Friday, June 5, 2009

Episode 62: The New Economy


The economy is messed up. Really bad. And it is never going to come back – at least back to the way it was pre-recession. The jobs that were lost in all likelihood won’t be coming back anytime soon at best, or more likely, never again.

In order to fix this problem, we have to approach the economy like a business would, by simplifying and diversifying. How do we do this… first we have to put our American ego aside for a bit. I love America as much as the next guy, and think our country is the greatest country since sliced bread. But we can’t do it all. It costs way too much money to do it all. I agree with conservative opinion when they say programs like healthcare and education are exorbitantly expensive. And while I 100% agree with Obama’s vision, I cannot logically deduce how we can make it happen, at least within his timeframe. With the lack of debate on Capitol Hill, my biggest fear about progressivism is coming to light – without true conservative dissention and debate, progressive thought is like a runaway train. The last major progressive movement, the civil rights movement, took 10 years and three presidents to be realized. What most progressives fail to realize is you have to give a little to get a lot. Giving a little, when it means asking people to sacrifice what they don’t have (from Obama’s speech regarding GM) while noble, and the absolutely right thing to do, is a wholly unrealistic proposition. Here’s a plan to get ourselves back on track, using Ideas borrowed from a great book I read by Daniel Pink called “A Whole New Mind.”

We Need To Simplify Our Economy

I believe an economy is built upon three parts: developers, builders, and distributers. America is the world leader in developing the most innovative technologies we have. Over the years we have deemphasized on building – aka. The manufacturing sector – and are pouring billions into bailing out that industry. Finally, we are the leaders of getting that technology and innovation to the people because our Constitution is arguably the least restrictive with personal freedoms and freedom to access. However, trying to take the lead on all three factors is incredibly expensive, especially considering how complicated the modern economy is. I argue that America should play a more cooperative role in the global economy. Rather than lead the world economy poorly, we should instead focus on one aspect, development.

In Pink’s book, he argues that the next revolution will be the information revolution, and that it is innovation, not manufacturing that will bring us the jobs of the future. I whole-heartedly agree. The new economy is going to consist of innovators and entrepreneurs. Private enterprise is the key to revitalizing our recessed (depressed) economy. Thus the government’s role should not be to endlessly prop up old businesses, but provide funds for new business. We need to get our best minds out in the forefront, creating the enterprises that the rest of the world will use. However, we will not be the primary makers of this technology in the new economy.

In the new economy, we will defer manufacturing responsibilities to developing nations like China and India. They have the manpower (both with over a billion citizens) and drive to become global leaders. However a manufacturing based economy loses money over a course of time, because as the manufacturing process becomes more efficient, and technology becomes smaller and faster, it becomes cheaper to produce. Idea – intellectual property - - has incredibly high value. Consider Apple Inc. The iPhone itself is not what makes Apple its huge profits, it is the intellectual property. It is the smooth touch screen interface, the app store, and the innovate architecture that makes its profits. Before the iPhone, there was no product of its kind in existence. The actual manufacturing of the iPhone is pretty cheap. China makes a knockoff iPhone that is nearly identical to the original that costs only $50 brand new without a contract!

How does this simplify our economy? We pour in resources one aspect of the economy, and save money by outsourcing the rest, while at the same time, dramatically increasing our revenue. What does it do to people in manufacturing now? Well, naturally, they will lose their jobs, the way they are now. Thus instead of endlessly propping up old businesses, the government should focus on helping these displaced workers retrain to perform the jobs of tomorrow. Instead of manufacturing, which I consider the mass production of goods and services, the blue collar working class of yesterday becomes tomorrow’s engineers, specializing in the development of new technologies. Thus the old assembly line worker is now specializing in building prototypes which require a specialized knowledge. Because there would be a high demand for the specialists, these jobs would pay higher wages.

