By Servaas Storm, Senior Lecturer at Delft University of Technology, who works on macroeconomics, technological progress, income distribution & economic growth, finance, development and structural change, and climate change. Originally published at the Institute for New Economic Thinking website
The Great Financial Crisis of 2008 deeply scarred the U.S. economy, bringing nine dire years of economic stagnation, high and rising inequalities in income and wealth, steep levels of indebtedness, and mounting uncertainty about jobs and incomes. Big parts of the U.S. were hit by elevated rates of depression, drug addiction and ‘deaths of despair’ (Case and Deaton 2017), as ‘good jobs’ (often in factories and including pension benefits and health care coverage) leading to careers, were destroyed and replaced by insecure, freelance, or precarious ‘gigs’. All this is evidence that the U.S. is becoming a dual economy—two countries, each with vastly different resources, expectations and potentials, as America’s middle class vanishes (Temin 2015, 2017). The anger and despair crystalized into a ‘groundswell of discontent’ among those left behind, which likely helped to propel Donald Trump into the White House on the promise of ‘making America great again’.
The task looks Herculean because, as most economists would argue, the U.S. is riding on a slow-moving turtle and there is little politicians can do about it. This view is founded on the evidence of a secular decline in aggregate total-factor-productivity (TFP) growth—a widely used indicator of technological progress, fondly known as and measured by the ‘Solow residual’. Dwindling TFP growth, which is in this view taken to reflect a general malaise in exogenous ‘technology-push’ innovation, reduces the rate of growth of potential U.S. output—this is the slow-moving turtle. Potential growth is exogenous if one assumes, as is commonly done, that the alarming crisis of U.S. productivity growth crisis is exclusively due to supply-side factors such as excessive (labor market) regulation, undue business taxes, an insufficiently skilled labor force, and too little competition (also from abroad). Demand does not matter in the long run and hence the TFP growth crisis cannot be lastingly cured by fiscal stimulus (as Trump seems to propose), higher real wages, or a restructuring of the private debt overhang. In this view, because demand is side-lined, rising inequality, growing polarization and the vanishing middle class play no role whatsoever as drivers of slow potential growth. They simply drop out of the story. I think this is wrong.
The U.S. economy is suffering from two interrelated diseases: the secular stagnation of its potential growth, and the polarization of jobs and incomes. The two disorders have a common root in the demand shortfall, originating from the ‘unbalanced’ growth between technologically ‘dynamic’ and ‘stagnant’ sectors, which—crucially—is bringing down potential growth. To understand how the short-run demand shortfall carries over into the long run, we must first rethink the Solow residual, which economic textbooks define as the best available measure of the underlying pace of exogenous innovation and Hicks-neutral technological change (Furman 2015). But it can be shown, using national-income accounting, that there is no such thing as a Solow residual, because it must equal—as a matter of accounting identity—either ‘weighted-factor-payments’ growth or ‘weighted-factor-productivities’ growth. My empirical analysis using BEA data for the period 1948-2015 shows that this is the case, bringing out that the secular decline in aggregate U.S. TFP growth is due primarily to secular declines in aggregate real wage growth and aggregate labor productivity growth.
The question is what causes these. I argue in a new working paper on both theoretical and empirical grounds that the suppression of U.S. real wage growth—what Alan Greenspan called the “atypical restraint on compensation increases [that] has been evident for a few years now and appears to be mainly the consequence of greater worker insecurity”—has been the main driver of faltering labor productivity growth and hence of TFP growth as well. This influence of wage growth on productivity growth can be alternatively explained as ‘induced technical change’, ‘Marx-biased technical change’, or ‘directed technical change’—but the key mechanism is just this: rising real wages, as during the period 1948-1972, provide an incentive for firms to invest in labor-saving machinery and productivity growth will surge as a result; but when labor is cheap, as during most of the period 1972-2015, businesses have little incentive to invest in the modernization of their capital stock and productivity growth falters as a consequence (Storm and Naastepad 2012). Globalization enabled the establishment of this low-wage-growth regime, in combination with domestic labor market deregulation and de-unionization. Financial globalization, in addition, enabled the rich to have their cake (profits) and eat it (by channeling them to offshore tax havens or into derivative financial instruments). In this way, trade and financial globalization have been essential building blocks of the dual economy (Temin 2017).
But the story so far is by no means complete. My growth accounting analysis for the U.S. economy during 1948-2015 shows that the slowdown in aggregate productivity growth is hiding from view a growing divergence in productivity performance and technological zing between a ‘dynamic’ sector (which includes ‘Manufacturing’, ‘Information’, FIRE and ‘Professional Business Services’) and a ‘stagnant’ sector (which includes ‘Utilities & Construction’, ‘Educational, Health & Private Social Services’ and the ‘Rest’, made up of fast-food services, arts & entertainment, recreational and other services).
The growing segmentation suggests a Baumol-like pattern of ‘unbalanced growth’ between a technologically ‘dynamic’ sector, which is shedding jobs and workers, and a ‘stagnant’ and ‘survivalist’ sector which acts as an ‘employer of last resort’. The growing segmentation between these sectors leads to a structural shortfall of aggregate demand, as workers shift from higher-paid dynamic to lower-paid stagnant activities, and this employment shift depresses labor productivity and real wage growth in stagnant activities. Demand growth, when lowered over a long enough period of time, starts to depress dynamic-sector productivity growth as well, hence aggregate potential growth comes down. Unbalanced growth causes premature stagnation.
Following this logic, the intentional creation of a structurally low-wage-growth economy, post 1980, has not just kept inflation and interest rates low and led to workers ‘traumatized by job insecurity’ (in Greenspan’s words) accepting ‘mediocre jobs’ in the stagnant sector—it has also slowed down capital deepening, the further division of labor, and the rate of labor-saving technical progress in the dynamic core. Hence, through the well-known Kaldor-Verdoorn effect, productivity growth in the dynamic sector has been depressed as well (see Basu & Foley 2013 for evidence for the U.S. on this relation). Household loans and corporate debt, obtained at low interest rates, helped to keep up autonomous demand growth during 1995-2008 and thereby temporarily masked the fact that the U.S. economy was on a long-term downward trend. A second factor helping to hide the secular stagnation was the ‘technology push’ originating from the rapid advancement of ICT, AI and robotics—but (as I argue in the paper) the technological revolution reinforced the dual nature of the growth process, as it led to labor shedding by the dynamic sector, forced ‘surplus workers’ to find jobs in the stagnant sector and depressed productivity growth in the stagnant sector.
Fiscal and monetary policies were far from supporting a shift back to balanced growth—and helped turn the U.S. into a dual economy. As the gap between downward structural trends (and deepened dualism) and the debt-financed mass spending bubble became unsustainable, the façade of ‘The Great Moderation’ fell away: The structural problems could no longer stay hidden. I believe these mechanisms underlie both the secular stagnation and the dualization of U.S. economic growth. The U.S. economy may well be ‘riding on a slow-moving turtle’, but that is because its (monetary) policymakers and politicians have put it there. The secular stagnation is a consequence of ‘unbalanced growth’ and it signals a persistent failure of macroeconomic demand management.
