One of the changes I mentioned yesterday is that we no longer live in a world that is dominated by finance and economics. With most of my blogs over the last month largely dominated by financial and economic issues, that statement may seem strange. That’s because the discussion up to now has been backward-looking—it has dealt with problems that were created in the past and now have to be resolved. Looking forward, finance and economics will not become less important, as we will be dealing with those problems for a long time, but less dominant as a decision framework.
Another way to look at this situation is to consider it not as a decline of finance, but as a resurgence of other factors. One of these factors is the role of government. Since Reagan, the job of the government has largely been to get out of the way. Government is the problem, went the cry, and deregulation was considered an absolute good. Much good was indeed done, but, over time, I’ve increasingly been thinking that perhaps the old regulated world had its advantages as well.
The primacy of economics and finance was based on a simple idea—that letting the markets decide was the best way to make macro-level decisions. Markets (so went the story) would automatically and quickly incorporate all relevant information and give us better decisions than bureaucrats were capable of. Markets were efficient and impartial. Markets were the future.
Much of that promise played out to everyone’s benefit, but 2008 proved that markets were not the entire answer either. Their shortcomings led to a global real estate and financial crisis, which governments had to step in and rescue them from. Governments and regulators are back in the game, and the consensus of the past 20 years is being rethought. Where we will end up, nobody knows, but it will be a more regulated world than it has been.
The other defining factor of the past 20 years or so has been the transcendently dominant position of the U.S. in the global system. No one else has come close. Our position has been eroding over that period, however, and the financial crisis brought that erosion inescapably to the world’s attention. The U.S. is no longer the hyperpower; we are still first, but among equals. Not the worst place to be, but not where we used to be, either.
Changes in the role of government and in the relative position of the U.S. make a new analytical framework necessary. One way to evaluate where the U.S. stands is to consider whether we are consumers or producers in various markets and to look at what our dependencies are. The results are actually pretty encouraging overall, although, of course, we have some serious issues to deal with.
I had a chance to do a presentation for the clients of two of our advisors last night, and I prepared some slides that describe my take on the points I describe above. You can view the presentation here.