Better get used to those bread dinners. (Illustration picture from my “Micropolis” story, made with The Sims 2, set in a near future of economic hardship, and written before it happened.)
It is hard to say whether people are deluded or just ignorant. They refer to the bursting of the Great Property Bubble as “recession”, and technically this is true enough: When economic output shrinks for two consecutive quarters, you have a recession according to the most common definition. When there is a quarter of growth, the recession is over. Technically, this too came to pass in the USA, and the government congratulated itself on a job well done and continued with something else that it had not been elected for. (Regardless of whether this was a good thing or not.) Unfortunately for them, most people don’t live on Wall Street and have a rather different idea of when the recession is over: When there are new jobs again.
So, when will there be new jobs again? Not anytime soon, is my guess. More important, they will likely not be in the same parts of the economy. Or we should hope not. For a long time, America has been on a spending spree, driven by borrowing and consumption. As any responsible adult knows, you cannot do that forever. You have to start earning your own money. In the case of a country, this means export. That won’t be easy, since you have to compete with established trade routes. You have to either export cheaper goods, better quality or something new that the competition does not have yet. America has a natural advantage only in the third part, as a country of boundless creativity. And it will be a race just to stay in place, as others will copy them as soon as they can. Still, it is possible to get a foothold in the market, as Microsoft showed with its Windows operating system. While there is widespread piracy, there has been no legitimate competition worth writing home about. Sometimes, an initial success can land you decades of leadership. America needs a lot of this to pay its bills.
Unfortunately, as I said, this probably won’t help most of those who got laid off when the property bubble burst. Actual construction workers will likely go back to work eventually, as continued population growth will make it necessary to build new (and cheaper) housing, but they will have a rough time until that happens. It is hard to see many of them going into building intellectual property.
For Joe Plumber to get his job back, as opposed to the occasional stray job, the new growth has to be strong enough to spread throughout society. And there has to be enough of it to replace the imaginary money – fairy money as I once called it – from the bubble economy.
Of course, it is more tempting to create another bubble. In fact, I already call the current economy a “government bubble” (a phrase I believe I picked from conservative economic publisher Forbes). In reality, government cannot inject money into the economy, as government does not have its own money, only yours. So the money it has injected into the economy has to be paid off in the future, either by higher taxes or reduced services. You don’t need to be right-wing to realize this, you just have to not be an idiot. (I won’t get into details on whether all leftists really are idiots, but if they think governments can create wealth directly they are certainly superstitious. The role of the government is to create the conditions for making money, not the money itself.)
There is another problem ahead: Oil prices. You may remember that during the last months of the boom, oil prices were unnaturally high. They then crashed to a fairly low level, about $40 a barrel instead of $140. But soon they bounced back up to about $80, which is quite a lot for the greatest recession since the Great Depression. To compare, during the recession a generation ago, oil prices were close to $10. The reason is of course that the global economy involves many more countries and many more people now. China and India are now industrialized, not populated mainly by farmers planting rice by hand. Even much of Africa has started to build roads, at least those nations not in a state of war or civil war. At the same time, the world may have reached “peak oil”, the point where production cannot easily be increased and will eventually begin to shrink.
There are horror fantasies being peddled about Peak Oil: Civilization will collapse, the rich will drive horse buggies and the commoners will walk on foot, as we cannot even operate the factories to make bicycles. This is pure bull. The decline of available oil is gradual, and will take the form of gradually higher prices. There is also enough coal left for some decades after that, and while coal is not suited for car engines, it works quite well for smelting ore and even creating electricity, if you are willing to live with the risk of global climate change. Or you could use the remaining fossil fuel to build windmills, water turbines, solar power stations etc, as Obama and friends have proposed. Even if Americans are likely to reject this since they no longer are in love with Obama, Europe has been doing it for a while already. Norway is mostly powered by hydropower and Denmark has a substantial part of its electricity made from windpower. In Germany, there are subsidies for private buyers of solar panels.
With mass production, renewable energy is steadily becoming cheaper. However, this is a process that cannot be hurried beyond a certain pace. It can be slowed, but depends on innovation, so a higher pace cannot be dictated, only encouraged. That is difference between the old and the new economy. You can crack a whip over people picking cotton and shout: “Pick faster!” But you cannot crack a whip over inventors and shout “Invent faster!” – Well, you can, but it slows invention.
We are talking about a time horizon of 10-20 years here. By this I mean that we won’t see much of it until after 10 years, but we should see a lot of it within 20. Now, ten years is not much in terms of human history, but it is a very long time to go unemployed, especially in the USA. So I can certainly understand the government’s wish to borrow and spend to keep the economy running until then. But I believe they are still mistaken.
If the recession truly ends, in the sense that we have paid off and put behind us the whole sorry affair and continue as if nothing had happened, the economy will still not be at the boom level it was during the bubble years. That was fantasy money, made on the insane belief that you can keep selling houses to each other for ever higher prices without some way to earn the money to pay them. Without fantasy money, even a smooth and well functioning economy cannot grow at that kind of speed. So expectations should not be set any higher than the kind of growth we had before the bubbles started.
There is another problem. It won’t happen if government puts on the brakes now, but if the public borrowing and spending spree continues, it could happen. When the financial bubble burst, we got a financial crisis; people lost faith in the banks. What will we do if people lose faith in the government? What if American shops start saying “No, you can’t pay with dollars here”? This is basically what happened in Germany between the wars, and just recently in Zimbabwe. When a government cannot find any more creditors, it will start running the money press, printing the money it needs, and in short order make it worthless. That is pretty far off now, but we will want to stay well clear of it. Even if that means we cannot pretend the government can fix all problems.
The most likely future, however, is one in which taxes rise for all except the very poor. Unemployment remains high. Those who are willing to live soberly, without luxury, will gradually be able to retrain to new jobs, unless they are too old or too poor or mentally challenged. An unpleasant time by recent standards, but not the end of the world.