Yves Smith: "... we can't talk about doing industrial policy intelligently."

[Junkdrawer]

I think Yves Smith has her finger on the problem with Economic debate in this country.

Republicans push for lower taxes and less regulation. Democrats ask for more stimulus money and extended unemployment benefits. None of this gets to the root of the problem: a contracting manufacturing base and crumbling infrastructure.

Here's part of the transcript of a recent interview Yves did with Paul Jay of TheRealNews:

....

SMITH: Well, we've gotten into an economic model that--some people date it to the 1970s, other people date it to the 1980s--where, historically, policymakers were concerned with average worker wages. That was the--you know, jobs and average worker wages, and politicians knew that that was what would get them reelected. And what happened in the period of the stagflation of the '70s is that people began groping for different economic models. And that was what led what's called the Chicago school, also called neoclassical economics, to really come to the fore, because they'd been in the wilderness and people were really looking for, you know, any new ideas. But what happened is we then went to a model where everything that--anything that came out of, quote, "free markets", even though free markets is--conveniently means something different, depending what context it's in. But we have this kind of nebulous, flexible, free markets concept. But the idea is that anything that happens out of market activity is deemed to be virtuous, so if we go to less regulation, which--corporate interests took this free markets mantra and used it to justify deregulation--if we as a result of deregulated activity suddenly have a big trade deficit, well, we shouldn't worry: that's really the result of free markets, and somehow it will correct itselves. Well, in the old economic model, sustained trade deficit would have been recognized as, gee, US demand is supporting foreign workers, there is something wrong with this picture, and there would have been a big debate around it. Now, who knows what the remedies would've been, but that problem would not have allowed to go very far. And yet it's a fact that we've allowed that problem to persist and get larger, which is why, then, we've had so much debt accumulation in this economy: when you run a really big trade deficit, that basically--basically it's almost like going to the bank, going and getting credit from your local grocery store. You wind up importing capital, and that's usually in the form of borrowing. In theory, they could also buy all our real estate, the foreigners, but they have tended instead to buy US debt. And what happened over this, again, period starting roughly in the early 1980s is you see consumers loading up on debt. You see it in the '80s bumping up a little bit. And then we had a recession at the end of the '80s, and so it drops, but it still is up on a trendline basis. Then in the 1990s it goes up a little more. Nineteen ninety-nine, it shoots to the moon. You suddenly see this rapid acceleration in consumer debt. Consumer debt is not economically productive. You know, it's one thing if you're a business, or even if you're the government--you know, the government's bad name to the contrary, in fact, for example, government investment in technology spending has been found to have a 30 to 40 percent return on investment. You know, well-targeted government investment can even be profitable. But consumer spending is consumer spending. I mean, buying more house does not make the economy more productive, and yet that's basically what happened is, to substitute for the fact that average workers were not getting more money, everybody had a higher standard of living by this, you know, basically 30-year pattern of loading up on more debt.

....

SMITH: I mean, that's one possibility. I think there's a lot of resistance in the country because we spent 20 years breeding for not very competent government. You know, the people who are very talented tend to go into government only to get their ticket punched and then get a more lucrative private sector job. There are countries all around the world that do a very competent job of running good public sector projects. And in fact, the US, you know, we built the Hoover Dam. We electrified the Tennessee Valley. You know, those were extremely productive projects. And with the US having very bad infrastructure right now, you know, again, by a global standard, there are plenty of opportunities for well-targeted expenditure. It will be very profitable to the economy. Another way for the government to go about it would be to fund more basic research. I mean, for example, people in the US somehow have blocked out of their mind the fact that we have a very successful pharmaceuticals industry is because we have a National Institutes of Health that funds a tremendous amount of basic research into medicine and health. And similarly, in Australia they have a group called the Commonwealth Scientific and Industrial Research Organisation, and they've picked ten industry sectors that they regard as a priority. And they have what basically amounts to a big government think tank to both do some basic research but also what amounts to applied research to help get ideas that will make their industries more competitive. You know, we like to pretend in America that we don't do industrial policy, which is crazy. I mean, we have a very heavily subsidized defense industry. As I mentioned, we have subsidized health care. We have--.

JAY: Agriculture.

SMITH: Agriculture. You know. But we can't talk about doing industrial policy intelligently. Instead, we pretend it doesn't exist and do it badly.

JAY: And everything's mostly now about the short-term buck.

SMITH: Correct.

http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=6004#

Here's my analogy: Our Economy of the victim of a vicious knife attack. It's bleeding from multiple wounds. Stimulus spending is the blood transfusion: absolutely necessary in the ambulance, but not a long term solution. And "lower tax rates / deregulation" is the guy in the corner with the knife.

[Angry Dragon]

1. Bookmarked for later intense read