More on the Methadone Economy

April 13th, 2009 by Al Lewis (alewis)

For years Americans spent most of their income largely on the assumption that their increasing home values provided wealth.  The entire economy, from retailers to restaurants, builders to banks, expanded to capture this spending.   Sustaining the increase in home values which generated this apparent wealth required the reduction of interest rates and the relaxation of credit standards, and vice-versa.   As a country, we quickly became addicted to the “economic heroin” of ever-rising home values.

When the economic heroin supply dried up, the government had two choices.  One choice was to go “cold turkey” and plunge the economy into Depression.  The other was to partially replace the economic heroin with the stimulus package, to ease the withdrawal symptoms, artificially keeping our consumption levels well above what a cold-turkey policy would permit.  Recognizing the consequences of economic cold turkey, the government of course chose this option.

Welcome to the Methadone Economy.

While better than the cold-turkey alternative, the Methadone Economy will lead to recovery only if it recognized as such and managed accordingly.   First, we must recognize that the recent upticks in consumer spending, manufacturing and the stock market are due not to any improvement in health of the economy, but rather to the substitution of methadone in the form of stimulus for heroin in the form of a housing bubble.  It represents no true wealth creation.  How can we be sure?  Because no sector of the economy not directly benefitting from the stimulus is growing fast enough to increase employment.

Second, we must recognize that the Methadone Economy itself is addictive.  Getting “clean” altogether requires yet another “intervention” beyond the stimulus package.   Otherwise, we will continue to delude ourselves that the bottom is in sight and that a turnaround to sustained growth will take place on its own.

History predicts the opposite.  Looking back 100 years, sustained growth in the economy has come only from innovation, in the form of entirely new business sectors.   Within the most recent generation, those sectors have been computer technology, the internet and medical technology.  Those sectors are maturing.  There is no reason to think they will suddenly “take off” again and bring the rest of the economy with them, while it is a sure bet that other, older, sectors will continue to falter acheter levitra.  To wean ourselves off the Methadone Economy and generate real growth and wealth once again, the next intervention must create an entirely new sector once again.

One seemingly sure bet for such a sector is renewable energy.  Yet even with its own generous taxpayer support, this sector will never achieve its potential as an economic growth engine for the simple reason that it is competing against fossil fuels, easily the country’s most subsidized commodity.  Fossil fuel subsidies encompass not just direct oil drilling tax credits, but also a range of hidden subsidies.  For instance, the cost of defending our oil supply lines is financed out of general revenues, rather than a user fee on gasoline.  Likewise, the cost of maintaining city streets is financed from property taxes, rather than any tax related to driving on them.  And, of course, carbon dioxide emissions are not yet captured in the price of fossil fuels. 

The nonpartisan International Center for Technology Assessment has calculated that these subsidies dwarf the current price of gasoline at the pump.  Yet there is no federal initiative to correct this massive mispricing, and right here in Massachusetts, lawmakers are balking at raising the price by only nineteen cents, to address a clear revenue shortfall.

This state and federal shortsightedness will prolong the recession and stifle the recovery.  The United States grows mostly through innovation.   Yet rather than intervene to create a level playing field to allow the “infant industry” of renewable energy to innovate and compete fairly, our policymakers are fighting hard to do exactly the opposite — subsidize its legacy competitor.  This is exactly the kind of attitude which will prevent the Methadone Economy from segueing into a clean economy in both figurative and literal senses of the word, and keep us dependent on stimulus packages for years to come.

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16 Responses to “More on the Methadone Economy”

  1. harvardeconomist Says:

    great name — that’s EXACTLY what it is.

  2. alewis Says:

    we’ve simply replaced the heroin of hte housing bubble with the methadone of the stimulus.

    No doubt a better idea than going cold turkey but we are still addicted and far from “clean.” The stock market seems to think we’re getting clean.

  3. thinkoobfan Says:

    as soon as I saw this I googled it. I couldn’t believe no one had come up with it first. It totally fits it, and your cautions about its addictive potential make a lot of sense

  4. bob Says:

    jsut saw this on Sphere.com — a perfect metaphor but needs to be thought of that way

  5. deb Says:

    how can you get this metaphor into the White House so thay they can understand it and get other people to understand it

  6. doodler Says:

    I was thinking that people who think the economy is going to recover are on drugs but this is more accurate-the economy itself is on drugs

  7. nobama Says:

    watch–he’ll keep us on Methadone and grow the government

  8. bceconomist Says:

    if your postings ever got out, meaning if anyone other than the same people ever read them, the stock market could take a tumble.

  9. economistintraining Says:

    scary but logcial. People have less money and they are spending less of it so it is hard to imagine anything but more stimulus to keep the economy afloat

  10. mikekearing Says:

    what you said here just happened yesterday. Yesterday was the day the rest of the world figured this out. what are we going to do about it?

  11. jacqueline Says:

    the cap and trade should help promote green technology but I don’t see which industry is going to lead us out of the methadone economy

  12. heroinjunkie Says:

    \This is where this term originated? I thought I made it up and then I went to google. This could catch on

  13. next Says:

    this is the perfect excuse to change the whole economy and go green

  14. boobama Says:

    He lacks the cohones to go green if it means raising taxes on carbon

  15. drzee2003 Says:

    Here’s what I think. When Greenspan used the term “irrational exuberance”, he was actually capturing the essence of what was going on. Most behavioral economics have everything to do with the heart and often very little to do with rational thinking. If we were rational about money, there would be no bubbles, no Ponzis, no Madoffs, no bankruptcy, no golden parachutes,, no yearning for Louis Vuitton, Rolex, yada yada yada. No one would sign up for a mortgage they could never pay back, or pay someone more money than the GDP of Lithuania. No one would think its a good idea to plunder our healthcare dollars to do occupational therapy with the terminally ill, or mechanically keep someone alive, who in reality (rationally) ain’t.

    People will more readily spend quarters than break a five dollar bill. This is not based on anything reasoned or rational, but because there is an illusion that we are spending less. People who save compulsively do so out of an irrational fear. People who spend compulsively do so out of a different kind of irrational thinking.

    This is why we need Heroin and end up in a methadone economy. Our irrational thinking gets us into trouble we would never experience if we did all our thinking with our head. Unfortunately it is our human condition that keeps getting us into trouble, individually and collectively.

    And I think your blog blares this fact, outlines it in ways people can understand. It’s not so much thinking outside the box as it is thinking inside the cranium. You have found a
    way to appeal to people at a time when thinking outside the cranium has been disastrous.

  16. ANOTHER ROUND OF STIMULUS? PROOF THAT WE ARE IN A “METHADONE ECONOMY” | ThinkOOB Says:

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