CHARLESTON, W.Va. -- In the midst of the worst recession in more than 40 years, the editorial writers and talking heads are sitting around waiting for the government to do something, but we can't do anything until we understand what is really at the heart of this surprising economic downturn.
Here, then, is the explanation: From roughly 1990 through 2007 the U.S. economy was booming. The fruits of this boom went disproportionately to educated, high-tech workers and imaginative entrepreneurs, but it as well trickled down to construction workers, service workers, government workers and virtually everyone else. What fueled this boom was something that economists call "disruptive technology," namely some combination of the Internet and the computer.
The Internet changed retailing. Everyone had to have some type of online sales capability. The Internet changed medical practice: Suddenly Australian doctors could read X-rays taken in New York at 2 a.m. and have the results back by 2:15 a.m. The old Yellow Pages became obsolete in favor of the Google search, and suddenly lawyers who had once spent Saturdays and Sundays in some law library found that they had a library with more than 1 million volumes available to them in their own homes through Lexis or Westlaw.
In any event, this "disruptive technology" could not be ignored by any business that wished to survive. Therefore, the Internet and computer forced hundreds of billions of dollars in investment, and that infusion of new cash was multiplied by at least five as one person paid the next person for goods and services (the "Keynesian multiplier"). Now, unfortunately, everyone has adapted to the new technology; everyone has a computer and everyone is tuned into the Internet. There might be some minor refinements like the iPhone and its imitators, but most of the modernization has already been done and the capital equipment has been bought and is in place.
Therefore, the current recession is more or less permanent, by which I mean that the economy will limp along until some new "disruptive technology" appears. A good candidate for such technology is the controlled nuclear fusion reaction. Controlled nuclear fusion would allow the thermal cracking of seawater to extract hydrogen, and then all vehicles and heavy equipment could run on pure hydrogen rather than oil, eliminating carbon emissions. Controlled fusion is a long way off, though, and it is hard to imagine other new "disruptive technologies."
Now having analyzed the problem, what is the solution? The solution is to put people back to work doing necessary infrastructure repair. Alas, in the last so-called "stimulus package" there was as much useless pork as there were legitimate public works, but we know that much of America's infrastructure is crumbling (aging bridges over interstate highways, inadequate levies in New Orleans, crumbling courthouses in heartland America, schools still in use that were built in the first decade of the 20th century).
If, then, a stimulus package is to be devised, its details need to be determined by something that looks like the Military Base Closing Commission -- not a perfect impartial body, but one that comes close to removing pure politics from important cost/benefit decisions. Also, if we are borrowing money to support a stimulus package, at least the money will go toward investment and not towards consumption. After all, infrastructure repair must be done at some point. (Bridges can't really fall on the cars below!) So, we minimize long-term fiscal damage by limiting stimulus money to "investment" projects.
CHARLESTON, W.Va. -- In the midst of the worst recession in more than 40 years, the editorial writers and talking heads are sitting around waiting for the government to do something, but we can't do anything until we understand what is really at the heart of this surprising economic downturn.
Here, then, is the explanation: From roughly 1990 through 2007 the U.S. economy was booming. The fruits of this boom went disproportionately to educated, high-tech workers and imaginative entrepreneurs, but it as well trickled down to construction workers, service workers, government workers and virtually everyone else. What fueled this boom was something that economists call "disruptive technology," namely some combination of the Internet and the computer.
The Internet changed retailing. Everyone had to have some type of online sales capability. The Internet changed medical practice: Suddenly Australian doctors could read X-rays taken in New York at 2 a.m. and have the results back by 2:15 a.m. The old Yellow Pages became obsolete in favor of the Google search, and suddenly lawyers who had once spent Saturdays and Sundays in some law library found that they had a library with more than 1 million volumes available to them in their own homes through Lexis or Westlaw.
In any event, this "disruptive technology" could not be ignored by any business that wished to survive. Therefore, the Internet and computer forced hundreds of billions of dollars in investment, and that infusion of new cash was multiplied by at least five as one person paid the next person for goods and services (the "Keynesian multiplier"). Now, unfortunately, everyone has adapted to the new technology; everyone has a computer and everyone is tuned into the Internet. There might be some minor refinements like the iPhone and its imitators, but most of the modernization has already been done and the capital equipment has been bought and is in place.
Therefore, the current recession is more or less permanent, by which I mean that the economy will limp along until some new "disruptive technology" appears. A good candidate for such technology is the controlled nuclear fusion reaction. Controlled nuclear fusion would allow the thermal cracking of seawater to extract hydrogen, and then all vehicles and heavy equipment could run on pure hydrogen rather than oil, eliminating carbon emissions. Controlled fusion is a long way off, though, and it is hard to imagine other new "disruptive technologies."
Now having analyzed the problem, what is the solution? The solution is to put people back to work doing necessary infrastructure repair. Alas, in the last so-called "stimulus package" there was as much useless pork as there were legitimate public works, but we know that much of America's infrastructure is crumbling (aging bridges over interstate highways, inadequate levies in New Orleans, crumbling courthouses in heartland America, schools still in use that were built in the first decade of the 20th century).
If, then, a stimulus package is to be devised, its details need to be determined by something that looks like the Military Base Closing Commission -- not a perfect impartial body, but one that comes close to removing pure politics from important cost/benefit decisions. Also, if we are borrowing money to support a stimulus package, at least the money will go toward investment and not towards consumption. After all, infrastructure repair must be done at some point. (Bridges can't really fall on the cars below!) So, we minimize long-term fiscal damage by limiting stimulus money to "investment" projects.
However, the only questions before Congress should be:
| Will we invest X billion dollars in a new stimulus package?
| By what criteria will this money be allocated among the states?
| What type of projects will qualify?
| How will the commission charged with disbursing the money be established? The emphasis, obviously, should be on roads and bridges, where the departments of highways already have a "to-do list" drawn up along with plans and dirt can start being moved in 90 days.
The pole star of Keynesian economic theory was that government should deficit finance and spend during a downturn in the private business cycle and then reduce spending and pay back during an upturn in the cycle. Keynes also had another great observation: "In the long run, we're all dead!" That latter observation should instruct our understanding that, all theory to the side, we have millions of Americans who are really hurting and it's time to get off our butts and so something now.
Neely is retired chief justice of the West Virginia Supreme Court and a former economics professor at the University of Charleston.
