Is the glass half empty, half full, or twice as large as it needs to be?
A couple of years ago my husband bought some really giant wine glasses. He loves them, but I happen to have abnormally small hands, and I find them hard to handle. Besides that, when you fill one of those things to just the one third mark, there’s enough wine there to make you a little sillier than you might like. It’s really hard to gauge your consumption. So now I just use a smaller glass.
There’s been a lot debate over whether the glass is half empty or half full for our economy. The unemployment rate says it’s half empty. Rising stock markets say it’s half full. You can’t argue with the facts on either side of the debate, but that doesn’t make it any easier to figure out how both could be true at the same time.
One argument could be that we are still recovering from a very severe economic shock, and that the Fed’s special sauce has only been sampled by the big banks and corporations. It has yet to be tasted on Main Street. But it will. So goes the half full argument.
The other explanation is that the Fed’s special sauce is bad for our health, but it may take a little more time before it actually kills us. In the meantime, it tastes good, so we may as well enjoy it while it lasts. This is more in line with the thinking I wrote about in QE Collateral Damage last week.
I’m not sure where you stand on the glass debate. I’m not even sure where I stand some days. But it occurs to me that there is a larger issue that the half-full/half-empty debate misses altogether. It goes to the reason we’re even concerned about the glass in the first place: We want growth. We want the glass to be full.
The Glass Is Too Big
Two books I’ve reviewed over the past couple of months have made the case that growth for growth’s sake has been the mindset of policymakers and consumers alike for the past few decades. Growth is always good. Taking a breather, or, heaven forbid, retracing a little, are bad. Really bad. They’re to be avoided at all costs. (The books I’m referencing are Your Money or Your Life and Consumed: Rethinking Business in the Era of Mindful Spending.)
If the glass represents the overall economy as well as our standard of living, there’s a case to be made that it doesn’t matter whether the glass is half empty or half full. It’s just too big. Our houses are too big. Our cars are too big. Our televisions are too big. Our wants are too big. We’ve grown the glass faster than we can afford to fill it.
The financial services industry, in particular, is too big. In many ways, it has been the ultimate glass-blower, crafting and profiting from ever larger goblets. Never mind that these things are not practical and don’t really offer a usable product. Jeremy Grantham, a member of this industry himself, pointed this out in his summer letter.
Grantham noted that the financial services sector made up 3% of GDP in 1965. By 2007, it was 7.5%. “This extra 4.5% would seem to be without material value except to the recipients. Yet it is a form of tax on the remaining real economy . . .” He further observes:
This bloated financial system was also increasingly deregulated and run with increasing regard for profit and bonus payments at all cost. Thirty years ago, Hyman Minsky could have told you that this would guarantee a major financial bubble sooner or later and at periodic intervals into the indefinite future. This unnecessary explosion in the size of the financial world has been a clear example of the potential for dysfunctionality in the capitalist free market system.
Mr. Grantham goes on to call the theory of rational expectations “the greatest-ever failure of economic theory.” Sorry to Modern Portfolio Theory fans out there. If you haven’t already read it, this letter in its entirety really is worth your time, and I apologize for not pointing it out to you sooner.
What’s Wrong with Big?
I don’t think there’s anything wrong with wanting and owning a big home, car, or television. I don’t think there’s anything wrong with rooting for economic growth. Who doesn’t want a full glass?
Maybe the problem is that we’ve bought a glass that’s just too big for us right now. It was really expensive and we’re still paying it off. Now we need a lot more stuff to fill that glass. We can’t afford that either, but we need that glass to be full in order for the electorate to feel prosperous.
There are a couple of ways for us to get the economic glass to the full line:
- We can borrow from our future reserves to fill it.
- We can use a smaller glass.
Obviously, our leaders have chosen option number one, and they’ve done so with our consent. We’ve happily borrowed at artificially low interest rates to buy our bigger homes and fill them with more furniture. We’ve bought giant gas-guzzling SUVs even though we’re not going off-roading in the outback anytime soon. We’ve collectively borrowed more than we can ever realistically hope to repay.
Again, there’s nothing wrong with more and bigger. But more and bigger at high velocity is a recipe for a crash. We could end up breaking our glass. A glass that’s too big really can be hard to handle. Where do you draw the line? When is it enough?
It will be enough when we decide more stuff is not making us any more fulfilled. It will be enough when we’re just too tired to keep up the effort it takes to fill that giant glass. It will be enough when there’s nothing left to put in the glass because we’ve emptied the bottle and forgotten to take the time to ferment some reserves for the future.
At some point, something’s got to give. We can keep going and hope we’ll eventually be able to afford to fill our giant glass before it breaks. Or we can just ask for a smaller glass.