Saturday, November 27, 2010

The Economic Paradox: The Real Causes of Current Economic Malaises and the Solutions - 3/28/08

<Note: This article was written on March 28, 2008 by Luke Ho-Hyung Lee. 

While John McCain won the Republican nomination for president on March 4, the markets were slumping on March 17 due to banking worries, and on March 18 the Fed lowered interest rates by  75 basis points.   

Pushed to the brink of collapse by the mortgage crisis, Bear Stearns – with prodding by the government – agreed to be bought by J. P. Morgan at a fireside sale of $2 a share.   Bear Stearns had a terrible choice:  sell the firm at any price or file bankruptcy.  This was one of many banking crises that indicated that the worst financial crisis in history was far from over.

I wrote this article during this time.  Some were still reluctant to use the word “recession” at this time, but it was clear to me and a few others like Nouriel Roubini that we were not only in severe recession, but were headed for a hard landing.  Again, it was the minority that had it right.  In that article I was very skeptical of the economic stimulus packages that had been undertaken; I didn’t think they would work.  It turns out they didn’t.

Once again, I reiterated in this article what I thought was the heart of the problem.  I felt we needed drastic changes to the market structure, just as I’ve been advocating all along.>

Federal Reserve Chairman Ben S. Bernanke keeps signaling the U.S. central bank is prepared to lower interest rates again even amid signs of accelerating inflation. Recently, he also endorsed the $168 billion stimulus package enacted by Congress and signed by President George W. Bush.  Moreover, he said continued gains in exports should help growth.  Nevertheless, fears of recession in the United States persist.

Some economists, such as Professor Nouriel Roubini of New York University’s Stern School of Business, founder of RGE monitor, expect a severe US recession.  He, along with other economists, see recoupling of the rest of the world with the U.S.’s hard landing, a continued severe credit crunch, and the risks of a systemic financial crisis.  Still, nobody can suggest any positive solution out of this mess.

What is wrong with our economy? Isn’t there any way to avoid recession? What are the real causes of the current economic malaise?  I believe that before we can get the economy on the right track we must first understand the causes of the crisis.

The role of stimulus economic policies

In order to stimulate the economy, we tend to promote business investment and consumption to increase jobs with expansionary stimulus economic policies. When the sum of increased consumption and increased consumer confidence by job growth is larger than the promoted consumption increase, the economy should be stimulated and revitalized, so the argument goes, and a positive cycle for economic growth could be achieved at last. Therefore, it could be said that the stimulus economic policies are just a means which could be used only temporarily and in a limited way for inducing this positive economic cycle.   

The changed economic circumstances

Yet, no matter how powerful the stimulus economic policies adopted, we will fall short. When the degree of job growth created by the stimulus is weak, and the sum of increased consumption and increased consumer confidence is less than the promoted consumption increase, the economy cannot be stimulated.  However, even in this situation, if we had not adopted the stimulus economic policies, a vicious cycle between the supply side and the demand side would have been perpetuated in the economy.

It seems until now, most economic experts viewed the advances in information technology only in terms of technological progress, with little downside.  That is, even if there is a direct job reduction, more indirect jobs would eventually increase due to innovation. However, in the real situation, the advances in information technology have done the opposite.  Rather, there has been little room for indirect job creation in the market and/or society. (Japan experienced this change earlier than others, because they had faster developing capability of productivity and commercialization mainly due to the rapid development and spread of a lean production system like Toyota’s production system and by the broad automation process.)

The paradoxical economic situation

Under these changed economic circumstances, we have had to adopt stimulus economic policies to avoid the vicious cycle in the market or economy, without finding any other alternatives over the last several years. Moreover, as globalization activities such as importing, outsourcing and off-shoring have been activated, we’ve had to increase the degree of the stimulus economic policies to an extreme degree. 

To make matters worse, financial deregulations have been excessive and abrupt, and as a result, the weight of consumer debt in consumer spending has been rapidly increased.

One could argue that the sum of increased consumer debt, increased consumption by job growth and increased consumer confidence was similar to, or larger than, the promoted consumption increase.  Yet, to so argue is to ignore the creation of numerous abnormal phenomena such as the weakening self-generation capability, not to mention the further losses to the “Missing Class.”  That is, even though the stimulus economic policies were adopted to stimulate and revitalize the economy, they have rather created a paradoxical economic situation, as only abnormal economic phenomena were intensified instead.  (The “Missing Class” is Princeton University sociology professor Katherine Newman’s term for the near poor who are technically above the poverty line but still far from a middle-class standard of living.)

This paradoxical economic situation has now lasted over the last several years, and the national competitiveness has steadily weakened, while the safety and welfare of the nation has been worsened.  Moreover, many unusual economic problems such as sub-prime mortgage failures, vast financial meltdown and credit crunches, etc. have now worsened economic conditions.  We should expect many other economic and social problems will be coming in the very near future, if we do not correct this paradoxical economic situation. 

What are the real causes of the paradoxical economic situation or the current economic malaise?

Plain and simple, it’s the market structure.

It is now widely recognized that modern information technology has been a boon to modern society.  However, not everyone has benefited.  Moreover, the market structure has suffered. That is, a situation has been created in which some have benefited more than others.  But, more importantly, the reduction of jobs as a whole has been a structurally unavoidable phenomenon.  No economic stimulus is sufficient to offset that decline in job growth.  Rather, paradoxically, only economic abnormalities have been created by these stimulus measures.  This time will be no different.

The solutions and the recommendation

I believe that the economic and social conditions which have come about in the modern information age require changing the existing outdated market structure to a more flexible and open new market structure, which is better suited to the modern information age.

Some people might think what I am recommending smacks of economic heresy.  Why change the system, they say.  Why not leave things alone, and they will correct themselves, as they always have?  No, they will not correct themselves.  But we can take comfort in the fact that our free market system could already provide all the necessary conditions such as information technologies, facilities, devices, and people for the development of a new market structure. It is restructuring, not changing all.
The new flexible and open market structure I recommend will increase job growth and also the consuming effects on efficiency and effectiveness in the market, and accordingly it will provide a policy for better working conditions, solve numerous economic and social problems, and eventually stimulate and revitalize the economy. The increased consuming effect on efficiency will also lessen the inflation pressure.

I believe our current malaise is not just the United States’ problem, but also a problem for most Western countries, including France and Germany, and Japan and Korea.  It is the most urgent issue we face, if we are to save the world economy. Therefore, I strongly recommend the governments and leaders of the Western countries initiate the urgent development of a new market structure, and provide the active assistance and support necessary to revitalize their own economies and also the world economy soon.   

Author:      Ho-Hyung Lee ( - Ho-Hyung (“Luke”) Lee is by training a lawyer, an international businessman and entrepreneur – and an inventor.  He is currently the president of Ubiquitous Market System, Inc. (UbiMS).

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