Lessons Learned

I am appreciative of two important lessons I learned with the help of President Barack Obama: 1. Capitalism is pretty resilient 2. The economy is a living, breathing thing that doesn't always react as you would expect. As an example, I would argue that carrying a mind melting $1.4 trillion debt (for this year alone) is incredibly debilitating for the country. However, as it turns out, it isn't as immediately destructive as I thought it would be. What perplexes me is that our economy, and the world economy in general, hasn't reacted more negatively to our deficit. I suppose it shouldn't be that surprising though, considering the reaction I was expecting was pretty much a total meltdown. But the situation is pretty dire. Imagine you make $100,000 per year. Last year you spent every cent of it and added $50,000 in various debt. Your creditors would quickly be at your door and would move to limit your future line of credit. So, to loosen the purse strings you set up a meeting to present your budget for the next 5 years. In it, you list how you plan to get out from under your debt burden by continuing to spend $150,000 every year, effectively adding $50,000 in debt per year. Obviously at this point you wouldn't be surprised if the bank laughed you out of the building and began repossessing all your assets. And yet this is what the U.S. is currently getting away with. At the rate we're borrowing money, why isn't our economy affected more negatively? Considering how interconnected the world economy is nowadays, the failure of the American economy would be devastating to the wold economy. Even our creditors are afraid to cut our line of credit, for to do so would be to cripple their own economy. Our position as the big kid on the block allows us to throw our weight around. When the economic crisis hit at the end of 2008 our government said we needed to bail out the banks because they were 'too big to fail'. Perhaps that is the best analogy for the U.S. economy as well. It continues to stand even against the most amazing odds. Initially I believed the repercussions for our extravagant spending would come much sooner. While I wouldn't ever suggest that the Stimulus Package has helped the unemployment rate, I also cannot argue with the fact that the unemployment rate has been dropping, currently at about 8.8% (depending on your source). So what gives? I believe there are two things at work. Firstly, capitalism is a pretty robust economic system. Because it is based on human ingenuity, and because humans do not enjoy starving to death, that ingenuity will drive economic growth even when opposed by government excess. Obviously those conditions can't hold forever. But as long as there is some type of promise for the future entrepreneurs will continue to work and innovate. Secondly, as alluded to earlier, it helps that the U.S. is the largest economy on the planet. We are interlinked with the Chinese so closely that even though they continue to be our largest creditor, our line of credit with them hasn't been shut off....yet. If the U.S. were Greece, it would be more difficult (and have more dire consequences) to run a continued massive deficit. This bears out in Greece's recent economic instability resulting from their unsustainable economic policies. Still, even the world's largest economic beast cannot do this forever. While I'm learning new things, I don't believe I was entirely incorrect. I expected the President's policies to have had greater negative impact in the short term. While that hasn't born out, it won't always be this way. In fact, signs already indicate life might get more difficult for the U.S. in the future. More and more countries are moving away from the dollar. The ECB (European Central Bank) has recently raised their interest rates instead of waiting for the U.S. Federal Reserve to make that move first. That is something they haven't ever done. China has recently hinted that they aren't ok with continuing to loan the U.S. money, especially with no hope that the U.S. will get our deficit under control and actually repay the loans. So my lessons are thus: in the short term capitalism can overcome even some of the most ridiculous economic decisions. With capitalism, people will always strive to innovate, and that is what drives the economy. Also, any economy has so many moving parts that while it is tempting to believe in a direct cause & effect relationship (a raise in taxes will always and immediately result in lower employment), that's not always the case. Common sense would lead you to believe that running a massive debt year in and year out would, at the least, cause extreme rises in the interest rate. However political pressure (a bad economy) coupled with the 'too big to fail' mentality can keep them low when they probably shouldn't be. While general principles can help guide us in the long term, short term behavior can be difficult to predict. What this means is that it takes longer for people to recognize bad politicians. They can hide the poor results of their decisions and still get re-elected. I am genuinely thankful that President Obama has provided the unique circumstances necessary for me to learn what I have the last two years. The major benefit to knowing this is it makes compromise easier. If you know that it won't always destroy the economy to raise taxes, for example, then why not make that compromise for the benefit of healthy debate? Seems like it'd be worth knowing this if you were serving in government.