The New Normal

Discussing Keynesian vs. Austrian economic theory with some friends yesterday, it boils down to the question of what to do to get us out of this ditch.  Cutting taxes aren't going to help because the problem isn't supply.  But more stimulus isn't the answer because now it's too late:  we're already stuck in the demand/unused capacity spiral and the stimulus we did have did a lousy job of getting to where we needed it.

We're in a place where neither straight Keynesian stimulus nor straight Austrian deregulation will fix the problem.  We need a third way out, because the problem is not business, but the American consumer.

Across the industrial parks and office towers of the Chicago region, in a more than a dozen interviews, senior executives said they see Americans for years ahead paying down debts incurred during the now-ended credit boom and adjusting spending to match their often-reduced incomes.

"It's a different era," said Daryl Dulaney, chief executive of Siemens Industry, which has 30,000 U.S. employees who make lighting systems for buildings and a wide range of other products. "Our hiring and investment decisions have to be prudent and reflect that."

Executives see little evidence that the economy is slipping back into recession. But they describe a business environment in which sales come in fits and starts and their customers can't predict what they will want to buy in the future.

"In the past, our customers had more long-term vision on what they're going to need," said Bill Larsen, president of Larsen Packaging Products in Glendale Heights, Ill. Now, he said, "they don't know what they're going to need and when they're going to need it."

Larsen's company sells boxes and other packaging materials to all types of companies, so its sales closely reflect overall economic activity. Those sales have been swinging widely from month to month.

When companies decide whether to hire workers or invest, say, in a new factory, this kind of volatility and uncertainty about future conditions makes for a strong disincentive. 

We're deep in the self-sustaining part of the downward spiral now.   Global competition means hiring new workers and creating more capacity is difficult, but even more difficult because our consumer-driven economy is now rapidly running out of consumers still able to consume.

And without that investment in workers and wages, there's no additional money to spur consumption and increase demand.

Congress is paralyzed and will continue to be well into 2012.  The Fed can't do much of anything right now short of massive quantitative easing, but even then that will just get parked on.

We had our chance and we blew it.  Now it's too late to do much of anything.  No wonder the government's shifted to concentrating the coming suffering among those who are least likely to be able to do anything to stop it.