The Economy Right Now

By Chris Baily

Alright.  The economy sucks right now.  It’s probably going to suck for a while.  No one really knows how much and for how long, but I think we’ve all agreed that the suckage is pervasive.  So is there hope?  Is this 476 and are we witnessing the fall of the American Empire?  Is New York going to be the next Constantinople, headquarters of a once mighty financial empire while it slowly declines?

I certainly hope not – I live here.  I’d rather not be fighting angry Ostrogoths on the walk home from the subway.

So where can we find the hope that Obama keeps talking about?  As usual, I claim no professional knowledge on the subject, but I have some ideas about where we might be headed – at least in the best case scenarios.

Lets start with where we are – everyone’s heard that this is probably the worst financial crisis since the great depression.  All those fun little graphs they keep putting in the papers show that our trajectory is sloping downward quicker than just about any other time in U.S. history.  However, a couple of economists have pointed out that current conditions may actually be more similar to 1873 than 1932.  So I looked it up, and they have a point – the Panic of ’73 started when a major investment bank in New York (Jay Cooke & Company) suddenly cratered and took down most of the rest of the financial industry.  It turned out that everyone had been over leveraged on Railroad Bonds.  The instability spread throughout the world and we ended up with an unfortunate global depression that lasted until 1879.  Sound familiar?  Oh, and by the way, in Europe, they decided to blame the Jews for the economic troubles, which obviously had some horrific consequences about fifty years later.  Plus that big immigration thing in the U.S. around the turn of the century was partially the product of the weak European economy.

I think we’re going through a similar thing right now, but instead of steel and railroads, we’ve got computers and the internet.  It’s clearly a major transition time for the economy as some industries (publishing, music, news media, etc.) are getting slammed by the internet revolution.  We’ve also got other areas like health care that desperately need to be networked and digitized, but the transition costs are just scaring the hell out of everybody.

The financial industry is one area where computers got introduced early, and from what I can tell, they may have something to do with the overheated markets that led us to the mess we’re in.  There are hundreds of reason why the financial crisis hit (go here and here for a bunch of them) but one that has been less discussed is the possibility that we just bungled a major economic transition – manufacturing to computers.  Computerization has been changing the way businesses run for over 20 years now, but we know that some areas of the economy adopted them quicker than others.

From a business perspective, the Internet speeds things up – for example, Walmart has really incredible inventory systems that can actually tell a factory to build a new mop every time someone buys one.  Immediately.  This obviously gives them a huge competitive advantage, which means they grow relative to non-computerized retail, and take over more of the economy. 

Well, with the credit derivative swaps and a bunch of the other complex instruments these guys were using, the financial industry was able to go into a digitized overdrive.  This meant that Wall Street was faster than everyone else at making money.  Is it really a surprise that most of our cash ended up in computers doing nothing but making money off itself?

I have no economic basis for this, but I’m guessing that speeding up certain sectors of the economy while leaving others alone can eventually create instability.  It seems like it would keep generating bigger feedback loops like the ones described in this blog, and they would eventually knock the whole thing over.  Rather than using all the money this speed was generating to modernize and computerize the rest of the economy (which would have been smart) everyone just bought Escalades and steam rooms in the Hamptons and stuck the rest back into the loop.  In moderation, this isn’t necesarily a bad thing – people get paid to make steam rooms too – but if you’re dealing with a major change to how business functions, you probably need to manage the transition a little better.

The positive side of this, though, is that there may be a lot more room for growth than we’ve seen lately.  If we can stabilize things, we might have an opportunity to do some smart stuff in the sectors that are in bad shape right now.  It’s not like people are going to stop owning cars or listening to music or reading.  And people will pay for quality, so if we spend our time and money right now building better, faster, more convenient distribution systems and products (which would mean cheaper to run), we could do some really amazing things (which would mean we don’t have to go into debt to use them).  The cool thing is that we live in a country at a time where we have a couple generations who grew up using computers on a daily basis. Computers are everywhere, and they’re getting awesomer, as my fellow poptenners have been pointing out (like here, and here, and here).

I had a Nintendo by the age of five or six – and I remember playing Oregon trail in elementary school.  Thats true for a lot of people my age – and I can’t even imagine how fast the kids who grew up on the internet are going to be.  This country is still at the forefront of the digital age, and we now seem to have a President who understands how powerful that is (he should, it got him elected).  If we use them right, I think computers could give us the shovel that digs us out of a massive pile of shit.  I just hope he spends our money wisely and figures out how to stabilize so we can start building stuff.  Otherwise, we’ll just have to keep playing tetris or solitaire.  

Legos anyone?