Herbert's Commentary in NY Times

In my opinion, we're not out of this severe recession/depression yet. 10% (reported) unemployment is the elephant in the room. We've traded a big sector of our manufacturing economy in return for (initially) cheaper imports. It's a big question where the laid off workers will find new jobs or retraining in industries still in demand. Even in this economic climate, one area which has remained largely intact is our education system. An educated workforce is essential in today's knowledge based economy. Even though our primary education system can vary widely, and may not match the "Brady Bunch" and "Wonder Years" ideal, at least our university system remains the envy of the world. Foreign students have flocked to the US to receive a "world class" upper-level education. The economic impact can be beneficial for everyone. The universities receive tuition to import students. The student becomes an exported quantity back to his origin, where he can use his skills to level the playing field among all countries. But as the recession/depression lingers, our education system may get bigger cuts as state budgets tighten further. It's a nasty downward spiral, and I'm not sure we'll be able to "pull up" in time. Today's editorial by Herbert in the NY Times is on target.

p.s. Modern economic theory says that recessions/depressions are unnecessary. Spending and the money supply can/should be manipulated to keep the economy humming on all cylinders. This theory is showing some signs of breakage as politicians are showing fear of endlessly increasing deficits. The Keyensian model may work only in a vacuum, and under ideal conditions when more goods and services are necessary. What happens when it is not clear what should be produced? The common anecdote questions whether people should be paid for "digging holes, and filling them back in." It keeps people busy, but does it add to the goods and services that people actually want? The obvious flip side is paying for extended unemployment benefits. There is a lot of wasted labor built into the model already. Couldn't the US benefit from some form of "planned economy" where we get the goods and services we need? It's ironic we can pay for unemployment, but can't pay for teachers to improve our schools, or pay for workers to fix our failing infrastructure, etc. etc.

Update: 2010-08-09
Krugman amplifies the same theme.

Update: 2010-08-13
The radio show On Point discusses the potential for deflation and a continuing downward spiral similar to the Japanese scenario of the 1990s. I have read a fair number of Richard Russell's Dow Theory Letters, and he is fond of saying that the Federal Reserve's entire mission statement can be summarized as "inflate or die." Several of the guests on this radio program expressed their fear of deflation in the same way; they'd rather have runaway inflation than deflation. (This is why Richard Russell refers to all paper currencies as "fiat currencies." All national money supplies are subject to arbitrary internal manipulations, and all national currencies are competing against each other to stay in the same relative ballpark, lest trade be disrupted. National currencies are supposed to be traded commodities- allowed to rise and fall according to market conditions- but some nations are not playing the game; they are undervaluing their currency to prop up exports. In any case, the net effect, is still a race to the bottom for all paper currencies.)