By Robert Johnson, former chief economist of the Senate Banking Committee and Senior Economist of the Senate Budget Committee who writes at New Deal 2.0.
Since the early 1980s, rises in the living standard of middle class United States citizens have not kept up with the gains in labor productivity. Wages in the middle class have been close to flat. At the same time, consumer spending continued to grow abetted by innovations in consumer finance that supported ever-higher levels of consumption for any level of income. The credit crisis of 2008-9 has ended and unmasked the contradictions inherent in this unstable system and also in the international commercial system that has relied upon U.S. consumers as the buyers of last resort since the Second World War. American consumers cannot be both under downward pressure from outsourcing competition and relied upon to be the locomotive of worldwide economic growth.
The retrenchment of the American consumer, as housing wealth evaporates and unemployment rises, blows a chill wind over the sentiments of consumers and business investment. Only the Obama Administration’s fiscal stimulus resists the decline of demand.
Declining fortunes associated the crisis are surely accelerating the retrenchment of American living standards. Yet the pain of adjustment is more easily borne if it is seen as transient rather than without end. The Obama Administration, despite the oratory brilliance of the President, has yet to articulate a credible vision and plan of how a broad base of Americans, and not just a few financiers, will recover and return to a vital medium term outlook. What challenges stand in the way of a credible plan that must hinge upon restoring sustainable living standards in this country? I see two. 1) Significantly lower costs of production in developing countries; 2) and deficit hawks.
The top management of American corporations has been able to see plainly for years that social costs of labor inputs and the costs of energy inputs (polluters do not pay) are much lower in the developing world than they are in the United States. Economists look at measure called relative unit labor cost of production and can see that China, and several other developing countries, have much lower labor costs per unit of output than in the United States.
Right now that gap is closing slowly. Investment is depressed in the United States and much more vibrant in China. Wage growth is higher in China than in the USA, albeit from a much lower level, but Chinese wage rises are somewhat dampened by the sheer scale of labor supply that can move from rural life to the factories. At the same time investment and productivity growth in China is also much higher than in the USA where investment is depressed. So the relative unit labor cost gap is not closing rapidly. In fact it may be decades before the relative unit labor cost gap ceases to be a major incentive to outsourcing, absent a large change in the exchange rate. The sheer size of China and India make this a major challenge to the United States and the industrial world.
This is not a static situation. The U.S. can regain competitiveness in several ways. First, through an exchange rate appreciation of the currencies of China and the developing countries relative to the dollar, which will diminish the cost imbalance. That is a necessary change in the near to medium term. Secondly, labor rights agreements and environmental standards in the developing world may also be helpful by raising the floor of costs rather than driving us to the lowest common denominator. Third, rising living standards in the developing world may increase demand for products made in the industrial world over time. These recommendations of a shift to environmentally sound consumer led growth in China, however, often leaves Chinese officials confused. They hear U.S. corporate top management with substantial foreign direct investments in China resisting policies of wage growth or environmental cost increases while leading officials in Washington talk as though it is a necessary component of restoring macroeconomic balance.
Finally, rising productivity in the United States both in absolute and relative to productivity growth rates in the developing countries would improve the competitiveness of our workforce. What would that entail? Investment in the human capital of the American workforce, business fixed investment on the U.S. mainland, and infrastructure investment by the U.S. government to augment and complement, and therefore inspire, business investment in the USA.
Resistance to public spending along these lines may be formidable. In an era when money-driven American politics has shown itself so much more responsive to special interests than to general interests it may be difficult if not impossible to create a consensus for efforts to enhance broad based productivity growth. Much of multinational corporate top management does not need a vital and healthy American workforce to thrive. Yet they do need a strong foreign military presence. Many high-income earners who finance politics see little benefit from paying more taxes to support public spending when they do not trust that their dollars will be efficiently used. As is evident in the news media today, the deficit hawks are on the warpath now when it comes to nonmilitary spending.
Despite their silence when tax cuts for the wealthy were enacted while we fought in Afghanistan and Iraq and despite their silence when losses from reckless financial institutions were transferred from the creditors of those Too Big to Fail firms to the public balance sheet, the deficit hawks will now vehemently resist efforts to rebuild the public infrastructure that would complement and augment the productivity of the productive plant of the mainland United States. That is the productivity that constitutes the promise to the American people that this crisis will be only transient.
