Whodathunkit? Or...the other title I wanted for this post was Creative Destruction For You, But Not For Me (so many good post titles, so little time). If the blogosphere seemed a bit sleepy or disoriented recently, nothing like an outrageous BIS report to wake it up again! (Boo Hiss it's BIS - okay I promise I'll stop, I'm killing myself here) It's probably a good thing that there's too many links for me to realistically list, but I have to mention Simon Wren-Lewis. Lest anyone think that the economy can "dog paddle" into the indefinite future with a teensy cap on "everything as usual", good luck with that (WSJ are you listening?). Eventually, refusal to budge off of a status quo that now means significant unemployment, likely means that resistance to change turns into bad deflation, somewhere down the line. This is no time for all the economic players to sit at the table and simply pray that theirs is not the bad hand.
Without a doubt some of my readers must be confused by now, because on regular occasion I sing the praises of authors who have been most happily adapted (adopted?) into Austrian thought processes. Therefore, the word austerian is most helpful, because it gives me a chance to readily distinguish certain areas of discourse from Austrian writers who inspire me and who I believe to be imminently respectable. Austerian is also a great word because it's not so much meant for Internet Austrians (again, not quite the same as Austrian) who are but a small subset of this group, but actually indicative of people from many walks of life, moneyed and not-so-much so, who have inadvertently painted themselves into a corner by their own expectations of themselves and others around them.
The primary difference between this far flung group and others who wish to limit money printing is that austerians tend to see money primarily as representative of hard assets and assorted real estate rather than services, even though these areas of life generally play out in local economies as two sides of the same coin. Unfortunately, if services disappear in significant ways, the very ones who dissed said services tend to follow, in spite of what they felt or thought about them.
What about the normal and upbeat rationale one normally hears as to wealth creation: where does it go in times like this? Why the sudden slamming on the brakes - that is, dropping NGDP off a cliff in such a way that made the Great Recession inevitable? Indeed it doesn't make sense how central bankers could have convinced themselves that letting this happen was the right thing to do, and the fact that they did means the public is no longer so quick to trust them as before. If central bankers had believed in their previous methodology, why would negative expectations cause them to back off so quickly? How did they think that wouldn't send the wrong message to the world?
And - as for those who got "cold feet" about their own course of action - think how that runs counter to what so much free trade literature actually extolls. When we read about the progress of production efficiencies and technology in the twentieth century, there's not so many praises sung about the primary forms of wealth (building construction) we actually came to rely on in the present. And even though some really serious people decided to pull the "emergency brake", no one ever bothered to explain why, even though there were plenty of discussions as to who was really to blame. So when we hear how we need to "sit back" (a couple of decades, maybe) and wait for creative destruction to do its magic, what exactly are people referring to, and why isn't anyone actually starting the process now? For something that sounds so active and positive, there's a lot of passive resistance and defensiveness going on...and I for one will not be happy if "creative destruction" is just a copout phrase or excuse for war.
And even now, we know that many forms of new innovation, production efficiencies and free markets (in some respects anyway) finally helped to pull us out of the Great Depression. BUT...not before a lot of people were killed, and a tremendous amount of wealth was destroyed first, in far too many nations. No one was particularly interested in innovation for a couple of decades, it seemed, until a lot of potential economic players were knocked off the field, both literally and figuratively.
In other words, creative destruction seems to be great so long as the ones in power are not the ones having to deal with it. How would governments large and small pay for services, if it weren't for their citizens running like hamsters on the mortgage treadmills? Oh, it's easy to praise creative destruction from afar, especially when it involves wealth creation which doesn't threaten one's own particular piece of pie in the first place. In a sense, the present day output gap in NGDP represents a vivid crisis of imagination. Which perhaps would not be so bad, were it not for the fact that the output gap also represents a massive loss on the part of those who would have gained work and a decent life, from those forbidden wealth generation processes. The scary part is that a government which refuses to lift regulations against innovative construction, is a government that ultimately courts bad deflation destruction.
What's more, the central bankers knew all along that the crisis of imagination on the part of proud austerians was behind the problem, which is probably why the Economist had this oddball article heading the other day: "I'm a Central Banker, Get Me Out Of Here". The worst part? The central bankers finally - when it was too late - knew they were going to get the blame for bankrolling whatever the austerians wanted in the first place (mindless growth with practically zero innovation and technological gain), until everyone actually lost their nerve. A nominal targeting rule would have at least stopped the process before it went too far along and sucked up too much future income, but who wants a reasonable rule when it's not necessary?!
Fortunately, there is actually a simple way to express the lack of coordination which has led to the stalemate between central bankers, governments and citizens. While central bankers and citizens would happily blame one another till doomsday, the regulations of local economies are in fact the real culprit. The only reason it is not readily apparent that the outdated laws, regulations and zoning are the actual source of the problem is that no one in power has a single thing to gain by speaking out against a broken status quo. No wonder Buckminster Fuller must have seemed like a bit of a dingbat, to some.
A big part of what appears as business cycles is just the effort to put too many citizens into outdated forms of construction which are not well suited to their income, and thus, financial needs. Yet municipalities have been reluctant to update construction methodology for fear of losing construction jobs and the outsized tax base that became available for services. But the need for everyone to have income for that outdated housing only made the problem worse over time. Bad deflation can be overcome by giving construction over to innovation, and by creating more sustainable forms of services which do not need to rely on yesterday's representations of building and construction in order to happen. When that happens, a lot of finger pointing and wealth destruction will no longer be necessary.