Monday, November 05, 2012

Hope for the future

Some of you may have heard this one:

The torrential rains started to fall, and Smith prayed to the Lord that the Lord would save him from the floods. And Smith said to himself, “I’ll trust the Lord to save me from this.”

The rains continued, the water came up into the first floor of Smith’s house. A boat came by and asked, “Friend, can we help you?” And Smith said, “No, I’m trusting that the Lord will save me.”

The rains continued, and the water continued to rise, and so Smith ran up to his second floor. Another boat met Smith at his second floor window. “Friend, can we help you?” And Smith said, “No, I’m trusting that the Lord will save me.”

The second boat left. The rains continued, and Smith ran up onto his roof. A helicopter came by; the pilot said, “Friend, can we help you? And Smith said, “no, I’m trusting that the Lord will save me.”

The waters continued to rise; Smith was swept away with the torrent. He died, and met the Lord. And Smith said to the Lord, “I prayed for you to save me, I trusted you, and you didn’t save me. What of that Lord?”

And the Lord said, “What more do you want, I sent you two boats and a helicopter.”

I don’t know if that reflects a Calvinist worldview, but it makes sense to me now.

I lived through the Carter-Reagan recession(s), and I remember how the country pulled out of those recessions.

It was particularly severe in Pittsburgh, where the steel industry, having taken on huge obligations through having supported a number of generations of increasingly greedy steel union workers, increasingly sought to “deleverage” itself from those wage and benefits burdens.

At the same time, new steel-making technologies enabled them to make as much steel with 12,000 employees as they previously had when they had a payroll that was some 10-20 times that large. Here in Pittsburgh, the unemployment rate hit nearly 25%. Those were painful times.

Things were about that bad in the Northeast, but not quite so bad everywhere else. What pulled the country out of that recession?

Some of you younger folks probably don’t remember how IBM fostered a whole new industry in the 1980’s, in the form of hardware manufacturers who could compete in the creation of PCs, and applications developers who created applications to run on the IBM PC platform.

Again, this was all in the wake of the worst recession since the 1930’s. While it was happening, there were probably economic studies in academia. But then, there was the reality of it; I lived through it, and I read about it in the papers, and I had friends and family who went in various directions both to avoid the economic difficulties and to pursue the emerging opportunities in a new technology industry.

This did not involve the printing of new money. It involved many cycles of economic growth that derived from funding whole new technologies that no one had ever seen work in the past. After all, businesses worked fine without computers for centuries. Who needed computers in offices? It seemed ridiculous to some. But others went out of business for not keeping up.

I’m not an economist, and I cannot cite economic studies to the effect that this happened. What I do rely on is “living memory” of having participated in those events, or watching them nearby, and seeing the outcome. This is how things worked in the 70’s and 80’s.

There was another recession in 1991, and President George Bush promised “jobs, jobs, jobs”. The problem is, the government can’t really create jobs.

Some of you younger folks probably don’t remember how Microsoft fostered a whole industry in the 1990’s, of applications developers who created apps to run on the Microsoft platform. These were where the “jobs, jobs, jobs” came from that led to the government revenue that enabled the US government to operate with a balanced budget during the late 1990’s. (The Republican congress helped at that time, too.) True, the economic prosperity seemed to lead into the “tech bubble” situation of the 1990’s, but before there was the bubble, there was the reality of it.

Fast forward to today. In the midst of an economic recession caused by a “financial bubble”, the solution, for the past four years, has been to accumulate government debt in the hope of “spurring on the economy”. That’s a Keynsian way of thinking about the economy.

At this point, the US government has now gotten itself into a position at which its total debt is about 100% of the total US GDP.

Yes, I admit, that is serious.

But today, on this day, we are faced with a choice between two paths. One will take us further into debt. The other will enable us to work out of our debt.

After World War II, the US government was in a similar debt-to-GDP ratio. I’ve written about it below, but I haven’t provided the context for it.

Whatever ails us, however bad the US debt burden is, I believe a growing economy will make it easier to get out from under that debt – to “deleverage” – while continuing to offer opportunities that “America” and “the American Dream” can remain in focus for future generations.

One of the recurring news stories from several years ago was not that “businesses are sitting on capital because there is simply no demand”. The demand is already out there, and Romney does not need to “create” it.

Businesses are sitting on capital because there is uncertainty. I’ve written about that situation with my own company, a technology company that deals in network and network infrastructure expansion.

Technology is advancing mercilessly (especially with hand-held devices and the need to incorporate all types of devices into networks securely.) This is happening across many vertical markets, including retail, hospitality, restaurants, health care, industry, and others. Everywhere businesses are interfacing with the public and have the need to provide secure Wi-Fi networks. It’s not just that expanded networks are needed. New apps are being created all the time.

The same kind of thing is happening now: applications are being developed for all of the various hand-held devices that are being introduced. I’m not talking about the 99 cent game apps you see on your iPhone. I’m talking about serious business and industrial applications that can and yield tremendous productivity gains, again, of the kind and scale that we saw happen in the 1980’s and 1990’s.

One of the reasons that I’m not blogging as intensively as I had been is because I’ve picked up some freelance marketing work from one of these very kinds of companies. It’s a company with five people, two of whom have PhDs from a very prestigious technology university, funded by venture capital, who are writing applications for the health care industry. You can Google them if you want, but you won’t be able to find them. They are riding on the wave of the need in health care for providers to standardize medical records on some kind of standard technology platform.

Maybe in three years an academic economist will write about this growing trend, but right now, I’m seeing it happen on the ground, it is an incredibly hopeful thing that I think will be encouraged by a Republican administration.

Is there a particular law or policy that I can point to now which will give an economist a slam-dunk premise-and-conclusion, “if X, then Y”? No. It involves smart people, working hard, taking risks, and trying to make something that will be profitable. Is it guaranteed? No. Can it succeed? You bet it can. This sort of thing has worked in the past. Has there been an economic study about it? Not yet.

The future is being created now. Historians will write about it one way or another. I’m just not of a mind to be pessimistic about it right now.

This recession, it’s the government that’s debt-ladened and not the steel industry. The steel industry had some hard medicine, but in another neck of the woods, there was growing prosperity.

The “deleveraging” of the US from war debt in the 1940’s and 1950’s did not involve either pain nor inflation. It involved spending discipline, to be sure, and it was the economic growth of that period that enable the country to work its way beyond that debt. I’ve cited that several times here. No, we don’t see the same circumstances this time. It’s never the same, except for one thing: I admit, things are difficult, and things will be difficult.

But I’m not ready yet to fly the white flag yet, by any stretch. The Lord is sending us boats and helicopters. We ought to take advantage of them.

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