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November 27, 2013 | NYT
The debate over secular stagnation has shown some signs of getting confused with the debate over technological stagnation; it's important to understand that they are not the same thing. What Bob Gordon (pdf) is predicting is disappointment on the supply side; what Larry Summers and I have been suggesting is that we may face a persistent shortfall on the demand side. It's true that Gordon's world might suffer from low investment demand, since investment demand depends more on the rate of growth than it does on the level of real GDP. Still, they are distinct concepts.
But what do I think about Gordon's notion that the good times of progress are behind us? One honest answer would be that I don't know, and can't even make a good guess.
What I can say, however, is that my gut feeling remains that while Gordon may be right about the next decade or two, he's likely to be very wrong beyond that. Or maybe it's a bit more than my gut. I know it doesn't show in the productivity numbers yet, but anyone who tracks technology has a strong sense that something big has been happening the past few years, that seemingly intractable problems - like speech recognition, adequate translation, self-driving cars, etc. - are suddenly becoming tractable. Basically, smart machines are getting much better at interacting with the natural environment in all its complexity. And that suggests that
Skynet will soon kill us alla real transformative leap is somewhere over the horizon, maybe not this decade, but this generation.Still, what do I know? But Brynjolfsson and McAfee have a new book - not yet out, but I have a manuscript - making this point with many examples and a lot of analysis.
There remain big questions about how the benefits of this technological surge, if it's coming, will be distributed. But I think this kind of thing has to be taken into account when we try to imagine the future; I'm a great Gordon admirer, but his techniques necessarily involve extrapolating from the past, and aren't well suited to picking up what could be a major inflection point.
Yosemite Semite, Far West
If I understand secular stagnation correctly, shouldn't we be passing anti-sumptuary laws (or maybe "consumptuary" laws? "pro-sumptuary" laws?), where every economic entity has purchasing targets, and those whose resources don't extend far enough to meet their targets would receive mandated loans?
Steve Rodgers, San Francisco
Don't worry. Larry Page, like Eldon Tyrell, is improving all of our lives with his Nexus-series Androids.
Long ago, computer typesetting wiped out the jobs of the linotype operators who composed the pages of the New York Times. Unions had enough power so that they could slow the transition long enough so that their members's lives weren't destroyed, too. And the economic environment was robust enough that the Times could absorb the economic hit (although the Sulzbergers were very unhappy about it).
Things really are different now. AI techniques have matured, so that human expertise can be fully embedded into software. Coupled with machine learning, automation is finally eliminating vast categories of work that formally required skilled knowledge work.
The Bay Area where I live is arguably the epicenter of where this embedding is taking place. The software architects and programmers are getting well-paid to do it. Most of the executives and engineers I speak with are proud of this work. They think it's eliminating busy-work that human beings shouldn't be doing, freeing them up to do other more fulfilling things with their time.
The only flaw in the scenario is the most of the rewards of those productivity gains seem to be flowing to the owners of the automated processes.
Rational Thinker Baltimore, MD
Dear Dr. Krugman,
Many commenters have noted that the growing lack of demand attributed to secular stagnation may be due to the growth in income inequality. I know it's not as simple as saying that 1,000 people making $50,000 a year will spend more than 1 person making $50M a year. But surely you have the tools to analyze this and reach a factual conclusion. I wish you would address how growing income inequality is related to secular stagnation.
Bill Jencks, Philippines
I am not sure that PK, ever the optimist, has thought through his arguments correctly.
- Where will these new high tech innovations like voice recognition and self driving cars, auto-translations etc actually be made and manufactured ? Asia, that's where.
- So who benefits? The stock market and Asian countries. Period.
- Will this help to reduce US unemployment? Nope.
- Will this help the US to close its terrible deficit ? Nope.
- Will this increase the lack of demand on Mainstreet ? Nope.
I could be wrong but my gut keeps telling me that PK is actually working for the Chinese now...
