Out of Control Policy Blog

A Theory of Recovery: Exports or Flying Cars

The Economist has an interesting vision of economic recovery, one that has them really bullish on the future of the market. Basically they posit that that "a 'rebalancing' is under way: from consumption, housing and debt to exports, investment and saving." Here is their argument:

  1. They believe this is promising because in their view the current American recovery isn't based on consumer spending but instead consumers "saving more and borrowing less because the collapse in home prices has eviscerated their wealth."
  2. With that reduced consumption at home, "American firms will have to sell more to the rest of the world" and this growth in exports could be the new driver of economic growth. 

This certainly isn’t the craziest idea. We haven’t seen rapid return in consumer spending accompanying the slight growth in GDP. And the current administration is very internationally focused when it comes to economic growth. The increasing concern over how American trade deficits fueled the bubble could shift investment focuses. And if America recovers faster than other struggling nations there very well might be markets for American firms to move into.

But I’m not convinced. To begin with, I don’t quite believe America will cease to be a consumerist nation. We have faced recessions before. People have seen economic hardships. And eventually they forget about their former problems and try to figure out whether a gold plated iPhone or diamond studded Crackberry would match their Armani wardrobe better. Consumer spending may not return in force for a number of years—in fact, I’d fully expect it to take a while if the federal fiscal policy remains on a reckless path scaring Americans.

On the housing issue, The Economist is probably right. Housing has been in a serious slump for at least four, if not five years (depending on your definition of “serious”). And it won’t have a real recovery for some time given the government’s various programs to artificially prop up mortgage prices and support housing values. Exports could fill this hole, but since I think consumption will eventually return here—not to mention population growth continuing to rise, albeit slowly—I don’t think they will be the leader.

Given America’s history, what is more likely to be the case—if we’re going to be throwing around some hypothetical ideas on recovery—is that consumption will return, but that it will drive the development of some new sector of the economy. It could be an expansion of the information sector. Maybe water technology. Maybe flying cars. The possibilities are endless in a free society.

I guess that does assume a free society for the future though. (I’ll leave that discussion for Glenn Beck.)

The Economist admits that there are challenges to this kind of a recovery. A transition of this kind could be rough and would be dependent not only on fiscal policy decision in both the US and other countries, but also monetary policy decisions relating to the value of money, and the consumption decisions of people around the globe.

Interestingly, this recovery theory depends on the rest of the world acting like America did over the past few decades—people favoring spending over savings—in order for America to recover. But that proved to be unsustainable here in the U.S. when coupled with excessive risk created by misaligned incentives. If every one saves, then an export driven recovery will stagnate.

Ultimately, we should understand that no matter what recovery looks like, if it comes with the current government supports it won’t be sustainable. This will happen again. Stimulus programs, mortgage modifications, jobs bills, will only provide temporary relief (if that). An export driven recovery built on top of that would eventually cave in. Even a flying car industry led recovery would eventually crash if government spending supported it. The reckoning simply can not be put off forever.

Anthony Randazzo is Director of Economic Research


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