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Downtime

What works?

The word "depression," which I was using a year ago, is the only thing about the economy that is gaining currency. This dismal word has now flopped off the lips of General Electric's CEO and Great Britain's Prime Minister like a dead fish. Another D-word, "denial," still holds the teeth clenched when it comes to speaking the word "depression." We only speak that word looking backward because no one likes to admit they're currently depressed. It's fine to talk about later when the wine is pouring. Our great denial right now is to think we are witnessing the burst of a real-estate bubble. We are not. We are witnessing the failure of an entire economic model. Recessions correct market bubbles. Depressions correct failed economies.

What doesn’t work

When the expansion of debt ends, the economic expansion built on debt ends. You cannot expand the capacity of individuals to increase debt forever by loosening the terms of credit. Debt was our economic foundation, and it has failed. We were fundamentally unsound. Unfortunately, the new U.S. government talks of change but clearly doesn't know how to change. Most of its recovery plan is aimed at bailing out the old economy to get it to float again, but you cannot bail out a ship that is already underwater. We need to build a new economy that is more durable model and let the old ship rest in the sand bars of history.

Instead, the government's program aims at stimulating debt-based consumption all over again, but you cannot solve a fundamental problem of excess debt by re-expanding credit. That's why the biggest interest cuts people have ever seen plus hundreds of billions spent on bank bailouts have accomplished nothing.

Moreover, that additional debt is passed to the next generation, but it gives that generation nothing in return for the bill. What does the next generation care if Citigroup still exists? They will still have banks. Passing our mountain of bad debt into the future may come to be seen as the most selfish act any one generation has foisted upon another in order to avoid its own pain.

What works

Let's hope "the government of change" did not mean putting a little change in people's pockets with more tax breaks that are just one more bill to hand to the future. With jobless claims now at a twenty-six-year high, the government's stimulus plan should focus entirely on job creation as the path to avoid suffering. In a true-wealth economy, wealth is created by good-paying, sustainable jobs that give rise to the ownership of durable goods. Assets are accumulated that can be passed to the next generation, not debt. Those jobs are not created by investment breaks. They're created by demand for the goods. In this case, government demand.

Only one kind of enormous deficit spending can create a new economy that does not damage the future -- spending money now to build and repair things that the next generation will have to build and repair anyway (the creation of very durable goods). By that path, we hand the next generation the trillion dollar bill, but we also hand them more than a trillion dollars in value-added assets -- new rail systems, repaired highways, new schools, etc. The debt handed to the future is offset by their cost savings in not having to build those things.

By way of example, my parents grew up through the Great Depression. My father still raves at how the CCC (Civilian Conservation Corps -- one of the WPA-type projects created by Roosevelt) kept him alive with the only sustainable employment he could find. As the next generation, I benefited in the 70's when I attended a high school built under the Works Progress Administration in the Great Depression. I traveled over bridges built by my grandfather. I hiked on trails created by my father. The WPA produced over half a billion miles in roads, 125,000 public buildings, 75,000 bridges, 8,000 parks and 800 airports. My alma mater was recently renovated into the most modern school I've seen because its essential structures were still rock-solid. So, it has become an asset handed to yet another generation. That's wealth accumulation, instead of debt accumulation.

Reality today

At the beginning of January, I predicted that those long lines at Walmart over the Christmas season meant nothing. While sales volume appeared O.K., it was only because goods were being sold at no profit. As soon as those cheap goods were cleared, nothing sold. Data released at the end of January confirmed that the final quarter of 2008 saw a drop in consumption of American goods that can only be matched by one other quarter since records began at the end of World War II.

In spite of these enormous job losses, the "government of change" is putting the same old pork fat in its stimulus bill when we need all muscle. Here are some examples: $335 million for sex education. (I don't think the stimulation here is economic, unless it's to create jobs in the world's oldest and most stimulating occupation.) Over half a billion dollars to help people switch to digital T.V. (I suppose with so many people out of work, the government gurus figure there will be a lot of couch potatoes needing public assistance.) $70 million to help people quit smoking. (The government should realize that money will need to be spent on drinking problems.)

These are not durable assets, so they hand nothing to the future in exchange for the bill. While some of these may be worthy ideas in good times, they are frivolous additions to a critical bill that should be nothing but lean meat in jobs that produce durable assets. Their inclusion demonstrates that the reality about depression has not sunk in, nor has the reality about the bill we are handing to the future. Some of those future people may wish a few of us had died of smoking.