This current global malaise is a first. Factories have been abandoned, homes and buildings sit empty, machinery is idle and people are unemployed. Yet, while we know how to manage the economy, we won’t employ our tools effectively.
Our primary challenge is to coax more output out of the economic machine. Secondary challenges are unemployment, underemployment, deflation and inflation, monetary policy and national debt. While these symptoms can be treated to ensure the right mix to reach full power, we must fix the machine to permanently solve the problem. Until the primary challenges are solved, generating more spending without creating greater production will be inflationary.
Instead, we must seek high bang-for-the-buck ways to expand production. Past stimulus emphasized consumption by bolstering public-sector employment and unemployment compensation. It failed to invest in greater production of critical goods or services.
First, we must once again become the most innovative, export-oriented nation in the world. Innovation will require education in specific areas. Patent reform, R&D stimulus and more venture capital will help us foment the next great ideas.
We also need to access our natural resources, sustainably and sensibly. Energy is available from new natural-gas technologies and the expansion of alternative energies like wind and solar. We must solve a pricing and distribution problem. Our gasoline is underpriced in the sense that it has not provided a sufficient incentive to drive more efficient vehicles, as Europe already does. Most economists agree that gas should be taxed more, as painful as a transition to greater fuel efficiency may be.
Our energy distribution network is archaic. We can earn almost immediate dividends in more efficient distribution and lower energy infrastructure costs if we invest in our electricity and natural-gas grid. There is no reason why natural gas is not much more available here and in the Eastern United States. Investments in these sectors would reemploy the construction industry, create greater export-industry competitiveness and allow our savings in energy costs for homes and industry to be used to invest in ways that secure our economic future. The private sector refuses to invest in these networks in this uncertain economy. There is a role for government, with its low cost of capital, to stimulate this investment and get construction going again. In turn, this investment will create secondary jobs in other sectors.
We should also invest in ourselves, but we are income constrained. These unglamourous investments include making our homes energy efficient, enhancing our skills in those knowledge areas that fuel our export sectors and improve our global competitiveness, and returning efficiency and accountability to parts of the financial sector that are essential for investment.
We must also import less. When our economy was the only economic superpower, our consumption could fuel the world’s production, including our own. Now we must rid ourselves of our self image as an indulgent consumption economy. We must constantly demonstrate how government is channeling our resources to enhance future production rather than indulge present consumers. Political indulgency has not worked, and we have done very little to stimulate future export-driven production. Merely fueling consumption increases imports rather than enhances exports.
Our challenge is that we enjoy consumerism. We want gratification, government payouts, and we don’t want to pay taxes. So our government pays us off, cultivates our sense of entitlement, lowers our taxes, and creates the false reality that we can do whatever we want and expect someone else to pull us up by our bootstraps. Both the citizenry and the government are equally culpable. We tolerate political gamesmanship. Our leaders placate us and leave our children the bill.
If the private sector will not mobilize, government must play a role in building infrastructure and investment. I doubt our current leaders have the political will to corral the best minds to create the private sector pathways that reinvest in our future. Some have given up all hope in government and want to see it reduced. Others have more faith in government than in capitalism. Economists believe a well-informed and apolitical government can be an effective economic coordinator when the private sector has lost confidence and won’t make bold moves. We must resist the temptation for bigger government as the solution, rather than a lean government as the facilitator.
Most of us recognize major structural change is necessary, but few seem willing to change. For instance, will we tolerate government-subsidized student loans and grants for those strategic areas of science, technology, engineering and math, and less generous loans and grants for other studies? If we don’t make major structural changes in programs and production, monetary policy and stimulus will inevitably fail. The economic disease will fester if we only deal with its symptoms. And, we can’t change if each of us resists reform. Europe demonstrates that.
Colin Read is the chair of the Department of Economics and Finance at SUNY Plattsburgh. Continue the discussion at www.pressrepublican.com/0216_read.