Where's The Recovery?

Three full years after the end of the recession, it's time to acknolwedge that the economy has not really recovered in a meaningful way for millions of Americans. The latest job numbers today show that the unemployment rate has actually increased to 8.2 percent. Housing has not recovered; consumer spending has bounced back somewhat but is nowhere near the level it was. Health has has become increasingly expensive, putting it out of reach for millions.

None of the indicators show what the economics profession has been promising—a return to the status quo ante, or the situation that prevailed before the financial shocks of 2008. With every release of government data, the orthodoxy that the economy is “healing” or “showing green shoots” has proven overly optimistic. Even the nostrum that “we are headed in the right direction” may be unraveling as government spending, particularly for defense, comes under pressure and the nation faces a year-end fiscal cliff.

They key to understanding what has gone wrong is to recognize that the economic downturn has not been a typical business cycle recession of the sort that occurred regularly since World War II. It signifies something much deeper. It was the popping of a vast financial bubble that had provided easy money for housing and consumer spending, concealing deep structural problems that had been building for decades such as the migration of many industries and jobs to East Asia and the growing U.S. dependence on imported energy. The combined effect is a once-in-a-generation jolt that requires an adjustment in the American economic model.

Yet the United States is locked in policy paraylis with fundamental disagreements over whether government has a legitimate role of any sort in charting an economic future. But why can’t the nation that launched the Manhattan Project and the Marshall Plan, put men on the moon, declared war on cancer and seeks to “nation build” in Iraq and Afghanistan devote sufficient resources to building an economy that responds better to international competition and improves its energy consumption patterns? Doing so would create new industries, new wealth and new jobs. It’s ludicrous to believe that the Federal Reserve alone can “fix the economy” by managing interest rates. That might have worked in a shallow cyclical recession, but it won’t work if deep structural adjustments are necessary. And history suggests that only the federal government has the scale and the reach to lead those sorts of adjustments.

The federal government built the interstate highway system, and sparked the Internet and biotechnology industry. But it is still locked in a post-war framework and is not organizationally focused on creating the high-value added manufacturing, export-oriented economic model that Germany, Japan, South Korea, China and Singapore have built. It does not possess a unifying vision of the future.

The debate should not be about whether the government has a role in the economy, but rather how to improve its role. We need to ask how effective the government is in how it spends nearly $150 billion on research and development each year, how it supports the emergence of technology clusters around the country, how its agencies support exports by small and medium-sized companies, how it supports training and retraining of workers and how it supports the emergence of alternate energy models. The answer on each count is, not well enough. There is huge overlap among competing agencies. There are more than a dozen federal programs in the departments of Labor and Education for retraining workers who are displaced, but they have been spectacularly ineffective. Export promotion and licensing efforts are similarly fractured among half a dozen agencies. The government clearly needs reorganization and streamlining to do a better job while spending less money.

At the state and regional level, there is huge interest in the industries of the future, as evidenced by New York State’s efforts to create a nanotechnology cluster around Albany and New York City’s plan to build a research institute. Pittsburgh is trying to do much the same with advanced robotics, Cleveland with flexible electronics and biomedical devices, Orlando with computer simulation and lasers, and San Diego with genomics and wireless communications. Michigan is building a lithium ion battery industry. These industries, however nascent, are creating globally competitive jobs.

But rather than supporting and fueling those efforts, Washington is tied in knots. One obvious reason is the fight over the failed government loan to the California solar energy company, Solyndra, which went bankrupt. That $500
million-plus loan was a tiny piece of the overall equation, yet is has been allowed to disrupt meaningful dialogue over the future of the American economy.

The debate should be about what works and what doesn't. Solyndra didn’t work, but there are very real successes around the country. The federal government needs to better understand the intricate relationships among universities and research institutes, entrepreneurs, incubators, angel and venture capitalists, and others involved in innovation. The
knowledge exists. It’s time to start acting on it.