Why Going 'Back To Normal' Is No Longer An Option for the American Economy -- And Where We're Headed Now

Former IMF chief economist Joseph Stiglitz has a message for everybody who's sitting around waiting for the economy to "get back to normal."

Stop waiting. ‘Cause that train’s gone, and it ain’t coming back. And the sooner we accept that “normal,” as post WWII America knew and loved it, will not be an option in this century, the sooner we’ll get ourselves moving forward on the path toward a new kind of prosperity. The only real question now is: What future awaits us on the other side of the coming shift?

In a don't-miss article in this month’s Vanity Fair, Stiglitz argues that our current economic woes are the result of a deep structural shift in the economy — a once-in-a-lifetime phase change that happens whenever the foundations of an old economic order are disrupted, and a new basis of wealth creation comes forward to take its place. The last time this happened was in the 1920s and 1930s, when a US economy that was built on farm output became the victim of its own success. Advances in farming led to a food glut. As food prices plummeted, farmers had less money to spend. This, in turn, depressed manufacturing and led to job losses in the cities, too. Land values in both places declined, impoverishing families and trapping them in place. 

We remember this as the Great Depression. It lingered until the government stepped in — largely through the war effort — with unprecedented education, housing, transportation, and research investments that created new pathways for all those surplus farmers to come in off the farm, for the factory hands to get back to work, and for both groups to move into the modern industrial middle-class.

Stiglitz thinks that we’re going through much the same kind of process again now, as the postwar manufacturing-based economy that saved us 80 years ago moves offshore, leaving our manufacturing workforce just as surplus and idle as those 1920s farmers were. In his view, the current phase shift is taking us away from industry-as-we’ve-known-it, and on into an economy that will have us relying more and more on many different kinds of knowledge work. (This isn't a new thesis; Daniel Bell was writing about it back in 1973.) But Stiglitz goes on to point out that because people are misunderstanding the moment, we're investing in the wrong things.

Austerity and debt reduction will get us nowhere, in this view. In particular: it won't change the fact that we have too many manufacturing workers and too few information workers. Stiglitz argues forcefully that this gap is likely to remain open until our governments make a long-term commitment to do what they did in the 1940s -- that is, fund the kind of aggressive education, research, and infrastructure investments that will finally get us fully transitioned to the new phase. The current economic crisis is doomed to last exactly as long as we delay put off building that necessary to the new information economy. When we come out the other side, there will still be farmers and manufacturers — but even they will be leveraging the power of the Internet to create new wealth. Everybody will. 

But Stiglitz is far from the only theorist who’s trying to look beyond the phase change, and figure out what new form wealth might take when we get to the far side of it.

Another one is Thomas Homer-Dixon, a Canadian economist who wrote The Upside of Down. Homer-Dixon marshals evidence that all great empires rise and fall by controlling the dominant energy supply of their age. The Romans used roads and aqueducts to harness solar energy (in the form of food) from around the Mediterranean basin, and used that surplus to fund the most complex society of its time. The Dutch empire rose on its superior ability to master wind technologies — the windmill and the ship — to extend its land holdings, run early manufacturing industries, and extend its trading reach around the globe. The British empire rose on coal-powered steam engines, which gave it more productive industries, railroads, electrical generators, and faster ships. The US eclipsed the Brits due to its vast wealth in oil — a far more concentrated and fungible fuel — and inventions from cars and planes to plastics and fertilizers that allowed it to make the most of its advantages. And the Chinese are now making huge investments in renewable energy and safer, more efficient second-generation nuclear power, which they can use to fuel their ascent to global primacy.