We’re Probably Screwed

Bob (RL) Crabb made a clever comment following Dean Baker’s article on the economically illiterate “thugs” who propose to gut Social Security and Medicare:

So we got into this mess by borrowing money at historically low interest rates in the hope that a speculative yet unsustainable economy would pull us out of the hole, and now we are told that must borrow money at historically low interest rates in the hope that a speculative yet unsustainable economy will pull us out the hole. Okay.

Following Bob’s comment I offered my own scrupulously nonpartisan observation, which — and this rarely happens — I like well enough to reprint here.

RL, that’s a clever and funny way to put it.

But the humor glosses over some important facts.

For instance, what caused the “hole” in the first place (the hole you rightly say we need to be pulled out of)?

The hole was the insufficiency of the demand side of our economy starting in the mid to late 1970s, when for the first time in our history (and because of policy decisions by politicians of both parties) rising productivity no longer created a corresponding rise in worker real wages. Real wages went flat in about 1979 (when inequality also began increasing more rapidly) and have stayed flat since.

The benefits of rising productivity thereafter accrued almost exclusively to the rich, who — because of this tremendous process of wealth redistribution upward — grew richer at an accelerating rate.

Worker wages, the usual demand engine of our economy, were no longer growing. The problem then became how to fill that demand gap (the “hole”) … where to find (or how to create) demand to keep the economy afloat?

First a stock bubble sustained demand for awhile in the mid to late 1990s, followed by a (dot-com) bust in the year 2000.

Then there was the housing bubble, pumped up by the Fed’s “historically low interest rates,” as you point out. Artificially inflated home mortgage equity, while it lasted, was the favorite working class/middle class ATM supporting demand until 2008, when that bubble burst.

So what should we do now?

We could try to reflate the bubble through private borrowing at historically low interest rates and investing again in non-productive financial instruments (to keep the cycle of boom and bust sputtering along continuously). Hair of the dog that bit us.

Or, we could do it by means of public borrowing at historically low interest rates and investing in infrastructure and job growth as a way to restore the historical lockstep connection between rising productivity and rising real wages. WWII provided the impetus for this solution after the depression of the 1930s.

It’s worth noting that in the usual cycle of boom and bust … inequality (with its destruction of demand through the impoverishment of the working class) reaches its peak just before the bust phase. This was true in 1928 and true again in 2008 (and, if you look carefully, you’ll probably find that to be the case in most earlier depressions).

In other words, there appears to be a cause and effect relationship between excessive inequality and the bust phase of the perennial boom and bust cycle.

This moves the issue of inequality from a “mere” moral issue into the realm of economic practicality and economic well-being.

Recent economic literature is full of the sharpening realization that extreme inequality in a society is toxic to its economic health.

See, for instance …

Inequality and Instability: A Study of the World Economy Just Before the Great Crisis,” by James Galbraith.

The Price of Inequality: How Today’s Divided Society Endangers Our Future,” by Joseph Stiglitz.

Beyond Outrage: Expanded Edition: What has gone wrong with our economy and our democracy, and how to fix it,” by Robert Reich.

The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer,” by Dean Baker.

Inequality Matters: The Growing Economic Divide in America and Its Poisonous Consequences,” by James Lardner and David Smith.

It’s also worth repeating that the original hole was the result of deliberate policy decisions (favoring the 1% over the 99%, if you want to put it that way) made by members of both political parties.

Whether we overcome the current doldrums by more engineered boom and bust cycles or — on the contrary — by intelligent long-range investment in our nation’s productive capacities … continues to be a policy issue entirely dependent on statesmen of good will of both parties making the right decisions in the public interest.

A modicum of economic literacy — largely now absent — wouldn’t hurt either.

In other words, we’re probably screwed.

