How to Deal with Financial Tornadoes

Being retired affords me some personal options. For example, I can sleep until noon and Betty dusts around me. It also gives me the flexibility to take on some overseas teaching. I have been fortunate enough to teach for the last two months in an MBA program in Seoul, Korea. My contract provides an unlimited supply of kimche in return for economics lectures. It seems pretty fair to me! Anyway, I am now in Bloomington with great intentions to rake leaves and otherwise be a productive household unit.

While in Korea I read my usual newspapers and watched a little business/political news and tried to write my blogs from afar. I am struck, however, as I sit here in little Bloomington Indiana at how common are the political breakdowns in most countries. The political breakdown and  government malfunction have got to be a defining signature of our times. In my last blogs I nibbled around the edges to try to understand why we get such bad policy and today I try a different angle. This one focuses on the difference between problems and big problems – or dealing with challenges versus emergencies.

Many of the important policies we are dealing with daily have had and will have relatively enduing consequences. The stimulus programs will have effects that last for years. Today we are confronted with a new debate about how best to improve the jobs situation. In parallel is a very heated question of taxation of rich persons. Health care policy and what to do about entitlements require policies and solutions that will be with us for decades. In short, our government is bent on making policies that could not be considered temporary – these are changes whose impacts will last. These are solutions whose effects will endure.

The heft and durability of policies should, I think, reflect the nature of the challenges they seek to resolve. For example, if your kid stole a pack of cigarettes you would probably not send him to prison for 50 years. If your house burns to the ground you would not rebuild your house without a stove. If a tornado destroys your house you would not move to Venice Beach California or a place that almost never has tornados. If you got a stomach ache, you wouldn’t quit eating.

Most experts agree that the financial collapse and the ensuing recession and slow growth period, including the continuing dismal performance of unemployment came about because of a once-in-a lifetime-event.  I would not call it a random event but the swiftness, the depth, and the very sources of problems made it a rarity among economic shocks.  Tornados and fires are tragedies that sometimes unfold for reasons, but the truth is that most people never encounter these problems. If you live through one such event the likelihood is that you will not endure a second one. When someone is unlucky enough to experience one such tragic event, it is reasonable that they wonder what they could have done to prevent the problem and what they should do in the future.

It is equally reasonable to conclude that sometimes because of the severity of the negative consequences of such rare events, that people come to the wrong conclusions and sometimes make tragic decisions about how to avoid them in the future. I am afraid that is what is happening today with respect to economic events since 2007. Let’s go back to the tornado example. Surely moving to Venice Beach seems pretty outlandish unless you always wanted to live near Muscle Beach and were afraid to admit it. Less extreme would be to rebuild a house that has a basement, so you would be safer if another tornado did impact you. In between those extremes might be building a house that could stand the high winds of any tornado. I am guessing that such a house could be very expensive and well beyond the financial resources of most people. No matter which choice is made, however, there are financial consequences.

With respect to our current high rate of unemployment and slow economic growth, it seems to me we are barking up the wrong policy trees, especially if you believe that the economic shocks of 2008 were macroeconomic tornados – once in-a-life-time shocks that may never happen to us again. The negative economic consequences of the financial crisis are all around us and it is easy political picking to find demons and red herrings. Let’s blame it all on the capitalist system. Let’s blame it on rich people. Let’s blame it on China. Let’s blame it on globalization. Let’s blame it on….

If 2008 and thereafter really were the results of a rare event that has some small possibility of returning in the future then it seems to me that we want to do three things. First, realize that nothing you do right now will make the past go away. Second, don’t change things forever that have very little to do with a rare event. Third, whatever you do make sure that you are focused on what really may have caused the problem and attack those causes directly and with a budget that seems commensurate with the probable return of the problem.

So let’s create two lists. First we list all those things that did not cause 2008 and thereafter. Second, let’s list those things that we think did cause it and which could happen again without remediation.

List 1. Did not cause it:  people without healthcare insurance, rich people, insufficient taxes paid by rich people, the capitalist system, unions, worker demands, China, oil companies, inadequate infrastructure, air pollution, unemployed teachers and policemen, a disdain of small business to hire workers, immigrants

List 2. Did cause it: excessive leverage by financial and other firms, households incurring too much debt, governments incurring too much debt, unrealistic expectations about housing prices, corrupt practices among some individuals in financial firms, Fed policy that left interest rates too low for too long, realization that government revenues are insufficient for current and future liabilities, earthquake

Before you get too hot under the collar…note that List 1 does not imply that there are no problems with respect to income distribution, poverty, de-regulation, re-regulation, business costs including employee health and pension benefits. There are problems that need addressing in all those and other areas. But the point is to try to prioritize and to focus on cause and effect .If high unemployment and slow growth are the result of something – then let’s stick to those things. Let’s not use the current economic malaise as a cheap excuse to solve all of man’s ills.

Let me end this with a few words about the recent protests.  Those who have lost their jobs, houses, retirement incomes, and other means of living in the last several years have a right to be disappointed and angry. They have a right to peacefully protest and make their grievances known. There is much wrong with this country and we should all demand better solutions. But it helps no one to throw the baby out with the dirty bath water. What we all want is for things to get better. To do that with limited resources we have to focus and we have to be logical. Capitalism has served this country and most of the world well. Just imagine how the world has changed in the years since I was about 14 years old walking around Miami as Kennedy faced down the Soviets over rockets in Cuba. Since then country after country gave up central planning for some form of capitalism. It hasn’t been perfect and there are many things we can do to improve capitalism as it serves people of all incomes – but surely if we have learned anything it is that central planning is not a superior system.  We already have a mixed capitalist-socialist system. The financial crisis and resulting global slowdown will not be improved by radical departures from capitalism. Let’s keep our eye on the ball and not be diverted by people who are just using this crisis as a means to their own ideological ends.