Free Rise

GameStop announced delicious earnings growth this morning. During the darkest economic times in a generation, they also announced their intention to open eight new stores every week in 2009.

Wait, aren’t we in a global depression? What is happening? A number of things:

• Games have momentum. No longer the domain of kids, games’ appeal has become nearly universal, especially among men. And like other forms of entertainment, game producers have created titles for particular demographics.
• Games are value purchases in bad times. Even at sixty bucks for a new title, a good game can provide months of entertainment value. I’ve put something close to 60 hours into Grand Theft Auto IV, and I just discovered multiplayer a couple weeks ago. And the more one plays games, the more boring passive entertainment (like TV) seems.
• Games are resellable. This is where GameStop gets its mojo. Walmart and Target may have killed Toys R Us and other monoline-type retailers, but GameStop has the resale business. Game producers hate resales because they cannibalize new sales, but many full-price purchases are undoubtedly influenced by the potential of a future resale.

But why should a purely digital medium require a retail presence at all? Might GameStop be the next Sam Goody?

Definitely. Even as GameStop installs more cash registers, game producers are selling directly to the people, whether via SAAS-models like Xbox Live, downloadable content like GTA’s new “episode” The Lost and the Damned, or add-ons like Rock Band tracks or virtual gifts.

As Darren Gladstone mentions in PC World, even against GameStop’s success, games’ dependence on retail seems fleeting. Why?

• Stronger independently-produced games
• More online games
• Downloadable content replacing sequels
• Flexible pricing schemes

But the main reason why GameStop, and most games retailers, are doomed is that they provide little value to the broadband-enabled customer. Ever been in one? Most are just a few promo displays, a couple maybe-functional demo consoles, and walls and bins of empty boxes. You can’t try the game out; you can’t even see what it looks like.

GameStop does provide a resale channel, which is something that isn’t a (legal) option in the download era. But iTunes aren’t resellable, either. Game producers will defeat resales with convenience and pricing.

In 10 years, we’ll marvel at the days we brought home an object in a box to watch, listen, or play. In the meantime, GameStop has a load of money to make. For a little while.

Thank heavens for the Washington Post’s Steven Pearlstein. I hope every Congressional staff reads his column today, where he lays out what “stimulus” means and how it affects the economy.

Wanted: Personal Economic Trainers. Apply at Capitol.

I have to agree with him; the economic illiteracy of Congress is staggering, and too much of the debate on the Hill is stuck in the Reagan years.

Of course “learn some economics” is a blunt argument. Plenty of men with impressive economic pedigrees are no more than shills for industries, the wealthy elites, unions, real estate. They’ll have you believe that cutting taxes raises revenues, or deficits don’t matter, or real estate only goes up, or farm subsidies create food security, or taxes on profits impede employment.

But the column still hits important points. Tax cuts increase debt to put some money into the economy. Spending increases increase debt to put more money in the economy than tax cuts do. And some spending on consumption may help the economy in the short term, but spending on investment helps in the short term and paves the way for tomorrow’s prosperity.

This is not hard. But it’s harder than “ungh, taxes always bad, ungh ugh ugh” or “ungh, buy more stuff so recession end, ungh ugh ugh” which is sadly what we’ve come to expect from Congress.

With the economy in a free-fall and a bottom still months if not years away, Washington has taken on a public debate about fiscal stimulus. And like most Washington debates, it’s being crushed by dead ideologies, false assumptions, and old-fashioned pork barreling.

The stimulus debate seems to falling along two primary lines of argument, both utterly predictable and useless:

(1) Spending vs. tax cuts. Falling into their stereotypes, the Democratic leadership wants to spend, and the Republican leadership wants to cut taxes. The former will have a direct impact on demand, the latter a greater relief to wage-earners. But to call the modern Republicans supply-siders is giving them too much credit. They just think it’s both politically popular and economically beneficial to reduce taxes. Most of them couldn’t draw a Laffer curve if you spotted them a cocktail napkin, a Uniball, and both axes.

(2) “Stimulative” spending vs. pork. This choice is about as false as you can get. All spending, if it’s spent in America and primarily on domestic labor (as opposed to imported goods) is stimulative. It doesn’t matter whether it sounds useful (freeway maintenance, subway construction) or frivolous (the National Endowment for the Arts). In the short term, spending is spending.

If anything, spending on arts — which would presumably pay people to teach and create art, and thus help develop the young creatives on whom real long-term economic growth depends — would be highly stimulative, both short and long term. Conversely, building another bridge to nowhere would require importing tons of materials from overseas, or igniting a disastrous trade war by requiring the projects to Buy American. And long-term, projects like exurban freeways hurt our domestic economy.

But really, both of these above debates are ridiculous, because such is the premise of “stimulus” — that the a shrinking economy can grow again (or shrink more slowly) by encouraging people to buy more stuff.

That’s a 20th-century economic model — dig minerals out of the earth in country A, ship it country B for processing and manufacturing, and then ship it again to the USA for retailing and consumption. Country B gets paid in US dollars, which they then use to buy American assets, which the Americans then rent back from country B. (Warren Buffett calls this phenomenon “a sharecropper’s society.”) Meanwhile, in America, lenders lend to other lenders, who lend endlessly to consumers, who can keep borrowing to pay off past debts. But the global housing bubble brought debt to its breaking point, and defaults are still working their way up the debt stream.

What we’re witnessing now isn’t just the downswing of the business cycle; it’s a reckoning of our debt dependency. And it will result in the restructuring of our industries, whether we like it or not. Big Auto is probably terminal. Many retailers are definitely terminal. Many banks have already died.

Or as Umair Haque puts it so brilliantly: “20th century capitalism is eating itself… Today’s leaders are plugging dikes, bailing out industries and banks as they fail. Yet, what negative global growth suggests is that the problem is of a different order: that we have reached the boundaries of a kind of growth.”

True. Our economy as a whole is restructuring, becoming something else by necessity. So what should the purposes of a “stimulus” bill be?

(1) Expedite America to the next economic model. This means a model that reduces our dependence on oil and other minerals, restores sanity to borrowing, and gets our trade closer to balance. It means a model where we spend more on investments like renewable energy, sustainable food, general research, shared transportation, and education, and where our growth comes from doing things smarter instead of just making more. Because “more” is becoming less of a viable option.

(2) Support Americans through the transition. The new global economy requires that millions of workers move from 20th-century jobs to 21st-century ones. People will still need to grow food, sew clothes, fix machines, and lay pavement, but not in the same places or manners they once did. The upheavals that will result from this transition are massive and obvious — think America during and after WWII — and people need help to make it through this shift.

We need to get serious about this as a nation. The current spending/tax cut bill contains some elements (like home weatherization) that address both these points.

But America’s borrow-from-abroad-to-buy-from-abroad economy isn’t just down in the dumps. It’s doomed. Any bill that focuses on consumer spending for its own sake is only prolonging the inevitable, and extending the pain for the worse.