Deficit hawks prefer, it appears, to rely upon private sector solutions. Yet business fixed investment in the U.S.A. is likely to be lackluster without a public jump start as consumption wanes and the temptation toward outsourcing continues. The Obama Administration is faced with an increasingly angry populist energy and 2010 is none too soon to implement a plan for the economic revitalization of the nonfinancial economy.
35 comments
Comments are closed.
The American financial system seems to be one of great fraud and no accountability. A system where the rules apply only when covenient, and where the force of law is only applied to the powerless.
http://www.voguetouch.com
Winter Clothing Big Bargain. New Year’s wearing new clothes.
You have enough new clothes? Cool enough beautiful? Have brand?
If you do not have words. I would like to introduce you to my company’s clothing.
Great Brands. Fashionable. Is absolutely unique.
Do not look at the money. Just a few seconds you have time. You can get what you want.
More new sporting goods. For more articles please visit http://www.voguetouch.com
(I)Our Company is Online store, and we vogu emalls offer top quality sport shoes, famous brand shoes and sportswear at good price.
(II) I n the past 6 years, we have sent great many products to the customers in USA, Europe, ASIA and other area, also we have lots of experience in dealing with online business oversea
(III) Generally, Goods are delivered in fast and safety way Of course, shoes and clothing will be packaged in original box with tags
http://www.voguetouch.com
New to Hong Kong : Winter Dress
—**** NHL Jersey Woman $ 40 —**** NFL Jersey $ 35
—**** NBA Jersey $ 34 —**** MLB Jersey $ 35
—**** Jordan Six Ring_m $36 —**** Air Yeezy_m $ 45
—**** T-Shirt_m $ 25 —**** Jacket_m $ 36
—**** Hoody_m $ 50 —**** Manicure Set $ 20 … …
Wel come to Shopping http://www.voguetouch.com
Click: Connect
http://www.voguetouch.com/productlist.asp?id=s83 (AF Jacket woman )
%
The budget busting programs were dead wrong in the Bush administration and the budget destroying programs are double-dead wrong now.
Let’s call a spade a spade: the “deficit hawks” are basically in favor of converting America in a full-fledged banana republic. Nothing for the society, everything for the military-industrial complex and the wealthy.
As such, they are nothing less than enemies of the people and the United States too.
As for the endless responsiveness of the political class to special interests, this is the stuff of futures social upheavals. The rank and file will become increasingly fed up with a political system that refuses to represent their interests.
Something’s gotta give…soon!
“Yet they do need a strong foreign military presence. Many high-income earners who finance politics see little benefit from paying more taxes to support public spending when they do not trust that their dollars will be efficiently used.”
Yet, they have entire confidence that their tax dollars will be well spent when it comes to the military…but not anywhere else?
Am I the only one who sees a glaring and moronic contradiction here?
“Deficit hawks prefer … to rely upon [soicalized] private sector solutions.” Indeed, the “glaring and moronic contradictions” expose breathtaking hypocrisy beyond willful blindness to commoner pain and suffering…rising to outright malice. It is small consolation that rigged market cannibalism at this scale is ultimately fatal even to the living dead banksters that feed on the public carrion. Hence, as a deterrent to this, those of us who survive MUST exact a very heavy punitive price from our tormentors. In France, the bloodly guillotine had a lasting legacy. I suggest sport-hunting in the Hamptons.
► “Yet, they have entire confidence that their tax dollars will be well spent when it comes to the military…but not anywhere else?”
And, as Johnson did, it is also worthwhile to point out “their silence when losses from reckless financial institutions were transferred from the creditors of those Too Big to Fail firms to the public balance sheet.”
That said, however, I nevertheless dislike arguments based on the lowest common denominator, justifying one thing because something else is worse.
Face it, the current administration and congress could tear up a crow bar. Anything you put in these guys hands is going to turn to shit.
I’m very much in favor of healthcare reform.
I’m very much in favor of the government taking the leading role in, as Johnson puts it, providing the “investment in the human capital of the American workforce, business fixed investment on the U.S. mainland, and infrastructure investment by the U.S. government to augment and complement, and therefore inspire, business investment in the USA.”
But, as Amatai Etzioni observed in The Moral Dimension: “If those whose duty it is to set and to enforce the rules of the game are out to maximize their own profits, a la Public Choice, there is no hope for the system.” Unless there is a major change in the moral climate that leads to a considerable reduction in political corruption and a significantly improved environment necessary for a modern economy, ranging in trust in financial institutions to curbing the ability of monopolistic firms to use the state to restrain competition, there is no hope.
