Yesterday I was going on about how we need to do three things to really get the economy moving in the future. The fundamental issues that face the economy can be traced to one truly basic issue and that is whether the amount of growth in the country is growing faster than the population. Now, consider the amount of wealth the "pie". If the pie is effectively shrinking, then there will be less available for each of us. That is not to say that the pie is, or even should be divided equally, but if the pie is shrinking someone has to suffer and in general, the average amount for each of us goes down.
There is a simple equation that contains extremely complex components to determine this. Effectively it is the amount of wealth created minus the amount of wealth consumed. Wealth creation and wealth consumption are not easily defined however. One gross approximation might be to compare the growth in GDP to the population growth. There are many problems with that measurement, not the least of which is that GDP growth is in dollars and you would probably have to look at real GDP (GDP after inflation) at the very least.
However, to improve the ratio, you don't necessarily have to define everything. There is one area where we know we are consuming much more wealth than we create domestically and that is related to energy. The amount of energy we consume from foreign sources, far exceeds any energy we export. As long as this continues, it either has to be offset in other areas or it will decrease the net wealth of the nation. So, if we simply fix that issue, it will have a positive impact on the formula. It may or may not be enough to change the calculation from a negative result to a positive result, but improvement is improvement.
Another clear indicator is when we export jobs. When we decide it is more economical to employ a foreign worker to provide domestic goods and services, the amount spent on those services becomes a negative. Now in a world where trade flows fairly evenly, this can be a neutral component, but clearly for quite a few years now, domestic employment has been transferred to other countries. This may be the right decision for an individual company and it simply indicates that we have created an imbalance via our tax system that needs to be corrected. Now, ultimately, in a free market, we will see the currency adjust and fix this problem eventually, however we can certainly do other things to improve the situation, such as review our tax and health care situations.
Of course, housing is pretty much a domestic issue and the deflation that took place in housing has many causes. One scenario would suggest that it was a way for the financial system to adjust perceived wealth in the economy to reflect the fact that it is decreasing. Unfortunately, when this happens it is similar to the way an earthquake happens, subtle pressure build up over time but are unable to break through resistance until they get to a point where they effectively release years of pent up energy. The only real answer to housing is to reverse the wealth formula so that assets in this country start to appreciate and there is more wealth available. In the short term, principal modifications with the Government using the stimulus money to help mortgage holders instead of banks, could provide a base for housing from which it could grow steadily. However, if we don't fix the energy and tax issues, it will in the long term be ineffective.
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