Features

The idea: a virtual roundtable on the economy. No holds barred. We invited UNH professors from every discipline to participate: their responses appear below.

—The Editor

Devotion to the Catholic religion was the most powerful social influence of Spanish 1492. King Fernando and Queen Isabel, designated the "Catholic Kings" by papal decree, had taken up the quest for a Christian Spain and were determined to spread ("enforce" may be a better description) Christianity throughout the world. With the king and queen as driving forces and active participants, this pivotal year saw Christian Spain finally conquer the Moors and capture the ultimate prize, Granada, the last great bastion of Moorish Spain, and acquire its crowning jewel, the Alhambra Palace. Military victory was sweet, but it had come with an expensive price tag and saddled the kingdom with enormous debt. Times were tough, but so committed were the Catholic Kings to their cause that, among other drastic measures, Ferdinand cut silver chalices and trays into pieces while Isabella pawned off the crown jewels in an effort to pay soldiers' wages and cover expenses. Despite these troubled economic times, with increased vigor taken from the Granada victory, the Reconquest rolled forward. In less than 100 days, all Jews refusing to be baptized as Christians were expulsed from the country. This, despite the fact that many Jews held key positions in the kingdom (Fernando himself is believed to be a quarter Jewish), and it was precisely the Jewish middle and working class that provided for most of the country's active commerce. Nebrija's new Spanish grammar was published this same year, a key instrument of a rising and expanding empire. And Isabel, after previous rejecting Christopher Columbus's previous pleas, finally consented to support his expeditions of a new route to the Orient. Whether her decision was based on conquest or for economic reasons, it is hard to tell, but the decision was made. Some surmise that she saw this as a way to take Christianity to more souls, and a new route to the east might even allow her forces to catch the Muslims by surprise and take possession of the Holy Land. Others argue that Isabel was motivated by the idea that faster and safer travel to the east could help solve the country's economic woes as they would be able to more efficiently procure valuable spices. At the time even simple pepper could garner some forty times its purchase price back on the Peninsula.

Discovering a new world to the west may have been an accident, but history has borne out that it has been a fortunate one, although perhaps, not necessarily for Spain. In retrospect it appears that growth was too quick and power and responsibility too great for this fledgling nation to control. This was a nation built on the conquering new territories and dividing the spoils, rather than on industry and enterprise. The pattern for ultimate demise, however, was already in place. Into the reign of Carlos V and his son Felipe II, the throne maintained its commitment to crusading and conquering, and the funding of constant wars and conflicts simply proved too costly. No workable government plan was ever instituted to incorporate the newly acquired riches of gold and silver which would flood into Spain for two centuries, despite the fact that over 80% of the world's gold and silver production for this period came from the Americas. Instead, these new riches were used to pay off debts, build cathedrals, monasteries, churches, and palaces, and squandered on various royal whims and enterprises. Individual success for the interested Spaniard was still primarily derived through service in the church, military, or to the royal family. Yet the clergy was unproductive economically, the military was stretched beyond its effectiveness in its efforts to conquering of the Americas and maintaining order and control domestically. Attitudes of the "pure blood" Spaniard didn't help. It was beneath the dignity of the Spanish gentleman of the time to be concerned about making money. Wealth and station were simply things that you were born into. If you had it, you had it. If you didn't, you pretended that you did. It was your entitlement. So in need of cash was Felipe II's kingdom that he sold titles of nobility like lottery tickets. There was no virtue in honest industry and work was seen as punishment or undesirable endeavors of "lesser" persons, such as the Jews or the Moors. Heavy taxes could not cover costs since most of nobility was free from taxation. Even successful merchants, unwilling to bear the burden alone, gave up on their businesses and joined the idle noble class. Investment was non-existent due to market instability. Trade was not balanced as exports were few and imports were great. Control of most economic activity fell to foreigners, they not being above the hard work, but there were simply not enough human resources, skilled enough or willing enough, to maintain a productive and workable economy.

George Santayana remarked, "Those who cannot remember the past are condemned to repeat it." Spain, for centuries, could not learn and was destined to leave its glory days behind. As I have been following our own current economic situation both at home and abroad, I can't help but see several parallels and lessons to be learned. I wonder: will we learn in time?

