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The Economy, Policy and Politics:From Early Warnings to the Crisis
By Dave Livingston. Dave is a management consultant with almost 30 years of experience with analyzing complex business problems and developing solutions and new businesses. He blogs on public affairs at his blog Parts, Systems, Structures and Outcomes ( http://llinlithgow.com/PtW/ ) where he attempts to apply that toolkit to current affairs and public policy.
Introduction
Understanding how the economy works is hard, and made harder because the practioners tend to be obscure,difficult and not much interested in explaining themselves so the rest of us can understand. At the same time thehealth of the Economy underpins everything else we do from personal choices and opportunities, what jobs weget, how well we live and the possibilities for our children. It also determines the overall well-being of our societyand what we can do as a society. Whether that means creating jobs, dealing with Healthcare and Education oranything else. It is, in a phrase the Sine Qua Non, “that without which there is no other”.When the economy heads into a crisis, and worse, heads into a crisis because of the poor behavior and self-interested actions of a small minority of our fellow citizens the natural reaction is anger. Yet anger does not serveus, despite the ground having been swept from beneath our feet by causes and consequences we understandpoorly, if at all.What does serve us is improving our understanding of how the machinery works and, when it breaks, as it hasdone, what needs to be done to fix it and get it back in service. We are even better served by supportingrepresentatives who will act in our collective best interest instead of selling us “magic beans” of simple answersthat are easy to believe. But are in fact dangerous and lead, in the long-run, to a re-creation of other problemsand crisis.
Perhaps the single most challenging policy problem we face today is continuing to act wisely andcorrectly in addressing our economic challenges despite the political and popular challenges to do thewrong things in the name of wrong-headed ideologies.
Very early in 2008, January in fact, we warned that the economy was headed for serious difficulties. Later weeven identified it as the single most important issue in the ’08 elections, and so it turned out. We then tracked it toand through the crisis, as the economy worsened and the markets collapse. Toward the end of the year we thenwent on to discuss the steps necessary to correct the problem. And the actions necessary to correct the long-standing and long-ignored deeper flaws that had accumulated over three decades and that metastasized undersevere pressure in a collection of major problems all acting at once.This collection of essays puts together the story from beginning to an end, though not the final end. That is notonly still playing out but has a long way to go. Along the way we try to address the nature of the total economy insuch a way that it’s easier to understand the machinery and how economic cycles work. We also address thepolicy steps we think are required to repair that machinery in the short- and long-terms.And since we’re going to be living in a policy-driven economy for a long time we also take a hard look at thepolitics of the situation, and the partisan posturings, that contributed to the crisis and have hampered us sincethen.
Economy, Policy and Politics: Sailing Into the Storm
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We hope that after reading these essays you’ll have a better understanding of where we’re at, how we got hereand what needs to be done. As well as an understanding of the role and impacts of both policy and politics.Especially how dangerous mis-placed ideological posturings are to all our futures.Each essay started life as a blog posting and the URL link is always provided because, in most cases, each hasan extensive collection of readings excerpts and linkings backing up our analysis.
Table of Contents
1. WRFest (Economics): Oops...Recession Ahead 32. Pump Priming, Rates Cuts and Crameritis: More on Economic Outlook 43. You, Economics and the Elections 44. The Coming Economic Crisis 65. Economic Crisis in a Nuts Shell: Jump Out of the Window? 76.
Understanding Economics: Introduction to Macroeconomics & Business Cycles
97. Economic Tides, Naked Swimmers and Sharp Rocks 108. Facing Reality: Father Feldstein Explains It All 119. WRFest(Policy): More Economics - Realities vs. Rhetorics 1210. A Little Off-Topic: the Credit Crisis, the Economy & You 1311. Readings (Economy): It Really is the Economy, Stupid Frog 1412. This is a Rescue, Not A Bailout: And It's Your Life 1613. OOPS! Somebody Just Kicked the Wheels off the Wagon 1914. Calm Down: the Fat Lady Ain't Sung, Yet. 2015. Anatomy of a Crash: Welcome to the Political Sausage Factory 2216. Wobble Wheels Wakeup: Crisis, Response, Policy, Execution 2417. Populist Panderings, the Candidates and Real Solutions 26
18.
First Things: Financial Crisis, Economy and Barry 28
Economy, Policy and Politics: Sailing Into the Storm
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January 21, 2008
WRFest (Economics): Oops...Recession Ahead
http://llinlithgow.com/PtW/2008/01/wrfest_20jan08economics_oopsre.html Economics and economic policy is one of those things that most people ignore, take for granted and find makingtheir heads hurt. Unfortunately, for good or ill, it conditions most of the rest of what we can do. Just in case youwere living in another world, or paying attention to purely "practical" things last week not only did the major USmarkets continue tanking but the escalating chorus of cries for some sort of combined monetary and fiscalstimulus effort to short-circuit an increasingly likely US recession were capstoned by Ben Bernanke'sCongressional testimony and Pres. Bush's call for a $150B fiscal stimulus program.Please understand that these efforts are necessary and vital but are unlikely to prevent a recession that's likelyalready underway. The real goal here is to a) mitigate the damage and b) prevent it from metastasizing intosomething much worse given the weaknesses in credit markets and the housing sector. And also c) to keepworldwide problems from feeding back to severely, as it increasingly turns out that the rest of the world is not infact decoupled from the US.At this point you may be going, oh my god...he's off on economics. Please don't or why do I care ? Several of theexcerpts below will speak directly to that question of course. And it's an interesting one - for several years now itseems a conversation I"ve been having with several friends, all of whom would rather not think about it, by andlarge. Part of the problem is that everyone confuses economics with business or finance, which are significantparts but not the subject as a whole. Economics on a small scale is about finding the best use of availableresources to get the most done with those resources. On a large, or macro-, scale it's about the complexities ofmaking sure that the most people have the most jobs and overall welfare and well-being is moving ahead as wellas possible.Put another way all the other things we think we need to do from protect our national interests to reform educationto changing healthcare to paying for pensions involve economics, on several levels. First off designing workableprograms and paying for them is often 90% a problem in micro-economics. But second off without a healthymacro-economy we end up being unable to pursue any of these other initiatives.There's a Latin tag phrase somebody explained to me once - sine qua non. That without which there is no other.Economics is the sine qua non of a healthy society.When Antwerp fell to the besieging Spanish army in the 16thC and was sacked because the siege had been long& ugly and the bankrupt Spanish monarchy hadn't paid the troops in months it destroyed a major port and tradingcenter that had risen to prominence as the major economic and financial powerhouse of Europe. Its' destructionduring the Dutch-Spanish 80 Years War lead to the rise of Amsterdam as its' replacement and the eventualindependence of the Dutch and their leading role on the world-stage for two centuries as a major trading,economic and politico-military power. After months of successfully defending themselves do you know what oneof the primary triggers was ? The city fathers put price controls on smuggled food and smugglers would no longertake the risks to bring in the supplies that had been keeping the city alive. After a few months the starving city wasso weakened it fell to the Spanish troops.Be careful what you wish, understand that often supposed unintended consequences are the results not ofignorance but of either not thinking things thru to the next step. Or of believing what we'd like to believe in the faceof all evidence to the contrary.Speaking of which at least skim these readings and ask yourself a) how bad you think this problem might be, b)what you think of which candidates proposals and c) whether you're willing to let them "play politics" for partisanadvantage for what could be a major problem shortly ? And for the next several years. Several of the excerpts arewell worth at least skimming if not going to and reading but the three that are sort of the minimal set are one on
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