For any meaningful change to take place, the Libertarian-Austrian-Neoliberal doctrine that has dominated American policymaking for the last thirty years must be shown to be the outright fraud that it is.
Johnson perpetuates the political dynamic of the last century. The growing dynamic of this century will see a new species of deficit hawk attacking ALL federal wealth transfer programs including wealth transfers into the military industrial complex.
Robert Johnson says:
Well … there is nothing to be done as our economic malaise is the result of consuming the world’s cheap petroleum. The more expensive stuff does not allow for increased US – or anyone else’s – labor productivity.
Sure, oil can go to $10 a barrel but a car will cost $100 and a house a thousand. What kind of a situation is that?
The establishment’s blindness toward its energy foundation is breathtaking …
One can have a vigorous, extensive direct involvement of government in the economy while being a deficit hawk. It involves taxes commensurate with expenditures. Call me old-fashioned, but I like pay-go, keeping accounts simple, and especially not owing foreigners anything much.
Where New Deal 2.0 fails IMO is in its explicit or implicit bias toward deficit spending (depending on the commentator). Its goals are great, but just because FDR tried the deficit spending he excoriated as candidate Roosevelt in 1932 doesn’t mean that our now-wildly indebted government can do so now. Old dogs don’t hunt well.
A number of comments above point out that there is an apparent contradiction in ‘deficit hawks’ who favor (often inefficient) military spending, while opposing spending on things that would benefit the country as a whole.
There is one analysis under which these things are all consistent: hierarchical power. Basically, a good many ‘conservatives’ in America want to keep resources from the weak in America, while they love (I don’t think this is too strong a word) pumping up American military power, which enables America to bully and threaten the rest of the world. In other words, they seek to assert their power at the top in two ways: dominate the relatively weak rest of the world, and dominate the relatively weak (everyone else) in American society.
I doubt this explains everything, as nothing ever does. But I think people overlook how consistent all this is with a basic psychological stance of hierarchical domination by those at the top, at home and abroad. This serves to resolve the ‘inconsistency’ that these policies otherwise seem to show. I wouldn’t underestimate how strong this might be.
With all due respect, the people the author is calling deficit hawks are obviously no such thing. There are many of us who are deficit hawks for all seasons. We believe in small government, government that pays as it goes, not building up a debt for future generations.
When we went to war in Afghanistan and Iraq, I viewed the war as necessary (still do), but I am appalled at the extravagant way in which it has been prosecuted through private corporations. Furthermore, the American people should have financed the war through war bonds, instead of simply expanding the debt the money supply under Alan Greenscam to accomodate the war bubble and housing bubble and the reflation of the stock market bubble, and on and on.
Let’s call a spade a spade. We did not need all the deficit spending we’ve been doing for ten years. And anyone who did not speak up about it is not a deficit hawk. Period.
Yes, I believe taxes should have been much higher to maintain the level of spending. Of course, if taxes were raised to the level required, we would soon have much smaller government, due to big spenders being kicked out of office! That’s what I call a win-win.
There is no doubt in my mind that your position is very much a minority position. If given the choice between guns and butter, a vast majority of Americans would undoubtedly choose butter.
If given the choice between the Iraq War and social security, which one do you believe would prevail with the American people?
If given the choice between the Afghan War and Medicare, which one do you believe would prevail with the American people?
All the smoke and mirrors with the economy is of course perpetrated deliberately to keep the American people from making the above choices:
All parties that have embraced the conventions of BWII have had good short-term reasons for doing so. The U.S. has acceded to this arrangement because it has served to boost U.S. asset prices and lower risk spreads, thereby helping to facilitate America’s “guns AND butter” foreign policy. In the absence of its Asian creditors acting as “dollar sub-underwriter of last resort,” it is hard to envisage a chronic debtor country like the U.S. mounting successive wars with little financial strain and an absence of tax increases…
The U.S. has been perfectly happy to accede to the current state of affairs in spite of the immense economic damage it has inflicted on its domestic manufacturing sector (and the concomitant evisceration of its middle class) because it has provided the country with a cheap form of war finance, a particularly important consideration as it has gradually militarized its energy policy. If one includes America’s array of privately outsourced services along with a professional permanent military, the costs run around three-quarters of a trillion dollars a year. Chinese, Japanese and other central banks of East Asia via Bretton Woods II indirectly finance this cost.
http://www.pimco.com/LeftNav/Viewpoints/2007/Renegade+Economics-+The+Bretton+Woods+2+Fiction-+Executive+Summary.htm
You want your war, but you also want fiscal austerity. The only way to achieve this is by sacrificing social spending. And this runs counter to what a majority of Americans want. This is why those in the Libertarian-Austrian-Neoliberal axis always end up hating democracy.
