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An economic accident waiting to happen

Jack Balshaw 1/22/2003


In aviation accidents the finding of cause is often that a series of conditions, taken together, caused an accident, that wouldn't have happened if even one of the conditions hadn't been present. Some combination of equipment failure, pilot error and weather combine to create a situation that can't be anticipated or mitigated. I'm wondering if such things happen in global and national economics.

Our current national economic slowdown has been kept from becoming serious by the consumer's continued willingness to spend money for consumer goods. It's been mentioned that two thirds of this country's economic activity is related to such consumer spending. But will it, can it, keep up?

Much of the consumer spending was the result of the stock market's growth in the nineties. That's gone away. Another big chunk of the consumer's money came from using housing equity to supplement normal income. This allowed consumers to continue spending even when income from stocks and employment were reduced. But the housing "bubble" may be collapsing and this could put an end to that source of money.

For the past two years there has been a loss of jobs every quarter. This loss hasn't been great each quarter. But it has been continuous and is becoming, cumulatively, a very large number. The recent reporting of people being out of work for so long their unemployment benefits have run out is a further indication that jobs are getting harder to find.

Business spending accounts for the other third of the national economy. That spending has been severely reduced because increased production capacity created during the booming nineties has resulted in businesses not needing to spend money. This has left those businesses that provide equipment and services that help boost production, without work for their employees.

As those employees are laid off because of lack of orders, they're no longer consumers. This results in less consumer spending, which results in other businesses further reducing their production and number of employees. At some point it becomes a downward spiral.

A recent book called this the "tipping point". This is the point where the magnitude, the number of things happening causes other unexpected things to happen. This might be the point analogous to the aviation accident situation.

Tie this all together with the costs resulting from our over reaction to the 9/11 incident, the aviation industry's continuing meltdown, the return of national deficits (possibly resulting in an increase in interest rates), pursuit of terrorists, the anti Iraq campaign, North Korea's fling with nuclear weapons, riots against our presence in South Korea, our major ally Britain becoming less supportive, etc., etc., and you have the makings of an unanticipated economic disaster.

We've become so used to things going the way they're supposed to go that we no longer build a margin of error into our lives or businesses. Thus, when things do go wrong, the effect is much more serious. It would be comforting if we could feel that someone, somewhere in government was preparing for the unintended consequences of a series of unfortunate events coming together to cause havoc with our economy. Sadly, I don't have much confidence that anyone is paying attention.

The onset of severe economic problems in the past, ie. Japan, Indonesia, Mexico, South America, caught the world's economic experts unaware. They seem to focus their talents on understanding the financial relationships within the economic models. When politics, greed or warfare upset these models, economists are often blindsided by the unexpected results.

Perhaps that's the way it will always be. If the experts (in any field) understood their specialty, they would be able to prevent problems from occurring. That doesn't seem to be the way things work. Whatever happens will be a surprise to all of us.


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