Comments

8 Responses to “We’re Probably Screwed”
  1. RL Crabb says:

    Ah, yes, Don. Who am I, a self-described village fool, to question the wisdom of Nobel laureate economists? But I do see some contradictions in this elaborate solution to our nations woes. While we spend yet unprinted dollars to revive a booming economy, there are many who wish to constrict the use of fossil fuels, making energy an expensive commodity. Likewise we are told to reject the corporate consumer-driven enterprises that do manage to provide many low paying jobs. During this wrenching conversion, we’ll no doubt have to spend trillions upon trillions to feed, house, medicate and educate the unwashed masses before they can assume their new positions in this undefined new economic model of sustainability. Can there really be a “boom” big enough in this scenario to pay back such a huge investment?
    Or perhaps it would be easier to declare war on China before they can catch up to us. We could void the debt entirely, if you don’t mind a little radiation in your broccoli.

  2. Don Pelton says:

    RL, that’s a breathtaking rant:

    “Who am I, a self-described village fool, to question the wisdom of Nobel laureate economists?”

    I mentioned those particular writings of those particular economists (some obscure, some well-known) because they all support my point about the relationship between excessive inequality and economic busts, not because those particular economists are all Nobel laureates. They aren’t. Among them, only Stiglitz is a Nobel laureate, I think. The point about excessive inequality is somewhat new in economic thinking, and important. You needn’t construe my mere mention of sources that support my point as an attack on you personally.

    “While we spend yet unprinted dollars to revive a booming economy, there are many who wish to constrict the use of fossil fuels, making energy an expensive commodity.

    You make it sound like the increasing cost and difficulty in obtaining fossil fuels are the result of some misguided people “who wish to constrict” their use,” rather than to the natural and inevitable peaking in the production of these inherently finite non-sustainable fuels. For instance, if cheap, sweet crude was still easy to find, the major oil companies would not be spending the billions they are spending on deep drilling in places like the Gulf, on tar sands in Alberta and on shale oil, etc.

    Energy expert Professor Michael Klare makes the same point:

    While many analysts and pundits joined in the premature celebration of the new “golden age,” few emphasized that it would rest almost entirely on the exploitation of “unconventional” petroleum resources — shale oil, oil shale, Arctic oil, deep offshore oil, and tar sands (bitumen). As for conventional oil (petroleum substances that emerge from the ground in liquid form and can be extracted using familiar, standardized technology), no one doubts that it will continue its historic decline in North America.

    The “unconventional” oil that is to liberate the U.S. and its neighbors from the unreliable producers of the Middle East involves substances too hard or viscous to be extracted using standard technology or embedded in forbidding locations that require highly specialized equipment for extraction. Think of it as “tough oil.”

    ” … we’ll no doubt have to spend trillions upon trillions to feed, house, medicate and educate the unwashed masses before they can assume their new positions in this undefined new economic model of sustainability.”

    I’d be glad to ease into the Glorious New Age of Sustainability by diverting a few easy trillions here and there from obsolete, useless and unsustainable Defense Department projects (including some of its wars), for instance. In my lexicon “sustainability” means jobs. When did “sustainability” become a dirty word in anyone’s vocabulary? It seems as American as apple pie to me.

    “Can there really be a “boom” big enough in this scenario to pay back such a huge investment?”

    Booms are inextricably linked to busts. The whole point of my post was to suggest that there’s an alternative to the engineered boom and bust cycles. That alternative by the way, exemplified by the New Deal, worked well between about 1945 and the late 1970s (when the conservative assault on the New Deal increased exponentially).

    “Or perhaps it would be easier to declare war on China before they can catch up to us. We could void the debt entirely, if you don’t mind a little radiation in your broccoli.”

    Funny. Therefore, by definition, not to be taken seriously, right?

