Tuesday, July 14, 2009

Alphabet Recovery Soup

The latest post by Reich has appeared on the blogs of the usual suspects, and on the blogs of the usually suspect. I think it appealed to a lot of people who don't usually read Reich because it was a declaration of doom from a normally optimistic person. But that doesn't mean that it was a ground-breaking post.

Reich is right that we can't return to the previous economy, but he gets a number of things half-wrong. First, he repeats the old wheeze about the consumer being 70% of the economy. That's the old economy; we actually need to go back to the old, old economy where the consumer is ~63% of the total, or less. Second, he says that we can't count on exports for growth because the rest of the world is contracting. This is true as long as the dollar is over-valued. A fairly valued dollar (roughly 0.65 EUR, 85 JPY, and 5 CNY) would do much to eliminate the trade deficit in goods other than oil. The Obama administration needs to work on the issue at lot harder. Finally, he says that we don't know what the future economy will look like. While making predictions about the future is especially hard, we certainly know what we want the future economy to look like. It would be filled with a lot of investment in energy-saving technologies, high-speed rail, public transportation, and national health care. It would also see a significant contraction of the finance, insurance, and real estate industries. But the political will to back major changes doesn't exist right now, and no clear leader has emerged. Obama is obviously in a position to lead, but he has been very tentative so far. With no leader, we will experience business-as-usual, but at a lower level.

V, U, L, or X - what will the future hold? Right now I think a couple of years of L are ahead of us.

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