Friday, October 17, 2008
Reflections on the Current Economic Downturn
As of recent, it has occurred to me in various layers of epiphanies that the current economic crisis has the potential to be much worse than what some economic analysts and Wall Street hopefuls are predicting.
Six to seven years ago, as I was embarking upon my first studies regarding the nature of economics and international economies, I was exposed to some basic, fundamental rules that economists must follow. These rules range from the laws of exports and imports, the balance of supply meeting demand, the nature of trade surpluses/deficits, and interest rates, to consumer spending versus government spending, taxation and the distribution of, War, free trade agreements, and many other factors that can contribute to the health of a nation-state’s economy.
As I was tearing down these barriers of economic knowledge I was studying in Chile, so I also became acquainted with the Latin American markets and how some economies crumble (like the timely Argentine and Brazilian recessions) while other Latin American economies flourish, like Chile. I learned how IMF-debt can destroy an economy if jobs and production aren’t increased domestically with adequate programs in place to insure that the infrastructure, especially health care, housing, and educational institutions are benefiting along with an increase in GDP and exports. If these key infrastructural institutions are not benefiting, than the overall economy is not sustainable. By sustainable, I am referring to an economy that can be self-sustained through a good balance of exports and imports with an adequate GDP (not GNP) and without foreign direct investment; where as, the means of national investment in health care, housing, and education, are met in that the population is more educated, healthier and less-stressed. In turn, the output of an educated populous generates better/more efficient and creative businesses and inventions that serve its people. This in turn, can lead to a larger specialized labor force. A country that has a resource-dependent economy, as most developing countries have, does not have a sustainable economy. Instead, this type of economy drains a country’s wealth and potential by exporting all valuable resources to support low paying labor jobs. In this sort of economy, little is done to re-invest into the country’s infrastructure. Some countries that come to mind with such an economy are Nigeria, Panama, Venezuela, Russia and many others that are predominately dependent upon exports of oil, fruit, agriculture, logging or any other natural-raw good. If a country wishes to jump from having a resource-dependent economy, to a more developed, industrial economy, than they must adequately tax the resources being exported in a non-corrupt fashion to re-invest in its own infrastructure and domestic small businesses.
Five years ago, I was back in Boulder, Colorado continuing my studies. Around this time I deepened my understanding of the economy of the U.S. and stared blankly into the faces of professors that preached out-dated corporate initiated sermons on how economic methods such as free trade and privatization are the most efficient ways to development. An economy that is propped up under the false pretense that ‘privatization of all sectors is the most efficient way to become developed and healthy’ is nothing more than a cardboard building, which can be quickly and easily built, and seems strong and adequate, until of coarse the first signs of a downpour (or housing bubble burst). Most contemporary free trade agreements have the cards stacked against developing nations. NAFTA and CAFTA have regulations on zero subsidies for under-developed members while 80% of U.S. agriculture is disproportionably subsidized. There are also interesting disadvantages on tariffs between the developed and underdeveloped nation-states in most free trade agreements. The Chicago Boys, the group of Chilean economists who were educated by Milton Freidman in Chicago and who were accredited to having saved and boosted the Chilean economy after Pinochet’s military coup of 1973, are an interesting case. Chile was successful in seeing higher exports and GDP after Pinochet’s coup, but to a large affect, this can be due the fact that Pinochet failed on his promise to hand the major Copper companies back to private, foreign owners, after they aided him in his coup.
I did, however, have a few professors that were willing to break the U.S. educational mold and explore into other economic methods; such as the more Keynesian and List Social Democratic models. These professors helped deepen my understanding of what exactly sustainable economics is. .
At this time, certain factors were becoming clear: there is an obscene amount of military spending on two illegitimate wars, the national deficit has grown to an unmanageable figure, and the approaching retirement of baby-boomers (the largest population bubble the U.S. has yet to see) will further stress government funds when they go for their 401Ks and social security checks. Also, it was becoming more apparent every year that infrastructure programs such as health care, domestic building/road/sustainable energy projects, affordable housing, were not even near the top of the Bush Administration’s list of priorities. The wars however were and still are at the top of the list, along with military and government contract spending, funneling a large percentage of American taxes into the very pockets of some corporations and individuals making decisions in the Bush Administration. In fact, not only was the country becoming increasingly more privatized, so was the war! Iraq and Afghanistan together were becoming one of the most lucrative wars ever to be fought for the ones investing in it, behind only World War II. The scandal is that the American public and Iraqis were/are the ones paying for it, and suffering its consequences while extremely wealthy military industrial business owners and politicians are the ones benefiting.
In other words, to the ones who were paying attention to the overall health of the economy, times looked troubling, to say the least. At that time, and I believe that this was from 2004 on, we were told as students of international economics to expect a recession in the next 5 to 10 years unless serious measures were taken to get a handle on inappropriate government spending.
Also at this time, I myself, and I believe many others were completely oblivious to what a fragile housing market bubble could do to an already vulnerable economy when it pops. I was also unaware of the loans strapped with ludicrous and elusive interest rates that were being passed out like candy to illegitimate borrowers on the behest of extremely large, seemingly immune, financial institutions…which brings us to our current economic state. As any keen economist and onlooker could have predicted, the lack of affordable education, affordable health care, and affordable housing will urge any middle class worker to grab at an easy-to attain loan, completely desperate and indifferent to the time-bomb compound interest rates attached. In turn, one after another, the borrowers defaulted on the loans pushed on them, leaving the seemingly “immune” financial institutions strapped with un-paid debt and foreclosures. The impossible occurred, like a stack of dominoes, all co-dependent, the largest and most respected financial banking and insurance institutions started to waver, and fall. Bear Stern’s, Freddie Mac, Lehman Brothers, WaMu, CitiBank, one by one, came tumbling down. The Stock Market reacted in a similar fashion, as it should, like a roller coaster with more steep drops than ascents. A knife, a small knife, has been thrust into the side of the U.S. economy, leaving it to bleed, only momentarily bandaged by a couple of bail-out plans passed by Congress. Some might be thinking that the worst is over and that the economy will now need to take some time to heal. Really, in my opinion, what has been created is the Perfect Storm, for a complete economic meltdown. As more corporations are outsourced (jobs shipped overseas) interest rates raised, Baby Boomers retired, and more billions spent on the War, exacerbating the national debt, and more lenders default on their housing loans, it is more than apparent that we’ve only felt the first wave, a swell, in an approaching storm that could possibly capsize this ship for some time.
I don’t mean to make times look completely hopeless; I just want to emphasize the need for a shift in economic theories in the U.S. Only if we shift our economic outlook, will our country become sustainable; in the terms of the environment, and quality of life.