Monday, October 11, 2010

The Decline of the High Economy

Today I read an opinion editorial by David Frum on CNN, blaming China for the recent economic recession in the U.S.  In it, he talks of the attempts China has made to sustain a booming growth.  While they might have the best of intentions, their methods are unscrupulous, and as Frum pointed out, they have essentially set themselves up to learn the same painful lesson Wall Street was recently taught (but doesn’t seem to have learned): just because you can write a number down that someone theoretically owes you does not mean the money exists.  You cannot squeeze blood from a turnip, no matter how hard you twist.

However, while the piece does correctly identify a contributing factor, it misses a larger picture.  Like many distributed systems involving people, the market is far too complicated to be described in such simplistic terms.  Several levels of interactions are taking place simultaneously, and there is more than enough blame to go around, making it easy to pick out the portion which blames a convenient group for the speaker.  Both The Chinese government and Wall Street were complicit in this level, and in both cases greed overcame reason when the respective people in charge saw imaginary numbers piling to sky.  Indeed, I would be quite surprised if China is anything but the next one slapped (let alone the end) as the rubber-band of debt fires back through the hands of everyone in the lending chain holding it.

But this is just one layer.  Beneath it lies a much bigger problem for the Western world, of which this is merely a symptom.  The so-called ‘trickle-down’ economic effect has taken hold.  While it was mostly spoken of in a self-congratulatory manner by people defending exploitation of low-income foreign workers, the truth is that the rationale behind it was quite justified.  What many failed to realize, however, was the eventual obvious implication: what happens when the rest of the world doesn’t need to work for you anymore? 

Make no mistake: the gradual rise in living standard among the third world is not a bad thing, taken as a whole, and certainly not undeserved.  Quite the opposite: most of them have put in a harder day’s work on a daily basis than anyone in the Western world does.  And that their efforts are beginning to bear fruit for them is cause for celebration in its own right.

No, the problem is the failure of the Western world to prepare for this. With capitalism and the globalized economy actively making the flow of money more and more liquid across geographic boundaries, these effects which were spoken of before with a wink and nod are now poised to lay waste to the economies of the Western world.  In fact, many of these economies were better equipped to handle the transition before such widespread globalization.  What happened was a long, methodical process over several decades of attempting to exploit the gradient difference between living standards in various parts of the world (the United States is far from the only one involved).  Corporations, noted these days for have foresight spanning mere months (frequently only until the next quarter), moved their production assets and operations overseas to where the bottom line was the lowest.  The free market did exactly what it was designed to do and optimized for profit.

But the ugly truth looming in the not-so-distant future is that Western world did little to nothing to try to maintain some assets in place, which would remain geographically tied to their location.  Acting as middle-men is too lucrative a position, and who doesn’t want cheap gadgets?  Now, much of the United States’ production capacity is only a memory, and somewhere along the way we forgot that another thing we like to do is cut out the middle-man for greater profits.  Greed blinded the lawmakers and businessmen to the fact that was was best for the global economy was not necessarily best for the national economy.  We have, in essence, become a nation of middle-men, in the form of the so-called ‘service economy’, and before long people will look to cut us out of the loop.  With very little left to anchor money geographically, the financial power will eventually migrate to other places, preferentially toward areas with few regulations, leaving economically burnt-out superpowers in their wake.  One need look no further than the explosive growth of Dubai to see this exodus in action.

It isn’t an apocalypse, and the nation will eventually recover, but not before the process reaches or is well on it’s way toward the inevitable conclusion in which most or all of the living standards of the world more or less equalize at some average level.  We had a chance to try to prepare for this and make the transition gracefully, perhaps even ensure that the average rose until it was at the level we generally expect for ourselves, but greed has allowed the opportunity of control to slip away.  I had hoped, when I initially saw the meltdown of 2008, that it was not the harbinger of the tipping point, but with each day that passes I see more and more confirmation that the chance to fix the problem is at last gone, and control no longer truly rests in our hands.

I hope that some day the new rising stars of the world stage will be more considerate of us than we were of them, but history weighs in rather grimly on how people typically react when a power dynamic is reversed.

The question quickly becomes, for the Western world, one of how to make itself valuable again.  Given that the standard of living among the highest has nowhere to go but down, the most damage-controlling options are those which are easily replicated and permit a global living standard to be higher.  That is, creating technologies which are more efficient, cleaner, and scalable while we still have the resources to conduct research.  In addition, during this critical free-fall period, anything that can be done to restore actual production would be helpful.  Given the impossibility of competing based solely on price, the United States’ battle cry should be a return to the higher quality of production that ‘Made in the USA’ once stood for.  It will never be as profitable as selling cheap junk which then needs to be replaced (read: ‘consumerism’), but one lesson we should be taking from this is the value of eschewing higher short-term profits at the expense of long-term stability.

But when has the financial sector ever learned its lesson?

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