” is a misnomer; policy makers
are fixated on financial policy, not economic policy.]
As the debacle is
continuing to unfold, I have watched with increasing alarm and consternation
as a massive GROUPTHINK has taken hold of policy makers and the public,
aided and abetted by the media, that we must focus on “fixing the financial
system” to prevent a bad economic recession or worse.
Certainly, the financial
system needs fixing, but notwithstanding what banks, insurance companies,
investment gurus and even car companies may have you believe, THE FINANCIAL
SYSTEM IS NOT THE SAME AS THE ECONOMY!
Basic System Analysis
A number of years
ago, as a presumed policy expert, I spend considerable time searching
for a methodology that could help me better understand policy processes,
structures and dynamics. That led me to study systems analysis and modeling.
Systems concepts can be quite helpful in identifying basic issues and
can be a practical basis for defining a problem.
For example, with
respect to the current situation, let’s step back and look at the basics,
defining the economy as the system, using a pro-active, pro-social perspective.
Figure 1 defines one such system.
Figure 1. Situation: Basic Economic System at Two
Levels
The important distinction here is that the financial sub-system operates
at a secondary level. Humans invented money as a means of exchange in
the quest for efficiency and increased prosperity. It has been a great
invention, but the fact is that we can survive at the base level and even
prosper somewhat, without a financial system, as we did for most of human
history. In other words, the financial sub-system is NOT the economy,
and it is not even the primary sub-function of the economy, which are
production and trade.
Of course, I am not
arguing that we go back to barter and do without a financial system. I
am saying that from a policy formulation point of view we must first have
a clear picture of priorities and understand the basics. Then it may be
possible to come up with a better solution for our current situation.
Playing Defense and the Cost
Figure
2. Crisis Event: Broken Financial Sub-system
Due to ignorance, policy laxity, greed and a number of other factors we
are now confronting a truly dangerous challenge, not only in the United
States, but on a global scale as well. People use such words as "
fallen off a cliff", Pearl Harbor and the Great Depression to describe
what is happening.
There has been a breakdown
of the financial system which is having a tremendous impact on the economy
with a speed that is frightening. No wonder that everybody has become
fixated with repairing the financial system as depicted in the diagram
of Figure 2. U.S. economic policy makers focused almost exclusively
on playing financial defense, but that singular focus has been a grave
mistake, because that is not how economics is won. You win with
the economy when you produce and generate commerce. Yes, the stimulus
spending plan will create some relief, but it does not address the underlying
problems.
I like sport analogies
because they require good score keeping systems that help everybody understand
current results. In many games, one of the key strategic decisions
has to do with playing offense or defense. For
example, in sports games such as soccer and American football, coaches
sometimes decide to play defense once they get ahead, and then they still
end up losing the game because they let their opponents have too much
control.
Applying the sports
analogy, what has happened in economic policy is that we were playing
an economic game where we felt comfortably ahead and suddenly the other
side ended up with a large number of points against us, and now we are
far behind. The coaches have decided to play 90% defense and 10% offense
because they are so worried that they have forgotten that you need offense
to win the game. There are no games I know of, where when you are far
behind you can win by playing 90% defense and 10% offense.
Focusing on repairing
the financial system is defense, and of top of that the cost is enormous,
and we are playing not to win, but just to get to a basic economic comfort
level. It is estimated that the cost of improving the financial
system in the United States alone is at least $2 trillion and probably
$3 or $4 trillion, nearly all of it being spent on defensive plans.
The primary functions
of the economy are production and commerce. That is how prosperity
is created and that is where the focus of economic policy should be, the
creation of improved production and commerce, not just their maintenance!
Policy makers seem to have forgotten that money and the financial sub-system
serve production and commerce, not the other way around. For example,
in the United States it is truly ironic, and stupid really, when you consider
that it is the Department of the Treasury that is taking the lead in formulating
supposed economic policy, not the Departments of Commerce and Labor.
[I recognize that the latter entities may not be qualified, but that is
another issue. The point is, what is more important and who is responsible
for governance relating to job creation?]
Playing Offense
More Cheaply and Winning the Game
Certainly, we need
a good financial sub-system and the faster we repair and improve it the
better, but that alone will not make us prosper for some time, especially
at the global level, and there is a good chance that we may slide back
more. We need to fix the current financial sub-system at the least cost
possible and at the same time we need to go on the offensive, and that
means stimulating and funding high impact economic activity immediately.
Figure 3 below suggests
a simple policy shift that can have a faster, greater positive impact
at lower cost than the policies that governments are currently pursuing.
Instead of focusing on the financial sub-system, this model recommends
a two-pronged policy that emphasizes ongoing repair of the existing financial
system, and at the same time implements direct financing of trade and
commerce that have high-impact results.
Figure
3. It’s About Commerce, Stupid!
Note:
The above diagrams emphasize structural components. Each structure
of course involves dynamic processes that define the policy results
that we seek or want to avoid. For example, the processes that matter
most are production, commercial exchange and the velocity of exchange,
which are the exactly the processes policy makers have tended to
ignore.
The Economic Policy Game Today: Where Is the Offense?
There are funds budgeted
that are supposed to help stimulate business activity. However, the funds
are inadequate given the scale of the economic problem, and worse, spending
will take place within a policy context and bureacratic framework that
has been proven to be sub-standard at best.
Past government policies have rarely been
the catalyst for large scale job generation, which has almost always occurred
as a result of private sector capitalist processes. We must harness these
processes, formulate policies based on them, and then execute the policies
with effective controls but minimal government interference.
Specifically, with respect
to job creation, we need policies that focus directly on the creation
and support of high impact businesses. The facts show that nearly all
new jobs in an economy are created by such companies, then why don’t our
policies emphasize the startup of such firms?
The
fact is that we know how economic growth and resulting job generation
works. The formula is simple: facilitate business formation, growth
and innovation and let commerce flourish. When it is done right, the
cost of doing so is a fraction of what we are spending now to prop
up the banks and inefficient corporations.
The link below presents
a simple thought experiment that I shall flesh out in part 2 of this article.
It theorizes that $100 billion can conceivably generate 14,400,000 jobs
in the United States over three years by funding 8,000,000 startup businesses.
Even if that is not likely to happen, that is not the point. The job creation
model suggests an offensive game plan based on research findings that
emphasize a direct economic stimulus of commerce rather than an indirect
stimulus of a broken financial sub-system.
Real
Job Creation Thought Experiment
By emphasizing direct
economic stimulus with a policy that actually represents the way economic
prosperity happens, we get two results for the price of one policy. In
addition to job creation, Increased commercial activity will help heal
the financial sub-system, and it will likely do so faster!
The challenge for
policy makers is to recognize that a bureacratic solution to stimulate
high impact commerce will be mostly ineffective. Historically, economic
development initiatives managed by government organizations have been
failures in that they have not generated much prosperity on average. Some
further outside-the-box thinking will have to be done.
In part 2 of this article I shall present
a policy approach that I believe will work.
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The
Jobs Problem Simplified