I don’t hate democracy, as long as it is within the bounds of the constitution. I don’t believe butter is within the purview of the federal government. War most definitely is. Obviously mine is a minority view. That doesn’t make it untrue. As evidenced by the Tea Party movement, it is clear that this attitude is growing. It will have an impact on national politics in coming years, as the distortions stemming from unbridled spending (on everything) become obvious to even the lumpen masses.
If the country collapses because it cannot control government social spending, I will have the satisfaction of knowing I was right all along. But it will be a cold comfort.
What liberals advocate is theft. John McCain called the stimulus package “generational theft.” Whatever my other disagreements with him may be, he’s spot on there. War is immoral, but necessary, and it must be a collective endeavor — in other words, federal. Charity is moral and necessary, but it should be the duty of individuals, churches, local governments, and in extreme cases, the states. Why? Because none of those entities can print money, thus thieving from everyone large and small. The liberal’s compassion is immoral, being coercive. My compassion is moral, responsible, and sustainable. Ultimately, the welfare state will not be sustained, war or no war, because inevitably thieves take over the system, just as they have now. Like Willie Sutton, they go where the money is. Reality is a bitch.
Your view about the purview of the federal government is neither true nor untrue. It is an opinion.
“Theft” is a label, and again, how you define “theft” is an opinion. Language is far more complex than you give it credit.
I have opinions too. I believe war is neither moral nor immoral. I also believe charity is neither moral nor immoral.
As an aside, the idea that you think collective defense is less coercive than collective charity is mind-boggling. They are both coercive. You just prefer the results of one to the other, and it’s probably just a “coincidence” that you would be personally better off in a society that has collective defense and not collective charity (the root of almost all collective defense is asset and wealth protection). Also, the idea that if the country collapses you will be able to prove it was specifically attributable to “social spending” is also mind-boggling. But I have little doubt that if the collapse does happen, you will enjoy your cold comfort with the absurd proposition that the collapse was of a definable, simple origin regardless of the complex facts at hand.
Although reality may be a “bitch,” you do not seem to have a very good grasp of it.
eric anderson:
You are a moron. Your reasoning is so flawed, so offensive, it’s not even worth responding to. All I will point out is this: without charity at home, why would we need a military for? Exactly what would that military defend?
Vinny
PS — I don’t often call other people names here, but you really are a cretin that needs to hear it more often.
Vinny,
You KNOW ad hominem attacks are against the rules here! I know you like to mix things up a bit, but you need to stick to the substance of arguments. Aside from the fact that I don’t approve of that sort of thing, it often backfires and creates sympathy for the person you’ve tried shellacking.
Clearly I am not against charity. I simply advocated a different source and channel of charity. For this, I am a moron? I don’t think so. You just had a knee jerk reaction and did not read what I wrote.
“What liberals advocate is theft.”
The biggest theft is private landownership under a regime of low land taxes.
“War is immoral, but necessary…”
The invasion of Iraq was neither moral nor necessary, and ultimately harmful to the long-term interests of the US (economic and security both).
Frankly, it’s sickening to hear someone preach about budget austerity, only to proclaim his support for our government having spent on the order of $1T on the useless (not to mention monstrous) invasion of Iraq.
Whether the Iraq invasion was or was not useless, I did not approve of spending a trillion dollars on it. I said I was appalled at the spendthrift way it was conducted. You need to read more carefully. I believe in frugality and fiscal responsibility in all things, including war.
Where did I say collective defense was less coercive? I said it was bad, but necessary. The guy who called me a moron asked me, “Without charity at home, what would the military defend?” Without a military to defend it, there is no home. Good grief.
Really we are just arguing about how to arrange the deck chairs on the Titanic. The reality of this depression will force a contraction of both our military empire and our social spending. If not, the wheels will come off the wagon. (Talk about mixing metaphors.)
Theft. Is it a matter of opinion? I think what’s been happening in banking/finance encompasses a great deal of fraud, by which theft was perpetrated. Surely we can at least agree on that much. Where are the prosecutions? Where are the calls for prosecutions? I only hear Tavakoli, Galbraith, and William Black talking about the fraud. Voices in the wilderness.
