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Why This Economy Is Stuck


Unless we learn to come together and trust ourselves again, we should expect more of the same sluggishness we've seen in our economy to continue.


What you don't have you don't need it now.
What you don't know you can feel it somehow.

- "Beautiful Day," U2

Discussion over the past few weeks has revolved around one simple question: Are we in recession or not? Some say we either are in a recession or are headed that way. Others say we aren't. And then the jobs number came out that showed 80,000 jobs were created. From my vantage point, that jobs number got a lot more play than it should have. It was a miss of 13,000 on a report that was already forecasted to be pretty weak. But the question remains: Is a recession lurking?

I tend to side with my fellow professor Conor Sen on this issue, in that I don't think a recession is just around the corner. But again, the discussions are focused on charts and estimates of data, as if all we needed was for the data to match up with some consensus view of the world, and then everything would be right as rain again. If only.

Our problems are much deeper than any two-dimensional chart can present. With the credit crunch in '07 and '08 came an existential crisis. Many things we had put our trust into were quickly and dramatically deemed unworthy of our continued trust in them. And when trust is gone, a void is left in its wake.

We trusted the homes we lived in were worth what we paid for them, if not more. And we trusted that over time, those home values would continue to rise. But they didn't. Many investors, who bought the mortgage-backed securities backing those home purchases, expected them to behave a certain way, which was reflected in their credit rating. But they didn't. From Bloomberg (emphasis, mine):
Ratings companies, whose scores have helped determine the cost of money for governments and businesses for more than a century, are no longer trusted by the world's biggest investors, according to the former head of structured finance at Standard & Poor's.

"They're there because people have to have them, not because people believe in them," David Jacob, who was fired from S&P in December, said in an interview at Bloomberg headquarters in New York. "Maybe retail investors do, that's the unfortunate part, but I think institutional investors don't."

You can't have a functioning economy if its participants don't believe in each other. Governments are making new rules and regulations because they don't think people or businesses are following the existing ones. People are railing against governments for either not doing enough to enforce rules to prevent abuses or for being too sympathetic to well-funded interest groups with selfish agendas. People are also very distrustful of companies for everything from having bad or nonexistent internal controls to buying and selling governments. And businesses don't trust governments to put appropriate rules and regulations in place nor have they been really confident individuals would return to their old behaviors of cycles past. It's a menage a trois of dysfunction. As if to emphasize the point, take a look at Saturday's stories on the New York Times:

Our faith in practically every kind of institution has eroded. Colleges to educate our children, banks to finance our businesses and dreams, and governments to watch over our markets, our freedoms and nation. But our faith has also been broken in something else that nobody talks about. It's not an institution, but a paradigm.

That paradigm is rather simple: Happiness comes from the things we have. If we could only buy more things or buy more different, rare things then we'd be happy, or happier than we are right now. We'd finally be content. It's the ethos that drove the push out to the suburbs (buy a bigger house and pay less for it). Which then led to longer commutes so you needed to have a plusher, fancier car to drive in. All so we could take the money we had, leverage it up with credit cards and fancy mortgages to buy things that we used to fill a hole inside ourselves.

But then, as Robert and Edward Skidelsky said in the FT, we discovered our wants are relative. Because as we were busy buying stuff, so was everyone else around us. And while we may be living better in absolute terms, we're no better off relative to those around us. And since all competition is relative, we never win. So we work more so we can buy more. And everyone else around us does the same. It's a never-ending treadmill powered by our own narcissism.

And what kind of people does that turn us into, this endless pursuit, this "disease of more?" We're not happy. We're tired, overworked, unappreciated, and stressed out. From a recent New York Times piece, which has garnered a lot of attention:
What she had mistakenly assumed was her personality - driven, cranky, anxious, and sad - turned out to be a deformative effect of her environment. It's not as if any of us wants to live like this, any more than any one person wants to be part of a traffic jam or stadium trampling or the hierarchy of cruelty in high school - it's something we collectively force one another to do.

The cruel irony is we do this even though there's less and less need to do so. If there was ever a word to describe work in the Industrial Age, it would be "repetitive." Yes, you had stuff to do on an assembly line, but what kind of work was it? That spurred the push to redefine what our economy was based on, as Industrial Age-style work was commoditized. Enter the Information Age.

