This promises to be a crisis of epic proportions.
People are comparing it with the Great Depression, but there is one huge difference: during the Depressions US still had it manufacturing base intact. It was a financial and social crisis, but the country had robust physical infrastructure to cope with it.
This is not the case today: US infrastructure is largely gone, and we're very quickly losing our R&D base.
I've realized how far this has gone when I took a trip to Taipei in 2003. For a large part of its history, Taiwan was one big factory. Products were designed in the United States and built here. By 2003 however manufacturing has moved on to the mainland China, and R&D moved in: we visited 5-6 companies that were building routers, and they were all purely R&D shops with manufacturing outsourced to China.
Quanta Computer in Taiwan is the largest laptop company in the world. You probably have not heard about it: the laptops that it designs (in Taiwan) and makes (in China) usually sell under Dell, SONY, and HP brand names. In 2006 it produced roughly 60% of all laptops made in the world. It also makes servers: about 40% of them.
Back in 2006 the joke that went around Microsoft was this: "Dell people think that they outsourced the manufacturing to Quanta, and Quanta people think that they outsourced marketing and distribution to Dell". Very true: a lot of what's left in the US is just that - marketing and distribution. We no longer make stuff - we just buy and sell it. With the money borrowed from Chinese.
The end of 90s were a brief respite: the pyramid scheme of .com boom had temporarily returned engineering to the top. Not for long: the enrollments into computer science programs are now below 1995 levels, US high school scores in math and science rank around 20th place in the world - below most European and a few Asian countries.
The universities churn out people who are largely incompetent. When I was interviewing graduates in China, it was immediately obvious that although there was a wide distribution in intellectual capabilities, they have all studied hard and came out of school with solid knowledge of computer science and math.
When I interview college graduates here, there is the same wide variety of IQ - and almost universal lack of basic training. At school they mostly had worked in large teams where there was one nerd that did everything, and everybody else managed process and collected customer requirements.
Our social protection net is in probably worst shape it's ever been since the New Deal. The unevenness of income distribution is as high as it's ever been: an average CEO makes 400 times the income of an average worker. This is compared to 20-40 range it's been throughout much of the history: the growth took off when Reagan lowered the upper tax bracked from 70% to 28% (it has since moved back a little to 36%).
The income distribution here is more similar to the Middle Ages than to any modern developed society.
The insane compensation packages at the top are the source of our current predicament: they incent a rationally-behaving CEO to maximize the short-term profit (after which he or she simply cashes out) at the expense of the long-term risk.
Meanwhile, the number of people lacking basic health insurance is as high as it's ever been, and the percentage of people who qualify for government assistance is as low as it's been as well, with state budgets weakened to the breaking point.
So now that we're in financial crisis, we don't have either manufacturing, or R&D capacity to lean on, nor health care or protection net to carry us through the bad times. To wit: even illegal immigration from Latin America is at its lowest point in decades.
We're in deep trouble.
So what do we do? The future depends on the new Democratic administration's willingness to take the reins, and do it vigorously.
They have the power to do a lot: strong majorities in Senate and House, and the Presidency. What they do not have is time: if the country is not on the right track in two years, if there's no improvement in the situation - beyond any reasonable doubt - they will lose the mandate, and the Obama government will be powerless.
Democrats should be quick, effective, and ruthless. Any talk about bipartisanship must end now: there's simply no time to reason with the Republican wackos in Congress - the moderates of that party are now largely gone anyway, and what's left are the crazies from the slave states, both geographically and mentally.
First and foremost, the Democrats need to take control of the media. They should push through legislation that breaks down enormous conglomerates that serve primarily corporate interests, the Rupert Murdoch epmire being first and foremost focus. Something akin to trust-busting efforts of Teddy Roosevelt, only directed at Faux News.
The discourse in the country must move away from infotainment that feeds the idiots the line that they are the greatest, smartest, most hardworking idiots in the best country in the world to actual information and informed deliberation. And yes, fewer ads :-)!
In parallel, they should break the lobbying industry. Now or never! The Deomcrats are at an enormous advantage today: with the strength of the grass root, they can survive (and win) without the lobbyists, unlike the Republicans. This will help the Democrats to solidify their power, and the government to start making the decisions that are actually good for the people, not industries and foreign countries.
Nationalize the health care. The elephant in the room that is never mentioned when the rising costs are discussed is that the lion's share of the money goes to the doctors. It's not to the malpractice insurance (<10%). Not the equipment, and not the drugs: the bottom quartile of doctors in this country make more money than the top quartile of the engineers. There's no reason for this other than the current broken health insurance system, which disintermediates the costs.
Fixing the health care is one of the few instances where the interests of the corporations and the people are identical (the fact that the companies have to pay the health care costs of their workers in the US puts them at a huge disadvantage compared to their competitors in Europe). The nationalized healthcare will give the voters immediate benefit, and the reason to vote for Democrats again in two years.
Invest in the education - big time. Literally, pour money into it. The teachers should have one of the best paying jobs in the country, and right now it's one of the worst. As a result, US's Sunday school education is better than the regular one, and we keep churning out religious fanatics. Better education correlates negatively with voting Republican, so investment here should help Democrats keep on their power.
Create massive programs for public works - and research investments. Energy independence, putting a man on Mars, rebuilding the physical infrastructure of the country - all at once. Massive spending is the only thing that can arrest the spread of the financial crisis, keep it from turning into multi-decade depression. Luckily, we're so behind in terms of progress, that the opportunities abound.
Finance these public works by devaluing the dollar and raising the taxes in the upper income bracket. The dollar os way too expensive, and it does not help: the paper should not stand in the way of the progress. Especially when much of the paper is held by foreing investors anyway :-). Cheap dollar will help revitalize manufacturing and R&D here in the US.
Higher taxes will restore the right set of incentives for the executive class: instead of get-rich-quick scheme, being a CEO will be what it was before here, and what it is now anywhere else in the developed world: a respectable, highly-paid job with high responsibilities.
Protect domestic manufacturing and R&D with tariffs. It's a myth that a country can live on moving the borrowed money from one pocket to another. To survive, we need to start - for once - making something useful again. And there's no way to do it without the base. Let's have the industrial revolution again!
Finally, investigate the abuses of the previous administration. Iraq, the torture, the wiretapping, the role of lobbyists in government must not be swept under the carpet: there's a wonderful opportunity to (1) get a lot of Republicans in jail where they belong, and (2) create and reinforce in the public mind the mental equivalency between the words "Republican" and a "crook". This association could last for a generation or two - it is very much in Democrats' interests to not pass on the opportunity.