The economic crisis is deep and hardship is widespread, but the nearly 8 million American families who live in poverty have really been hurt by the events of the last year. Even when the economy seemed healthy to middle class Americans, poor families were struggling to make ends meet. Nearly a fifth of American children were poor in 2007. Single parent families are especially vulnerable, of course, with nearly 30 percent of single mom families struggling in poverty. Will the worst economic downturn since the Great Depression move us to create social policy that supports families?

The fundamental framework for America's current system of social provision was developed during the Depression of the 1930s, three decades after Britain and Europe developed their own social policy to protect industrial workers and support the needy. As Harvard professor Theda Skocpol and her colleagues have pointed out, during this "big bang" of U.S. social policy development in the 1930s we put in place a bi-furcated system, with one set of policies and programs to provide social insurance such as contributory old age insurance, later called Social Security, and unemployment insurance for workers (which were seen as respectable, earned programs). Another set of policies provided a safety net, or welfare, for the needy, mostly widows and other women and children, who were without workers and dependent on the government. Unlike Britain and Europe, we failed to integrate social policy with macroeconomic management and labor market policy, and we failed to put national health insurance or family allowances in place. We tinkered with our policies in the 1960s and 70s, adding Medicaid and Medicare, food stamps, and other programs, but still rejected efforts to install universal health insurance and any sort of family allowance. By the 1960s, the number of female-headed families relying on the Depression era public assistance program, Aid to Families with Dependent Children, had grown tremendously, and in the 1990s we replaced the program with a new one, Temporary Assistance to Needy Families, that required mothers to work and offered assistance only for a limited period. Over time, Americans have come to take the policies for workers for granted, and have questioned the safety net. Until recently we had lost sight of the need for policies that offer a hand up, focusing instead on building responsibility and reducing dependency.

This bi-furcated system met the needs of industrial workers whose employers provided health and pensions and contributed to their social insurance. The post World War II era saw gains for families across the board, and in an era where unions had won good pay and competition from other countries was limited, the blue collar middle class grew. The majority of American families were two-parent, with a male wage earner and a female home maker, so tying family benefit to employers worked for families. But this world began to turn upside down in the early 1970s. Wages began to stagnate, the minimum wage lost value, single parent families increased, and many married women went into the workforce to add to the family income. Global competition challenged our core industries like steel and automobiles, and those with low skills fell further and further behind. Black males were especially hard hit. Our 1930s era system of social provision continued to leave out poor males and poor two parent families. Perversely, by hanging on to policies that virtually left out low skill men and low income two parent families, we had created disincentives to marriage. Poor mothers often faced what sociologist William Julius Wilson called a shortage of "marriageable men" who could bring a decent income to the household. (We also provided little support for low income married couples, until the Earned Income Tax Credit was implemented in 1975.) Women now work in great numbers, including mothers of young children: 70 percent of rural and 64 percent of urban mothers with children under six are in the labor force. Times have changed for families and workers, but the direction of social policy has not adapted to them adequately.

But now policy makers across the political spectrum want to develop policies that (1) encourage work and make it pay, (2) support working families, and (3) invest in educating poor children. Study after study shows what a difference good early childhood education can make, the positive impact of mentoring youth, and the benefits of stable employment and wage supplements, including preserving marriages and improving children's school performance. There is a growing consensus in favor of policies that will support poor, at-risk families' opportunities to obtain stable work that pays a living wage, and that invest in children's education and youth's connections to the mainstream. Perhaps as the nation addresses the second deep downturn we can remake our social provision system designed during the first one and invest in families and their children's opportunities.

The housing downturn has been in the headlines since 2007. Overleveraged buyers further grew their personal debt while mortgage firms sold the adjustable rate mortgages that included enticing percentage fees. The concept, as was seen with previous downturns, was that the value of the property would continue to rise and the owner would sell the property before the ARM (adjustable rate mortgage) ballooned. Due to a confluence of conditions, property values began to fall and housing values fell below the heavily mortgaged value of the property.

While these conditions were initially a problem in the housing market, a downturn was also beginning in the commercial and industrial building markets as early as 2007. AIArchitect, the online publication of the American Institute of Architects, has been reporting that "work on the boards" and billings have dropped significantly during 2008 and are expected to continue to drop in 2009. In fact, 2/3 of all architectural firms are projecting lower revenue levels in 2009.

Does this mean that commercial developers fell prey to the same lure of "sup-prime loans" that so many consumers fell for? Without question, the challenges that large facility developers--restaurants, hotels, and mix-use structures--are suffering from tightened availability of funding along with a decrease in leisure and business travel. While many of their projects show reasonable financial projections, the lack of funding from major banks, and investment groups has put many projects on the shelf for now.