Raghuraman R, India
I agree with Bob Gordon's notion because what 'optimists' are forgetting is the already existing legacy (or pile), which cannot be simply wished away. Whatever technological innovation it may be, it cannot simply discount the already existing pile. There is a bigger need for 'backward compatibility'. You cannot simply say - ok, new thing has come up, ditch all old stuff (people?) - can you? This prediction is no longer simply 'technological' but also sociological.
Steve Bolger, New York City
I'm skeptical that technology will add many new ways to pursue happiness.
schrodinger, Northern California
Some historians of technology have pointed out that technological progress has been unusual in history. The Roman empire and ancient Greece are good examples of prosperous societies that were technologically stagnant.
China was technically creative in ancient times, and then stagnated after 1450 for reasons that aren't clear.
The chance of technological progress coming to an end is greater than people realize.
Greengranny, Ames, IA
" real transformative leap is somewhere over the horizon, maybe not this decade, but this generation".
It is so easy to forget that climate change marches on to unbearable consequences while we contemplate driverless cars.
By the time humans truly focus their technological brilliance on climate mitigation, it will be too late. The Masters of the Universe may obtain high-tech means of survival for themselves, but when the underpinnings of a broader civilization fail, they too shall pass.
It is obvious from the squabbles about health care implementation that even liberals fall apart into rival factions when this fundamental of social justice is addressed. Millions of people are being added to Medicaid as I write, but they whose health is secure at this moment want to throw those people (back) onto the garbage heap because single payer for everyone is better and they want it NOW NOW NOW.
Without social justice as the foundation in our civilization, technology by and for the few will not insure survival of our species, let alone prevent a very unpleasant life for people already born.
Khannea Suntzu, Netherlands
Unless you address the problem of irreversible technological unemployment I predict you are wrong. Yes we will be collectively and synergistically and serendipitiously more productive as a planetary species. Yes this will deplete natural resources fast quicker. No, the loss in services and the gain in productivity will NOT redistribute to every being on the planet equally.
In fact- this could get uglier than any previous period in human history. There are quite a few timelines in our future that lead in to gigadeath scenarios.
James Jordan, Falls Church
Dr. K,
Thanks for the clarification of the Summers/Krugman position on secular stagnation. I don't expect you & Dr. Summers to agree but I think this lack of demand, jobs, etc. is the result of the continued concentration of income earned by America's productivity. It is the result of policies that favor the 1%. Historically, concentration of wealth & income can't last. It is a failure of capitalism and must be corrected by making the tax code, retirement, & minimum wage policies fair. They are not fair & everyone knows it. I don't know when the informed elite are going to act to save the republic but the sooner the better.
I like your admission of gut feel, so I hope you will accept my gut feel that Bob Gordon is calling it wrong. I reread his paper and accept his 6 headwinds but he is leaving out the strong mother of invention posed by global warming, ocean acidification & the need to increase & efficiently distribute the global food supply.
Eugene Patrick Devany, Massapequa Park, NY
Luke, TaiwanIt seems that, "a persistent shortfall on the demand side" is a euphemism for the fact that half the population will remain near bankruptcy for quite sometime.
Pope Francis said two days ago
"To sustain a lifestyle which excludes others ... a globalization of indifference has developed. Almost without being aware of it, we end up being incapable of feeling compassion ..."
One may consider the Pope less qualified to "pontificate" about technology than Prof. Krugman who "tracks technology" and sees that "smart machines are getting much better at interacting with the natural environment in all its complexity ... [and concluding] that a real transformative leap is somewhere over the horizon" Pope Francis said,
"This epochal change has been set in motion by the enormous qualitative, quantitative, rapid and cumulative advances occurring in the sciences and in technology, and by their instant application in different areas of nature and of life. We are in an age of knowledge and information, which has led to new and often anonymous kinds of power."
"This epochal change" seems to be a reference to "fear and desperation, even in the so-called rich countries" and to people forced to live "with precious little dignity". The "anonymous kinds of power" could be a reference to "American Exceptionalism" - that connotes business success to Americans and unbridled power to many developing countries.
Four hundred million people in China came out of poverty and hundreds of millions more in India. The world has become a far far better place in the last 40-50 years. This is easy to see if the people in the West can stop its own navel gazing just for a moment.
