CREATING ECONOMIC GROWTH

In September of 2008 the American economy transitioned from a mild recession to a devastating collapse. Even after spending more than two trillion dollars to try to stabilize it, the economy continued to spiral down until it seemed to reach a plateau near the end of the first quarter of 2010. The American economy remains fragile, unstable, and unsustainable. With more than 33 million unemployed workers (19.6% of the workforce) and another 10-15 million economically-forced part-time workers, the flow of money through the economy can't sustain activity at a level higher than its current state. "We need to create more jobs!" has become one of the favorite clichés of the talking-heads that parade across the newspapers and the television. Unfortunately, none of them ever suggest how to create new jobs, and the experts know that jobs follow spending - not the other way around.

It is impossible to force new jobs into the economy! New jobs are created when an economy grows, and getting the economy to grow is the difficult task. Growth in an economy, like growth in any complex system, is produced by increasing the flow through the system!

The Complex-Systems Theory of Culture (Gehlsen, 2009) is the only published scientific theory that explains Cultural Evolution. According to this theory, modern economies are complex evolving cultural phenomena, which it explains scientifically for the first time. The theory of cultural evolution can't be explained in this blog posting, but I can provide a simple analogy that describes how all complex systems function. An apple tree is a good example of a growing and evolving complex system. A tree is an open system, which means that it always grows by expanding its capacity to capture more of the flow through the system. The flow through the system is predicated on the size of the roots that produces the flow through the tree. The roots of the tree capture a portion of the flows (energy, water, and nutrients) available to it and use them to build a larger root system and to produce emergent properties (trunk, branches, stems, leaves, blossoms, and fruit). The tree continues to grow as long as the flows through the system are sufficient to sustain the growth process and as long as the tree can support an increase in size.

The "root" of the modern economic system is the consumer sector. Consumers earn money and spend it on goods and services, which produces the basic flow that sustains the economic system. Stores, factories, banks, and the government are examples of the emergent properties of the economy. Getting the economy to grow is a direct matter of getting more money to the consumers, which increases consumer spending. Business trends over the last thirty years have resulted in a shrinking middleclass and a declining amount of consumer wealth. Consumer spending continued to increase during this period due to enthusiastic "debt-spending". Debt spending is always unsustainable, and it has reached its logical end. The problem wasn't too much consumer spending, which is the common cry of the pseudo-intellectuals who want to blame the consumers for our current economic dilemma. The problem was all the easy debt that the financial institutions provided for consumers so that they could live beyond their means.

Debt spending is unsustainable! The debt load on consumers grew to the point that the system collapsed under its own bloated weight. After the initial collapse in September of 2008, the economy continued to spiral down until it reached a level of activity that can be sustained by the current level of consumer spending. This is analogous to what happens when the apple tree goes through a mild draught, and it withers back to a smaller size that can be sustained by the current flow of water. Trees protect their roots by disposing of the emergent properties (leaves, blossoms, fruit...) and use the flow to sustain as much of the root system as possible. With 33 million Americans out of work (and millions more forced into part-time employment) the flow of money dwindled because the American consumer can no longer borrow enough money to continue to spending at high levels. The economy is on life support (supplied by the 15 million Americans who are collecting unemployment). The economy will spiral down to an even lower level if the unemployment benefits are reduced or stopped.

Fixing the economy requires getting more money to consumers so they can increase the amount they spend each month. In other words, increase the flow of money through the roots of the system and the economy will grow and create new jobs. Many options are available. One way to create a modest amount of economic growth is to give all families a free month of housing each year. This plan could increase consumer spending by 100 billion dollars each year (and it doesn't cost the taxpayers any money). On the other hand, I am not convinced that this would create substantial economic growth.

Ironically, the only asset available for ensuring dramatic and immediate economic growth is the vast pool of consumer debt. We must restructure all consumer debt so that the amount of money paid to mortgages, car loans, credit cards, student loans... is substantially reduced, which leaves consumers with more disposable income to spend on goods and services each month. For example, a typical 30 year mortgage with a 5% interest rate could be changed to a 40 or 50 year mortgage with a 2% interest rate. I estimate that an aggressive restructuring of consumer debt would result in 100 billion dollars of new spending each month. This increase in spending provides the needed flow of money to produce growth and to entice investors back to the economy.

This isn't a "rob Peter to pay Paul" scheme. A sufficient amount of increased spending will stimulate new investments in the production of goods and services because the wealthy will compete to capture as much of this new spending as possible. New investments produce new jobs, and this represents a positive feedback process that puts more money into the roots of the system and continues to stimulate increased economic growth and activity. In other words, the long-term growth of the economy will be far greater than the amount of money that is released from debt payments.

REPLACING BERNANKE

Should Ben Bernanke be confirmed as the Chairman of the Federal Reserve? I am absolutely certain that he should be replaced.

Ben Bernanke is an “expert” on economics, and many observers hail him as a “savior” of our economy. The problem is that he didn’t save our economy. He only saved a few very large financial institutions, and he did it by loading main-street with debt and the loss of a significant portion of their life savings.

