Two years after the economy officially started a “recovery,” all the signs are pointing in the wrong direction—the jobless rate actually increased to 9.1 percent, housing prices are falling, consumer spending has been slack overall as oil prices surge, and now the stock market has dropped, erasing billions in household wealth.
We are beginning to hear from economists that we are at risk of a “double dip” recession. Or we’re having transitory problems. Or there are headwinds. It’s just a question of waiting it all out. “Most economics reckon the economy will right itself,” the Wall Street Journal proclaimed on Monday. It’s just a question of waiting for the invisible hand of the market to sort us out.
At the same time, we’re hearing the same tired old arguments being trotted out on both sides of the ideological divide. From the right, we hear it’s time to cut federal spending in a way that would somehow magically unleash the private sector. And from the left, we’re hearing that it’s time to stimulate the economy again with a QE3. Or it’s time for the federal government to engage in the direct creation of jobs, as The New York Times argued Sunday in its lead editorial, which is complete folly.
But economists are misdiagnosing the fundamental problems in the economy. We don’t face a double dip recession. We face a protracted five to 10 year challenge to bring about structural changes in the economy. Now that the financial bubble has burst, revealing the depth of the U.S. competitiveness challenge and the dangers of its dependence on foreign petroleum, it’s time for Americans to undertake a strategy that allows the country to bolster older industries, such as autos, but more importantly to unleash the power of new industries such as lithium ion batteries, solar and wind energy, advanced robotics, biotech and genomics, smart energy grids, nanotechnology, and the like. It is possible for the United States to create industries and jobs while at the same time beginning to put a dent in its huge dependence on Middle East oil, which is siphoning out hundreds of billions of dollars from the U.S. economy.
But we don’t hear anything from the economics profession about how to do any of this. Economists can’t talk about competitiveness or innovation, in any meaningful way, because they don’t understand those concepts. They don’t appear in the textbooks. Like the high priests of an ancient temple, they continue to repeat their mantra–macroeconomic juggling can create a silver bullet solution.
Economists wouldn’t be dangerous if nobody listened to them, but unfortunately, the opposite is true. Americans—from the White House on down—have been encouraged to take a passive approach to their economic crisis and not to seek practical solutions. Just wait. Everything will be fine.
The reality is that things won’t be just fine—we won’t have a return to the status quo ante because that status quo has been blown up.
Americans should be encouraged to strive to innovate and create more disruptive industries of the sort that has characterized U.S. history—radar, transistors, lasers, GPS, biotech and the Internet. Those new technologies are struggling to be born but are not attracting enough capital and are not achieving sufficient scale. Americans should be encouraged to get serious about exporting more goods because the export of high-value manufactured goods is clearly a path to great wealth creation, as the Germans and Japanese have found. Americans should be encouraged to experiment with new energy models such as smart grids to find answers to easing the dependence on Persian Gulf crude. And Americans should be encouraged to find answers to how to train and retrain the right people for the jobs that are being created in the country’s technology clusters.
All that implies that Americans should be active in seeking solutions, rather than heeding the call of economists to just wait it out.