Unwinding the Birthright/Potage Trade

So, after we wipe out the investors in General Motors, and package the company for sale to the Chinese – and wipe out the investors in Citigroup, and package the bank for sale to the Saudis – and we finally pull the plug on AIG, and sell its still-functioning insurance subsidiaries to the Japanese – maybe then we can sit down and talk about where we are going from here, as a country.

Or, maybe not. Right now, the going thinking is that our big problem is that we’re headed into a deep consumer recession. People have this crazy idea that, having seen their wealth evaporate, they should save and rebuild their balance sheets – whereas, of course, what they should do is spend, spend, spend, for the sake of the economy. And if we can’t get people to spend on their own – then let’s have the government spend for them!

But you can’t get a turnip to bleed. There’s been discussion of the role of the “savings glut” in Asia in producing this crisis, but everything is relative. If Asia was saving “too much” that’s really saying that America was saving “too little” and spending “too much” – after all, we were borrowing from Asia to finance our consumption.

Now, I’m not a “neo-Hooverite” advocate of austerity budgets during a recession. We have to take care of those in need. And there’s a role for government beyond this in trying to pull the country out of the ditch we’re in. But we should not be thinking in terms of boosting “aggregate demand” much less reflating asset values, which look to be two of the chimeras we’re going to chase. Rather, we need to be thinking in terms of productivity: what can the government do to promote greater productivity in the American labor force, which is the only way to get back to real economic growth.

The Obama Administration’s thought at the governmental level is to spend a whole lot of money on “green infrastructure.” I agree! I vote we make John McCain green-eyeshade czar in charge of making sure we don’t spend too much of that money on out-and-out boondoggles.

The other area where the Obama Administration is going to try to realign investment in ways to make the economy more productive is health care. And again: I agree! If we don’t get greater productivity out of the health care sector, we’re leaving too much of the economy on the table.

On the other hand, the Obama Administration has not made it clear that they are eager to see housing prices drop to their natural level, focusing government interventions on alleviating the human cost of the price drop and the systemic cost of working out lots of bad debts (whether we have foreclosures or cram-downs or “owners” turned into renters, you’ve got a lot of debt going bad). I’d like to hear something explicit about that.

Other things I’m not hearing (yet):

- Reducing defense spending. The current defense establishment is comprehensively unaffordable. We need to start thinking about what kind of foreign policy is consistent with the forces structure we can afford rather than the other way around. This is something where the Obama Administration needs some bi-partisan cover. Bob Gates, Dick Lugar, Bob Hagel, Colin Powell: I’m talking about you guys. Without that cover, we’re going to wind up spending way too much on completely unproductive investments in weapons that we will never use.

- Reforming Social Security. Medicare and Medicaid are going to be part of Obama’s big-picture rethink of health care generally. Social Security is another story. I know it’s a pet issue of mine, and it’s pathetic to trot out your pet issue in response to a generational crisis. But a reform of Social Security that raised the retirement age and replaced the payroll tax with a value-added tax would increase the size of the labor force on both ends: you’d create an incentive for able-bodied older workers to remain in the labor force, and you’d remove a disincentive to hiring younger workers (or, at least, a disincentive to hiring them on the books). And raising the retirement age would also reduce the aggregate cost of the Social Security entitlement. This is something where Obama – if he’s pushing health care reform and other items on the liberal agenda – is in the strongest position to lead on.

- Reforming education. Education is a huge and growing chunk of the economy. Nobody is even measuring productivity in that sector in any meaningful terms. NCLB was a failed attempt to get a handle on this problem. The Obama Administration needs to take a comprehensive look at how we spend our education dollars, with an explicit goal of getting good measurements of productivity and then reforming the system to achieve higher productivity across the board. I’ve got my own ideas on this, but the main thing at first is to set the terms of the debate correctly – not “how do we make every child in America a Yale-educated lawyer” but “how do we get every child in America a better education than we currently provide them, for the same or less money in aggregate.” Ask the wrong question, you can’t possibly get the right answer. Again, Obama is in a unique position to make progress here, as he’s less beholden to the education interests than any recent Democratic nominee. But it’s not clear to me he’s asking the right questions on this one.

We’ve just gone through a decade of malinvestment. We can’t afford another such decade. Baumol’s Cost Disease would be killing us in terms of productivity growth even if we invested intelligently – the low-hanging fruit has been plucked. It gets harder from here.