Secular stagnation is not fate, however. To cure the U.S. economy from the two diseases of secular stagnation and the polarization of jobs and incomes, the demand shortfall, originating from technologically ‘unbalanced’ growth, has to be offset. This requires steering the economy closer to ‘balanced growth’ by a policy of coordinated macro-economic management and guidance, and by sufficient ‘countervailing power’ of workers vis-à-vis the powerful vested interests in the dynamic (FinTech) sector, which is needed to keep real wage growth in stagnant-sector activities close to real wage growth in dynamic-sector activities. Tellingly, the trade liberalization, labor market deregulation, and business tax reductions proposed by supply-side economists wanting to boost TFP growth (intended to raise potential growth) will backfire, as exactly these reforms will lock the U.S. economy into a path of ‘unbalanced growth’—thus further feeding the groundswell of popular discontent with unintended but potentially upsetting political consequences and risks.
Their mistake is to lopsidedly assume that potential output growth is determined by the inexorably exogenous factors of ‘technology’ and ‘demography’, while demand growth is simply irrelevant in the long run. It is high time to write off the intellectual sunk capital invested in this—mistaken—belief—if only because on present dualizing trends the U.S. economy cannot preserve its social and political legitimacy for long.
References
Basu, D. and D. Foley. 2013. “Dynamics of output and employment in the U.S. economy.” Cambridge Journal of Economics 37 (5): 1077-1106.
Case, A. and A. Deaton. 2017. “Mortality and morbidity in the 21st century.”
Furman, J. 2015. “Productivity growth in the advanced economies: the past, the present, and lessons for the future.” Remarks at Peterson Institute for International Economics, July 9.
Storm, S. 2017. “The New Normal: Demand, Secular Stagnation and the Vanishing Middle-Class.” INET Working Paper.
Storm, S. and C.W.M. Naastepad. 2012. Macroeconomics beyond the NAIRU. Cambridge, Mass.: Harvard University Press.
Temin, P. 2015. “The American Dual Economy: Race, Globalization, and the Politics of Exclusion.“ INET Working Paper.
Temin, P. 2017. The Vanishing Middle Class. Prejudice and Power in a Dual Economy. Cambridge, Mass.: The MIT Press.
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Yes, yes, Hell yes!
—Just had to get that off my chest, now I will read the rest of the post.
And then he ends with this!
Technology and demographics are false flags and non-sequiturs; Trump as showing the non-legitimacy of the ruling class!
I’ve been saying that for years! If only my wife had written it down… Where is my Boswell to my Johnson?
Again, an analysis that completely disregards resources and the environment.
Our current system evolved out of colonialism. As more and more countries won their independence, it became harder to exploit these for their resources. But since they had plenty of resources, they kept on exporting a lot of these and the big resource consumers had to make sure these stayed cheap.
Debt-to-GDP was not an issue because most of these countries started with a clean slate. But now that many countries are way above the 100% level, it will become an issue. These debt-to-GDP levels will determine who gets future resources.
We know that Japan is looking to play some financial tricks because of their high debt ratio and it looks like the world is letting them get away with it. But for how long? We know that many countries are also concocting tricks to keep on getting a share of world resources that was based on colonial distributions and not necessarily on today’s productivity.
Alliances have always been key to getting a good share of resources and these are sure to evolve over the next decade as resources get scarcer.
The other reality is that despite all this bad economy and job market for Americans over the last few decades, they still get to consume an inordinate percentage of world resources. The stagnation seems not to have mattered much!
All this talk about finally getting the economy growing again gets me wondering what percentage of world resource Americans think they can consume considering they already get an unfair share and other countries are coming out of the shadows.
This economic malaise is linked to global resource distributions and until we look at it that way, wr will keep on wasting them, leading to wealth destruction.
Deb to GDP isn’t necessarily a big problem. It depends on who owes what to whom.
Japan’s debt to gdp is mostly internal, so it results in transfers between govt and households/corporations which own the debt. Plus japan issues its currency and its debt is denominated in yen. So japanese govt can’t run out of debt paying capacity.
As far as americans consuming too many resources, yes your are right, no doubt. But i think it doesn’t make them better off, necessarily. If regulation forced cell phone makers to make phones that lasted 10 years, instead of, say, 2 years as seems to be the case these days, that would be a net positive for productivity and the environment. It might not be great for the profit margins of miners, manufacturers or chemical companies!
I disagree. If this debt is owed to a small group internally it is a big issue.
For the last 3 decades, Japan has been living off its high quality exports. This edge is slowly getting eroded and their energy sources are getting tired.
When they become net importers, they’re in trouble… they will face resource and energy issues if that happens.
As for the US, in no way am I saying its population is necessarily better off because of its easy access to resources.
What I am saying is that :
1. The country gets to consume an unfair share of world resources. A ratio that could very well drop over the next few decades.
2. If this situation is not in the equation, then you can expect more bad policies leading to a waste of resources.
3. This will lead to more poverty as unforeseen constraints lead to forced ad hoc cuts
4. I don’t see any policy based on limited resources. They are all based on more.
In Japan internal transfers don’t seem to be an issue for Public Debt, because it’s paying close to zero interest rates.
Unlike, say in Brazil the Public Debt there isn’t even serving the purpose of providing risk-free income to the already wealthy. But it’s still a useful charade, in the sense that it maintains the fiction that the government needs to borrow its own currency from private investors.
Ya know, David Rockefeller, the prince of darkness, just died a short time ago, bequeathing a large chunk of the country of Australia to his grandnephew, Mark Rockefeller.
Mark Rockefeller presently “earns” hundreds of thousands a year in payouts from the US government on his land, which lies fallow in Idaho, for lying fallow in Idaho!
That is, those hundreds of thousands of dollars per year in taxpayer payouts to Mark Rockefeller, depletes the American tax base (along with all those other payouts to the rich and super-rich, for owning the lands), which necessitates more and more borrowing which increases the national debt, etc.
This demonstrates the underlying agenda for the conservation movement which was foisted upon us by the Rockefellers and other members of the super-rich.
This fellow’s paper is rather circuitous, given the obviousness of everything: they globalize wages downwards with their jobs offshoring, and insourcing of both foreign visa replacement (scab) workers and undocumented workers. (A perfect example of the insourcing of undocumented workers to drive wages downwards: NAFTA, which allowed for the private ownership of the Mexican banking system — forbidden prior to the verbiage inserted into NAFTA — and the banks which were purchased by American banks and Swiss banks then moved with the local politicians to privatize those farmlands in Mexico, dejecting the small tenant famers, leading to a mass exodus north to seek any jobs they could find.)
Add to this the globalization of housing in America and elsewhere (which is why Ontario and Vancouver in Canada passed taxes on foreign purchases of homes there), driving up housing costs dramatically by the foreign purchase of homes, along with corporate purchases (by such well known private equity landlords as Blackstone Group, and others, plus those condos purchased as set asides for AirBnB and similar enterprises (unregulated hotels/motels, etc.).
