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Political Leaders Must Grasp Structural Changes in Our Economy

The following was written by Tom Licata of Vermonters for Economic Health. It has also been published in he Burlington Free press on September 5, 2010.

“What is critical to keep in mind is that this situation is part of a broad, multiyear process driven by national and global realignments. It's a secular phenomenon that needs to be better understood and navigated -- by recognizing its structural dimensions…. Unfortunately, the approach in too many industrial countries [and states such as Vermont] has been to kick the can down the road, seemingly hoping for a series of immaculate economic recoveries.”

Yes, I understand that this - from Mohamed El-Erian, CEO of Pimco (an investment company) - is a mouthful.

But, it is a mouthful that needs to be understood, especially by gubernatorial hopefuls Lt. Governor Dubie and Senators Shumlin or Racine, other Vermont legislative candidates and Vermont’s various public stakeholders and business leaders.

What we are experiencing today is nothing short of the structural changes that transpired during the 1920s through 1940s; which were followed by decades of unprecedented prosperity and growth in the United States.  Today’s structural changes will not be followed by such good fortune.

The 1920s ushered in a booming American economy, followed by the stock market crash of 1929 and followed by a multi-year deflationary period and depression in the early 1930s.  After a seeming period of brief recovery, America fell into a “second depression,” in 1937-1938, which was followed by America’s entrance into World War II and, emerging from this conflict, America’s preeminence and predominance was unmatched, as it accounted for nearly 50% of the world’s output, owned 66% of the world’s gold, produced 80% of the world’s automobiles and had 50% of the world’s oil.  And talk of a demographer’s dream, 1946 witnessed 330 babies delivered every hour!  Let the good times roll.

My, how times have changed.

Similarly, the 1990’s ushered in a booming internet-driven economy, followed by the dot-com bubble and stock market crash of 2000.  This was followed by the recession of the early 2000s, the 9/11 terrorist attack and wars in Afghanistan and Iraq.  Our government’s policy-makers responded to these events with record low interest rates and poorly constructed housing and other policies that helped create yet another bubble, our debt bubble…and the rest is history, as we now find ourselves rummaging through the ruins of our own, self-inflicted destruction. Pogo, the character of the long-running comic strip, may have said it best:  “We have met the enemy and he is us.”

Simply put, we have lived beyond our means and the solution is to methodically manage an orderly reduction in our standard-of-living.  Without such action, a disorderly reduction is inevitable.

Facing us is a deflationary debt-depression, which may be the precursor to a kind of supra-inflation economic period, as tens-of-trillions of dollars of government, corporate and household debt and unfunded liabilities ravage our economy and threaten our way of life, standard of living and even our national security.  Simultaneously, emerging countries around the world are challenging our once dominant, near economic monopoly of post WWII.  China, next year, will become the leading manufacturer in the world, a distinction held by the U.S. for some 110 years.

Erskine Bowles, President Obama’s Co-Chairman of his “Fiscal Commission” recently said this: “We face the most predictable economic crisis in our history.  It is truly going to destroy the country from within…and it is basic arithmetic.”

Professor Carmen Reinhart, an economist at the University of Maryland and co-author of the book “This Time is Different: Eight Centuries of Financial Folly,” recently presented a paper at an annual policy symposium, organized by the Federal Reserve Bank of Kansas City.  Like Mr. El-Erian’s warning of a “multiyear process,” Dr. Reinhart warns of economic turmoil that may last another decade, if not longer.

These long-term structural problems require structural solutions:

For Vermont, this means policies to promote long-term planning; moving to a four year Governor’s term and biennial budget cycles.  It means policies to promote economic growth, and the enactment of pro-growth permit, tax, education and land-use reforms.  It means moving to a defined contribution pension plan, ending the transfer of market-risk from state and teacher employees, to the taxpayer.  Vermont’s current student/teacher ratio of 10:1 and student/adult ratio of 4.5:1 are both mispriced and unaffordable, moving to a 13:1 ratio would save some $100 million, as Vermont consolidates its smaller schools and districts.  State asset sales should also be on the table.

As Mr. Bowles noted, “It is basic arithmetic.”