Tuesday, October 16, 2012

“You Can’t Go Home Again”

Sydney M. Williams

Thought of the Day
“You Can’t Go Home Again”
October 16, 2012

We live in a fascinating age. It is a period which I suspect will be considered one of the great sea-changes of the industrial world, not unlike the early 19th Century. In 1830, a person living in Chicago who wanted to visit or contact a friend in New York had to do so in a manner that would have been familiar to someone living in the 16th Century. Ten years later the Chicagoan would have traveled east by rail, and would have telegraphed ahead as to his or her travel plans. That remarkable change caused dislocation among stage drivers and others, but the railroad, steam engine and telegraph – all of which appeared in or about that decade – shrunk a nation that had been expanding westward. In like fashion, the internet and instant communication have shrunk a world whose expansion was expedited by the fall of the Wall and the rise of China.

A great benefit of the internet has been the free flow of information and ideas. It has helped increase the globalization of commerce and shown the promise of freedom to subservient people living under dictatorial regimes. Global trade has lifted millions of people from abject poverty and has allowed China to become the world’s second largest economy.

Change is never easy. The ability to adapt is a quality given to some, but not to all. It is that lack of ability for so many to adjust that has helped prevent the economies of the world to bounce back sharply from the credit collapse and recession of 2007-2009. The old medicines of either stimulus or austerity are not working. We have only to look at a splintered Europe or a moribund United States. The risk to economic growth in any age is a slowdown in trade. “What happens,” wrote Kevin Warsh and Scott Davis in yesterday’s Wall Street Journal, “if policy makers remain preoccupied with short-term urgencies to the exclusion of long-term priorities?”

A negative and local consequence of globalization has been an inability for some to compete, generally because they don’t have the skills and/or the flexibility. Competition for our best schools and universities increasingly come from students overseas. The same is true in jobs, where the skills of American workers may not offset the willingness of the less skilled to work for less. Seventy years ago Joseph Schumpeter wrote about the role creative destruction plays in the advancement of technologies and their role in economic growth. These changes make for exciting opportunities, but the transitions can be painful. The fact is that technology has advanced faster than man’s ability to adapt. Ultimately people, economies and nations will respond, and so will standards of living, but, at the immediate point of change, the down escalator may be more crowded than the up. There is no way that outcomes will be fair. Consequently, there is a tendency for policy makers, concerned about labor conditions, to turn inward, away from the world. Government can ease the transition, but they cannot and should not impede it.

Government policies should encourage this changing environment and help lead it. Yet, thus far the results have been poor. In part that is because governments concern for the welfare of their people – those unable or unwilling to adapt – has inhibited the free market’s ability to respond. It is the proper balance that must be sought; world trade numbers suggest that governments have erred on the side of too much intervention, thereby prolonging the down cycle. The current year marks the second continuous year of slowing world trade. At the end of last year, The United Nations published their “World Economic Situation and Prospects 2012.” The opening sentence read: “The world economy is teetering on the brink of another major downturn.” They point out the United States and the European Union form the world’s two largest economies; they account for about one third of world trade and their economies “are deeply intertwined.” Last month, for the second time, the International Monetary Fund (IMF) lowered its estimate for global growth for this year and next, and the World Trade Organization (WTO) lowered its outlook for world trade expansion. In their September 21 press release, the WTO noted that a downside of an interdependent world is that economic shocks in one region can quickly spread to others.

The lowered IMF predictions may prove too aggressive still. They assume, first, that the Eurozone is able to resolve their financial problems and, second, that the United States avoids plunging off the “fiscal Cliff.” The latter seems probable to me; the former doubtful. A couple of weeks ago Jack Bogle, founder of Vanguard and the grandfather of index funds, called the current environment the worst time for investors in his sixty years of being in business.

A few days earlier, the CPB Netherlands Bureau for Economic Policy Analysis reported that global trade volumes for the second quarter grew at 2.6%, versus an average over the past twenty years of 6.1%. Two major West Coast ports, Los Angeles and Long Beach, reported that outbound containers fell 4.1% in August, the steepest decline since September 2009.

History is replete with examples of economic hardships causing countries, like individuals, to turn inward. It is a natural reaction to protect one’s home turf. In the first decade of the Twentieth Century a haze of comfortable complacency spread over Europe. The idea that within a decade that world would be mired in a calamitous war was inconceivable to most people at the time. An early reaction to the economic downturn following the stock market crash of 1929 was to pass the Smoot-Hawley Tariff of 1930, which served only to prolong the Depression.

No one wants to see anyone suffer, yet no government can protect everyone, no matter what politicians may claim. It is an unhappy fact of life. The focus of government, when it comes to the best interests of the people, must be on policies that foment economic growth, and the best way to do that is to get the juices flowing to the private sector. It requires a simplified tax code, with a policy that encourages investment, allows corporate cash to be returned with no penalty from overseas. It must do away with the corruption that has bred the cronyism that infects Washington. Regulation should be streamlined and easily understood. The regulated need to know that rules will be enforced and not subject to change based on campaign contributions. It is actions not words that are needed to restore confidence on the part of business.

From the perspective of a non-economist, the biggest cause for mediocre economic growth has been a lack of willingness of business capital to invest. The Federal Reserve has done what they could to reduce the cost of capital, but governments, not only in the U.S. but in Europe as well, have done very little to rectify the fiscal problems. As a result there is no confidence.

The U.S. and much of the European Union have offered two choices to revive their faltering economies – stimulus or austerity. Stimulus has been tried with mediocre results; austerity has failed where it has been tried, as in Greece and Portugal. Stimulus implies a central role for government, and a growing dependency of its people. Austerity denotes an absence of government, but without the substitution of the private sector. The consequence has been a stalemate. What is needed is a pro-growth strategy, one that endows the private sector with the tools necessary to facilitate growth – tax and regulation reform.

It is comforting to stay with what’s familiar. But instead of adapting the attitude of “if it ain’t broke, don’t fix it,” we must embrace change. For government it must mean unleashing the private sector. For us individuals, it means we must learn to compete in an unfamiliar world. All of what’s happening will ultimately prove very positive. It is a question of moving forward and global trade is a measurement of progress. The prognosis at this time is discomfiting. Transitions, in their early stages, can be difficult, but they provide enormous opportunity to the creative. We are not going back. As Thomas Wolfe entitled his 1946 novel, “You Can’t Go Home Again.”

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