It is finally becoming clear to political and financial leaders what most of us have known for some time -- our dismal economic situation is set to last years. We are not looking at an economic recovery, but rather building a brand new economy unlike the one that collapsed a few years ago.
It is hard to say exactly what that economy will look like, but we know it will not include a vibrant housing sector. Real estate investments devastated so many people, that the industry is probably gone for good, at least in the way we remember it. In fact, the entre concept of a consumer driven economy might be a thing of the past. Sales of new electronic gadgets that are quickly obsolete – the phones, big screen televisions and mini laptops -- that drove a good portion of the economy have fallen off dramatically compared to a few years ago. People seem to be re-evaluating not just their purchases, but their entire lifestyles. The concept of lifestyle simplicity is gaining ground and the banking and finance sector is reacting to it.
Normally the Federal Reserve makes only short term changes to interest rates, but about six months ago made a major departure from that practice. On August 9 the Fed announced that it will maintain interest rates at near zero for the next two years (FRB August 9, 2011). Clearly the Fed hopes to encourage long term financial commitments that would spur business growth and employment.
They were not the first of our high level officials to admit that we are in for lasting pain. A month before the Fed made its long term commitment to low interest rates, Secretary of the Treasury Tim Geithner said that the American people are facing a future that is “going to feel very hard, harder than anything they've experienced in their lifetime now, for some time to come.” (MSNBC, July 10, 2011)
He is right. Things are going to be very hard for a long time, but we don’t know exactly how hard or how long. Exactly when economic depressions begin and end is difficult to define because they are gradual process without well defined starts and stops. It is like deciding exactly when dawn occurs or night falls. Nevertheless we can say with certainty that economic depressions usually last decades. The Great Depression lasted about twenty years, from 1929 to 1947, and the Panic of 1873 ebbed and flowed well into the 20th century.
How long will the Great Recession last? It’s hard to say, mostly because it’s not an ordinary economic downturn. Businesses and economies run in cycles, but this is not part of the normal cycle that can be expected in a normal economy. Something far more fundamental has changed. Things that we took for granted as foundations of our national economy may not ever re-emerge. Things as basic and bedrock as a consumer economy, a middle class, uncollateralized debt, and a housing sector may be gone for good.
Even traditional jobs may become a rarity. Carl Camden, CEO of Kelly Services, one of the biggest temp agencies in the world has this to say about the emerging economy and the changes in attitude workers will need in order to survive in it:
“The name of the game everywhere is to reduce permanent headcount and we are still only at the early stages of this trend…Every American is going to have to get used to the idea of a completely different work style…What you learnt in college five years ago may already be obsolete.” (Luce 2011, December 11)
People like Jeremy Rifkin (1995) and Erik Brynjolfsson and Andrew McAfee (2011-10-17) have written books suggesting that we are experiencing the end of the Industrial Revolution and the birth of something new. Maybe we are witnessing the first stirrings of a digital economy and the freelancers writing apps for iPhones are modeling the future of work. Robert Neuwirth (2011-10-18) describes an emerging global economy based on very small “grey market” entrepreneurial concerns operating without government licensure or regulation networked together with each other and large legitimate suppliers. Maybe that is the economic future in which we will find ourselves making. It is too soon to say exactly what the economy will look like once it stabilizes – or whether it will stabilize at all. Maybe, in the transition from the Industrial Economy to whatever comes next we will experience a very long period of instability. No one has any idea what to exepct.
But life goes on. We do not suddenly stop living, although it feels that way sometimes. Economic catastrophes can be devastating because assumptions about our futures are no longer valid, and we have not created new visions of our place in the world of the future. We simply cannot see ourselves doing something other than what we had assumed we would be doing for so many years. It takes a while to adjust to the changes that economic depressions and recessions impose on our lives. Sooner or later we give up expectations that the previous economy might have offered and create more realistic visions of our futures. Sadly, some people never manage to make this change in perspective. Instead, they yearn for a future that can no longer and long for the days of unionized labor, the industrial Revolution or life before the global economy.
This is not the first time people have faced the challenge of adjusting to a new world brought on by a change in economics. Back in 1995 I had a fascinating conversation with one of the economists who had gone to Russia after the fall of the USSR in an effort to create a market economy. The effort was naïve and fated to be an epic failure for reasons I’ll get to in a minute. First, though let’s look at how alien the idea of a market economy was for the average Russian.
For centuries the economy of Russia was not based on a free market, but on central planning. People in Moscow looked at industrial and agricultural output and matched it up with domestic needs and international trade. If their analysis determined that the people of Novgorod would need winter boots this year they would order boot factories to manufacture the required number of boots and arrange to have them shipped to Novgorod. This system was ancient, starting with the occupation by Mongols from what is now China demanding “tribute”, (that is protection money), from cities and villages. Local leaders had to calculate how much profit from the following years crops could be given to satisfy the occupiers. This system of prediction and distribution became centralized when Peter the Great unified Russia in the 17th century, and continued under the Tsars until the early 20th century, then was maintained by the Communists after the Russian Revolution in 1918.
This system, (technically called a “command economy” by the way), collapsed along with Communism in 1989. Shortly afterwards several hundred American economists went to Russia to help plan and implement a free market economy. I got a firsthand account of this effort when one of these economists knocked on my door on a rainy Oregon day in 1995 and tried to sell me a cell phone. It only took a few minutes to get past the issue of cell phones and discover that we both had an interest in economics, political science and history.