A perfect case-in-point is Seattle: 50% or more of houses in King Country (Seattle, Bellevue, Redmond, etc.) costing over $500,000 are purchased by mainland Chinese, with who knows the remainder purchased by other foreigners and corporate entities!
In certain Seattle neighborhoods, they have razed affordable housing (mainly apartments) and put up unaffordable or hard-to-afford condos instead, with low occupancy rates. That is, they are purchased by absentee owners, either as investments or to move money to America, or as AirBnB-type enterprises, etc. With the lowered occupancy, the local consumer base for the local small merchants and businesses has disappeared, rendering more and more empty commercial Main Street enterprises, leading to swaths of property destruction.
Definitely a one-way trip to economic hell!
So, globalize wages downwards, while globalizing housing upwards — all to inflate financial assets of the super-rich!
(Please note that the outfits which are now telling us that our national population is getting too low, and hence more and more immigration is necessary to replace the “work force” are the very same outfits which tell us fewer and fewer workers are needed due to increase in automation (or jobs offshoring, etc.)!
“The other reality is that despite all this bad economy and job market for Americans over the last few decades, they still get to consume an inordinate percentage of world resources. The stagnation seems not to have mattered much!”
Consumption driven by auto loans,student loans, and credit cards matters to those who owe the money…also, don’t know how much time you spend in the states but the homeless issue is a real eye opener in seattle, so unequal distribution is evident to the naked eye but the powers that be have messed with the numbers and conjured (“atypical restraint on compensation increases [that] has been evident for a few years now and appears to be mainly the consequence of greater worker insecurity”)…by the magicians in the central bank to justify their nefarious policies. I agree with your point that resource constraints are the elephant in the room and autonomous vehicles and a full fleet of electric cars ignore that stark reality, and that america as a whole consumes too much stuff, and largely crapified, unhealthy, and useless stuff at that.
And the jargon in no way differentiates between the low added value sectors and high added value sectors.
Since America has a resource intensive economy, it has done everything in its power to keep resources cheap.
And many states suffering the most are those dabbling in low added value sectors with no good wealth redistribution mechanisms.
If Americans want more redistribution, they need a better social net or to simply let resources get more expensive so there is less discrepancy between ESSENTIAL primary sectors and discretionary high value added sectors.
Sorry this post is meant for justanotherprogressive below.
you’re making good points, thanks
Actually, we need to make those people profiting off of those “cheap” resources pay the true costs for those resources. The debt created by the use of those resources shouldn’t be paid by us but by them…..
To make it clearer:
Let’s look at a back of the envelope analysis of a micro example, one that I am very familiar with, Butte, MT.
The copper kings made vast amounts of money that they got for using a resource that belonged to everyone in the United States – the copper that was in the ground, and they got that resource basically for free. They did have to pay the labor to dig it up and process it, but economists would only have looked at the amount of wealth made from those mines v. the costs to produce it, i.e., labor, and the taxes on their profits. They would have declared Butte, MT a positive influence on Montana and the US’s economy. Economically, everything is great!!! They wouldn’t have factored in the fact that the people of the US were losing a resource that was being used up or the damage that was being done to the environment because of that production.
Now, the copper is gone, and Butte MT is a Superfund site. How would an economist now look at Butte? They would say Butte, MT is now not producing wealth but has huge debts due to environmental cleanup. They wouldn’t look at where those debts came from or why, just that Butte, MT is a drain on the economy of Montana and the United States because of the tax dollars now needed. Bad for the economy!!!!
Why should the people of Butte, the people of Montana, or the people of the US pay the debt the copper kings created? Kind of reminds me of the bailouts…..
And this didn’t happen only in Butte – it is happening all over the world. Countries are going into debt because of the loss of their resources that they gave away, or were taken from them…… Turns out those resources weren’t that cheap after all, were they?
And then consider what global warming is doing to food resources (i.e., desertification)……where is that accounted for by economists?
When economists fail to actually price in the cost of the resources used, they give a false view of what the economy is, and they let the “wealth-generators” get away with not paying their fair share (good for the economy, ya know…..). Yet, I still see no economists even attempting to consider the actual costs of resources used or lost, and its effects on the economy……
And this is the cake under all that frosting…..
Meanwhile, I’m giving away all my data for free (actually I am paying to do it because I pay a carrier) so that my carrier can make great wealth……so it goes…..
Exactly!
Agreed. And everything that you say about copper can be said about fossil fuel energy resources, with one difference. Without surplus energy from fossil fuels, none of the other resources have much value. Energy resources are abundant, but high surplus energy resources were a one-time gift that fell into our hands and we squandered it to throw a big, two century party that is drawing to a close.
It is this dynamic which both created our prosperity and is now gradually taking it away. Let’s hope that the gradual part continues, it may not.
Energy and resources are too cheap. Proof lies in the excess of goods and planned obsolescence.
The US system subsidizes energy and resource production. This leads to undervalued primary and essential sectors and overvalued discretionary sectors.
This economist, like all other economists, like to analyze a cake by tasting the frosting on top……everything is about big business and finance and GDP and debt and trade; they don’t want to analyze where the resources come from that support all of this “frosting” (I guess basic resources just magically appear – without economic cost!!) and how the changing environment affects those resources…..interesting enough, the bio at the top says this author studies climate change……
If an economist fills his/her writing with enough of the economic jargon of the day, then he/she thinks he/she has said something important, even if he/she says nothing new……Sorry, but there are others who have said the same thing (we need stronger labor unions and better governmental economic policies) without all the jargon……
To admit that there are environmental and ecological constraints on growth, in terms of resources, population, distribution and literally every tangible aspect of our existence, requires the near complete abnegation of the entire human project.
Our entire history as a species is one where the primary driver is growth. Even hunter gatherers, who grew into agrarian societies. The idea of growth is so integral to who we are as a species that it leeches into all aspects of society. Many can often accept the idea that growth may stall or temporarily move backward, but very few seem to be able to imagine or admit that growth could cease altogether.
I do think it is possible to move beyond this base human drive, but I also believe the probability of it happening on any scope large Enough to make a concrete difference on a global environmental scale, is unfortunately extremely slim.
A long way of saying an economist including unmoving environmental and ecological constraints in their models, requires them to go against (I’ve found it tends to be taken as an individual attack) base human nature, and doing so rarely (9/10) fails to generate a dismissive or derisive, irrational and often hostile response.
Seriously? Perhaps you are thinking that the only humans that count are those greedy ones that only want wealth and power? Or perhaps you believe all the ads foisted upon us? There is no basic human drive towards growth, but I will agree that in every civilization there are a few people who are more greedy than others and want more than everyone else. History shows most humans to be fully content with everyone having about the same as everyone else. The Egyptians were content to work together and share – it is only the Pharoahs and priests who wanted “growth”. Most Native Americans were content with the way they shared the land, it is only a few priests and Kings, like with the Mayas and Incas who wanted “growth” -……I could point out civilization after civilization to you…….and btw, with just about every civilization that failed, it was the “growth” that the few greedy types wanted that destroyed them…..
