Wednesday, October 1, 2008

The "Stupid" Economy in 2008

I hope to release a new book soon. The working title is The "Stupid" Economy. The first chapter (see below) draws from the current events related to the "credit crisis" and proposed economic bailout and suggests a choice "Counterfeit Affluence in the Short-Term or Sustainable Competitiveness"

No, the economy is not “stupid”. And neither are the systems of education in the United States. On the contrary, the United States is envied for both its world-leading economy and its public and private education systems and institutions. The title, The ‘Stupid’ Economy, is meant to invoke a range of perceptions and emotions about our economy and our systems of education leading into a discussion about critical interdependencies.

The recent crisis in the financial markets, skyrocketing prices, and plummeting investment values highlight a troubled economy in which ‘foolish’ mistakes made by a few have caused many to suffer. (Foolish, greedy, selfish, or even misinformed are more appropriate words than ‘stupid’ in this context, as many of the mistake-makers have been very intelligent.) While our free market model is the best that there is, better than the alternatives, it is not immune to the human natures of fear and greed. Our economy needs corrections.

At the same time, it is widely recognized that our systems of education are failing to meet the needs of many students. Recent reports such as “Tough Choices or Tough Times” have raised alarm that the U.S. workforce is not adequately educated to compete in the emerging global economy.

The ‘Stupid’ Economy, a play on words from the pop culture phrase “It’s the economy, stupid”, looks at the interrelationships between our nation’s economy and education systems. It makes some high level observations about factors in the economies of the free enterprise system and public education system, and makes the case for a new model for U.S. public education and the way educational services are delivered.

"It's the economy, stupid" was a phrase in American politics widely used during Bill Clinton's successful 1992 presidential campaign against George H.W. Bush. For a time, Bush was considered unbeatable because of foreign policy developments such as the end of the Cold War and the Persian Gulf War. The phrase, coined by Clinton campaign strategist James Carville, refers to the notion that Clinton was a better choice because Bush had not adequately addressed the economy, which had recently undergone a recession. - Wikipedia

Counterfeit Affluence™ in the Short-Term or Sustainable Competitiveness

The current economic condition has been categorized as a “credit crisis”. That is a short-term view. It is more accurate to describe it as a DEBT crisis. Far too many people and institutions have borrowed more money than they can repay. Debt spending is a national addiction.

Individuals, corporations, and governments – from the 19 year college student, to the 65 year old corporate executive, to the federal government are all suffer from the borrow and spend addiction. In August 2008 U.S. News reported that “The average American with a credit file is responsible for $16,635 in debt, excluding mortgages, according to Experian, and the personal savings rate has hovered close to zero for the past several years.”[1] At the end of the same month the national debt clocked in at $9,645,725,555,640.02. One month later the debt had grown by another two hundred billion dollars.

Lawmakers and economists have raised the alarm that the lack of easy access to credit will cripple the economy, but fail to acknowledge that easy credit is a root cause of the problem. A government ‘bailout’ is a flawed attempt at a quick fix, a short-sighted and short-term solution. It does not solve the root cause, it only transfers the problem. Individual and corporate debt is transferred to the national debt. Rather than suffer discomfort today we are willing to steal from future generations.

The Merriam-Webster dictionary defines sealing as “to take the property of another wrongfully and especially as a habitual or regular practice”. This seems like an accurate description of what is happening with the national debt. To satisfying our greed for a higher standard of living today, and to avoid short-term discomfort, we are building up a dept that future generations will have to pay.

There have been times in our nation’s history when the attitude was different, when Americans where willing to sacrifice in the short term in order to preserve freedom and opportunity for future generations. World War II was one such time. Between 1942 and 1945 those who were not risking their lives oversees were sacrificing comforts at home, women worked in factories and shipyards as “Rosie the riveter”, families collected and donated materials used for the war effort, and everyone accepted a lowered standard of living through rationing of energy and food. This generation that was willing to sacrifice present comfort for future opportunity was the same generation that had suffered through the great depression. This generation had a dream, the American Dream, that they might have a higher standard of living than the previous. Now, what was once an “American Dream” has become the “American Sense of Entitlement”. Many interpret the Declaration of Independence’s reference to an inalienable right to the pursuit of happiness as a right to happiness.

Easy access to credit in the U.S. economy has, in fact, allowed a majority to live in a society of comfort, convenience, and instant gratification. We can have what we want when we want it whether or not we can afford it. This is “counterfeit affluence”. If a family wants the latest large screen plasma TV, they don’t need to save money until they have enough to buy it. They can buy it now, on credit, and pay later...maybe.

The same goes for businesses. Easy access to unearned money (credit or equity-based funding) gives business owners and executives the opportunity to grow their business, hiring new staff, buying equipment, buying raw materials, buying supplies, to opening new locations and introducing new products. This is a very good thing in moderation. When businesses grow it reduces unemployment, allows local, state, and federal governments to collect more in taxes to fund programs that help people. This all is good. Unfettered business growth benefits the economy as a whole, at least in the short term. However, there is a down-side to credit funded business growth.

