Trapped in Jail with the Key in Our Pocket

The summer of 2010 has become one of discontent; businessmen, politicians and journalists seem to be elbowing each other aside for the chance to put forth the bleakest outlook for the global economy. The trickle of terror in 2008 turned into a stream of strife in 2009 and has now flowed into a spreading pool of panic in 2010.

Elected and appointed world leaders have issued statements that have enhanced the fear, the contents of their speeches acting more like gasoline on a fire than the water that the people wished for, with the assignation of blame and self promotion obviously more important than finding solutions that build trust and hope.

In the U.S. the word hope has been hopelessly perverted into rhetorical phrase used to ridicule a President who promised change but has been able to do nothing but try to suppress the flames in the burning house he inherited. Of course, Obama has started a few blazes of his own while trying to pass reform in two areas that together make up over 25% of the $14 Trillion dollar U.S. economy, Health Care and Financial Services.

With an opposing party that has declared a standing policy of non-cooperation as an attempt to convince voters that doing nothing is better than doing something, confidence in the U.S. political system is very low, and is headed towards non-existence. The bills that have been passed have been modified repeatedly at the request of the status quo, designed more to insure election talking points than any real relief for citizens.

Europe is dealing with its first major crisis since the E.U. was formed, and all of the national differences that lurked undetected below the surface in the good times are rearing their heads. Germany is scolding the rest of Europe for recklessly borrowing money from the International Banking Cabal, despite watching exports to these countries grow and support their own economy.

China has expanded its economy at the fastest rate of any country over the past two decades, but the financial markets have worked to create bubbles in consumer and commercial real estate that are now becoming problematic as irrational speculation takes its toll and slows growth. Couple this with large export markets in the U.S. and the E.U. about to punish their populace with austerity programs targeted at the middle class and poor, and China will certainly suffer additional economic cooling.

A recent Economist article on austerity attempted to point out the weaknesses and strengths of both Keynesian and Hooverian approaches to the perceived problem, but the real take away is that there is no empirically-tested scientific understanding of these ideas with any predictive value. The story described the moods towards one type of economic policy or the other, and this duality should sound an alarm, as moods move like fashion, with the tried and true Wall Street example of the length of hemlines being specifically mentioned.

For a domain that is awarded Nobel prizes every year to have only two accepted philosophies shows that economics is more in our heads than in an understanding of some external system. The same whims that decide what jacket we buy determines something at the core of our quality of life, and are literally a matter of life and death for millions of people.

Recognizing that we have designed this system to provide a required function in society should make it clear that the answers to the problems are in our minds. Both Adam Smith and Jeremy Bentham wrote about the psychological components of utility, but physics envy resulted in the creation of Homo Economicus, the perfectly rational citizen.

In capitalist economic systems citizens are first and foremost consumers, with modern societies generating 70% of their GDP from people buying things over the course of their lives. Because of the systemic necessity of this buying power, the gainful employment of as many people as possible needs to be the core focus of economic policy.

This understanding makes the current move towards austerity the exact opposite of what a country trying to get people working again should do, which is providing some money to get employers to invest and hire, with sustaining momentum beginning as soon as the first pay check is cashed. The only way to get money into the economy more quickly is to extend unemployment benefits, as those folks spend every dime as soon as they get it due to need.

But the leaders of most of the world’s largest capitalist economies are doing exactly the opposite; cutting off benefits to the unemployed, which directly removes that money from the economy, and indirectly provides an “example” of prudent spending habits so that the people who have money won’t spend either. This is a sure prescription for continuing pain and will darken the moods of the people that need to feel better before things are going to get better.

Despite the emergence of Behavioral Economics in academic settings in the 60’s and 70’s, complete with the awarding of Nobels for Daniel Kahneman and Amos Tversky for their work on decision making in uncertain or stressful situations, the models used for economic planning continue to default to the assumption of a completely rational Homo Economicus, and these models fail us over and over.

This is the time to develop new policies, as there is precious little to be learned from studying the 1930’s except to reinstall a few obvious banking regulations that were eliminated in the unregulated orgy of spending that the world embarked on over the last thirty years. After eliminating the moral hazard in the financial system the next chore is for Larry Summers, a recognized leader in the field of behavioral economics, to present some ideas based on new facts instead of old assumptions and presuppositions.

For the world to move forward economically we can’t look back, the ideas of the Keynesians, Austrians and free market ideologs have been trashed by the demands of the global economy and we need to try new ideas honestly and in good faith.

Establishing goals like eliminating any poverty within so-called first world countries, removing trade barriers without the inclusion of terms that lock in old prices but rather provide a path for new business models to emerge with full knowledge that certain rich folks won’t control a particular industry through coercion or corruption are needed steps to move past the limitations of the old models. Is there anyone with the nerve and influence to take this path? If so please raise your hands and let us begin.

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