The Good Ship "Economy" Posted by: MichaelW
on Tuesday, July 15, 2008
One of the most important issues of the upcoming election is the state of the economy. In fact, it's always that way when the economy is chugging along at less than optimum speed during an election year. But how much does it really matter? And would it be healthier, economically speaking, if we didn't worry so much about "doing something" when the economy is in a down cycle?
To answer my own questions, I don't think it does matter that much, and we shouldn't be so inclined to tinker with it. Invariably that causes other problems that we'll have to deal with down the road. Sooner or later, with all the tinkering, it gets difficult to tell the difference between natural weaknesses in the economy and those which are purely a result of our meddlesome ways. Most problems are likely a mix of the two. Perhaps if we resigned ourselves to letting cycles adjust naturally, we could better discern the natural issues that need fixing and avoid the rest.
In my opinion, if we viewed how the economy worked a bit differently, maybe the urge to fiddle with it would abate. For example, the current debate centers on whether or not we are (a) in a recession now, (b) have been in a recession for some time, (c) are entering a recession. The question that occurs to me is "why does it matter?"
Maybe it matters because we tend to analogize the economy to a car's engine. When your car starts emitting funny sounds or smells, you take it to the shop. You expect the engine to perform the same way all the time, and when that performance drops you know you need to get it fixed. Plus, your car depends on oil to function, just like the economy, so the analogy seems perfect. But it's not.
Instead, I think the economy is more like a boat sitting in the water. Depending on what burden it's bearing, it sits lower or higher as judged by that line where the barnacle paint stops. Just because the barnacle line is under water, that doesn't mean anything needs to be fixed. Of course, at some point the weight may become too great and the boat may be in danger of capsizing. Or perhaps the seas are too rough given the size and structure of the vessel, which can potentially lead to the same result. But the fact that the barnacle line is resting below sea level does not mean that such danger is inevitable. In fact, it's normally not even a cause for alarm.
So if the economy is like a boat, instead of an engine, and the barnacle line represents zero growth (i.e. water below the line equals expansion; water over the line equals recession), then is there really any need to worry about that line getting close to being under water? If the economy bobs on the waves like a boat on the water, isn't it inevitable that, at least some of the time, the barnacle line will be breached but to no detriment to the boat? It will go down and then rise right back up again. All esle being equal, the cycle will repeat endlessly, all without any harm coming to the vessel or its cargo.
That's not to say that the relative position of the barnacle line is devoid of any useful information. When considered in conjunction with the general condition of the sea, and the burden being carried by the boat, knowing just where that line is can mean the difference between smooth sailing and a shipwreck. But worrying about that line alone is useless. In fact it's worse than useless because focusing so much on that limited information can distract from better indicators of the boat's seaworthiness.
So if the economy is a boat that gently rises and falls in the water, as opposed to an engine that's supposed to function at peak performance all the time, then wouldn't that suggest that worrying about where the barnacle line is relative to the water is a waste of time? Instead, shouldn't we be worrying more about conditions that have a greater impact on the boat? If the seas are stormy, then decrease the weight in the boat, and batten down the hatches, until the barnacle line reaches a favorable height and the vessel is secure. Or if the seas seem calm, but the boat is still listless, reduce the boat's burden and let it float. In this way, the barnacle line can give us a good measure of how well we are dealing with these other conditions, without distracting us from the tasks that most affect its buoyancy.
In my mind, worrying about entering a recession is just as useless as worrying about that barnacle line. Especially since the preferred method of dealing with a recession seems to be placing more of a burden on the boat. Cycles happen, and regardless of whether we've entered a recession already, or are heading into one, we'll be rising again soon enough provided we don't hinder the natural process. Our economy will bob up on and down on the waves, like the boat, and continue to stay afloat despite being below the barnacle line for part of the time.
If we could restrain ourselves from tinkering with the economy like it was an engine, maybe then we'd be better positioned to deal with the conditions that have a greater affect on its functioning, such as the burden we place upon it, and the general global outlook. Instead we hastily "fix" certain parts of it in attempt to thwart the natural bob of the boat. And we then place all praise or blame on the mechanic in charge of the fix, despite the fact that the laws of physics are against him.
Meanwhile, everyone piles into the boat, loading as much cargo as they can, and all eyes gaze warily at the barnacle line slipping beneath the waves, unaware that a storm is brewing. And they wonder why the engine won't start.
I think the economy is more like Earth’s climate, but on a much, much shorter time scale. Alarmists, in reference to both the economy and the climate, love nothing more than to talk about how dire the future is and how we need massive government intervention to prevent a catastrophe, but in reality governments can’t plan the future of an economy any more than they can plan the future of the Earth.
The problem with the economy is the same problem we had before the Great Depression, and to a lesser extent before 1980. It is actually two related problems. (1) Too much debt (2) Too much governmental meddling.
The debt can be taken care of if we can get some more growth, But only if there is less government spending. Unfortunately there will be more not less.
Things are going to get worse before they get better.