Bernanke may be as smart as any of our economic experts, which is a good indication of why the Great Depression lasted for more than a decade, the Japanese recession extended for ten years, and the current American depression may last longer than both of these. If Bernanke is as good as our Ivory Towers have to offer, then why should we replace him?

There may be several good reasons why we should consider replacing Bernanke, but the most important reason is that he doesn’t know what he thinks he knows. In his testimony before congress he stated that he acted to save the financial institutions because that was the lesson to be learned from the Great Depression. The view he voiced was that the financial institutions had to be saved because they were the key to keeping the money flowing. In other words, if the financial institutions failed the money would stop flowing and we would continue to lose jobs. The problem is that he was right about the need to keep the money flowing to save jobs, but he was wrong about the importance of the financial institutions and their role in keeping the money flowing.

All cultural systems are complex evolving information systems (as explained by the Complex-Systems Theory of Culture: Gehlsen, 2009). Economic systems are dependent on the flow of information, and modern economic systems are dependent on the flow of money, which is an extension of the flow of information. The first step in understanding our economic system is to accept that consumer spending is the foundation of the flow of money. This fact indicates that you can manipulate financial systems drastically and to extremes, but the economic system won’t improve or grow until consumers have enough money to produce an adequate flow through the economy.

Replacing Bernanke probably won’t improve the economic advice President Obama is receiving, and it probably won’t alter the economic policies that have been so misguided and disastrous for more than thirty years. They are disastrous because they culminated in the economic collapse in September of 2008, which we have failed to begin to extricate ourselves from. I really can’t imagine that any of the “experts” that provide economic advice for our politicians would have performed any better than Bernanke. Like him they would probably have acted to save the wealth of the rich at the expense of the working class, and like him, they would all probably have sacrificed the life savings of ordinary Americans in an effort to save the financial institutions they seem to worship as the sacred foundation of our economic system.

The only reason that I advocate replacing Bernanke is found in the illogical and unreasoning hope that his replacement might forsake the “conventional wisdom” of the economic discipline and accidentally hit upon a new, even radical, approach to recovery. It’s an astronomical long-shot, but a new Chairman of the Federal Reserve might just try a seemingly absurd approach, which could just be the one that saves our economy before it collapses further.

DIPLOMATS WITH MACHINEGUNS

I heard a joke. It goes like this: “American Marines with machineguns engage and kill insurgents out in the country-side then retire to the local villages to become diplomats…” It’s not a joke so much as an ironic notion. Diplomats and soldiers are required to put their lives on the line occasionally (more often for the soldiers right now). Diplomats must always face the unknown unarmed.

Confusion on this point arises because American soldiers in WWII were occasionally referred to as “diplomats”. They weren’t diplomats. They were part of a vast effort to liberate many European countries from the tyranny of the Axis powers. There will never be parades in Iraq or Afghanistan because our soldiers are not liberators any more than they can ever be diplomats.

DEMOCRAT’S DILEMMA

Last year Barack Obama, along with many other Democrats, won a stunning political victory that inspired a wave of optimism. This year the Democrats face a rough political sea.

I agree with President Obama’s agendas, and I embrace virtually all of his polices. Unfortunately, agendas and policies are not enough. The eight million people that lost their jobs in the last two years, who still can find work, and the millions of families that lost their homes just don’t care about the medical business, the environment, alternative energy, or the wars in Iraq and Afghanistan. The millions of Americans who are afraid they are about to lose their jobs and their homes don’t care about agendas and policies either. This condition poses a severe political dilemma for the Democrats.

The security of our jobs and homes represents the number one concern of a large segment of voters. We aren’t losing these to terrorists; we’re losing them to a broken economy. President Obama and the Democrats have failed to produce any progress in reversing the current disastrous economic collapse, and there is no tangible evidence that 2010 will produce any positive change. On Election Day many voters will be looking for leadership that can address their top concerns, and it looks like the Democrats will have failed to provide what the voters want. This condition does not present a bright future for the dominant incumbent political party.

Why can’t the Democrats produce any real gains on these two important issues? One answer seems to be that the Democrats continue to listen to the “experts” who caused the problem in the first place. Popular wisdom suggests that continuing on a course of action and expecting different results is the definition of insanity.

If conventional economic policies are responsible for the problem then a rational course of action would seem to be to seek out non-conventional approaches to economic policy. The Democrats have not sought out fresh new approaches to economic policy, and non-conventional thinkers simply can’t get access to the politicians. The knowledge for producing immediate and dramatic economic recovery exists, but the politicians have failed to access it. If the Democrats fail to mend their failed practices, then they will have earned the midterm defeat that seems to be on the horizon.

I don’t blame the Democrats for not knowing how to fix the economy. Conventional economic models simply fail to provide useful information about our current economic condition. On the other hand, Democrats should have recognized this failure by now, and they should be seeking non-conventional solutions. They should bust a gut trying. They should have teams of staffers out turning over every rock and shinning a light in every dark hole until every possibility has been examined. From where I stand they seem to have given up on the economy and moved on to “issues”. The lives of millions of Americans are flapping in the wind, and the Democrats have protected the investments of the wealthy and moved on to “issues”.