Pain, Then Gain

On Thursday's Fast Money, Rob Cox of BreakingViews.com offered up the following thoughts, paraphrased closely:

As a country, we're producing too little and consuming too much. Obama's going to have to be upfront with the American people about that, and correcting the imbalance might mean that we have to accept a lower standard of living.

We think we know what Cox means here, but let's dig into this a little bit.

First, we've long thought "standards of living" aren't easily captured by, or accurately reflected in, consumption data. Individuals' quality of life goes well beyond the number of cheap Chinese goods they buy, or the marginal 400 square feet in their homes. But it's certainly true that relative wealth can buy relative comfort, and thus, in some sense, a higher standard of living: less concern about day-to-day and month-to-month finances, more leisure time, more (and more attractive) employment/retirement options.

But the bigger point here is that the only reliable path to a better standard of living, no matter how we define it, is through a sequence leading from savings to investment to higher productivity to gains in real wealth. We simply must spend less and save more. As we've written here before, and as Rob Cox noted last night, that means significant short-term pain. We can't borrow our way to prosperity.* So here's hoping this economic mess prompts the utterly necessary and long-overdue process of repairing private and public balance sheets in the United States.

The other key to national well-being, and an under-noticed cause of Barack Obama's political success, is the distribution of the country's gains in real wealth. Is it any surprise that rank-and-file Americans were fed up with the status quo after several years of zero gains in their real incomes? This isn't about class rivalry or redistribution; it's about enlightened self-interest.

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* Not all borrowing is created equal, of course. Student loans, for instance, can greatly enhance one's future wealth. Using revolving credit to buy more stuff? Not so much.

Comments

[Tony Petroski:]

Back to the future. Were going to have to make sacrifices. Obama already told us to inflate our tires and tune up our cars. How long will it be before he tells us to wear sweaters and turn down the thermostat? Barack the Magnificent in the role of Jimmy Carter the Great. We're on the verge of another era of learning to live with less. After that era, hopefully over in four years, we return to "America is too great a nation to live small dreams."

2008 Nov 07 10:51 AM

[Warm_Paw:]

The US has "Offshored" it's manufacturing to India and Mexico.
Or buys what it needs at a less expensive price from China.
Without Americans building those products, wages are earned elsewhere.
Now America's coffers are empty - where an upturn in manufacturing would have the US work it's way out of this situation, unemployment is rising.
That means no spark, no catalyst.
Tumble weeds blowing down mainstreet.
I'm glad the rest of the world's standard of living has increased to purchase US made big ticket items but guess what?
The US doesn't make them anymore.
Third worlds are buying from a gloabl economy.
This is why protectionism occurs.
Time for the US to get back to basics and promote from within.

2008 Nov 07 12:17 PM

[User 68127:]

Intellectual property is high value added and has high margins. America is good at this. Think software and computer chips. It costs almost nothing to manufacture, in the case of software, or almost nothing for each incremental unit, in the case of chips. We sell it abroad and receive money or goods in return.

Meanwhile, manufacturing labor is a commodity which tends to be low value added and much cheaper in other countries. So we send the labor over there. This allows lesser developed populaces to earn higher levels of income, emerge from poverty, afford better food and healthcare, etc. as well as eventually afford more of our goods. As a whole, the populaces of both countries win, and the world becomes more "equal" and "just."

There is no question that America has over-consumed, fueled by lax lending standards which allowed credit to grow much too freely. The solution is not protectionism, higher taxes, or redistribution of wealth--quite the contrary! The solution is to promote strong families, the Protestant work ethic, and to introduce merit and accountability into the educational system. Then you don't have to "protect" of give handouts to those who are temporarily sqeezed out of a job by today's fast-paced and global economy.

Smart, creative, well-educated, and/or just plain hard-working Americans will always find a way to add value to the economy, and that will be reflected in their wages. The beauty of this is that not only does the individual worker benefit, but it also serves the collective good by expanding the pie for the whole world. You don't have to pick winners and losers, which introduces dead weight to the economy and opens the Pandora's box of the corruption of the political system and the erosion of freedom for our citizens. Everyone just adds value and the market sorts it all out.

2008 Nov 07 12:52 PM

[Steven Hansen:]

"But the bigger point here is that the only reliable path to a better standard of living, no matter how we define it, is through a sequence leading from savings to investment to higher productivity to gains in real wealth."

it seems most talk is about american's not saving enough. that was never true - just look at 401k's, and investments in real estate, etc. the problem is and was credit / leverage. nobody paid cash for real estate - you borrowed as much as you could - it would be worth more tomorrow. this was leverage of your "savings". putting cash into a bank did not give you leverage.

but we created some very big bubbles. we had so much money coming into equities from 401k - we bid them up more than they were worth. the same for real estate, commodities .......

credit and leverage created our crisis. everything is trying to return to its natural level. there is nothing wrong with americans. we may be consuming too much because we could afford to do so. now we cannot so we won't. but producing too little??? i do not even understand the basis for this statement.

2008 Nov 07 11:05 PM

[fahrender:]

Before Obama even gets sworn in Tony Petroski is comparing him to Jimmy Carter, echoing Peter Schiff's theme. The Mighty Wurlitzer is cranked up and running.
The truth is that we should've listened to Jimmy Carter, especially about getting geared up with alternative energy sources. Had we started doing that in the '70's we wouldn't now have the ridiculous situation that exists in America with oil dependency.
I'm not a particular Obama fan but I plan to give him a chance to be in office for at least three months before I make any criticisms of him. Lassez Faire Capitalism has crashed and burned, spectacularly I might add, and most people have noticed. That's why Obama got elected. Maybe we should see what Obama does before we start yelling hysterically that the sky is falling. And considering how big the SNAFU is, no matter what Obama does or doesn't do it's going to take several years for a recovery to actually take shape.

2008 Nov 08 12:04 PM