Perhaps a balanced economy should be the goal, not growth. Growth only means someone is getting more than their fair share at the expense of others…..
Sometimes you have to look around you to to see what is real – you won’t get it from economists or anyone else who wants your money…..
You miss my point.
“History shows most humans to be fully content with everyone having about the same as everyone else.”
This is completely true, and I agree 100%
My point is. Humans, even contented, fully equal ones have a drive to grow as families, as communities, as societies. The same drive for growth as any other species.
Whether humans pursue growth equally or unequally, they are still growing. They still require more resources to continue growing. Even the contented egalitarian north American native societies grew, North America didn’t just busrt out of nowhere with a thriving population of more than 20 million.
Please give me one example egalitarian or otherwise of a society that didn’t grow and thus consume more resources to grow.
Growth is growth, just because it is equal doesn’t negate that. My point is we as a species cannot have infinite growth, equal or unenequal.
One may last for longer than the other but neither is sustainable.
In Collapse, Jared Diamond cites the people on Tikopia. 1,200 people on an island of 1.8 square miles. I assume it’s easy to be responsible when you can walk around your land in a day and see everything that you have to work with.
Thank you for clarifying.
To answer your question: “Please give me one example egalitarian or otherwise of a society that didn’t grow and thus consume more resources to grow.” , let me remind you of those nomadic societies that still exist, like the Taureg in Africa, or the Inuit in Canada, or the Chukchi in Siberia……they live off of renewable resources – they aren’t depleting resources that belong to all of us…
Before the missionaries got to the tribes in South America and convinced them that Jesus meant for them to be rich, equality was maintained on an annual basis. Once a year the entire tribe got together and those who had had a really good year were expected to give away their “riches” to the poorer members (riches could be extra blankets rather than money). The better-off members understood that helping each other was for the good of the community–something our capitalist elite never learned.
This author is addressing public debate but debate within his profession. Unless his ideas are championed by a public figure, such as Sanders in the US, they have no weight in public discourse. What is truly awful is the state of the Economics profession which has managed to suppress these and similar ideas since they were first thought through, in one form or another by Marx, Keynes, Michał Kalecki as implied in this article. So-called responsible politicians, like the policy-wonk Clintons surrounded themselves with aggregate demand deniers, secure in the idea that responsible mainstream economists at the investment banks had all the answers. That is the state of the ideas that rule.
Moneta says: “Again, an analysis that completely disregards resources and the environment.”
Yes. Also, uhm, agriculture. Isn’t that a rather critical oversight?
Economists are such bullshitters.
Why am I not surprised that a micro-economist would fail to include the two most fundamental characteristics of the US economy circa 2017? Empire and Energy.
The USA still has one economic sector that is still capable of high rates of growth–the production and sale of weapons of mass destruction. We spend nearly as much as entire rest of the world combined on our weapons systems to protect the Empire and create cost-plus profit rates. Under Obama the US market share of the world arms trade rose to nearly 85%. It took self proclaimed master deal maker Trumpet only a few months to seal a deal worth many times more by modernizing the weapons systems of Saudi Arabia– a country that Trump recently correctly identified as being one of the primary supporters of ISIS. But there is nothing new here– the relationship started with the first drop of oil that was extracted from the desert sands. Along the way it was punctuated by the well documented business ties between the bin Laden and Bush families. And when Dick Cheney needed a cadre of mad fundamentalists to serve as fall guys for the 911 false flag terror attack, our long term friends in the Royal Family were only too happy to supply them. So who better to sell weapons to?
The other unmentionable (to economists) characteristic of all contemporary industrial societies is the exceptionally close correlation between growth in GDP and growth in energy consumption. Since these same macro-economists seem to have about the same time frame in their thought horizon as the life span of a mosquito, it is easy to see why they think that linear projections of energy use and population represent useful forecasts of the future. Only an economist could look at a phenomenon like fracking shale to extract oil from wells that deplete at a 50% annual rate as the answer to the world’s future energy needs. Or somehow believe that rates of new discovery peaking in the 1970’s is no predictor of present and future rates of production.
“Peak Oil is so last year–” “And who needs it for self driving electric cars?” Climate change? We’ll just use 3-D printers to build a sea wall around New York and Miami and grow all our food in automated vertical greenhouses.
Huh, interesting. Makes some sense.
Growth, growth. I made a fine living based on growth. I treated cancer. I never thought that such growth was good. And cancer is not much of a problem because it grows. It is a problem because it causes terrible pain. The pain of economic growth is the destruction of families of the environment, of the social cohesion. That is the pain growth produces. I suppose that the cancer cells themselves feel pretty good about reproducing while the body deteriorates. Our society is the cancer, the growing growth, the rest of the world is the suffering body.
Unfortunately, great analogy.
Now we get to the underlying problem; who is the “society” to whom you refer?
In essence, a “dual economy” produces a “dual society.” Not just intermingled classes, but existentially separate “volk.”
At heart I fear this discussion will turn upon the contest between “dominion,” and “stewardship.”
There is a reason why the (now fewer than 10) individuals who own as much as much of the world’s wealth as the lower 50% are known as the Malignant Overlords. The start of the solution is to surgically remove them just as you would treat any other deadly cancer. The French long ago invented the proper scalpel.
The King was executed in January’93 and Saint-Just and Robespierre were executed in July’94. That period saw the Grand Terror and the period that followed was twenty five years of general European blood letting.
Surgery is bloody and the outcome is always uncertain. Perhaps we will devise a means for non-violently cutting off the blood supply to the Malignant Overlords who have their tentacles fastened to the very lifeblood of the planet, but I see no reason to believe that will happen before the patient (planet) dies from heat exhaustion and species extinction.
Thank goodness Obama cracked down on the bankers.
Thank goodness Republicans are eager to spike the punch bowl and supply bankers with all the hookers and blow they want.
That’ll save us for sure.
Whether the water is salt or fresh,….
…monsters are coming to eat your flesh.
Oh yes! My significant other used to remark that b—jobs (Ross Perot’s “sucking sound”) paid much more after the “O” man appeared on the scene with his Mighty Pimp Cane. (He was channeling Teddy Roosevelt; “Speak softly and carry a big stick.”) It used to say that that Arch Demon Bill Clinton required his b—jobs “on the House.”
Thank goodness Obama cracked down so hard on the banksters that they are rushing to pay him even more for His presence at inspirational prayer meetings than they paid either of the leaders of the Clinton Crime Family.
Hold on now! Are you suggesting that his pay of $3 million plus for speeches cannot be attributed to his superior skill set, which he stated in his 2012 State of the Union Address was missing among the American workers, which was why those business leaders offshored those jobs?
Boggles the mind . . .