So, the question at hand is when will the commercial building market turn around? As of November 2008 the commercial building market was in worse shape than the residential market, according to AIArchitect. And with architectural firms forecasting a continued slowdown in 2009 we should expect a commercial construction rebound at the earliest in 2010.

Philosophically, the recent crisis owes its intellectual roots, at least in part, to the crude selfish individualism of Ayn Rand. Former Federal Reserve chairman Alan Greenspan, who presided over the run-up to the credit collapse, was a close disciple of Rand and shared her faith in the total self-sufficiency of the free market, as well as her "virtue of selfishness." Greenspan attended Rand's funeral, where a 6-foot-tall floral arrangement in the shape of a dollar sign stood beside her coffin. (Lately, Greenspan seems to have had doubts.) These modern disciples of Adam Smith dropped his moral sympathy for the less fortunate but kept the pure self-interest. And yet it was not always so.

Many of the great classical and neo-classical economists, as well as the theorists of the early 20th century, were also philosophers. John Locke's work was an early precursor of economics. Adam Smith wrote Moral Sentiments as well as the Wealth of Nations. John Stuart Mill and Karl Marx are at least as well known as philosophers as they are as economists. In the 20th century, John Maynard Keynes wrote a major treatise on the philosophy of probability.

Economics in its great days of Smith, Mill and Marx was known as "political economy" and included history and political analysis. Today economics graduate students are primarily people who majored in math or engineering, and lack knowledge of history and society. Much of modern economics has lost its ties to ethics and philosophy of science, and prides itself on pure mathematical abstraction devoid of social realism. As Warren Buffett said recently, "Beware of geeks bearing formulas." The combination of total selfishness with technocratic formalist hype has been fatal to the U.S. economy.

During the first half of the fourteenth century, the three most powerful banks in Florence were run by the Bardi, Peruzzi, and Acciaiuoli families. The first two were important patrons of Giotto, who almost singlehandedly revived painting at the very dawn of the Renaissance. All three banks were ruined in the 1340s, partly by bad loans to Edward III of England, who was beginning what would become known as the Hundred Years' War against France. There was also famine, and then the Black Death, beginning in 1348, wiped out at least a third of the population of Europe, including some of the best artists.

When art historians ask themselves why the pioneering achievements of Giotto were not fully taken up and exploited until the fifteenth century, they don't need to look far for answers. The combination of financial disaster and devastating sickness left relatively little energy for artistic innovation. In the long run, however, the Medici Bank arose out of the ruins of its predecessors, and the Medici became essential patrons of what became known as Early Renaissance art, the art of Masaccio, Donatello, and Brunelleschi.

Fifteenth-century Florentines looked back on Giotto's art as the beginning of what they saw as the revival of painting, and on Giotto's contemporaries, Dante and Petrarch, as the founders of modern literature. The Peruzzi and Bardi families were forgotten as the Medici came into prominence, both admired for their wealth and munificence and resented for their power. Their bank, in turn, fell on hard times at the end of the fifteenth century.

The patronage of bankers and merchants was essential to the flourishing of Renaissance art. When the banks suffered, patronage suffered. On the other hand, Cosimo de' Medici was an exceptionally discerning patron, and a tiny fraction of his wealth would have enabled him to carry on his loyal patronage of Donatello, the modern artist who most inspired Michelangelo. Some success by bankers certainly helped Florentine artists along, but it took many factors to change society in the radical way we call the Renaissance.

The one good thing to come out of the current economic crisis is that we are no longer obliged to listen to economists. They haven't a clue. A handful of them saw something bad on the horizon (George Soros, for instance), but most of them didn't, and if you made a statistical analysis of their predictions I think you would find that the number of accurate ones is less than you would get if they threw dice or flipped coins. Remember those guys a few years ago who were predicting a long stock-market boom? They wrote books with titles like Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market (James K. Glassman and Kevin Hassett, 1999). My favorite title is Why the Real Estate Boom Will Not Bust--And How You Can Profit from It: How to Build Wealth in Today's Expanding Real Estate Market (David Lereah, 2006). Well, they no doubt made their pile by selling books.

The secretary of the treasury, that genius, Henry Paulson, assured us throughout 2007 that the collapsing subprime mortgage market was not serious and would be "contained." The global economy, he said, was healthier than it had ever been.