Yes let’s call a spade a spade. The wars in Iraq and Afghanistan were for the purpose of building pipelines and controlling them. We tore up two countries where people had a decent standard of living, with cultures different from ours, so we could be boss and be in control.
The wars were not necessary. They were and are evil.
The only thing that middle-class Americans hate more than seeing people above them get handouts is seeing people below them get handouts.
That sounds stupid, but it motivates the politics of resentment. . .
“Deficit hawks prefer, it appears, to rely upon private sector solutions. Yet business fixed investment in the U.S.A. is likely to be lackluster without a public jump start as consumption wanes and the temptation toward outsourcing continues.”
Economic structure is driven towards consolidation,automation and lowering labor cost rather then job creation or organic growth.
The crisis is the lack of recognition of this dynamic by the political class no matter what part of the spectrum they occupy. Pretending that tax cuts to corporate interest or government stimulus will jump start a new round of lasting prosperity is finally hitting the wall of reality.
That economic growth will reappear by pulling the levers of political interest is the most entrenched religious dogma of our time.
“1) Significantly lower costs of production in developing countries”
This is mythology. For example, the last television factory in the US, The Zenith plant in Springfield, MO, closed down when South Korean TVs flooded the market at less than the cost of the components. The only way for this to be possible is for the labor rate to be negative.
Government subsidies for export to the US market have distorted the true picture. The cost of transport and handling would take care of most lower labor costs, quality and health issues aside.
We need to tax our elites in order to fund investment.
We tried cutting their taxes and got a harmful splurge of investment in bubble housing.
We need to raise their taxes to fund education, infrastructure, re-training, and small business loans.
We also need carbon based tariffs.
“Much of multinational corporate top management does not need a vital and healthy American workforce to thrive. Yet they do need a strong foreign military presence.”
Every foreign economy and corporation that is whipping us hands down seems to be able to do it without requiring their military to bully the rest of the world. It just shows how flawed, doomed, and self-deceived our entire way of thinking and acting has become.
Vinny
“First, through an exchange rate appreciation of the currencies of China and …”
China said it won’t do that.
“Secondly, labor rights agreements and environmental standards in the developing world …”
China said it won’t have any of that.
“Third, rising living standards in the developing world …”
It is high time to stop dreaming about these and other unrealistic “solutions”.
Americans thought all the problems were caused by the Republicans so they elected Democrats, only to be sold out again.
The US political system is corrupt far beyond the point where policy debates matter. When the ruling elite is looting the public in broad day light, bickering over liberal/conservative philosophies only serves to distract. Counting on China and others to changes their ways only demonstrates desperate self-delusion.
Fromchina,
you express a very lucid point of view about the current state of American self-delusion, which I encountered in other parts of the world besides China. It’s like this country lives in an anternative reality.
Vinny
Good piece…..except Rob’s complaints about deficit hawks are really complaints about Bush Republicans. True deficit hawks in no way supported the bailouts last fall. They’ve argued for recapping the banks from the start. And they don’t like deficit spending on the wars in Iraq or Afghanistan…
If he means that Republicans are acting hypocritically having supported runaway deficits and, crucially, a dramatic increase in Medicare’s unfunded liabilities via the drug benefit, then he’s right.
Though I wonder, would he publicly call for the repeal of that drug benefit to make current deficit spending more sustainable???
This is the point I was making. The use of the term deficit hawks to describe those who were/are for big spending is inaccurate.
I’m a deficit hawk, and I opposed both the Iraq invasion and the Afghanistan occupation. I also opposed the Too Big To Fail doctrine from the beginning and foretold the collapse due to their nefarious activities.
So Mr. Johnson is either being intentionally dishonest, or he is playing partisan politics.
Both suggest that his words are vapid and unbecoming of further consideration.
Matt,
Thanks for your comment. However,
1. Your heated tone suggests you are deeply invested in this issue and may not be fully objective.
2. Although he could have been more explicit, the “deficit hawks” tag in context refers to policy makers and influencers, like economists, lobbyists, and big donors (note his remarks about the executives of multinational and “Many high-income earners who finance politics”).
3. One data point (yourself) is not proof.The existence of a few outliers (citing yourself as an example) does not disprove a generalization. I have no doubt you are not alone, but your argument as it stands is not sound.