The Information Age was less about making stuff on an assembly line than creating and analyzing information. And with the advent of the computer and telecommunications networks, that work happened a lot faster and more efficiently than ever. Throughout economic history, the desire to gain efficiency was what drove us to do things faster and cheaper, but we've arrived here at this place and time only to be unhappy with the result. Yet our collective desire to stay busy and cure our insatiable appetite to consume (with more consumption) drives us to do more of the same, over and over again. Answering emails at dinner, responding to text messages during meetings -- it seems there's simply too much to do at any given time. And we allow it to happen to us over and over again. And then this recession and this nascent recovery came along and it's making us ask some tough questions about ourselves.

Which, ironically enough, leads me to a chart. On the back of Conor's analysis of why he doesn't think we'll enter a recession, I created this one chart: it shows fixed private investment minus the cost of fixed capital as a percentage of GDP. In short, it shows the capital stock our economy has after we account for depletion of current capital stocks. Here's the chart:

Click to enlarge

As you can see, four and a half years after the start of the recession, it's still negative. We're depleting fixed capital faster than we're investing in it. As surprising as that may seem to many, to me it makes sense. Because if you look at these two charts from the BEA's report on GDP, it's easy to see where the drop in investment has come: Residential and non-residential structures.

Click to enlarge

Click to enlarge

There's plenty of unoccupied homes and unoccupied retail and office space. And so while folks are pointing to a recovery in housing, nobody should think housing is going to lead a recovery. Nor should we want it to. Drug addicts never get cured by what put them in rehab in the first place.

We've built our post-World War II world around a model that assumed everything would rise. Rising populations would handle the burdens of Social Security and entitlements. Rising house prices and ever-expanding suburbs would give state and local governments a rising revenue stream to pay for the things that we as individuals may want, but really don't want to pay for. And we would have happier people that achieved their happiness by buying a fancier house, fancier clothes, and furnishings. In short, lifestyle inflation for all of us, everywhere, forever. "Keeping up with the Joneses as far as the eye can see, for as long as we live" would've been a great . Now, that whole paradigm is running head-long into a deflationary reality: What do I need to have a good life for me, right here, right now? "I don't care about what my neighbors are doing, I'm not playing that game anymore." It's kind of like being on Facebook, but ignoring all the status updates. From Fast Company:
In other words, the reason we acquire "stuff" is becoming more about what we get from the acquisition. Purchasing something isn't really about the thing itself anymore. Today, a product or service is powerful because of how it connects people to something -- or someone -- else. It has impact because we can do something worthwhile with it, tell others about it, or have it say something about us.

In short, if all of your handbags have some sort of logo on it, you're not viewed as a person anymore. You're just someone who defines their existence by buying fancy bags with logos on them. In short, you're an empty shell. You have to give me a reason to connect with you. Just because you have a bunch of fancy, glitzy things won't cut it anymore. That was enough to attract people to you for the past 40 or 50 years. But this isn't our parents' world anymore, much less our grandparents' world.

In short, our economy faces an identity crisis. And at the heart of any identity crisis is a lack of self confidence. You have older generations telling younger ones, "Just do what we tell you to do and everything will be fine. Trust us." But that trust between generations has been broken. The younger generations response to older generations has been for them to tell the older folks, "Just get out of the way. We are the ones who will have to pick up the pieces from whatever you call this, so the sooner we can get started, the sooner we can get finished. Trust us." And so the intergenerational tug o' war continues.

But until we can figure out what this new world is going to look like when we grow up, we're likely to see more of the same out of the economy. We'll have economic growth, but it will feel like a recession. Time passes, but the economic data will all look like the data that came before it: tepid and sluggish. Indeed, Neil Howe offers up this view of the future through a demographic lens:
Throughout history, we have argued, inequality both by class and by age reaches its apogee entering the Crisis era. Indeed, part of the historical purpose of the Crisis is to tear down dysfunctional institutions, vacate positions of entitlement and privilege, rectify the inequality, and create a tabula rasa on which the rising generation can build something new.

Does that foreshadow something really dire? I do not know the answer to that. But what you see and hear more of these days are calls for reform. Everyone knows we can't continue building on what has come before, but nobody is quite sure what comes next.

But one thing we do know is that since social mood has already darkened, it's just a matter of time before it rises again. And when it does rise again, there's going to be a new group of leaders leading the way and the world isn't going to look the same. The key won't be to look at those changes as necessarily being bullish or bearish, but recognize what to be bullish or bearish of in that new world, whatever it looks like. That, will be a very interesting discussion, indeed.

Twitter: @japhychron
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