I found out that one of the big challenges to jump starting a market economy in Russia was the inability of people there to understand or accept the concept of supply and demand. Centuries of command economy had created a system of cultural values that equated the concept of unfettered supply and demand with unmitigated chaos. Many people, particularly older ones who had grown up in the old system, simply could not wrap their minds around the concept. I was shocked when my new economist friend said that nothing would change until this cohort of Russians either died or retired. He was right. It took about ten years – until the late 1990’s – for something resembling a market economy to emerge in Russia.
The same sort of thing happened in the American south following the Civil War. Similar to our situation today, the foundations that supported the economy of the antebellum south suddenly disappeared. Capital and wealth were no longer concentrated in huge cotton plantations driven by slave labor. A new economy had to be built and many people could not accept new concepts about work and wealth. People who had enjoyed wealth and power prior to the war did not always adjust to the realities of the postwar economy.
Margret Mitchell, a granddaughter of Civil War veterans, wrote a famous novel called “Gone with the Wind” about the aftermath of the Civil War, and the struggles of people to adjust to the new economic realities. She had this to say about it:
“It happens in every upheaval. Some people survive; others don’t. What qualities are in those who fight their way through triumphantly that are lacking in those that go under? I only know that survivors used to call that quality ‘gumption.’ So I wrote about people who had gumption and people who didn’t.”
What did Mitchell mean by “gumption”? What is it that motivates some people to figure out how to survive in a new environment while others pine away wishing for a time and place that no longer exists?
In his book about success, Malcolm Gladwell suggests that people need three simple things to motivate themselves to long term work – autonomy, complexity and a predictable relationship between effort and reward. Let’s take a moment and break each of these down. By autonomy Gladwell is referring to the ability to recognize an opportunity, analyze how it works, and learn new skills or modify existing ones to exploit it. Complexity means that work has to be challenging enough to maintain the interest of smart and ambitious people. And, of course, there must be promise of some sort of reward in order to make the effort worthwhile (Gladwell, 2008, Chapter 5).
Notice there is nothing in Gladwells analysis about the way that things had been before, or continuing to think or act in ways that had produced results in other places or times. Instead, Gladwells entire analysis has a sense of dynamism about it – that is, the theme flowing through it is based on action, movement and change. People acting on the world instead of people allowing the world to act on them. People analyze the economic situation they are in and figure out ways to make a living within it.
Here is Margaret Mitchell again, describing life in Atlanta after the Civil War, sounding a lot like Gladwell:
They were all busy, busy at something, working hard, working harder than they would have dreamed possible in the days before the war. They weren’t doing what they wanted to do perhaps, or what was easiest to do, or what they had been reared to do, but they were doing something. Times were too hard for men to be choosy. And if they were sorrowing for lost hopes, longing for lost ways of living, no one knew it but them. (Mitchell and Conroy, 2007 -07- 10, p.928)
What separates people who thrive and succeed in the face of adversity from those who wither and fall into complacency and depression? Is the ability to remain vital and focused a thing that some people are just born with, a matter of luck and happenstance? Or can we exert control and will over our circumstances? Or is success the result of the random variables in the environment interacting with our traits and abilities – which are to a large degree the result of random environmental variables affecting the way our genes are expressed? (For more about the interaction between genes and the environment see Shenk 2010)
It’s hard to say. One thing is sure, however. Nobody gets anywhere by being complacent. Instead of waiting for things to happen we have to make them happen. That means creating opportunity in our dealings with others and pursuing change when dealing with ourselves. We have to remain open minded to new ways of making a living because we live in an era in which the old ways no longer work.
Brynjolfsson, Erik; McAfee, Andrew (2011-10-17). Race Against The Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy (Kindle Location 1147). Digital Frontier Press. Kindle Edition.
FRB (August 9, 2011). Press Release. Board of Governors of the Federal Reserve System. http://www.federalreserve.gov/newsevents/press/monetary/20110809a.htm
Gladwell, M. (2008). Outliers : the story of success (1st ed.). New York: Little, Brown and Co.
Luce. E., (2011, December 11). Can America regain most dynamic labour market mantle? Financial Times. http://www.ft.com/cms/s/0/6327a7f4-21bb-11e1-8b93-00144feabdc0.html#ixzz1gHhHR9Ln
Mitchell, M., Conroy, P. (2007-07-10). Gone with the Wind. Simon & Schuster, Inc. Kindle Edition.
MSNBC (July 10, 2011). Meet the Press. Meet the Press transcript for July 10, 2011. http://www.msnbc.msn.com/id/43672884/ns/meet_the_press-transcripts/t/meet-press-transcript-july/
Neuwirth, Robert (2011-10-18). Stealth of Nations: The Global Rise of the Informal Economy (p. 248). Random House, Inc.. Kindle Edition.
Rifkin, J. (1995). The end of work: The decline of the global labor force and the dawn of the post-market era. New York: G.P. Putnam's Sons.
Shenk, D. (2010). The genius in all of us : why everything you've been told about genetics, talent, and IQ is wrong (1st ed.). New York: Doubleday.