Who captures the benefits of all this growth that economists tell us is the panacea for all our ills? Productvity and output growth in the midst of suppressed demand (due to low wage growth in advanced economies) leads to a production and output surplus that must find a ready market to consume said surplus. Enter trade agreements where developing economies are essentially forced to open up their markets and allow the dumping of advanced economy production surplus “or else”, with grave consequences for local businesses who are simply unable to compete with this imported surplus being dumped on their doorstep. While the author’s analysis is mainly US-centric, rest assured that productivity growth in the US context need no longer rely on US demand growth as an incentive to up production because trade liberalization has created plenty of open markets for production and output surplus over and above that which local US demand can absorb on its own. My suspicion is that this widening of the options pool via trade liberalization vis a vis where demand can be generated to absorb production output for US firms is also leading to the unwillingness on their part to raise wage levels (which in theory raises demand) as trade agreements allow them to access demand on a global scale, so the incentive to pay higher wages locally to raise local demand is somewhat diminished by this hedging dynamic…
Canadian households have gone from 80% debt to income to over 160% in the last decade or so. And government debt has also doubled.
Meanwhile, there are plenty of countries with low governement and household debt.
The writing is on the wall. Canada and other developed countries are sure to use all kinds of financial shenanigans to get that debt level down and get to keep on consuming resources but how are those countries with low debt going to take it?
It’s not obvious to me that future ressources will necessarily be consumed by developed countries without some friction.
But rare are those who talk about this. All that is mentioned is how all those poor 99% ers in developed countries are being held back.
>” All that is mentioned is how all those poor 99% ers in developed countries are being held back.”
By this, are you referring to, e.g., “overconsumption” of opioids?
Not sure what you mean by “developed countries”…are you suggesting that debt peonage is a justifiable constraint on a vaguely defined “overconsumption”? Does “development” need lead to rust belts and opioids?
I’ve gravitated towards a visceral aversion to the use of the word “growth” within “economics”, especially without the caveat of ‘relative to what?’. This post presents real facts and stats(with real references), that suggest that “growth” of inequality was a predictable outcome of policy, and this polarization has led to pernicious social outcomes(Case & Deaton). From my POV, seems that focusing on the inequality among countries has been a disempowering distraction from the inequality within countries, where you at least have a better chance of influencing policy.
I’m saying that we in the developed world are consuming too many joules per capita (i.e. resources and energy).
If there is a redistribution of this consumption of resources and energy on a global scale and our leaders don’t adjust for this, our economy will get worse.
” per capita” does nothing to contextualize inequality, and “our economy” has already been getting worse for most. What policies would improve quality of life, locally?
Yes it does because per capita energy and resource use in North America is exorbitant relative to most of the world and Americans want America to be great again, meaning that it would need to consume even more resources and energy than it does right now.
No, it doesn’t…this seems like conjecture affected by sloganeering…
How does ” per capita energy and resource use in North America”, put inequality within North America in context?
Because if the US ends up getting a smaller share of global energy and resources, the sharing internally will get even harder.
In the context of inequality—at the lower end of survival, what defines basic needs? at the upper end of greed, is more than enough ever enough? The lower limit of physical quantities is zero, and the upper limit is NOT infinity.
. . . All that is mentioned is how all those poor 99% ers in developed countries are being held back.
How about all those poor 99% in developing countries being held back. Here is some irony for you.
From this Saturday’s Globe and Mail business section is a lengthy article regarding the take over of Alberta’s oil and gas assets by Chinese “investors” titled “China’s return to the oil patch”, and here are a few choice paragraphs from it.
. . . Last fall, Shanghai Energy Corp, and an affiliated numbered company also listed at the Springbank-district address bought oil and gas properties from Endurance Energy Ltd., a Calgary-based producer that, unable tp pay its bills, sought bankruptcy protection in the spring of 2016. It owed banks roughly $211 million.
The deal’s backers are among a new breed of Chinese investors who are plowing fresh funds into Canadian energy companies in a takeover binge that has largely escaped public notice
Feasting on assets from debt hobbled domestic producers and companies in receivership, a handful of well connected Chinese financiers and oil executives has spent nearly $2 billion in a series of deals since Ottawa imposed restrictions on buying by state owned enterprises in 2012, a move thought to have soured China on the Canadian oil patch.
——————————
The influx of capital, tallied through public statements, corporate registrations, court documents, confidential brokerage reports, as well as interviews with industry executives and investment bankers, is led by an array of small companies that share directors and addresses, including some in the Britsh Virgin Islands, a noted tax haven – all with origins in China.
——————————
Mr Deng oversees a growing stable of Canadian investments from Changchun Sinoenergy’s head office on the 29th floor of the swooping Zaha Hadid-designed Wangjing Soho, one of Bejing’s more striking office complexes. Inside a staff of 100 work at cubicles. A sign near the front desk says “carrying out decisions with high efficiency, building careers”.
The spending is far from over.
By the end of this year, Sino-energy expects to build up production to 70,000 barrels a day, rising to 100,000 by 2018 said Hu Hai, a consultant for the company, in an interview. That will vault the firm “into the top 20 in Canada,” Mr Hu said.
Operating from China, he said Sinoenergy can benefit from cheaper labour and an unsentimental approach to the Canadian oilpatch, which Mr Hu faults for getting fat on the good times. “We fired many high level managers. We simplified management teams and reduced those costs,” he said. He figures the company can turn a tidy profit with US oil prices as low as $48 (US).
“Why do so many oil companies lose money? It’s because of heavy financial costs, property depreciation and management costs. The CEO of a small oil company might enjoy a $500,000 (Canadian) annual salary. He also has many vice presidents enjoying luxury offices. It’s all very high cost.”
Changchun Sinoenergy benefits from cheap capital at Chinese banks and from networks of investors with cash to spare and a desire to find a safe place for it. None of Sino-energy’s investors are in Canada, he said.
He identified Priceline as “one of our companies,” used for tax purposes but also because of scrutiny on Chinese money. “Sometimes, Chinese investors have to invest in Canada by setting up a company in the BVI” he said. It is related to “passing federal government checks a bit faster”. . .
———————————
The investments are part of a wider outward flow from China’s borders that has raised concerns among senior government officials in Bejing. Indeed, the demand has spawned a new sub-industry of go-betweens in Calgary who seek out potential investments then go about raising capital to buy them from their contacts in China.
In the paragraph above, the last sentence makes no sense as written unless one substitutes the word “for” for “from” so it reads “go about raising capital to buy them for their contacts in China. My take anyhow.
Robert Kwauk, the Bejing managing partner at Blake Cassels & Graydon LLP, said he occasionally receives inquiries from what he calls “really really small” Chinese buyers, people who identify themselves as representing investment companies or private equity funds.
“They’re certainly not oil companies – they’re just really no names.” Mr Kwauk said.
But they want to know about buying small oil and gas companies in Alberta, the kind that might have only a few wells, but nonetheless pump out regular barrels. That can make for favourable math.
“If you buy a house in Vancouver for say, $3 million, you get a very average house.” said Mr Kwauk. . . . By comparison, in Alberta, “for $3 million, you can get a small producing asset that spins out regular cash flows.
==========================
Where are the vaunted Canadian pension funds during this? They want to set up toll booths at the front door of our residences, and if the money isn’t enough to pay the pensioners, raise the toll some more.
