Growing Ourselves Out of a Recession

Jan. 16, 2009 — -- Economic recessions always have solutions. There are always proven prescriptions for recovery. The problem is that most of them are wrong, like a useless medicine that is credited for a patient's natural recovery; and those that are right are usually implemented with such single-minded attachment to theory that they prove far less potent than they should be.

I also think, like dying, economic crashes go through their own emotional stages. Thus, we almost always begin with Denial – the notion that whatever is going on is merely a cough, not a full-blown infection … which is why it usually takes us months to even accept that we are in an economic downturn.

Then, of course, some shocking event – a stock market crash, a major institution goes into financial meltdown – finally makes it undeniable that we have a mess on our hands. This leads to the next stage, Frenzy, where everybody runs around in a panic (hence the use of that word), blaming everyone and everything for screwing up, hoarding cash, firing employees, calling for the economic equivalent of War.

Interestingly, as society has become more sophisticated about economic cycles and the regularity of market crashes, this Frenzy stage has not only become more complex … but, ironically, even more frenzied than in the past. Where Americans in 1890 just looked around in disbelief, their descendents in 2009 harkened up images of breadlines, Wall Street apple sellers and Hoovervilles – what is being called "Depression Porn" -- to make the economic Boogie Man even more terrifying.

The next stage is Combat. Suitably frenzied and terrified, we now declare we are facing an emergency of historic, even unparalleled, proportions. It's no time to be timid, we declare, but rather to gird ourselves for war.

And with war comes war powers: abandoning most traditional economic and political restraints, we start throwing around vast sums (trillions, this time), empower the government with the right to interfere with the market, and reward key individuals – henceforth, "czars" -- with powers that would never be acceptable during economic "peacetime." Everybody blames "capitalism," and everyone agrees that capitalism has failed.

Phase four is Recovery. As with most biological diseases, the patient usually recovers at about the same rate with or without the medicine. Historically, the recovery from major downturns usually take about the same amount of time – unless the economic physicians screw things up and attenuate that recovery with their various monetary medicines and regulatory nostrums.

Thus, the U.S. economy during Great Depression, that enduring reference point for all things economically ugly, can be seen as a healthy patient with a few aches and pains (America in the 1920s), that would have probably stayed that way (the homeostasis of market capitalism) had it not been hit with the double whammy of self-destructive behavior (the stock market bubble created from widespread buying on margin) and infection by a deadly pathogen (Smoot-Hawley and trade protectionism).

Left alone (Hoover), the patient might have recovered quickly – or succumbed. Instead, the patient was given two courses of treatment.

The first (FDR's emergency procedures) appeared to help the patient's immune system and set it on a fairly long, but continuously upward, path to recovery. The second (the New Deal) was far more extensive and draconian, using a wide array of experimental drugs. The result was that the patient's full recovery – even with heart transplant (WWII) – took more than a decade.

Did I mention the fifth and final stage of recession? It's called Delusion: that's where, healthy again, we look back on the illness, its progress and treatment …and draw all of the wrong conclusions about treatment for the next time we get sick.

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So the real questions we should be asking ourselves right now as we contemplate our current economic predicament are: How bad is it? Should we do anything about it or let the economy cure itself? And if we do intervene, what does the past really teach us about treating it?

So let's start at the beginning. How bad is this current recession? It's pretty bad. You only need to look at the stock market and the unemployment rolls to see that. But is it of dangerous and historic proportions? Not yet.

In fact, unless you've been laid off or about to cash in your 401K, your gnawing fear of the current "crash" is probably far greater than its actual material reality. The stores seemed just about as crowded at Christmas; your income is likely to be just about the same as it was last year; everyday life seems just about the same.

There's even a tiny feeling out there, especially in technology enclaves of the country, that we could even start seeing some improvement in those economies by late spring. After all, Windows 7 is coming, the Google Android phone is proliferating, the Palm Pre is cool, it's time for another generation of chips … and who knows what Steve Jobs has up his sleeve?

That, of course, doesn't mean that things can't get a whole lot worse – especially if we've learned the wrong lessons and indulge in the wrong responses. Then we could throw ourselves into a bunch of hurt.

