Emerging Issues: It’s the Stupid Economy!

June 6, 2011
by Bill Barnes

The mess in the U.S. economy is not an ordinary one. So, figuring out what is to be done is not ordinary either. 

The difficulties go far beyond the policy processes in which all interests agree that pain must be endured: by goring someone else's ox.

Three other factors make matters worse: tattered frameworks; the long and short of it; and Goldberg's rule.

Tattered Frameworks

Actual economic conditions don't fit our conventional frameworks for economic thinking.
John Cassidy's "When Markets Fail" traces the rise and fall, over the past 40 years, of what he calls "utopian economics": the markets-work-and-they-should-be-left-alone model. That way of thinking lost dominance as markets and the model failed to work and produced disastrous results (think the dot.com and housing bubbles, financial system collapse, stagnant wages.) 

Similarly, the Wall Street Journal, in a review of the 21st century's first decade, described "The Dimming of a Beacon" and headlined that "the Nation's Economic Model Had a Rocky Ride." An important marker of this dimming light was Alan Greenspan's retrospective mea culpa regarding his tenure at the Federal Reserve. "The National Journal" reports that "good economics is in short supply."

We're also a long way from Richard Nixon declaring that "we are all Keynesians now." Two major "stimulus" packages, more or less Keynesian, surely helped prevent things from getting even worse. Huge makeshift efforts seem to have brought a still deeply unsatisfactory financial system back from the brink. But "what might have happened" isn't tangible and what has happened is bad enough to rivet people's attention. 

Something, for example, is amiss with the concept of "recession." Officially, it was more than two years ago. But a very high unemployment rate persists, and we surely see that as a key measure of what normal folks mean by recession. Now, it's just another drag on recovery; that seems unconscionably inappropriate. Recovery seems to be mainly about growth in GDP; maybe growth is not the answer to all questions.

The search is on for alternative frames, but we're nowhere near a new consensus. Cassidy recommends "reality-based economics [that] affords the concept of market failure a central place." The Institute for New Economic Thinking, funded by investor George Soros, has begun a search for fresh thinking and better theories. The monetarists are still with us, and the field of behavioral economics is developing rapidly. Others promote looking at the economy from the bottom up, beginning with the city-centered economic regions. 

The Long and Short

We're amidst ruins created by both the business cycle and also by deeply rooted trends of long duration; that is, both cyclical and structural factors. Each exacerbates the other, so we cannot just wait for a "recovery" to arrive naturally or by administering home remedies.

Public Agenda, the opinion research and public engagement organization, reports that Americans worry at least as much about their longer-term economic struggles (sending their kids to college, retirement) as short-term ones. 

Structural maladies have accumulated over several decades. Extreme income and wealth inequality, for example, continues, making it harder to solve other problems, and poisoning politics. The percentage of Americans who are officially "poor" has been stuck in the low-to-mid teens since 1970. Infrastructure and R&D investments are inadequate. Americans have over-consumed and under-saved. Governments borrowed too much. Regulatory capture - cozy relationships twixt regulators and the supposedly regulated - produced bad results in diverse fields from building codes to bank monitoring. 

Goldberg's Rule

Finally, we're nowhere near agreement on the question of "what's the problem?" and so we're in complete disarray about "what is to be done?"

In "Thinking in Time," Richard E. Neustadt and Ernest R. May cite Avram Goldberg, executive of a chain of grocery and department stores: "I don't ask 'what's the problem?' I say 'Tell me the story.' That way, I find out what the problem really is."

Lots of people are offering their favorite solutions. That's the wrong place to start. The Goldberg Rule suggests that we need to sort out - from the many tales of greed, misjudgment, bad systems and worse - a convincing story about what the problems are and how we got into them and how they fit together. Lacking that, we have a Babel of options, each vaguely nested in a different yet merely implicit framework of economic ideas. 

Unfortunately, amidst all of these and other challenges, economic policy discourses in Washington and in many states and localities have narrowed down to governmental budget strategies. 

Pundits and the news media are treating the federal budget situation, for example, as a horse race story between tax-and-spend versus shred-the-safety-net. The biggest horse race story of them all, the 2012 elections, is well underway already and is affecting all these debates. 

Horse race stories are not enough; they are easy but misleading. Tough thinking -about frameworks and options and stories, by leaders throughout governments and other sectors - is harder but necessary.

Bill Barnes is the director for emerging issues at NLC. Comments about his column, which appears regularly in Nation's Cities Weekly, and ideas about "emerging issue" topics can be sent to him at barnes@nlc.org. Previous columns are collected on the Emerging Issues webpage at www.nlc.org.