Over the long term, I’m calling for the shrinking of the working class. Of course there would be some room for the working class as it is today, but under my plan, there would be a massive expansion of the middle class. The ultimate result is the average American could legitimately live the American dream without having to resort to subprime mortgages to emulate a lifestyle they could not sustain. All the while we are creating brand new industries, and improving existing ones at breakneck pace. This leads to part two of the new economy, Diversity.

Diversity Ends “Too Big to Fail”

With increased emphasis on development, there will be a lot of competition for the best idea. I am a firm believer that American competition is the single most important reason we have the #1 economy in the world. When someone in America has a great idea, our version of capitalism rewards one for it with a huge bankroll. When other companies vie for the best version of that great idea through competition, the consumer wins and the industry wins.

What is missing from the economy today is diversity in competition. AIG was pretty much the only insurance company performing the tasks it performed, so in failing, they would single-handedly bring down the economy with them. With an emphasis in development, there is inherently many players in the game who are finding ways to things better, faster, and cheaper, while still maintaining high quality. Thus is should be the responsibility of the government to legislate and enforce tough regulation to ensure that there is an equal chance for every company to succeed. One government department I think does a good job with good regulation is the FCC.

In the Digital Millennium Copyright Act for example, the DMCA “issued six exemptions to the DMCA last year, one of which allows consumers to unlock their cell phones "for the sole purpose of lawfully connecting to a wireless telephone communication network." (source: Though the legislation is kind of open to interpretation, the idea is that so long as one unlocks their phone (modifying a phone to allow it to access multiple compatible networks) for the sole purpose of connecting to a wireless communication network, they are protected under the DMCA because it promotes competition. This is precisely what regulation should do: stay out of the way enough to let businesses grow, yet create rules to promote fair competition and just punishments for breaking the rules. With the big field of entrepreneurs and regulation that promotes competition and diversity, a “too big to fail” scenario cannot exist. Though corporate Darwinism will be alive and well, the constant flurry of new ideas will protect us from another AIG meltdown.

In order to simplify and diversify our economy, the single most important the government can make is in education. We NEED to completely overhaul out education system for this plan to work. Without an academic class, none of this can happen. I fear if we keep on our current course, we will be stuck between eras, and it will only be a matter of time when we are overtaken by Asia, namely China, who is already positioning themselves to capitalize on our economic catastrophe.

Love him or hate him, Obama is well aware of this notion of the new global economy (though I suspect he’d disagree with my thought on manufacturing to some extent). Conservatives may call him fool hearty, and there is much debate on whether he’s doing the right things in the right order, but don’t think for a second that Obama isn’t preparing America for the long term plan.

The next few episodes will consist of a series of posts I call “Road to the 21 Century. In these posts I will outline what I believe America needs to do fix the economy, and secure our lead as the #1 economy in the country, starting with education, which will be part two of “” Grab some popcorn and bring all your friends to these debates because I think as a blogosphere we can do what politicians are not doing: debating the hell out of these issues and perhaps we can find a way to get our middle ground consensus to Washington. Lofty? Maybe, but I enjoy a good challenge!
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13 comments: on "Episode 62: The New Economy"

conservative generation said...

Sometimes I'm surprised there is ever any disagreement between you and I on the economy.

For your post, I only offer some constructive criticism. Innovation is really a 4 partner dance between Innovation, Research and development, marketing, and profit. Investing in political capital will only help you out in two areas, innovation and marketing. You need money for the other two; R&D and profit. Leftist economic policies of taxing the heck out of companies make the dance lopsided and defunct. As I've argued in the past, we need to also unshackle the economy. Money and profit are just as important as the input of human capital. We are bleeding ourselves and slowing down our own innovation.

del patterson said...

this us really well written. As a 34 year veteran teacher of economics I think I can say you wrap it up quite well.

The Law said...

Cgen, thanks for your comments. Research is definitely an important piece in the chain. I think I lumped in research and development together in my analysis because I forgot the terminology, so thanks for pointing me in the right direction

And thanks Del =) I'm glad my limited understanding of the economy makes sense to atleast two economic veterans =)

conservative generation said...