  3. RL Crabb says:

    I don’t necessarily disagree with the notion that we are having to change our lifestyles to fit the 21st Century reality, and I don’t necessarily endorse the conservative alternatives. I do wonder if all these things can be accomplished without much pain and suffering in the transition, and without sacrificing a good deal of the freedoms we take for granted. It seems that even ultra-progressive San Francisco questions the numbers that environmental experts provide when it comes to their water supply. (Do as I say, not as I do.) And when I see Robert Reich advocating that top earners should be happy to donate three-quarters of their income to the government, and be satisfied living in a modest suburban home rather than a mansion, alarm bells start rattling around in my otherwise empty head. Should the rich pay more? Of course, but given their track record, I have little confidence in the government’s ability to spend the money wisely. And I don’t begrudge those who are smart enough or lucky enough to accumulate wealth. There are times when this new class warfare sounds more like the French Revolution, and we know how that turned out.

  4. Don Pelton says:

    Thanks RL. I agree with much of what you say. For instance, I agree that much pain and suffering is in our future, and that especially concerns me because any statement we make about the future is really a statement about our children and our grandchildren (I personally don’t have a very long future at this point). Our civilization, totally dependent on increasingly expensive fossil fuels, is entering a world of trouble, even under he most enlightened leadership (if we could ever agree on what that means).

    I too worry about our freedoms, lately most threatened by the national security state, including for instance the president’s arrogation unto himself of the right to execute American citizens. That constitutional overreach should worry every citizen.

    But I don’t share your concern about Robert Reich’s proposal to increase the marginal tax rate to 70% on incomes (incomes … not wealth) over $15 million. Reich justifies it this way:

    Between the late 1940s and 1980 America’s highest marginal rate averaged above 70 percent. Under Republican President Dwight Eisenhower it was 91 percent. Not until the 1980s did Ronald Reagan slash it to 28 percent. (Many considered Reagan’s own proposal a “fantasy” before it was enacted.)

    Incidentally, during these years the nation’s pre-tax income was far less concentrated at the top than it is now. In the mid-1970s, for example, the top 1 percent got around 9 percent of total income. By 2007, they got 23.5 percent. So if anything, the argument for a higher marginal tax should be even more realistic now than it was during the days when it was taken for granted.

    You could well argue that the decades between the 1940s and 1980 was our golden age of capitalism, including the golden age of the middle class. Our society was doing quite well under the regime of those high marginal tax rates. In fact, a compelling argument could be made (and I won’t make it here) that there is a cause and effect relationship between high marginal tax rates and economic stability.

    I share your concern about trusting our government to spend our money wisely. But — unlike Reagan, who apparently would not trust government under any circumstances, and so wanted to “starve the beast” — I’d be willing to trust the government more if we could reduce the influence of money on policy. Easily said, but frustratingly complex to accomplish.

    I don’t know how we’ll get there, but I share the founders’ essentially liberal vision of a strong and vital federal government, responsive to an enlightened citizenry, no matter how unlikely that looks at this late stage of empire.

  5. RL Crabb says:

    I don’t remember where I saw it and I can’t find a link now, but I recently read an article advocating the taxation of wealth as well as income, the fear being that some rich people don’t need to make any new money but live on what they already have. The government has an insatiable appetite, and they will always need more than they take in. California is a prime example. Now that Gov. Brown’s tax initiative has passed, all those entities that were cut during the past two years are demanding a return to their previous levels of funding. Thus, we can expect calls for more taxes in the near future.

    Perhaps it would be helpful to to identify who “the rich” are, exactly. We tend to think of the corporate raiders and hedge fund manipulators as the villains, and not many would dispute that. But there are many others who made a good deal of money honestly and used some of it in many worthwhile endeavors. The next time you go to a function at the Center For The Arts, take a look at the names on the plaque in front. Some of them are the ones that are typically reviled as “greedy capitalist Republicans” in our local discourse. I know of others who have used their wealth to restore historical buildings and fund local charities, and in some cases help disadvantaged families and individuals personally.

    After the government confiscates and redistributes these monies the way they think it should be done, will that kind of philanphropy disappear? Will money that could have gone into building and expanding private businesses dry up?