The Chinese government wants to slow or eliminate capital flight from China, yet it’s the Communist Party elite, which represents the government, getting their loot out, and as far as discernable, the Canadian government’s scrutiny on Chinese money is “bring it in, we don’t care if it’s loot”. Which is super ironic. Let’s say a Canadian drug dealer is successful enough to amass a couple of million dollars in ill gotten gains, and the government catches him or her, it all get’s taken away.
I found myself enjoying my Shadenfreude at this turn of events in the oilpatch. When I was out there some decade and a half ago, I lost one tooling jawb after another to China, the reason being, I was too expensive. When discussing this with my soon to be ex customers, the responses ranged from “too bad, suck it up” to a blank stare. Now, it ends up, the wealth created in China is stripped from the Chinese workers and used to buy up over indebted oilpatch companies for 10 cents on the dollar by the Chinese elite.
Frankly, the article should have been titled “Hey, Alberta, how do you like your Chinese overlords now?”. Remember those Apple slaves and how they work and live? That’s the future they have in mind for us. Unsentimental indeed.
Globalization is a disaster.
And QE amplified the problem as China was forced to match.
Now they’re coming back with their $$$ buying us up. But our boomers in the top 15% don’t mind because their houses are going up… it’s just a cycle and things always work out if you work hard and stay positive.
“Enter trade agreements where developing economies are essentially forced to open up their markets and allow the dumping of advanced economy production surplus “or else”, with grave consequences for local businesses who are simply unable to compete with this imported surplus being dumped on their doorstep.”
But this analysis is no longer quite right. The U.S. has a large trade deficit. We don’t dump goods on others (on balance). We have goods dumped upon us, fueled by the overall indebtedness of the bottom 90%. Meanwhile, since the consequences of IMF dictates became clear two decades ago, less developed countries have run trade surpluses, which hinder their consumption.
“The secular stagnation is a consequence of ‘unbalanced growth’ and it signals a persistent failure of macroeconomic demand management.”
Its not our “persistent failure”, its our “persistent feature.”
Nothing is more American than unbalanced growth and untamed demand.
Only a madman or an economist would believe Americans are capable of moderation.
I think this is an accurate explanation of why an unbalanced economy can only fail. It doesn’t prescribe the solution. But it analyzes the dysfunction quite well. It’s like Picketty’s analysis of how a seemingly modest 5% yearly gain for passive investments can skew the economy into hopeless inequality in short order. Crony capitalism doesn’t help. It just perpetuates the imbalance. Maybe the problem is supply. It has always been true that producers have not produced more than they can sell at a good profit – so that is an imbalance in the flow of capital. Hoarding wheat makes bread expensive and produces high profits. No amount of growth can fix the structural imbalance because it is the system. So saving the environment goes hand-in-glove with restructuring the economy away from useless growth and toward sustainability and balance. No? I think it is a good argument for a jobs guarantee program.
Thank you for this insightful post. Listened to much of a podcast interview of a prominent venture capitalist in Silicon Valley yesterday on Bloomberg View. Both the alignment of what Servaas Storm characterizes as the ‘technology push’ and the divergence between the VC’s view and Storm’s analysis are profound, with the no acknowledgement by the VC of the effects of technology on macro demand, or on those employed in both what have been dynamic and stagnant sectors of the economy.
The VC’s view is that everything that can be converted to being software-driven will be, and that those companies who develop and implement the best software will be “The Winners”. His term du jour is “Appification”.
Most everybody “talks their book” and it is easy to be a Luddite, particularly with the hacking and ransomware issues that have recently caused major issues and related concerns about where this is all headed in the “Internet of Things”. I would like to see more discussion and public policy attention devoted to Servaas’ points, primarily for the reason he highlighted in his concluding sentence.
The core insight of this article, that high and rising wages spur investment and technological advances, is correct, and was pointed out decades ago by Joan Robinson. Stagnant/declining real wages is an important reason for slow productivity growth. But there are several points in the article that are problematic in its own terms – apart from important omissions identified in other comments. The article gives undue weight to unbalanced growth between technologically dynamic and stagnant sectors.
First, manufacturing productivity has risen faster than in most other sectors almost forever. Since the 1950s, this has meant the sector produces ever more goods without comparable increases in employment. But employment in manufacturing held roughly constant until China’s entry into the WTO, trade agreements that were disastrous for US workers, and dramatic increases in the trade deficit. That’s when employment in manufacturing actually declined. The article does recognize that trade and globalization have contributed to stagnant wages and hence slow growth. But it situates the core of the problem in unbalanced growth among industries and fails to give enough weight to trade imbalances.
Second, growth has always been unbalanced in the sense described in the article. Differences in possibilities for productivity growth are a major reason that a car used to cost more than a 4-year college degree and now a year of college education often costs as much as or more than a car. In the past, the fruits of productivity growth were shared with workers in two ways. Workers in high productivity growth industries shared in the fruits of their labor through higher wages. But wages typically rose less than the increase in productivity. For example, productivity in steel production rose by 8% in the late 1950s, but real wages of steel workers rose by 3%. In the past, productivity growth also led to a decline in the price of goods produced in these high productivity growth industries, driven by competition among firms in the industry. This decline in the price of these goods raised the real wages of all workers. Even workers in low productivity growth industries saw a rise in their real wages, purchasing power, and standard of living. Unions also played an important role in sharing productivity gains in some sectors with workers more generally as they bargained for higher real wages that kept pace with productivity and wage gains elsewhere.
Increased consolidation and concentration in industries across the economy, however, have undermined this mechanism for broadly sharing productivity gains. Half the health markets in the US, for example, have four or fewer health systems today; many have just one. This enables healthcare providers to raise prices for procedures relative to costs even as treatments become more effective. Readers can multiply this example. Reductions in costs due to greater efficiency are now siphoned off in higher profits.
Increased concentration means companies can exercise some degree of monopoly power over the prices they command, keeping prices high and making most of us poorer. It also means they can exercise some degree of monopsony power, able to dictate lower prices for the inputs they buy – including lower wages for workers. The drastic decline in unionization has meant that there is no countervailing force to the power of employers.
Solutions run to national policies that set a living wage floor to wages companies can pay (Fight for $15), that make it easier for workers to organize and create a meaningful countervweight to the greed of the 1% (as the article also points out), and that make markets more competitive and undermine the monopoly power of employers over prices and wages.
Hey, I’m late to this party but if you ever check back, I have a question about your interpretation. You say:
The core insight of this article, that high and rising wages spur investment and technological advances, is correct, and was pointed out decades ago by Joan Robinson.
I take that statement to mean that what Storm claims to discover, that productivity is ultimately a function of high wages rather than investment or technology, is already well-known among (certain) progressive economists. If that is the case, then why does one read everywhere, including often in EPI’s own materials, that wage growth fundamentally depends on productivity growth? The standard interpretation of the famous EPI chart, that shows wage growth tracking productivity growth through the early 70s and then lagging, is always interpreted as “workers deserve higher wages because of productivity growth,” not “slow productivity has growth is an outcome of low wage growth.” Indeed, the scaling of the graph is such that no observable decline in productivity growth post 1973-ish is evident. And here is a standard EPI claim:
This does not sound at all like the claim that “we must raise wages in order to raise productivity.”