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Mark A. Sadowski said in reply to Dan Riker...kievite:The Great Depression versus the Great Recession.
Monthly (Industrial Production):
http://research.stlouisfed.org/fred2/graph/?graph_id=103562&category_id=0
Quarterly (GNP and GDP):
http://research.stlouisfed.org/fred2/graph/?graph_id=148466&category_id=0
Annually (GDP):
http://research.stlouisfed.org/fred2/graph/?graph_id=148469&category_id=0
There are several factors that make the current situation unique:
1. Growth of energy prices make recovery of manufacturing sector impossible without new technological breakthrough. As a result money flows into financial sector creating speculative booms and busts: financial bubbles are generated because too much money (profits and surplus value) is chasing too few fruitful investment projects.
2. Financisation makes exit from each new recession more difficult. As Minsky's observed in Stabilizing an Unstable Economy excessive financisation makes economy unstable.
3. Military expenditures became at some point a drag on the economy.
4. Successful oligopolistic corporations try to maintain and increase profits by reducing share of them which is paid to labor. This way they further undermine consumption (outside of consumption of luxury good aka conspicuous consumption)
Looks like this is not a Great Recession. This is a new normal as Gross calls it. Stagnation as a norm.
I think The Endless Crisis How Monopoly-Finance Capital Produces Stagnation and Upheaval from the USA to China by John Bellamy Foster, Robert W. W. McChesney explains this quite well.
And S&P500 at 1800 is a pretty damning sign.
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Hans G. Despain on October 27, 2012Luminosity, Brilliance from Monthly ReviewThis is a must read book in political economy. It is a very sophisticated and innovative argument accessible to a general audience and will be of great interest to the expert.
This book follows off of the success of Foster and Fred Magdoff's "Great Financial Crisis" The Great Financial Crisis: Causes and Consequences. Whereas, the Foster and Magadoff book literally predicted in 2005-6 the financial collapse in 2007-8, "The Endless Crisis" predicts the problems are quite insolvable within the institutional design of Monopoly Capital.
The entrepreneurial function of society, fulfilled by financial institutions via the distribution of money as loans, radically depends on speculation. Speculation can be geared toward actual productive activity or toward simply making money from the change of stock/asset price. J.M. Keynes argued during a bubble speculation from changing prices drives the economy and dominates production.
Post-Keynesian best understand this aspect of Keynes and have developed the most important theory of the nature of money, noxious speculation, and the instability of capitalism as a function of finance (see Minsky's Stabilizing an Unstable Economy, Wray's Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, Hudson's THE BUBBLE AND BEYOND, and Graeber's Debt). The authors of "The Endless Crisis", John Bellamy Foster and Robert W. McChesney endorse the Post-Keynesian theories of money and financial instability.
But Foster and McChesney argue much more.
Foster and McChesney, follow very closely the work of economists Paul Sweezy, Paul Baran, and Harry Magdoff (see Monopoly Capital: An Essay on the American Economic and Social Order; and Economic History as it Happened (Stagnation and the Financial Explosion)(volume IV). The three primary arguments are the theory of "Monopoly Capital," the theory of "stagnation" and their theory of "financialization."
The theory of Monopoly Capital is quite straight forward and consistent with the historical analysis of Joseph Schumpeter Capitalism, Socialism and Democracy and Karl Marx (see chapter 25 of Capital: Volume 1: A Critique of Political Economy. In brief the argument is that competition leads to a lack of competition via the competitive process itself. The most efficient and market aggressive firms out compete the less efficient and market passive firms. The competitive process or what Marx called the accumulation process leads to successful capitalist firms getting bigger and bigger as these firms "concentrate" the capital of the industry. Next they "centralize" the industry via outcompeting and mergering with competitors. In this sense Monopolization is the logical outcome of competition.