    I would also like to counter the argument that we can return to the golden age of the fifties. (And I already know that many will disagree. They have in other posts.) I still hold that the prosperity and expansion of the middle class had more to do with the fact that the US was the only industrial nation standing after WWII. It took decades for the Japanese to make cars and electronics that could compete with those made here. We live in a different world now. I fail to see how we can employ workers at $25 an hour and be able to compete with India and others unless we return to the days of trade wars and tariffs.

    These are a few of the reasons I believe progressives should tread carefully while reinventing capitalism. Don’t throw the baby out with the bathwater.

  6. Don Pelton says:

    Thanks, RL, for the interesting and consistently civil dialog.

    About who the rich are, I have no doubt that most of them are fine people personally. In fact, I especially love these folks, a set of patriotic millionaires who express their patriotism by asking to be taxed more:

    But, despite the incredible intelligence and enlightened goodwill of billionaires like Warren Buffett and (locally) the benefactors of the Center for the Arts, do you actually imagine that we should rely on the “kindness of strangers” (private philanthropy) to finance programs like Social Security (which is actually self-financing, come to think of it) or Medicare, unemployment insurance, aid to dependent children, etc.? It “doesn’t scale,” as we liked to say in network engineering.

    The patriotic millionaires don’t consider (and I don’t consider) taxes “confiscatory.” Like Oliver Wendell Holmes, we consider them to be “the price of admission to a civilized society.”

    You make a good point about the fantasy of “returning to the Golden Age of the Fifties.” And I agree that our position in that golden age had much to do with our uniquely favorable standing in the world after WWII. But that’s not the whole story.

    As much as I would welcome an opportunity to vote for a sane Republican like Dwight Eisenhower and support more initiatives like his massive investment in our economic infrastructure, I have no illusion that we could actually return to that time in all particulars, and I’m not suggesting that we try.

    What I am suggesting is that it is instructive to look at the period between 1945 and 1979 and figure out why it worked well and why everything began to unravel after that.

    Even though it’s true that we are now living in a global-centric economy, there’s no reason to implement insane trade policies that reward corporations for moving their operations and jobs overseas.

    There’s no reason to suffer the high tariffs imposed on American products while at the same time we set minimal to nonexistent barriers to foreign products. Chinese tariffs on American autos are in excess of 20%.

    The extensive regulatory structures in the financial sector (Glass-Steagall, etc.) worked well during that Golden Age. The bipartisan destruction of these regulations, starting with Clinton, has been largely responsible for our current economic meltdown.

    The high marginal tax rates on the wealthiest Americans during that period not only helped support investment in infrastructure, there’s much evidence that they also led to greater economic stability by encouraging reinvestment in business rather than drawing down profits for speculative purposes. Today, we are back in a dark age of speculative booms and busts.

    The high marginal tax rates on the wealthy in that era also supported greater economic stability by mitigating the toxic extremes of destabilizing inequality. We are now seeing a return of obscene levels of inequality.

    Certainly we can’t turn back the clock to the Golden Age of the Fifties, but neither should we try to turn back the clock to the Gilded Age of the Robber Barrons, which our age now more resembles everyday. The conservative project of undoing the New Deal seems to have precisely that goal.

    As I see it, progressive principles, although frequently betrayed by so-called liberals themselves (for betrayers think: Clinton and in many ways Obama) … progressive principles represent our best hope for selecting what worked in the past, rejecting what failed, and defending us against the conservative project of returning us to the Dark Age of the Robber Barrons.

    Beneath all this is the more fundamental issue of why good government may be our only hope of having a countervailing force to oppose the overweaning power of corporations in the modern age. But that’s another discussion for another day.

  7. RL Crabb says:

    Thanks, Don. I suppose the only way we’ll ever find out whether Big Government is our savior or our demise is to let it play out – if we live that long. Merry Christmas.

  8. Don Pelton says:

    Thanks, Bob.

    I agree.

    You’re a good man.

    Merry Christmas to you too.

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