This Time, It Really Is Different
By JOE NOCERA
Published: October 10, 2011
The title of the white paper is, admittedly, a mouthful: “The Way Forward: Moving From the Post-Bubble, Post-Bust Economy to Renewed Growth and Competitiveness.” It was commissioned by the New America Foundation, which hoped that it might “re-center the political debate to better reflect the country’s deep economic problems,” according to Sherle Schwenninger, the director of the foundation’s Economic Growth Program. Its authors are Daniel Alpert, a managing partner of Westwood Capital; Robert Hockett, a professor of financial law at Cornell and a consultant to the New York Federal Reserve; and Nouriel Roubini, who is, well, Nouriel Roubini, whose consistently bearish views have been consistently right. It is scheduled to be released on Wednesday.
I don’t know that anything at this point could re-center the political debate, so unyielding are the two parties. But as Congress prepares to take steps, through the deliberations of the already deadlocked supercommittee, that will likely further wound our ailing economy, “The Way Forward” ought to at least give our politicians pause.
Its analysis of our problems is sobering. Its proposed solutions are far more ambitious than anything being talked about in Washington. And its prognosis, if we continue on the current path, is grim. “Unless we take dramatic steps, it will be Japan all over again,” says Alpert. “Continuous deflation, no economic growth, in and out of recessions. And high unemployment.” Adds Hockett: “It will be like the economic version of chronic fatigue syndrome. A low-grade fever all the time.”
The paper’s central premise is something I’ve been hearing from Alpert for more than a year now: this time, it really is different. What he and his co-authors mean by that is that the bursting of the debt bubble three years ago was not just a severe example of the ups and downs that are an inevitable part of American capitalism. Rather, it was the ultimate consequence of the modern global economy. Chief among the changes that have taken place is the integration of China, Russia, India and other countries into the global economic mainstream. The developed world once had maybe 500 million workers. Today, say the authors, we’ve added another two billion people to the global work force.
That change alone has had a great deal to do with the stagnant wages, income inequality and the oversupply of labor in America that was masked by rising home prices and access to credit. The bursting of the bubble exposed how much the American economy depended on cheap credit. Now that the curtain has been pulled back, cheap credit alone can’t fix our problems. The country is in a deflationary cycle that is very difficult to get out of: as wages decrease (or more workers become unemployed), people become afraid to spend. Assets like homes drop in value. Businesses react by lowering prices and laying off yet more workers — which only triggers a new round of deflation. The only thing that doesn’t change is the unsustainably high debt that was accrued during the bubble.
How can we break this cycle? Like most mainstream economists, Alpert, Hockett and Roubini roll their eyes at the calls for immediate government deficit reduction, which led to the creation of the supercommittee. Reducing government spending in the short term will only make things worse.
Instead, they believe that this is perhaps the best time in recent history for the government to take on a sustained infrastructure program, lasting from five to seven years, to create jobs and demand. “Labor costs will never be lower,” says Hockett. “Equipment costs will never be lower. The cost of capital will never be lower. Why wait?” Their plan calls for $1.2 trillion in spending — not all by the government, but all overseen by government — that would add 5.2 million jobs each year of the program. Alpert says that current ideas, like tax cuts, meant to stimulate the economy indirectly, just won’t work for a problem as big the one we are facing. Indeed, so far, they haven’t.
Their second solution involves restructuring the mortgage debt that is crushing so many Americans. It is a complex proposal that involves, for some homeowners, a bridge loan, for others, a reduction in mortgage principal, and, for others still, a plan that allows them to rent the homes they live in with the prospect of buying them back one day.
Finally, they call for a “global rebalancing,” which includes a radical change in the current dysfunctional relationship between creditor and debtor nations, and even a new global currency that would be administered by the International Monetary Fund.
It is impossible to do justice to “The Way Forward” in this space. It is rich in supporting data, deeply nuanced, with as clear-eyed a view of our economic predicament as I’ve ever read. Though it is not exactly beach reading, by academic standards it is quite accessible.
You can find it at http://newamerica.net/publications/p...he_way_forward. You should read it — even if your congressman doesn’t.