How did we get into this trouble? The standard explanation these days – or at least the one being promulgated by our elected officials, who have a good reason for doing so -- is that it was unbridled capitalism, unconstrained by regulation, that freed Wall Street and the banking industry to revert to their true greedy characters and run amok. The truth, I happened to believe (though you, dear reader, may disagree), was that this mess was actually the result of: 1. Government interference in the marketplace; and, 2. Political demagoguery – "A chicken in every pot, and an unqualified buyer in every house" … which goaded, when it didn't outright force, the banking industry to make increasingly risky deals until it all came crashing down.

If I'm right, and I suspect I am, then we are already learning the wrong lessons from this crash – and because of that, we are already implementing the wrong solutions.

Let's put that aside for a moment. What really matters is that to get out of this recession we need to create jobs. And that's going to be tough because not only will we lose several million more jobs before this is over, but we'll also be adding several million new workers to the economy, thanks to the Baby Boom Echo right now passing through college. That's going to be big deficit to make up.

Now, there are two ways to create jobs: either government does it or industry does it. Government "make work" jobs can be created more quickly, but they only transfer wealth, not create it. Moreover, research has found that this kind of job creation has little systemic impact in the economy (the "multiplier" effect). But, as the New Deal showed us, government jobs are good for rebuilding infrastructure and restoring hope.

By comparison, industry-created jobs have the benefit of both creating new wealth and creating still other jobs. But they take longer to develop and they are harder to target (but ultimately do a better job of filling real needs).

Unfortunately, and contrary to the common view, Big Business doesn't create jobs, it merely protects them. Almost all new jobs -- and thus all new wealth -- is created by small businesses and entrepreneurs. Unfortunately, this is the one group that has almost no influence in Washington.

On the contrary, as we've seen over the last few years, new and small businesses are the whipping boys of Washington; the target (or at least the victim) every new regulation, tax or other form of state control. And if that hasn't stopped them – entrepreneurs are a plucky group – there's also the fact that, in the words of marketing executive Tom Hayes, who helped engineer Silicon Valley's competitive turnaround in the 1990s, "our legal, regulatory, patent and tax structures are decades behind the curve."

In other words, we've taken the one proven effective mechanism for growing ourselves out of this recession … and, with obsolete regulatory agencies and years of misguided, intrusive government policies, we have effectively hobbled it. This means that we haven't taken the wrong medicine this time; we've poisoned ourselves in advance. That doesn't bode well for our economic future.

But we can still get out of this. With a little care and a flexible approach, we can still have the patient up and walking in no time.

What we need is a three-tiered approach. Short-term, it's time to break out the defibrillator paddles: The Obama administration needs to continue what the Bush adminstration began by shocking the economy of out its current cardiac arrest. And that may well mean the creation of a Virtual WPA or CCC. On the other hand, it doesn't have to mean a bailout to every industry that's whimpering right now and begging for a hand-out – frankly, some badly-run companies just need killing. But if we are going to create government make-work jobs, we need to recognize their limitations -- and put limitations on their duration. I'd say two years, half a business cycle, then the Feds need to get out of the jobs business.

That's short term. Middle term, we need to unleash the unmatched power of small and new enterprises. President Obama should start by convening a Summit on Small Business and Entrepreneurship in Washington. We've haven't had one on the national level since the first Reagan term, when the hot topic was the impact of the fax machine. We are long overdue. Gov. Schwarzenegger called just such a conference in California a couple months ago – and it's already having an impact in Sacramento.

But a summit is nothing if it doesn't have teeth. So, coming out of the summit should be a bipartisan task force to make binding recommendations regarding regulations, paperwork, taxation and all of the burdens and impediments placed upon new and small businesses.

This is the opinion of the columnist and in no way reflects the opinion of ABC News.

Michael S. Malone is one of the nation's best-known technology writers. He has covered Silicon Valley and high-tech for more than 25 years, beginning with the San Jose Mercury News as the nation's first daily high-tech reporter. His articles and editorials have appeared in such publications as The Wall Street Journal, The Economist and Fortune, and for two years he was a columnist for The New York Times. He was editor of Forbes ASAP, the world's largest-circulation business-tech magazine, at the height of the dot-com boom. Malone is the author or co-author of a dozen books, notably the best-selling "Virtual Corporation." Malone has also hosted three public television interview series, and most recently co-produced the celebrated PBS miniseries on social entrepreneurs, "The New Heroes." He has been the ABCNews.com "Silicon Insider" columnist since 2000.