While easy credit opens up opportunities for success, it also opens up opportunities for failure. Business executives take greater risks to keep up with competitive markets and may use easily borrowed money to fund extremely foolish ventures. Financial institutions that offer “sub prime” lending therefore are both a cause and a symptom of the easy money problem. Human nature drives business leaders to make foolish decisions. Greed and self-interest drive many to take irrational risks with other people’s money.

In the 1980’s investors foolishly lent money to risky businesses via “junk bonds”. In the late 1970’s and early 1980’s 747 savings and loan associations collapsed, primarily because of imprudent and excessive lending.[2] Here we go again. The current economic circumstances should not be a surprise. Since the 1970s Americans have become less willing to endure delayed gratification, “Christmas club” accounts have been replaced with multiple credit cards and home equity lines. Economists have predicted the “credit crisis” since the early 1990’s. But we tend to have short-term view of the economic situation. In an age of 24 hour news networks and text message alerts, a “current tick” mentality that can cause overreactions. In an age of easy access to credit we expect an ever increasing standard of living, even as our economy goes through inevitable ‘hard times’.

It is uncomfortable to adjust to a lower standard of living. We want the government to provide a quick fix bailout so we can go back to spending more than we have, back to living the good life, on credit. Unfortunately, any bailout is a short-term fix that feeds a long-term problem. When the government goes deeper into debt, or risks debt funded capital to solve a short term problem, it only exacerbates the deeper long-term problem by growing the national debt.

Whether or not the U.S. Government bails out financial institutions in the short term, the American people have a responsibility to give back some of what is being taken from future generations. Politicians should be looking not only at how to reduce the pain today, but also at how to reduce what could be even greater pain tomorrow.

There are a number of looming factors that suggest that the U.S. economy, and our standard of living, is bound for an inevitable period of decline. These factors include demographics, including the realities of an aging baby-boom generation; growing national and personal debt; and risks related to U.S. competitiveness in the global economy of the future.

The National Center on Education and the Economy 2007 report, Tough Choices or Tough Times made clear the threat of a declining American standard of living due weaknesses in our education systems.

“In this environment, it makes sense to ask how American workers can possibly maintain, to say nothing of improve, their current standard of living. Today, Indian engineers make $7,500 a year against $45,000 for an American engineer with the same qualifications. If we succeed in matching the very high levels of mastery of mathematics and science of these Indian engineers — an enormous challenge for this country — why would the world’s employers pay us more than they have to pay the Indians to do their work?”[3]

U.S. global competitiveness today and in the future is to a great extent dependent on the effectiveness of our education systems, and the skills of the American workforce to adapt to a changing global economy. Our current educational systems are structured to a meet century-old economy, to educate groups of students with industrial age skills, not to prepare individuals for the economic realities of the 21st century.

United States was once a world leader in educating its citizens. Today the U.S. is ranked low compared to other countries on tests such as the Trends in International Mathematics and Science Study (TIMSS) and the Progress in International Reading Literacy Study (PIRLS). And the U.S. has a declining percentage of the world’s college graduates. But even if we were more competitive based on these measures, it would not guarantee a competitive workforce. The world-leading economies have undergone fundamental shifts from manufacturing to service industries to idea-driven industries.

“There may be a limit to the number of good factory jobs in the world, but there is no limit to the number of idea-generated jobs in the world.”
- Thomas Friedman

America faces a long term problem that cannot be fixed with a quick infusion of money. American primary and secondary public education in particular is facing pressures on multiple fronts. On one hand there are increasing expectations for accountability and the preparation of students for a global workforce, so that our nation can stay competitive in the global economy. These pressures call for new models for education that tailor teaching and learning to unique talents and needs of each student, so that no child is “left behind” and everyone has the opportunity to maximized learning that will lead to his or her unique contribution to the 21st century economy. On the other hand the demographics indicate teacher shortages on the horizon.
Two groups will collide: the wave of retiring baby-boom teachers will crash into the wave of teachers who exit the profession after five years or less, leaving a lot of empty desks at the front of the class. This is a problem common to every state, explained [Tom] Carroll, president of NCTAF. But the shortage is also an opportunity to attract new teachers by revolutionizing the teaching profession.
"Good teaching is a team sport," Carroll said, arguing that teaching has to shift from the past to the future--from the Flash Gordon model of a lone hero to a "Star Trek" model where teams get the job done. Add better training, higher salaries, more professional development, and enhanced support, and the result could be an exciting career that attracts new teachers and retains those with experience.
-The Boston Globe Editorial, The Teacher Gap: Prepare Now, March 30, 2007

The speed and course of the transition to a student-centric education system should be of great concern to every American. The greatest opportunity for America to “give forward” to the generations that will be burdened with the national debt may be to fundamentally change in the way we as a nation deliver educational services to children and adults.

A long-term view is needed. It may require a willingness to sacrifice a short term “counterfeit affluence” for the longer-term economic strength needed to sustain a nation of the people, by the people, for the people.

[3] Tough Choices or Tough Times: The Report of the New Commission on the Skills of the American Workforce; National Center on Education and the Economy
ISBN: 978-0-7879-9598-0

Note: "Counterfeit Affluence" is a trademark of Sound Image, Inc.

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