What Have We Lost?

Recommending Roger Altman’s Foreign Affairs essay on the economic crisis, Steven Walt says “Altman draws the obvious but still under-appreciated conclusion that when a country loses trillions of dollars in wealth in a short period, is in the grip of a serious recession, and has dim prospects for a rapid recovery, then this will inevitably impose certain constraints on how much weight it can swing abroad.”

I think it’s important to draw, on a conceptual level, a distinction between the loss of trillions of dollars of wealthy and the serious recession. What happened wasn’t like Japan in World War II where we lost vast wealth because somebody blew it up and now we don’t have it anymore. Insofar as lost wealth is due to prices for things having been too-high before the crash, we never really had that wealth. And insofar as lost wealth is due to prices for some things now being too-low as a result of the atmosphere of panic, we still have what we have. These price collapses have real effects on individuals’ well-being, but they don’t imply anything about the country’s overall ability to do stuff.

What’s real are three things. One—the recession. We have lots of people now with the ability to do useful work and the desire to do useful work, but nobody will pay them to do anything. And we have lots of tools and machinery with the ability to do things that aren’t being used because there aren’t enough employed workers to use them all. We haven’t lost the capacity to do stuff, but we aren’t doing as much stuff. Two—the misallocation of resources. We imported tons and tons of capital over the course of the last expansion. But an awful lot of that capital didn’t wind up going to stuff that enhances our ability to produce goods and services in the future. Instead, at best it went to making it the case that people live in somewhat larger homes than they used to, and at worst it went to building homes that nobody wants to live in. This is a bigger deal than lost notional wealth—it’s a lost opportunity. Instead of an overhang of factories or broadband cables or railroad tracks that we could try to put to use, we have a supply overhang of square footage. Last—the skills mismatch. To get back to fully employing our resources we need to shift to a situation in which fewer people are building houses, fewer people are selling financial services, and fewer people are building cars and, instead, more people are doing other stuff. But all the people working in those industries have developed skills (“human capital”) that’s to some extent sector-specific and the tools and equipment involved also have some level of sector specificity. Switching from building strip malls to building bridges involve some loss of usefulness in terms of people’s skills. And switching from financial services into elsewhere in the economy may involve leaving a lot of experience behind.

But all that said, the point is that beyond the recession, all our losses were really losses we were already incurring before the crash—people were doing stuff that wasn’t as valuable as they thought it was at the time.