The Next Six Months are Crucial
(or Dylan Matthews Reduces Uncertainty*)

I see Dean Baker has a lengthy fisking of Thomas Friedman's column for today, but I'm not going to read it until I perform the exercise of doing it myself. Then I'll compare notes and see how I did.

Friedman takes the title of his column "Really Unusually Uncertain" from a description Bernanke recently made about the economy in testimony to Congress. The Fed Chairman described the atmosphere as "unusually uncertain" because the economy was giving off mixed signals. Economists are also divided on where the economy is heading, with many saying they don't know.

Right from the start, Friedman puts on his pundit hat and quotes PIMCO's** C.E.O Mohamed El-Erian to the effect that "Structural problems need structural solutions."  The Consenus seems to have latched on to the term "structural."*** Yesterday, the Minnesota Fed President asserted that the labor market had "structural" problems that would take time to sort out. Friedman opines:

There are no quick fixes. In America and Europe, we are going to need some big structural fixes to get back on a sustained growth path -- changes that will require a level of political consensus and sacrifice that has been sorely lacking in most countries up to now.

"We" are all going to need to compromise and sacrifice. But what exactly are these "structural problems"?

The first big structural problem is America’s. We’ve just ended more than a decade of debt-fueled growth during which we borrowed money from China to give ourselves a tax cut and more entitlements but did nothing to curtail spending or make long-term investments in new growth engines. Now our government owes more than ever and has more future obligations than ever -- like expanded Medicare prescription drug benefits, expanded health care, an expanded war in Afghanistan and expanded Social Security payments (because the baby boomers are about to retire) -- and less real growth to pay for it all.

Well Obama's health care reform should help with the deficit and government debt. Social Security isn't that bad off and the government's debt problems should ease with growth. Bill Clinton balanced the budget ten years ago, but he did it with "debt-fueled growth" - or rather with help from a stock market tech bubble and Alan Greenspan. Here Friedman raises an interesting issue. How do we get "sustained" growth rather than "debt-fueled" growth? Or more accurately, how do we get sustained debt-fueled growth, rather than bubblicious debt-fueled growth?

Structurally speaking, our political elites allowed the housing bubble to blow up and pop. And just to make sure the resulting financial crisis would be severe and sink us in recession, they allowed the shadow banking system to metastasize and outgrow Depression-era government regulations, some of which were scrapped anyway. At least Friedman, along with Rogoff and Reinhart, call for more fiscal**** stimulus in the face of weak employment levels:

America will probably need some added stimulus to kick start employment, but any stimulus right now must be in growth-enabling investments that will yield more than their costs, or they just increase debt. That means investments in skill building and infrastructure plus tax incentives for starting new businesses and export promotion. To get a stimulus through Congress it must be paired with spending cuts and/or tax increases timed for when the economy improves.

Government to the rescue! Golden straightjackets and invisible bond vigilantes be damned! (The world may be flat, but US Treasuries are still the safest investment.)

Second, America’s solvency inflection point is coinciding with a technological one. Thanks to Internet diffusion, the rise of cloud computing, social networking and the shift from laptops and desktops to hand-held iPads and iPhones, technology is destroying older, less skilled jobs that paid a decent wage at a faster pace than ever while spinning off more new skilled jobs that pay a decent wage but require more education than ever. 

I'm not sure but here things may be much more ominous than Friedman lets on. There's no class conflict or "outsourcing" in Friedman's (flat) world, just much less controversial concepts like "retraining" and "entrepreneurial innovation," even if the jobs aren't there thanks to a lack of aggregate demand.  And why is there less demand? Because as Friedman acknowledges, older, less skilled jobs are getting destroyed. Without consumers getting paid, they can't have demand - without incurring debt - and the US economy can't grow. (Without rising house prices they can't get loans.) And finally, Friedman turns to Europe:

But the global economy needs a healthy Europe as well, and the third structural challenge we face is that the European Union, a huge market, is facing what the former U.S. ambassador to Germany, John Kornblum, calls its first "existential crisis." For the first time, he noted, the E.U. "saw the possibility of collapse." Germany has made clear that if the eurozone is to continue, it will be on the German work ethic not the Greek one. Will its euro-partners be able to raise their games? Uncertain.

Greece couldn't devalue - as Argentina did - because they're on the euro, whereas the euro has been lower against the dollar which helped Germany's exports. Germany has basically exported its way to growth, something everyone can't do simultaneously, unless we find another planet to import our goods. Also Germany has better "automatic stabilizers" in times of recession and an innovative work-sharing program which reduced the fall in employment. So Germany - who didn't have a housing bubble even when England and Spain did - is doing better than the United States whose only social safety net is low interest rates/full employment and is suffering because of the fact.

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*My favorite recent blog subject title which was composed by Ezra Klein about his research assistant. Or perhaps Matthews wrote it himself?
** PIMCO's co-founder and co-chief investor Bill Gross was at Geithner's pow-wow on the housing market.
*** Is Structuralism back in vogue? I'd prefer post-structuralism.
**** Even though Friedman mentions Bernanke, he has no opinion on what the Fed can or should do. He's like the Mark Wahlberg character in the movie The Other Guys who has no idea what the Federal Reserve Bank is or does.