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Saturday, June 27, 2009

Do Something. Now.

I’ve touched before on the issue of what I think, ultimately, will propel us out of The Great Recession. But I’d like to expand upon it a little more now. On the one hand I agree with those economists who have acknowledged that such measures as bank bailouts and the stimulus package have been essential to preventing a crisis from becoming a calamity, as well as those who have asserted that there is already evidence that these measures have succeeded in slowing the downturn and bringing us close to a bottom -- if, in fact, we aren’t there already.

But, on the other hand, I also believe that, in the final analysis, it isn’t really going to matter all that much what government does. Government interventions may jump-start the beginning of the next up cycle, but they won’t be the primary factor or “first cause.”

All this is based on the assumption that we will remain, fundamentally, a free country with an economic system based on reasonably free enterprise. I think the likelihood is extremely high that this assumption will hold true, in spite of the efforts of some conservative commentators to incite McCarthy-esque, anti-socialist paranoia. Notwithstanding what Rush Limbaugh might say, we’re not about to turn into the next Cuba. The checks and balances built into our system are working -- we can see the congress and the administration compromising when they find the may have strayed too far beyond the public consensus.

Taxes may increase, as may regulations. And this may indeed alter the “topography,” if you will, of the business playing field. But it won’t block access to the field. As long as we remain a free people, and as long as our spirits of ambition, self-reliance, enterprise, ingenuity, and inventiveness do not for some reason become broken or stifled, we will adjust to the new topography. We’re homo sapiens, after all, and Americans. So we have the ability to adapt to a changing environment.

Business Will Adapt to the Topography of the New Playing Field

In the same way that human beings likely emerged as a species in a hot tropical environment but successfully adapted to be able to succeed in diverse settings ranging from the Sahara Desert to Iceland, we Americans should be able to adapt to and prosper in whatever environment of reasonable taxation and regulation we end up with -- through the same inventiveness, ambition, and work ethic that have served us well thus far.

This won’t be the first time our economy has experienced basic structural changes that have altered the topography of the playing field. Changes occur all the time, and businesses and the individuals who lead and work in them will adjust to the new environment, as they have in the past.

Example One: The Two-Income Household

Examples? Well, in the years following World War II until, perhaps, the late 1970s, it was very possible for an average Joe to get an average job with a compensation level that would support a family reasonably well without the need for his wife to work. But as women increasingly entered the labor force the dynamics of the labor market changed.

In the early phases of the two-income, middle-class household phenomenon, the wife’s return to work was a way to substantially increase a family’s standard of living. But as the number of two-income families increased, the labor pool grew faster than the rate of available jobs, and the market moved gradually toward an equilibrium at which the average Joe or Jane could only earn about half of what it takes to sustain a middle-class lifestyle.

I would argue that, today, perhaps with a few exceptions in certain industries and occupations, a middle-class worker needs to rise to at least middle-management level to earn compensation sufficient to support a family as the sole wage earner. So for households in which neither spouse has yet achieved that rank, the second income is not an enhancement to the standard of living but a virtual necessity to enter the middle class.

This might not be the most positive example, but it shows how business adapt when the playing field changes. The labor supply expanded, so the true cost of labor went down -- simple supply and demand.

Example Two: The Impact of Taxes

I think taxation has a similar effect. The fact that we pay income taxes is factored into the hidden “formula” that sets wage levels. Do you really think that, if the federal income tax were eliminated tomorrow, your employer would continue paying you, indefinitely, as if you were still paying taxes?

I don’t think so. While you might experience a short-term windfall, eliminating taxes would simply create a basic structural change in the cost of labor, and market forces would adjust your real compensation gradually to return you to about the same level of net purchasing power, through such means as reduced annual increases and reduced ability to negotiate higher salaries for in-house promotions or moves to other employers.

For businesses to keep nominal compensation the same if employees were no longer paying taxes would be patently irrational. This is why I believe that, in much of our political debate, taxes are little more than a rhetorical bogeyman.

The same would hold for increased taxes on businesses or on wealthy business owners, who, again, would eventually pass on their increased tax costs in the form of higher prices or, yes, even job cuts. In reaction to both of these responses to tax increases, the market would return to a new equilibrium. Increased prices, for example, would place more upward pressure on wages, while job cuts would provide other businesses with the opportunity to benefit from the talents of displaced workers.

Indeed, if market forces are as strong as those on the unconditional laissez-faire side of the equation insist that they are, one might wonder what the fuss over taxation is really all about. If the invisible hand always prevails, the system should be able to adjust to a new equilibrium no matter what government does, short of extremely draconian, fascistic restrictions on business activity or extremely high, confiscatory tax levels -- neither of which is likely in this country, at least under current conditions.

The Response to Crisis Generates Energy -- And Value

The illustrations I’ve offered here are rather lengthy, but the underlying principle of the ability of business to adapt brings me back to my basic premise. The current crisis has already changed the economic playing field in this country. And the playing field would have changed with our without the significant government intervention we have seen. Pain has been inflicted upon many in the process, both in terms of businesses and individuals.

But this pain, these challenges, can also be looked at as an infusion of energy, like an injection of strong medicine that initially causes pain to a patient from the needle prick, and perhaps some queasiness as the drug enters the bloodstream. Nevertheless, the medicine will ultimately do its good work. And those who have suffered setbacks may find themselves more motivated than ever to take actions that will improve their situation and improve their ability to withstand a future crisis.

It’s a cliché, but I’ll say it anyway: a time of crisis is a time of opportunity for those willing to say “No!” to the temptation to sit around and stew, for those willing to, instead, get off their butts and do something. Maybe it’s a career change. Maybe it’s starting a new business. Maybe it’s making painful decisions about whether to unload the McMansion at a substantially-reduced, post-bubble price and downsize to a more modest -- and perhaps more realistic and sustainable -- lifestyle.

But what all of these responses to crisis have in common is that they are all actions. And we know from physics that every action creates an equal and opposite reaction. These acts of “doing something” will create ripples of energy in the economy, and this energy will eventually show up somewhere as added value. One person’s “fire-sale” on their McMansion becomes someone else’s bargain investment that will eventually produce a return in terms of an enhanced standard of living, rental income, or a capital gain after the market turns around. One company’s layoff of a mid-level manager may mark the birth of a new entrepreneurial venture, successful freelance career, or unexpected and positively life-altering occupational change.

In the aggregate, these ripples of energy, created in the course of one “decision to do something” at a time, will have a tremendous impact. It is ultimately this energy, rather than stimulus packages or centrally planned systemic overhauls, that will drive the next up cycle.

So do something. Now. Don’t sit around and mope about multi-trillion dollar deficits or whether healthcare reform will lead to higher taxes and unfunded liabilities. Don’t focus so much on what the dueling pundits are saying. Instead, do some creative thinking about what next move might work best for you, and give it your best effort.

It won’t be easy, and there are no guarantees of immediate success. There are, after all, and however sadly, no guarantees for any of us in this journey of life. But at a minimum the effort will generate “psychic income,” as a learning experience that will leave you stronger and better prepared for whatever it is that life has in store for you next. And although it might take a while, with sustained effort you have a good chance of ending up in a place you’ll like better than where you were before. Sphere: Related Content

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