Sorry, but secular stagnation is caused by austerity. Period. A country with a growing population needs a growing wage base, and that means the amount of money in the economy has to be constantly increasing. That in turn means deficit spending. Every year. And not this crap where the money is in the billionaires pockets before it finishes drying. Cash for the chumps and fly-overs. Lots of it. Every year.
Don’t hold your breath. Nothing changes until that happens.
People discuss “economics” without first addressing “money”, seems futile.
Once you separate money creation from “work” it’s not surprising that you get all sorts of second-order effects that tend to devalue actual work. And requiring the society to continually take on additional debt in order to have more money doesn’t pass the “mathematically-sustainable” sniff test, i.e. you can only ever print the principal, not the interest due. Debt service eventually swallows rises in productivity, even (as we are seeing) with rates at or below zero.
And then every banking crisis is also automatically a monetary crisis as well. Bankers gotta lend, it’s what they do, and they always lend too much, especially when the consequences of doing so are socialized. Those consequences should not automatically extend to every user of the money, including those with zero responsibility for and zero gain from bad/fraudulent underwriting.
So
1. Separate money from credit;
2. Require work in order for money to be created.
As far as wages go, in 1964 the minimum wage was $1.25. In other words, five silver quarters. The value of five silver quarters today is: $16.75.
So my view is we don’t have an economic or a wages or even a resources problem, we have a money problem.
(And you’d think that any field with aspirations to being called a “science” might notice the 100% failure rate of debt-based money systems. With Jubilee you can keep resetting for a while and stay sustainable…and there’s a good reason we now associate that word with “happiness” and “joy”).
huh.
with linearly declining labor share of economy and (therefore?) linearly increasing asset prices, somehow we seem to be surprised that demand is falling and retail stores are empty. It has little to do with amazon
I for one buy stuff from amazon that retailers either do not keep (technical stuff), or have raised prices so much that amazon makes an obvious choice. Buying clothing from amazon makes little sense as you can’t try it out or see it earlier. That said I do buy safety clothing from amazon as local retailers dont keep it and local industrial outlets seem to expect to get away with blackmail level prices.
This argument only seems to apply to the US, yet the entire global economy has been crawling at a snail’s pace since 2008. The author is correct that there are structural issues at play, but he hasn’t identified them correctly.
‘Secular stagnation’ is here to stay because profit rates in the manufacturing sector have been steadily falling since the 1970’s (with the rise of Germany and Japan) as a result of the crisis of overproduction/under-utilization of productive capacity. The real economy has been rotting while the only growth since then has been from bubbles (Japanese real estate in the 80’s, US stock market in the 90’s, US real estate in the 00’s, Euro bubbles in the 00’s). What really drives GDP growth is industrialization and urbanization (this is why growth in the 16th, 17th, and early 18th centuries was anemic, and once that’s complete, it can only come from ‘urban renewal,’ bubbles, or external demand. It’s also important to remember how compound interest works: at 3% growth rates, the global economy would have double by 2060 and then double again by the end of the century, and not even with Africa booming will we get those kind of numbers.
Not even Keynesianism can solve this. Eventually you run out of useful infrastructure to invest in or repair and then what do you do when demand stays low? Fiscal stimulus is supposed to be a stabilizer; it can’t be the only source of economic growth indefinitely.
A few things to ask:
1. Standards of living rose rapidly in the 16th, 17th, and early 18th century…isn’t that what we’re after? Even if the measure called “GDP” did not “grow” much. Could it be because they had “real” versus “fake” money? (Money that allowed costs to decline, a condition formerly known as “progress”, not the inflationary rubbish that passes for money today).
2. Interesting that you note that GDP (output measured in fake money terms) started the decline in the 1970’s…when we finally decoupled from real money (1973).
3. And can you tie “overproduction” to overproduction of fake money? After all we now have money that is free, meaning free from any need to work to produce it as well as (since 2008) free from any pesky cost (interest)? And free from any time preference…meaning it is always and everywhere “economic” to deploy it into “production”, even absent demand.
Oops, didn’t see this.
1. I agree that standard of living and quality of life is more important than GDP. However, a lot of people don’t see it that way, and when they see low growth rates, they want to kick the government out. Eventually this will become destabilizing and make things even worse. I’m scared of the type of governments that people will vote in over the next few decades (look at how bad things are already).
2. Actually it’s the other way around. One of the reasons we got off the Bretton Woods system of exchange rates and switched to a floating one was that the rise of Japanese and German competition made it unworkable. This is also when the crisis of overproduction/under-utilization of productive capacity began. It’s the same root cause: we have the ability to produce far more than we could ever consume, and that ratio is only increasing with time. This leads to falling profit rates, and profits are the lifeblood of a capitalist economy.
3. They’re two different things. You can have a crisis of overproduction/under-utilization of capacity under a fixed rate regime, and this might have been the cause of the great depression: http://bev.berkeley.edu/ipe/readings/JD-1994-Depression.pdf
I think your last sentence: “And free from any time preference…meaning it is always and everywhere ‘economic’ to deploy it into ‘production’, even absent demand” is interesting.
Since the aforementioned crisis began in the 70’s, firms have been trying to undercut their competitors by investing in plant equipment (productive capacity) to achieve greater efficiency. This has only worsened the problem. Another issue is that 3% growth means 3% surplus of capital, and that capital has to be invested somewhere. That’s well over a trillion dollars. Even with China and India industrializing/urbanizing like crazy in the 90’s and 00’s, it wasn’t enough to absorb all of the surplus capital. Capitalists had to invest it in the stock market and then in all sorts of crazy new financial instruments in order to seek returns, one of the reasons the asset bubbles of that era were so large.
I’ll agree with the “economists are such bullshitters” comment above…but what else have they got?
Said one famous bullshitter: “The future is uncertain.” So best guesses must account for issues that will, of necessity, be surprising.
Mark Blyth suggests no democracy can withstand the deflationary pressure of the gold standard, so fiat currency is inevitable. Michael Hudson observes that debts grow faster than the ability to pay them, so periodic regular jubilees are a necessity to avoid debt peonage. Until we acknowledge these necessities, the beatings will continue until morale improves.
I’d add that the job guarantee may be in that same league in a society that embraces “disruptive” technology.
Consider a scenario described in Fleming’s Surviving the Future that fleshes out the observation that improved productivity isn’t always a net positive.
In the following economy of workers, consumers and goods there is no social safety net:
Workers Consumers Goods
100 100 100
Now imagine some new technology boosts productivity so only half as many workers are needed to produce the same goods:
Workers Consumers Goods
50 100 100
But that means 50 workers are unemployed, so they are no longer consumers
Workers Consumers Goods
50 50 100
The 50 unemployed workers die (no safety nets!), so we certainly don’t need as many goods
Workers Consumers Goods
50 50 50
But that means only 25 workers are needed to produce all the goods needed
Workers Consumers Goods
25 50 50
…which means, really, only 25 consumers exist
…Rinse and repeat.