I just realized I said political capital. I meant human capital...aka education.

Left Coast Rebel said...

The Law - This is a good post, I have nominal disagreements, essentially agree with most of your points though.

1 - As Conservative Gen points out, Leftist/progressive politics of today are taking the profit side out of the innovative business model. The focus should be in praising profit from great, creative companies, not having the general attitude that the government is Robin Hood and that every exec and stockholder is 'greedy', 'selfish' and such.

2 - The federal government is simply doing the opposite of diversification and simplification. Obama and the admin, the Congress as well are using the current crisis to further entangle themselves in our free market. GM is a perfect example. When the administration forced the company into 'bankruptcy', they basically re-wrote contract law, giving unlawful credence to the UAW, and shafting the bondholders. All in the name of a social cause - unionism.

3 - TL - you have fears essentially about pure, unrestrained progressivism? I commend the fact that you do see the need for reform, yet a one-sided debate-free situation is clearly dangerous. Hence Obama's 'now or never' mantra with health care. The progressives are getting power-drunk. The equivalent on my side, (libertarian/conservative), would be disastrous. It would be as if the country had elected Ron Paul and within 6-12 months, he dismantled 30% of the federal government, put people on the streets, pulled all of our military out of all overseas conflicts, etc. Although I support Ron Paul, I wouldn't want it all at once as he would certainly have his moment of power and then as a bright candle that burns brightly...well, you know.

4 - Your vision of a working class is not compatible with current immigration law. Our country has had decades of an influx, especially in southwestern states; of poor, unskilled immigrants, all the while making it tougher for well-educated foreigners to get work visas and eventual citizenship. Here in CA, the government bends over backwards for undocumented, unskilled people and it is one of the reasons the state is in such bad shape.

5 - I don't believe that Obama is preparing American for the long term global economy, it least in a constructive way. Obama is for the Democrat party for the long term. I know that you won't agree with me, but everything that the man is doing, is in the name of the State, increasing tax burdens, federal largess, and a decrease in US foreign competitevness. The trouble is that you have to go past his words straight to his actions to see this. The perfect example was his "we don't want to run GM" moment, then only to insert an unlawful UAW% in the bankruptcy, stongarm green ethics on the company, etc....

Left Coast Rebel said...

TL - I took you up on your point, didn't use the word 'socialist' even once in my recent piece, looking forward to some counter points......

The Law said...

LCR, thanks for the comments... interestingly enough, I agree with a lot of your disagreements.

taxing income tax on the top earners to help raise revenue. So Obama's plan to put the tax bracket the way it was nder Clinton is ok by me. However, I do think that it is a bad idea to tax the hell out of businesses. Perhaps instead of a trickle down or bottom up economy, my idea would be a middle road? Lowering corporate taxes would more likely keep jobs in America rather than tax breaks, but again, I stress that there HAS to be very strict regulation regarding taxes.

The jury is still out on this one, but the GM situation has a very real chance to blow up in Obama's face, if I understand the facts correctly... it is a really big gamble, and I'm not really a betting man.

Also, regarding the working class, my plan is indeed incompatible with immigration law in many ways... it should make it harder for them to find a job. And with strict regualtion, say random workforce inspections, failure to procure documents proving legal status could cost a company millions in fines. Also, highly education foreigners are probably not competeing for the same job as a migrant worker.

The Law said...

and btw LCR, I think your lack of the use of "socialist" makes your argument 1000% more convincing.... good read, and I'll post my thoughts on your blog.

Left Coast Rebel said...

TL - you are taking away from my blogging time, as writing a response to you is quite an effort! See what you think over at LCR...

Carl Wicklander said...


I actually don't have too much to add, particularly to what LCR has already brought up.

