Wednesday, July 13, 2016

Truisms that Aren't True

Before reading further in my piece, take a look at this essay on the bond market.  To me this is much more worrisome than the non-economic news, which admittedly is quite worrisome, because the gloom the bond market portends appears so pervasive and irreversible.

Across other major advanced economies, the signals sent by bond prices are even worse. Ten-year bonds are now offering negative interest rates in Germany, Japan, Switzerland, Denmark and, as of Friday’s close, the Netherlands. That means buyers of these securities will get fewer euros, yen, Swiss francs or Danish kroner back than they invested, a development without precedent in hundreds of years of financial history.

The upshot of the piece is that there is a global lethargy that is being forecast for the next decade.  Can anything be done about it to turn this aircraft carrier away from the doldrums?  By the way, if you think the U.S. is immune from this issue you'd be badly mistaken.  The real interest rate in the U.S. (quoted rate minus the inflation rate) is also negative.

Juxtapose these economic issues with Thomas Friedman's latest column, The (G.O.P) Party's Over.  Friedman predicts the demise of the current Republican party and/or engages in an exercise of wishful thinking about what loyal Democrats would like to see happen to the Republican party.  Nonetheless, he repeats the mantra he has uttered many times before.

Our country needs a healthy center-right party that can compete with a healthy center-left party.

This is the truism I want to take on.  From where I sit it is wrong on two different fronts.  The first is giving virtue to some mythical "center" implicitly praising the proverbial saying, moderation in all things.  Alas, a moderate response won't turn the aircraft carrier.  What is required is something much more forceful.  There needs to be a massive amount of government spending, some of which would be deficit financed.

Right now even moderate Democrats are terribly afraid of a massive amount of new debt.  Consequently, there doesn't need to be a counter force found in the Republican party; such a counter force is already present in the Democrats.

If and when the aircraft carrier gets turned and is headed in a new direction then Friedman's truism may again become true, but...

We have never had an honest and open debate about what the size of government should actually be nor on how our changing demographics affects the answer to that question.  We've instead had the nonsensical position by the Republicans that government is always too big, so shrinking it is always a good thing.  That nonsense is in good part responsible for the persistence of sluggishness in the global economy, well after the financial crisis ended.

We have also not had an open and honest debate on the question of whether fundamental R&D should be done publicly or privately.  The issue, as I see it, is about both the level of R&D activity (currently it's way too low) and the degree of subsequent monopolization when the R&D produces good and valuable results.

Our history is instructive here.  Arpanet was a government creation.  The early Internet years were dominated by university connectivity.  Google, Amazon, and the other big Internet companies grew out of that structure already in place.  Likewise, as broadband became the standard, ISPs became the next generation utility providers.

This model isn't perfect, for sure, but all of us are somewhat comfortable with it.  For whatever is the next Arpanet, which I suspect will be something in the renewal energy area, do we really want some organization in the private sector to have that gateway position to the technology?

A debate needs to occur on these questions, one that works through the issues and gets beyond truisms.  That is needed, certainly.  If a center-right party contributed to that debate, fine.  Otherwise, who needs them? 

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