This is the hamster wheel we’re on without robust, effective safety nets.
Last century, the Elite threw the working class under the bus for two very basic reasons; 1) to fight wage inflation and 2) nuclear weapons made peoples armies obsolete. For the first time since the Napoleonic wars, the aristocracy doesn’t need mass armies to defend their properties. Criminal exploitation is how the rich accumulate wealth now. They and their salaried staff can’t acknowledge this.
Humans need air, food, water and shelter. A just society provides security, health care and education for our search for happiness. There must be more equitable redistribution of resources to meet these basic needs. The alternative is the collapse of western civilization.
Yes collapse of western civilization ,I see it when I drive to Oregon’s capital Salem . what used to be thriving middle class of Salem 1940’s until the gipper became our president sworn in 1981. All based on lies from democratic and republican parties ,which the parties all play toys for the Billionaires . only crazy people and main stream economist is just fine, is in it Paris.
I haven’t seen any indication that the brilliant elites are taking the many existential crises facing the west seriously. They are fully prepared to endorse a massive war against Iran and areas beyond – and the dismantling of democracy at home – if it means keeping their moribund system afloat for a few more years.
Perhaps the west, particularly the United States, needs to feel some of the pain we dole out regularly to countries we want to destroy/colonize before it considers the validity of factors other than naked self-interest and the glories of unchecked avarice. Kind of proverbial schoolyard bully only getting the message after he has felt the physical pain of being on the receiving end of a beating for once
I hope it doesn’t come to that but I have a feeling it will. There is no political faction in the west (with any real clout) challenging the current economic order. All challengers thus far have been successfully neutralized.
And the massive media psy op pumping out propaganda nonstop is turning people’s critical faculties to mush. The worse things get the more people will seek refuge in wilful delusion…and the media will helpfully wheel out convenient targets for their fear-induced anger and the frustrations of living in a dystopian nightmare. It’s already begun.
There is no going back to “how it was before”. It is going to be crises, some real, some manufactured, and a full on media-driven spectacle all the way down.
Believe me when I say that a big part of the American population are feeling some sort of the “pain” you mention. Not necessarily absolute poverty, but then there are all of those homeless “deplorables” wandering our streets now, but a relative poverty. The mass of the people were promised a decent standard of living, by western standards, and are now seeing themselves and especially their children, sinking back into “hard times,” while the elites are conspicuously prospering. This sense of betrayal is where demagogues will make their best inroads into the political sphere. A certain Twentieth Century dictator held sway over a supposedly civilized nation state by exploiting a myth of a “stab in the back” after that nation had lost a war it had started in the first place.
The western elites err in believing that they are in some way “exceptional.” History has proven again and again just how self destructive such a belief is.
Larry Summers says there is a chronic lack of demand!
“Former Treasury Secretary Summers Calls For End Of Fed Independence”
“Central bank independence “comes from an understanding of the macroeconomic policy problem that is not relevant to current times,” Summers said in a speech at the International Monetary Fund.
Central bank insulation was needed in the 1970s and 1980s to combat inflation, Summers said. That’s because the White House and Congress sometimes saw the short-run benefits of unexpected inflation, while the Fed kept its eyes on the long-run costs, he said.
But that was yesterday’s problem, Summers said. The economy now faces secular stagnation, or a chronic lack of demand.”
Just remembered.
He also wrote a column in the FT where he has at last realised the disappearance of the middle class affects GDP.
A light bulb has gone on in that head at least.
Basically what has happened is that the rich have decided that they no longer need a middle class and have decided that they want to restore the Gilded Age or the Aristocracy of old.
All of the productivity gains and then some have been captured upwards, for the rich and solely the rich. I suspect that real wages for the poor are falling and that the inflation statistics significantly understate the real rate of inflation.
As for why this is happening? It goes back to the greed of the rich. Low wage workers who do not have stable employment are not a source of aggregate demand. They also lack the income for a viable tax base, an important consideration when the population is aging and the dependent to worker ratio is going down. Why are retail businesses and restaurants closing? People have no disposable income. Amazon has often been cited for retail, but that does not explain the collapse in restaurants.
Businesses love their employees poor and their customers rich. Actually they would prefer slaves to employees or to have no employees, just temp workers, or apparently, in their dreams, just robots. In other words, they want something for nothing. The problem is that capitalism is its own worse enemy. It is a classic case of the collective action failure problem because if everyone pays their employees poorly, nobody has enough money to buy their goods and services.
Then as others have noted, there are the ecological barriers. I suppose that is why right wing libertarians deny global warming. It is a fatal flaw of their ideology. For similar reasons, I suppose it is why the fossil fuel industry has tried to fund global warming denialism in a manner that mirrors the tobacco industry’s efforts to deny the causal relationship between tobacco usage and lung cancer.
Likewise, there is a ton of other rent seeking. An economy that pays millions to Wall Street people for playing financial games or Private Equity or High Frequency Trading or frankly, crashing the economy, while leaving those of us who do things that keep the basic functions of society running is not a healthy society. It is not a reflection of the value they add to society (actually in the case of Wall Street, I think that their “value” is firmly in the negative). Rather it is the sign of a total imbalance of bargaining power.
It seems the elites are not very good at long term thinking. Bright in finding ways to steal the riches of society for themselves. However willfully ignorant of long term problems like global warming or how inequality can lead to political revolution. They have a far deeper legitimacy crisis than they care to understand. It seems the rich who benefit most from this current arrangement are desperate to keep the charade up and to beguile people into thinking that this can work or that this is a true meritocracy.
We can see this too when the rich are asked to pay their fair share of taxes. It seems that those who benefited most from the current regime are the ones who resist the most in contributing to the society that they benefited so much from.
Capitalism and greed seem to be their own worst enemies. Left unchecked though, they will lead to a collapse.
Amorphous economics coalesced. You have the crackpots that say a sovereign borrower that controls its own currency cannot default (and there is no such thing as crowding out private capital formation). Dick “Armey curve” not. Greenspan’s 2011 “Activism” not. You have investments in productivity that lead to job losses (Schumpeter’s “gales of creative destruction”. “Malthusian” frictions not. I.e., irrespective of “S curves illustrating the diffusion of new techniques and resources, history demonstrated that innovation produces an overlapping sequence of transformations, always in the direction of lower costs and higher living standards.” There are no “Limits to Growth”. All you have to do is get R* right -> Y = f(K,L), Where is Marx when you need him?
You still have stress tests without mark-to-market accounting. Hooverville here we come.
Secular strangulation is simply where savings are idled, un-used and un-spent. Contrary to all economists, from the standpoint of the economy, commercial banks do not loan out existing deposits, saved or otherwise (and there are $10 trillion + U.S. bank deposits lost to both consumption and investment. The only way to put savings back to work is outside of the commercial banking system. I.e, commercial banks always create new money whenever they lend/invest. Never are the CBs intermediaries in the savings-investment process.