Monopoly Capital is a remarkably successful profit generating form. The result of this remarkably success of oligopolistic corporate hegemony is large sales and revenue, economies of scales (or lower average costs) and massive profits. Reinvestment becomes a quite serious issue. What does a successful oligopolistic corporation (e.g. Ford, Coca Cola, etc.) do with all of its profits, when sales of its primary product are in every household (e.g. cars, soda, etc.). The four main possibilities is to share the profits with its labor force (not a common option in the last four decades), conglomerate (investment in other industries), expand overseas (according to David Harvey, Foster and McCheseny, a form of new imperialism), or financialization of the company's efforts, by either forming a financial arm within the conglomeration (e.g. GM and GMAC) or hire a broker firm to financialize your profits (such as Goldman Sachs, JP Morgan, etc.).
The principal problem for Monopoly Capital and its massive profits is a lack of reinvestment opportunities. There simply are not enough profitable investment opportunities to absorb all of the investment seeking desires. Thus the result is that (a) profits do not get reinvested, (b) profits are reinvested overseas, and/or (c) financial bubbles are generated because too much money (profits and surplus value) is chasing too few fruitful investment projects.
Thus, the Normal state of Monopoly Capital is respectively to the above sentence (a) Stagnation, (b) New Imperialism/International Oligopolistic Hegemony, and (c) financial bubbles. The lack of these phenomena is unlikely and very unusual.
Foster and McCheseny have been beating a very important political economy drum for several decades. The recent historical conditions have certainly made their efforts urgently relevant and important. Moreover, they offer the most accessible and a highly innovative theory of why these financial crises cannot be solved, and why every politician who has ever promised to end financial crises has failed. Foster and McCheseny demonstrate Keynesian "New New Deal politics" are wrongheaded and any return to laissez-faire ideology is to give up on the American historical dream of democracy and hand over the governance of the nation to 2500 corporations and create a political oligarchy and economic tyranny.
A must read!
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How long will "depression rules" be in effect?A Permanent Slump?, by Paul Krugman, Commentary, NY Times: Spend any time around monetary officials and one word you'll hear a lot is "normalization." ...But what if the world we've been living in for the past five years is the new normal? What if depression-like conditions are on track to persist, not for another year or two, but for decades?
You might imagine that speculations along these lines are the province of a radical fringe. ... In fact,... the person making that case was none other than Larry Summers. ...
And if Mr. Summers is right, everything respectable people have been saying about economic policy is wrong, and will keep being wrong for a long time. ...
We have, he suggested, an economy whose normal condition is one of inadequate demand - of at least mild depression - and which only gets anywhere close to full employment when it is being buoyed by bubbles. ...
Why might this be happening? One answer could be slowing population growth. A growing population creates a demand for new houses, new office buildings, and so on; when growth slows, that demand drops off. ...
Another important factor may be persistent trade deficits, which emerged in the 1980s and since then have fluctuated but never gone away.
Why does all of this matter? One answer is that central bankers need to stop talking about "exit strategies." Easy money should, and probably will, be with us for a very long time. This, in turn, means we can forget all those scare stories about government debt, which run along the lines of "It may not be a problem now, but just wait until interest rates rise."
More broadly, if our economy has a persistent tendency toward depression, we're going to be living under the looking-glass rules of depression economics - in which ... attempts to save more (including attempts to reduce budget deficits) make everyone worse off - for a long time.
I know that many people just hate this kind of talk. It offends their sense of rightness, indeed their sense of morality. Economics is supposed to be about making hard choices (at other people's expense, naturally). It's not supposed to be about persuading people to spend more.
But as Mr. Summers said, the crisis "is not over until it is over" - and economic reality is what it is. And what that reality appears to be right now is one in which depression rules will apply for a very long time.
Randy,
It has seemed to me for some time that the error is the idea that we can always count on growth. Just like underestimating risk, the idea of growth as normal leads to reckless behavior.
Kievite,
Randy,
> It has seemed to me for some time that the error > is the idea that we can always count on growth.
I think the idea of permanent growth is the cornerstone of capitalism as a social system.
So it is the fundamental property and if it changes to zero or negative everything, including financial system destabilizes. With zero growth fractional reserve banking is meaningless. In no way you can treat it like underestimating risk.
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How long will "depression rules" be in effect?