Am I unfair to generalize from these incompetent and far-from-disinterested hacks? All right, the two Nobel-Prize-winners for 1997, Robert Merton of Harvard and Myron Scholes of Stanford, who (with Fischer Black of Chicago) worked out the Black-Scholes model for the valuation of stock options, which requires quite a few differential equations, sat on the board of a major hedge fund (LTCM); the fund largely followed their model, and collapsed ignominiously in 1998.

Thomas Carlyle famously called economics "the Dismal Science." He was wrong: it's not a science at all. Of course, if you abstract away from the real economic, social, psychological, and physical interrelationships of a population, if you hold a dozen human variables constant, you can come up with scientific-looking mathematical formulas. They might even induce a religious faith in the free market. But they only work in the laboratory, and their predictive power, beyond next Monday, is nil.

Some economists, including some at UNH, have rightly called for a more integrated "politico-socio-ecological economics" or something like that, which would take account of the messy world of real people. It's about time.

It strikes me as ironic that over the last 20 years, as unprecedented levels of economic prosperity and personal wealth were realized, we simply could not afford to maintain our public infrastructure. Yet now that we find ourselves in the most significant economic downturn since the Great Depression, we view revitalization of our public infrastructure as an attractive way to pull us out of the recession, grow jobs and realize some lasting value to our government's investment. Does public infrastructure "cost" the taxpayer during good times and result in desperately needed economic growth during bad times? Hardly, although now that we find ourselves at this juncture in history, with the likelihood of major investments in infrastructure, what should we build? Should we rebuild all of our roads and bridges, canals and ports, and water treatment plants expanding them where congestion is a problem? I would argue that we need to critically reconsider where we make infrastructure investments, and not simply maintain what we conceived of decades or generations ago. "Shovel-ready" projects, as are being called for to quickly put America back to work, are not necessarily going to be the wisest investments for the infrastructure we need in the 21st century and beyond. We have built an impressive infrastructure over the last 100 years, but we have built an infrastructure that is so expensive to maintain that we are unwilling, as a society, to pay for it. So what types of infrastructure do we need? We need investments in high-speed rail connecting city centers in the high population density areas of the country, and we need to make sure that we invest in a long-term strategy to make these projects work, to get Americans out of automobiles and off of planes and into fuel-efficient, time-efficient and less costly modes of transportation. And building rails, trains and bus lines is not enough--we need supporting land use changes, and mechanisms to integrate transportation and land use planning across multiple scales, from local to regional and national. We need to make investments in water and wastewater treatment plant upgrades, and critically important is that we simultaneously invest in grey water, water reuse and rain water harvesting technologies. These technologies can significantly reduce our demand for fresh water and impact on freshwater resources, yet their implementation needs to happen at the single building and house level as well as the regional level. We also need investments in communications technologies and the hardware that is the backbone of today's and tomorrow's information highways. Yes, America needs investment in its infrastructure, and has for decades. But equally important is to critically consider what we build/rebuild, and how we build it. We should not rebuild or maintain infrastructure because we built it once, but we should look to the future and envision an integrated infrastructure that serves our needs, builds strong communities, and conserves natural resources for generations to come.

If the past is a good indicator, New Hampshire may come out of this recession in better shape than many other states. In the early 1990s, high technology entrepreneurs led the recovery and growth in New Hampshire after the recession; many had been laid off and used the time to develop new product ideas and business plans, and organize new ventures. When the national economy turned around, these ventures were well positioned to grow.

The forecast for employment in New Hampshire and the New England region is a decrease of 2 to 3 percent. That's very close to the decline in employment in the last recession, in the early 2000s, and it's significantly less than the employment decline in the early 1990s recession, when the region lost nearly 10 percent of its employment base.

Coming out of these recessions, many businesses in New Hampshire recovered faster and stronger than the national average, and that should be the case again. New Hampshire and the state's businesses should benefit from a highly skilled workforce, entrepreneurial culture and strong high technology and innovation base.

After this current recession, the critical ingredient for business success will be engaging in strategic market analysis, including identifying new and expanding market opportunities, and developing new products and services to serve these markets in unique ways for when the economy does turn around.

Businesses and entrepreneurs that manage their resources effectively and plan for future growth during the current economic hard times can benefit from the current turmoil. This time, the businesses that lead New Hampshire out of the recession and contribute to growth will be from a diverse range of industries, such as health information technology, biotechnology, energy efficiency products and services and alternative energy. There can be light at the end of the tunnel.