You write that "our Constitution is arguably the least restrictive with personal freedoms and freedom to access." I have no argument with that. But shortly thereafter you say "the government's role should not be to endlessly prop up old businesses, but provide funds for new business." We are in agreement that government should not prop up failing businesses because that can only be done with taxpayer dollars. But the same thing applies to propping up new businesses, many of which will fail. In other words, I don't see how government propping up businesses in one way is any better than another. There is nothing in the Constitution to imply that the government may either prop up failing or new businesses. Simplifying the economy is the way to go but getting the government involved unnecessarily complexes it. As we know from the stimulus, there are strings attached to money coming from the government.

It seems that we are in general agreement about the role of competition (Diversity Ends "Too Big to Fail") for business. You had me until your idea for "tough regulation." Every company already has the best chance to succeed without "tough regulation," whatever tough regulation would entail. The tendency is that once government begins intervention in something, it never lets up. While it may seem like a good idea to "promote fair competition and just punishments," there is nothing to stop government from sinking its claws further into businesses. Government regulators routinely checked out companies like Enron and Fannie and Freddie right before they imploded, so regulation and the government isn't the foolproof solution. But that's my only problem in this area.

All that said, I think that pretty much everything you described could be achieved without government intervention.

It was a pleasure reading it.

~Carl Wicklander

The Law said...

Carl, thanks for stopping by!

I think it is ok that businesses fail because their failure is never in vain. Sometimes the idea is bad and other times, the idea wasn't though through enough and someone improves on it. Either way, you can't fail in the quest for innovation.

Govenrment can provide funding for new ideas through grants. As an educator, I had to file for grants to get funding for school projects, like building new wings to the highschool or getting updated computers for the labs.

Regardign reulation, rules or only as could as one's ability to enforce them, and punishment for breaking the rules. Businesses should be like the NFL: cross the line of scrimmage before the snap, get a 5 yard penalty. Hit the quarterback after the ball is thrown, get a 15 yard penalty. As in the NFL, the rules aren't perfect, but tough regulation makes it harder to get away with finding loopholes, which ultimately leads to corruption.

Just like the NFL, rule changes are addressed by the referees and the players association. They agree on some rules, argue about others, and find consensus. Then each season, you tweak the rules a bit... relax some, strengthen others, so that the game remains fair. I don't see why the government couldn't do the same.

Carl Wicklander said...

But simply because regulation is in place doesn't mean it will stop shady business practices. It makes sense to honest businessmen because they're honest - they're probably not looking for loopholes in the first place. Corrupt ones are looking for them - any advantage whether it's legal or illegal. To use your NFL analogy, it's against the rules to hit someone after the play is over but players still do it. Stupid ones get called for a personal foul penalty because they do it right in front of the official. Others get away with it altogether because they looked around to make sure someone didn't see it. The point is, even though it's against the rules and there's a penalty for it, it still happens.

I've had this conversation plenty of times before. It's been put to me in ways like this: "Locks keep honest people honest." Well, sure, but don't you lock your house because of dishonest people? Why go to all the trouble of making sure honest people are staying honest when crooked businessmen are the ones trying to find those loopholes the regulations are supposed to stop or at least decrease?

It isn't that I'm against ensuring people's safety or against honest business practice or a competitive market. If someone breaks the law, then they need to be busted for it. I'm just against all the unnecessary policing the government does of the private sector.

Even though I'm sure neither one of us will convince the other tonight, I want to thank you for a constructive and sane dialogue. I hope you'll visit my blog when the opportunity is convenient for you.

The Law said...

It would be impossible to catch every single transgression. But what dissuades peopel from trying in the first place. Otherwise you'd have a system like soccer, where sliding tackling yellow cards seem to be inconsistent (continuing with the sports analogy). What tougher regulations do is increase accountibility, dissuade criminal acts, and and enforce tough punishments for breaking the rules. Good regulation shuold be regulation that one barely notices if they are playing by the rules.

I agree it is a tough line to draw, but I think we should try, rather than leave it to corporations to police themselves.

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