Tackling the economic crisis: keeping the big picture in view

WITH the conclusion of our momentous election, we will find that how our leaders and we understand our current economic crisis gains the utmost importance. It is easy to get up caught up in the minutiae of financial shenanigans and lose sight of the big picture.

Unfortunately, there are several competing pictures to look at. One is that having ended welfare as we know it, we replaced the dole with extended credit lines having impossible balloon payments. I prefer to paint a wider picture of reality. We are in the throws of a major reconciliation that will bring America's claims on global resources more in line with fundamental realities.

After World War II, the United States inherited sole leadership of a global trading system. With the physical destruction of major portions of the global economy, the U.S. was much more productive than its old competitors, and this gave workers a greater claim on world resources. At the same time, U.S. dollars became the currency of the world economy, leading the world to be far more forgiving of our policy foibles than would otherwise have been the case.

By the late 1960s, Europe had rebuilt its economy, and Japan soon followed. Americans grumbled about imports of Volkswagens, Datsuns (now Nissans) and Toyotas. By the 1980s, several Asian tigers had managed to tap into the technology and organization that allowed their economies to grow as well. By the 1990s, the seeds of economic expansion drifted into less-developed terrain of countries like China and India.

The integration of the world's economy appeared so extensive that talk of globalization became commonplace. What had begun as an expansion of trade in heavy industry had expanded to low-wage textile production and then, suddenly, to the outsourcing of services though the use of new digital technologies.

All this meant rapid increases of wealth. However, the distribution of this wealth grew more concentrated. Fundamentally, this was because the integration of the world's labor market had intensified labor competition, keeping downward pressure on wages among workers who lacked the skills required by the new economy.

Western economies, such as ours, faced a dilemma in maintaining growth. In actuality, it was not just growth, but also the maintenance of current standards for the vast majority of the population that was at issue. Most Americans, however, had trouble seeing the forest through the trees. They loved cheaper prices and resented protectionist measures that favored some groups at the expense of others.

Unions and minorities that had advanced up to the 1970s were widely scapegoated as responsible for the stagnation of the white, especially the male, middle class. The new watchwords in American policy became competitiveness and flexibility. In other words, Americans would compete by removing the very standards they hoped growth would secure. Cream, many thought, would rise.

Politicians and financiers restored faith in a market-driven resurgence by developing policies that skirted the underlying economic realities. Most fundamentally, politicians delayed the day of reckoning by allowing Americans to eat their futures. Rather than search for mechanisms that would raise national productivity and improve the legitimacy of American's claim to the world's resources, we engaged in an orgy of consummation.

Politicians made a fetish of tax cuts, arguing that citizens were better positioned to make wise use of their resources than was government. Given that an increasingly large number of government officials were elected on anti-government platforms, these people sabotaged government in a way that nearly guaranteed the truth of that premise.

More importantly, policies aimed at eliminating unions, removing entitlements and eliminating investments in productivity had the intended effect of making America's workers more insecure and more willing to work hard to secure low wages, often in lousy jobs. More American's were competing head to head with low-wage workers in China, India, Indonesia and Vietnam. Without wage growth, however, national demand for goods and services was vulnerable.

Federal Reserve Chairman Alan Greenspan expanded credit substantially knowing he did not have to worry about rising wages pushing up inflation. Though the bubble of irrational expectations known as the dot-com crash had just burst, the Fed once felt comfortable lowering interest rates to absurdly low levels to prop up the economy.

It was always a longshot that Americans' standard of living could be permanently maintained far above that of workers elsewhere. To the extent this was possible, or at least that citizens would not suffer declines in their standard of living, major investments had to be made to raise workers productivity. We also needed policies ensuring that productivity gains not be entirely concentrated among a few well-positioned individuals.

These are tough problems that few of us were willing to confront head-on. The current crisis gives us an opportunity to rethink our goals and strategies.