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Envisioning the post-recession economy

April 07, 2009|MICHAEL HILTZIK

A nostrum we're constantly spoon-fed by pop psychologists advises getting through the bad times by thinking ahead to something better.

So in my search for a happy place in which to take refuge from the Great Recession of 2008-09, I've been pondering what the American economy will look like -- or should look like -- once we work through the current financial crisis and gear up for resumed economic growth.

This quest is based on a couple of immutable principles -- that is, things that have always been true in the past and therefore (fingers crossed) will be true in the future. The first is that all bad times come to an end, or, to cite King Solomon, "This too shall pass."

The second is that one can never count on getting out of a fix the same way one got into it. In other words, housing and easy money are unlikely to be the engines of growth in the Twenty-tens that they were in the Twenty-oughts.

That in itself may herald a healthier economy to come. If we've learned anything from the historic trajectory of the housing and mortgage collapse, it's that the preceding upturn had more froth in it than a vending-machine cappuccino -- it was bound to look more substantial than it was. Much the same was true of the dot-com boom of the late 1990s, which similarly ended with tears as the century turned.

What drives growth in the future is "more likely to be the little engine that could instead of the high-powered jet," Jerry Webman, chief economist at OppenheimerFunds Inc., told me.

Because high-powered jets flame out faster than chugging locomotives, he argues, a recovery based on brainpower and efficiency rather than high-velocity finance could be more solid and lasting than the last two.

That still leaves the question of what the driver of growth will be. Few objective experts I've talked to are willing to go out on a limb, because of another lesson that history teaches us: In economics, it's hard to know which horse will win a race until the race is almost over.

Looking back to the late 1800s, when the U.S. sustained a series of financial panics, the building of railroads and the exploitation of raw materials they carried were the keys to eventual recovery. The pioneering railroad builders of that era, however, almost all went bust -- leaving as the victor J.P. Morgan, who reorganized the wreckage into viable enterprises with himself in control. (In the same vein, the penniless former millionaires of the dot-com boom made their own unappreciated contribution to the development of today's indispensable Internet.)

The Great Depression yielded more than deposit insurance, Social Security and a modernized Federal Reserve, all of which have functioned to moderate the worst effects of the current downturn. It also bequeathed us a huge improvement in labor productivity and technological innovation.

Indeed, according to Alexander J. Field, an economics professor at Santa Clara University, the foundations of the postwar boom, including technical advances and capital investments in petrochemicals and power generation, as well as a road system designed for automobiles, had been built even before the Japanese attack on Pearl Harbor. Moreover, "the experience of the Depression forced labor and management to figure out how to get more out of the assets" of railroads and other important industries, which set them up for a profitable surge in productivity once the war ended.

That suggests that technological innovations gestating today could be the fuel of the next expansion. The most commonly mentioned candidates for the next boom industry are alternative fuels and other "green" applications. The expectation is that extricating ourselves from the fossil-fuel economy will enable us to deploy money and time more efficiently. "The half-trillion dollars a year we pay for imported oil is a terrible drag on the economy," says Fred Block, an expert in innovation at UC Davis.

Other potentially economy-altering developments may be invisible at the moment, whether they are taking place in pharmaceuticals, transportation, engineering or industries not yet on anyone's radar screen. The yields from research and development efforts are intangible and thus often go unnoticed in their early stages, says economist Charles R. Hulten of the University of Maryland.

But our tendency to see the manufacture of durable goods or consumer products as the only economic activities that matter may lead us to underestimate the value of the knowledge economy.

"Historically we're better at counting bricks and mortar," he says. "But even intangible innovation does have tangible manifestations." Advances in fuel technology, for example, will eventually show up in the family automobile.

One shouldn't overlook the effect that demographic and ethnic changes will exert on the economy, especially where they're welcomed, not resisted.

As my friend and former colleague James Flanigan writes in his new book, "Smile, Southern California, You're the Center of the Universe," this region -- the crossroads of Latin America and Asia -- has "opened up to economic opportunity, population growth and enormous energy from those two continents."

That may be the best reason for optimism. The flow of financial capital may be momentarily stifled by the dumb behavior of smart-aleck bankers, but the power of human capital never seems to ebb.


Michael Hiltzik's column appears in Business Mondays and Thursdays. Reach him at and read his previous columns at

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