Monday, July 18, 2011

A World of Contrasts


"Before I go on with this short history, let me make a general observation– the test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.
One should, for example, be able to see that things are hopeless and yet be determined to make them otherwise. This philosophy fitted on to my early adult life, when I saw the improbable, the implausible, often the "impossible," come true.
"
F. Scott Fitzgerald

Perhaps Fitzgerald would have understood the world that we are facing today, since there seem to be so many contrasting trends.

In the U.S., for example, no one doubts that we have the financial capability to pay our debts, yet we can't agree on how we should go about it.

Meanwhile, in Europe, several countries would very much like to pay their debts, but don't have the financial capability to do so.

Regardless of how the various budget crisises are resolved - and I remain optimistic that at least here in the U.S. we will avoid a major policy blunder - it could be that what we are really seeing is a world struggling with deeper changes.

At least that's the argument of the Economist blog Democracy in America. Published last Friday, the author cites a recent research piece published by Michael Spence, a Nobel-laureate professor of economics at NYU.

Here's a quote from Professor Spence:

"[A]s recently as July 8, after the latest disappointing employment report in the United States, President Barack Obama expressed the widely held view that an agreement on the debt ceiling and deficit reduction would remove the uncertainty that is holding back business investment, growth, and employment. In other words, America’s fiscal problems explain its extremely weak economic recovery. Once a fiscal deal is done, government can step aside and let the private sector drive the structural changes that are needed to restore a pattern of inclusive growth."

However, Professor Spence argues that fiscal policy is not the fundamental problem for our economy. The rise of the emerging markets - in particular China - combined with our huge debt burdens means that America is facing a period of economic readjustment that will involve significant dislocations.

In Professor Spence's view, for example, our high rate of unemployment does not reflect poor government policies, but rather that American industries, and American workers, are having trouble competing in the global market place.

In other words, even if the recent fiscal crisis is resolved, it could very well be that our problems are deeper, and more intractable, that we are recognizing.

Or, on the other hand, we can hope that Fitzgerald was right: that what today seems like a hopeless stalemate in Washington will, in fact, hasten our collective wisdom to recognize that the world has fundamentally changed, and that our policy responses in both the public and private sectors will be made accordingly.