It’s been 12 months since the financial collapse that has reshaped our economic outlook, and one year later we’re not much further along in resolving the problems that created it. But, for all the anxiety it has brought and all the arguments initiated over how to address it, the particular cause of the collapse is no mystery. It’s this: We’re short of capital. There is less value to our assets than we assumed previously.
This is important to understand, because in virtually every other way the economic disputes we engage today are not much different from those that have been conducted over the past decade or so. At the core is the dispute between those who would see our economy driven by consumer spending, and those who wish for a system guided by investments in capital goods and equipment.
There is no simple choice between these two approaches. Neither one promises to be wholly or consistently successful. Nor can either approach offer a clear plan to extricate the economy from its current straits.
If there had not been a financial collapse last year, the dispute between the two economic philosophies still would be relevant, or perhaps even urgent. The reason for this is that globalization has altered the balance of world’s wealth over recent decades. By foregoing many of the free-market assumptions of the Western Hemisphere, emerging economies (notably China) have established themselves as financial powers.
We knew we had global competition, but we didn’t properly evaluate how strong that competition had become. A simplistic summary of what happened last September is this: as equity values tumbled, Western economies had to acknowledge that their share of the world’s wealth is less than we believed.
The solution is obvious: we have to grow. We have to create wealth. We have to build value in our assets and our output. We have to match the global standards for quality, performance, and value, and we have to improve upon them, too. How well we do all this depends on our strategy.
Indisputably, the strategy that has been followed for much of the past year has been capital investment, specifically in the $787-billion federal stimulus program, along with other federal rescue and bailout plans. The particular goal is to instigate capital investment by businesses on a wider scale, creating a foundation for long-term growth that will support high levels of employment, and thus encourage consumer spending.
The most persuasive argument for this approach is that it will support higher volumes of manufactured exports. This is seen to stabilize the U.S. balance of trade and increase the value of U.S. currency.
But it’s not a perfect approach. Keeping this strategy in place demands an activist government that will coordinate its policies and regulations with business and industry. Government planning can foster economic growth; China is proof of that. It can be argued, too (as many have done in the past year) that the economy needs more authoritative oversight to ensure stability and global competitiveness.
But, proponents of a consumer-driven economy maintain that no strategy can anticipate every consumer need, respond to every opportunity, or compensate for every failure. More specifically, they contend that the capital-investment approach doesn’t create wealth. Ingenuity and risk do that, and so to spur growth we’ll need to enervate the consumer economy. Cut taxes. Reduce regulation. Consumers, they insist, will determine where the potential lies for growth, and drive the value recovery we need.
Machine shops may not appreciate it, but they are more or less at the center of this debate. Their suppliers are metal/material manufacturers and equipment and machine builders, who are direct beneficiaries of stimulus efforts. Their customers are OEMs, and ultimately consumers. Their operating costs (raw materials, technology, labor) stand to rise according to the capitalinvestment model, but that might also increase demand for finished products. More consumer spending might not bring stability, but it could drive product innovation that would open new market opportunities.
This is the debate we’re having, and the crisis we’re enduring has little to do with its substance. Knowing that the solution is “growth” doesn’t seem to clarify the issues — nor to expedite a concensus.