As the current economic crisis continues to play out there will be much waiting for things to turn around, but what do people mean by that? And is a reasonable expectation. My feeling is that what people mean by that is a return to economic vibrant economic growth and the ability for many people to create wealth. The alternative would be a return to economic health. These are rather different ideas. This goes back to Leroy's post about the piece on the bubble economy. I think that when people look back over the last 15 odd years and think of the "good" times they remember times marked by speculative excess, first in equities and then in housing. The unfortunate thing is that these times provide the benchmark by which economic performance is judged. It is an unreasonable expectation unless one desires to live in a bubble economy.

There is some real slack in the economy, to be sure, underutilization of capacity, employment measures that lag behind recent years. But these are things that a good but not necessarilly long recovery could pick up. The return to a healthy level of utilization of resources isn't going to provide the kind of economic performance people expect, it isn't going to supply the same potential to create high returns on capital. And so I would say that people expecting the performance of a bubble economy is an unreasonable expectation. We should accept lower levels of growth, and lower returns on capital once utilization of resources reaches a better level.

There are also some drags on the eocnomy that one might say need to be fixed, but really don't. For instance the tightening of credit. This is an adjustment from an overextension of credit, not an evil that needs to be fixed. It is painfull for the economy, but if people are havingtheir credit limits on credit cards rolled back that isn't a bad thing.

There are also issues that are real problems, let's say sustaining increasing wage levels. The thing is that growth or the potential to create wealth via speculation has little to do with wage levels. I won't say they operate completely seperately, that would be foolish, but they don't work closely enough to expect that a return to a bubble economy will have a positive effect on wage levels.

As everyone knows the only way to the easiest way to increase standards of living to to have productivity increases, both from the side of labor productivity and the productivity of capital. There were some relatively easy avenues to exploit recently to do that, (although the increases were largely funneled into profits instead of wages), just in time ordering, outsourcing, offshoring, IT benefits, innovations in capital management, but these have been largely exploited, and I don't see any immediate productivity boosts about to be introduced, as a matter of fact some of the ones already exploited may be rolled back in a tightening and more heavily regulated economy. As alluded to a second ago another avenue to increase standards of living for the "masses" would be better wealth distribution. But once again this has little to do with what people expect by their current ideas of what a vibrant economy functions like. Having a real not nominal raise isn't as sexy as making 10+ percent on your IRA.

So I believe people need to re-evaluate where they think the economy is going to when it eventually recovers, which may in and of itself take years. The wealth which should have been distributed better may be locked in by then by virtue of the decreased ability for it to expotentially grow. The weakness in real wage growth, which was for a long time masked by the inflation containing effects of globalization and the rewards reaped by speculative excess, may be impossible to reverse without a new surge in productivity.

A little side not on the employment issue. As we know labor statistics have for some years been missleading due to the inclusion of the growth in public employment, (I continue to believe that government labor stats should be provided sperately from general employment data), there has been an ongoing shift of higher numbers of people to the governments payroll. This is a good thing if you want to keep people working, but it would seem to be a trend which would be hard to reverse and a model based on large numbers of people on the public payroll is difficult to make work. Not only do these people tighten the labor market making labor more expensive for the private sector, but the jobs they generally have pay better and offer better benefits than private sector jobs, many wont be willing to forgo the benefits of public employment for the insecurity and lower returns of private employment. (This makes me sound like a hardline capitalist, which I am not, I do much prefer the European model, but you can only work with what you have, and at this point it seems easier to suggest improvements in the U.S. than the radical move to the European model.)

"at this point it seems easier to suggest improvements in the U.S. than the radical move to the European model."

It may be easier, but it is less satisfying. I see little future in declaring my own futility (although I have, in unguarded moments, probably been guilty of it in the past).

You know when I wrote that there was a bit of reflection going on...

There are a lot of levels to speak in when one posts, realistic, ideological, theoretical.

Maybe it is best to just fight the good fight rather than miring oneself too deeply in realism. Maybe it's best to put ones efforts into what one really believes should be rather than making the best of what might more easily hapen.

Accepting ones futility. A rather pathetic stance to take, one I shouldn't be proud of.

A turnaround would mean:

less than 5% unemployment

flat or rising housing prices

fewer than 100,000 foreclosures per month.