What comes after the great economic adjustment?

Robert Wieland

05/13/2009

We have had the fear put in us that the economy is in dire straits. Since the alarm was first raised by a very conservative administration and is being re-sounded by a much more progressive one, we should all suspect that there really is a problem here -- if the losses in our investments, home values and diminished work prospects were not enough evidence already.

What I wonder, when I try to understand the government's response to this great adjustment, is what is it we are trying to get back to? I know that we would all like to have our money back and to be facing the better earning possibilities that we enjoyed in 2006. But, if there was something unsustainable about the situation then, before the bubble popped, why are we trying to get back there?

Before the bubble popped, a developer was planning to build 2,600 housing units in Trappe, MD, a town of about 450 current housing units and 1,150 people. Trappe is about seven miles from both Cambridge and Easton, towns with populations in the range of 11,000 to 12,000 people (and their own new housing developments). But it is 50 miles from Annapolis and 80 miles from either Baltimore or Washington.

There is nothing really unique about Trappe; all across the mid-Atlantic, plans for similar developments now lie dormant.

Before the bubble popped, I wondered how building an additional 2,600 housing units this far from anything could possibly make sense. A finance guy explained it to me. It boiled down to this: the margin between the land's productive value (what one could make growing stuff on it) and its development value was so great that you could pass a piece of that margin down a long line of investors from here to Shanghai and there would still be a big pile for the guy who put it all together. It didn't matter if there was demand or not. The houses would be sold. The market said so.

So that didn't last. The market changed its mind. Now the proposition of that many houses in Trappe looks a bit dicier. And yet, the town commissioners and the developer still assert that this development will happen. All the permits are in. The developer has made a large commitment in time, energy and money that he will not easily let go, and the town thinks the development will improve its financial position.

Now comes the government's stimulus. What are its intentions? Will it make housing developments like Trappe's start going gang-busters again? Farming isn't getting any more remunerative, so that margin between the productive value of land and its development value is still the easiest money in town. And, if the stimulus money is looking for "shovel-ready" projects, what more tempting than already permitted housing developments? In fact, the town wanted stimulus money to get this project restarted, and the state initially approved it.

Meanwhile, at the same time we are facing this economic crisis, we also have serious environmental imbalances looming. Close to home we have the demise of the Chesapeake Bay looking increasingly imminent, and globally we have a problem with excessive carbon dioxide in the atmosphere. The economic downturn of the last two years has done more to help Bay restoration and global climate change than any well-intentioned, passable legislation might have done over that same period. Do we have to lose all that benefit if the economy gets going again?

I am not an opponent of growth. I understand that if there is no growth, then my children can't start accumulating wealth without making someone else poorer. Growth is good, if just for their sake. But building houses far from where people work is not good growth. Adding roads to accommodate more cars when there are already too many cars, adding shopping centers when there is already too much impervious surface, building houses so now people can own two homes - none of that is good for our environment. It is not sustainable growth.

Alan Greenspan made a pertinent Zen comment in reference to macro-economic imbalances when he was leaving his job as head of the Federal Reserve. He said that if something is not sustainable then at some point it would stop.

If you are awed by the changes wrought by the current unwinding of economic imbalances, wait until you see what could be coming due in the environmental adjustment.