'Balanced' is the keyword for coping with economic storm

There we were, my wife and I, driving through a furious rainstorm, on the periphery of Hurricane Irene. About 15 minutes from home, when traffic slowed to a crawl, I began worrying without speaking. Would a breakdown of our sump pump, which failed in a storm three years ago, again flood the basement?

Further down Route 7, police cars blocked us from the flooded road ahead, and waved us into a detour. Soon the worry about a flooded basement faded into: do we have enough gas to make it home? After another restless half hour, we thankfully reached a familiar crossroads. Soon we were home, bedraggled but safe, and sump pump working as it was meant to.

Many millions, all along the East coast, weren’t so lucky. Within our own county, hundreds had to be evacuated from their homes. Swift-moving waters swept four people to their deaths, including a 12-year old boy. Rescuers had to pluck dozens from their stranded cars.

While the East coast was suffering a drastic surplus of water, most of the Southern region was enduring a devastating shortage. In Texas, the hardest hit, the combination of drought and wild fires has so far cost farmers and ranchers $5,200,000,000 in losses; raging fires have destroyed more than 1,500 homes. Five other Southern states were also affected by what one expert called the driest, hottest summer on record in the area since 1895.

Learning from Two Parallel Crises

I’ve long considered the extremes in the nation’s weather as offering a metaphorical lesson for its extremes in income. Both kinds of extremes have corresponding losses in lives and property.

For extremes in weather -- long spells of dry heat in one region, devastating floods in another -- the consequences are widespread and visible, but solutions lie largely beyond human reach. For extremes in the disparities between rich and poor, the consequences are less visible but even more widespread. The great difference between the two types is that solutions to gross disparities in income and wealth are within human reach, but only if enough people recognize the perils and have the will to take effective concerted action.

For positive results in dealing with the economic crisis, the keyword is “balance,” a quality lacking in the deficit debate and in its mindless outcome. The Congressional supercommission will fail in its mandate if it proceeds without a vision that the results must be balanced.

Economist Benjamin M. Friedman, for one, understands what that means, using a synonym for balanced: “broadly based.” As he writes in his book, “The Moral Consequences of Economic Growth”:

“Economic progress needs to be broadly based if it is to foster social and political progress. That progress requires the positive experience of a sufficiently broad cross section of a country’s population to shape the country’s mood and direction.”

But that requirement, he points out, has not been met for more than a quarter century. “Except for a brief period in the late 1990s, most of the fruits of the last three decades of economic growth in the United States have accrued to only a small slice of the population….After allowing for higher prices, the average worker in American business in 2004 made 16 percent less each week than thirty-plus years earlier. For most Americans, the reward for work today is well below what it used to be.”

These days the average pay for work – when it is available -- remains more or less stagnated at the 2004 level. Meanwhile, according to numerous reports, corporate executive pay has continued to grow. CEO pay, according to AFL-CIO studies, has grown to 343 times the median pay of workers, by far the largest gap in the world.

“Only with sustained economic growth, and the sense of confident progress that follows from the advance in living standards for most of its citizens, can even a great nation find the energy, the wherewithal, and most importantly the human attitudes that together sustain an open, tolerant and democratic society.” – Benjamin M. Friedman, in the last sentence of his book. Read more!

The Failure of the Economy -- and of the Economists

So Wall Street’s Goldman Sachs reports the highest profits in the firm’s 140-year history -- $3,440,000,000 for the second quarter of this year – and earmarks an average of about $770,000 in bonuses for each of its 29,400 employees. Meanwhile, 14,700,000 men and women in the United States are jobless, triggering an unemployment rate of 9.5 percent, the highest level in more than a quarter century.

That’s an example of an imbalance in our economic system – an imbalance that favors workers who manipulate money over those who actually produce something. In a May 29 New York Review of Books article, a leading economist, Benjamin M. Friedman, fills in some of the details of this imbalance.

Friedman does so by using a favorite tool of economists: efficiency. His article, “The Failure of the Economy & the Economists,” tracks performance in several ways, starting with profit-making:

“In recent years the financial industry has accounted for an unusually large share of all profits earned in the US economy. The share of the ‘finance’ sector in total corporate profits rose from 10 percent on average from the 1950s through the 1980s, to 22 percent in the 1990s, and an astonishing 34 percent in the first half of this decade.”

Moreover: “The finance industry’s share of U.S. wages and salaries has likewise been rising from 3 percent in the early 1950s to 7 percent in the current decade. An important question … is what fraction of the economy’s total returns to productively invested capital is absorbed up front by the financial industry as the costs of allocating that capital.”

Friedman, author of “The Moral Consequences of Economic Growth," insists that the question is important, since the total cost of the industry goes up “if this system also exposes the economy at large to episodic losses in production and incomes and to the need for taxpayer subsidies.” And that’s what’s happening now. “Today those losses are mounting, and so are the subsidies.”

Why, Friedman asks, is there so little discussion of this fundamental reality?

One reason, he says, is intellectual: the systematic failure of thinking on the part of economists. He explains that failure at some length, and presents one solution offered by economists George Akerlof and Robert Shiller: “fire the weather forecaster.”

Just to be clear: I don’t support firing economists guilty of intellectual failures. That would be inefficient. We should first give them the opportunity to participate in intensive retraining programs.

Are you laughing? I am not.

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