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Restructuring, Revisited

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How is that economic recovery going?  It may not feel like much, given that it’s progressing far more slowly and cautiously than after any other postwar recession.  One of the themes we’ve been discussing for over four years is that given that the downturn was of a different kind, the upswing will be different as well.  The term offered was “restructuring”, meaning that the economy we’re evolving towards is going to be very different from the one that spent the 2000s sputtering and failing.  That takes time and effort.

The term is starting to catch on outside of Barataria as investors find opportunity in the new industries that are going to grow and prosper in this new world.  That’s great progress.  But as we’ve noted many times, the real restructuring takes a broader social, political, and legal reformation and agreement that has been woefully slow to develop.  Enter Niall Ferguson, a Harvard History Prof and conservative bad boy to offer some new ways of looking at the growing malaise in the developed world in his forthcoming book, “The Great Degeneration: How Institutions Decay and Economies Die.”  His points are worth discussing, especially on the left, because they offer some new perspective and potentially more fruitful debates than we’ve been having so far.

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A Capital Idea

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Borrowing money isn’t bad.  When it’s used to purchase something big that will last for years, like a house or a car, it often makes sense to do it now and pay the finance charge.  Borrowing to buy equipment or a build to be rented is an investment – as is borrowing money to learn a good trade.

When we look at how the Federal government borrows to keep itself going we can and should be able to ask the same questions – was this an investment?  Did we get anything good for the money?  Unfortunately, the accounting practices used by the Feds lump capital and other investment into the same pot as operational expenses, making it impossible to tease everything out.  It’s a procedure the Founding Fathers would recognize, if you wanna get all Tea Party on the practice.  But it’s still a dangerously stupid way to run things – and totally counter to the way any business or state is run.

As we talk about the need for serious reform in Washingtoon, we should add this to the list.

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Inequality vs Sustainable Growth

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Is wealth and income inequality holding the economy back?  A recent study by the Pew Foundation shows that from 2009-2011 the wealthiest 7% of the US saw their net worth climb 24% – to an average of nearly $3.2M – while the other 93% of the population saw their wealth plummet 7%.  More than being unfair, it may also be holding back economic growth overall.  The rich may be happy with their take, but it may stop coming.

A number of studies have shown the effect over a number of countries, and the effect is undeniable.  At what point does income and/or wealth inequality slow growth?  Like an excess of debt it’s hard to say, but the two taken together lead to a compelling argument that the search for sustainable, meaningful growth is a strongly bipartisan, left and right issue – and something we should get moving on as a priority.

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Crunching the Numbers

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At what point does public debt become a problem?  If you ask many Republicans  when the debt hits 90% of GDP we’re in trouble.  Given that the Federal Debt is above this level you can see why there is a push for budget control if not outright austerity.  But where did that magic figure come from?

The answer is a  work by two Harvard economists, Reinhart and Rogoff’s 2010 paper “Growth in a Time of Debt.”  But now that this magic number has been debunked in spectacular style, will the call for austerity ease?  Given how the sides have retrenched, no way.  But it is true that a certain level of debt is indeed a problem – it just isn’t something you can pull from a formula and throw onto autopilot.

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Perhaps, a Revolt?

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“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
– Henry Ford

In case you were wondering what the cost is of “Too Big to Fail” banks, the Federal Reserve has an answer – $440 million (about $4 for every household in the US).  If that seems low, well, it is.  It’s just what it costs to have “enhanced regulation” of those banks that have been declared “systemic” – legalese for protected by you and I.

Where did that number come from?  It comes at the end of a long, watered-down process that has finally defined just what it means to be one of the protected investment banks. It’s all the result of Dodd-Frank regulation that does more harm than good if this is all they can manage.  But perhaps we can make a bit more out of it …

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