A Permanent Slump?, by Paul Krugman, Commentary, NY Times: Spend any time around monetary officials and one word you'll hear a lot is "normalization." ...But what if the world we've been living in for the past five years is the new normal? What if depression-like conditions are on track to persist, not for another year or two, but for decades?
You might imagine that speculations along these lines are the province of a radical fringe. ... In fact,... the person making that case was none other than Larry Summers. ...
And if Mr. Summers is right, everything respectable people have been saying about economic policy is wrong, and will keep being wrong for a long time. ...
We have, he suggested, an economy whose normal condition is one of inadequate demand - of at least mild depression - and which only gets anywhere close to full employment when it is being buoyed by bubbles. ...
Why might this be happening? One answer could be slowing population growth. A growing population creates a demand for new houses, new office buildings, and so on; when growth slows, that demand drops off. ...
Another important factor may be persistent trade deficits, which emerged in the 1980s and since then have fluctuated but never gone away.
Why does all of this matter? One answer is that central bankers need to stop talking about "exit strategies." Easy money should, and probably will, be with us for a very long time. This, in turn, means we can forget all those scare stories about government debt, which run along the lines of "It may not be a problem now, but just wait until interest rates rise."
More broadly, if our economy has a persistent tendency toward depression, we're going to be living under the looking-glass rules of depression economics - in which ... attempts to save more (including attempts to reduce budget deficits) make everyone worse off - for a long time.
I know that many people just hate this kind of talk. It offends their sense of rightness, indeed their sense of morality. Economics is supposed to be about making hard choices (at other people's expense, naturally). It's not supposed to be about persuading people to spend more.
But as Mr. Summers said, the crisis "is not over until it is over" - and economic reality is what it is. And what that reality appears to be right now is one in which depression rules will apply for a very long time.
Posted by Mark Thoma on Monday, November 18, 2013 at 12:24 AM in
Matt Young:Randy:We know Larry declared a diagnosis of secular stagnosis. But that was in DC among the aggregate mucky mucks. We also know that three quarters of unexpected, increasing growth with reducing deficits is contrary to secular stagnosis.
Hence before proceeding we have to rule out the possibility the problem was fixed recently. Some how we have to solve another short term riddle, why did this little growth bubble happen.
kievite:It has seemed to me for some time that the error is the idea that we can always count on growth. Just like underestimating risk, the idea of growth as normal leads to reckless behavior.
ilsmRandy,
> It has seemed to me for some time that the error > is the idea that we can always count on growth.
I think the idea of permanent growth is the cornerstone of capitalism as a social system.
So it is the fundamental property and if it changes to zero or negative everything, including financial system destabilizes. With zero growth fractional reserve banking is meaningless. In no way you can treat it like underestimating risk.
to kievite...Darryl FKA RonCapitalism as imposed in the early 21st century is a failure does not serve the masses.
Interesting point capitalism is a social system!
Reply Monday, November 18, 2013 at 04:54 AMto ilsm...kievite:
"...I think the idea of permanent growth is the cornerstone of capitalism as a social system."
ilsm
to kievite...DrDick"Interesting point capitalism is a social system!"
[IMO, you can credit capitalism for at least being a socio-economic system. However, due to the nature of that systems governance it is also a political economy. The problem comes from economic actors controlling the political economy instead of democratically elected political actors when popular democracy can be undermined by dollar democracy.]
to ilsm...RandyCapitalism, as instituted at any time, has never served the interests of the masses (ask the victorian workers), but is simply a more efficient rent extraction machine for elites.
to kievite...Ignacio:Re; "So [growth] is the fundamental property and if it changes to zero or negative everything, including financial system destabilizes."
Well said, but that doesn't mean that growth can be assumed. I believe that those who do so are considering only a very narrow slice of history.
Darryl FKA RonThe sad thing is that Summers' take is that nothing can be done about it except easing banks and wait. I have recently heard some opinions of proclaimed experts sayng that "nothing can be done" and this fatalist sentiment will almost certainly ensure that the depression will linger. Fatalists substitute Austerians and nothing changes unless...
to Ignacio...bakho:IMO, Summers and Krugman might be backing away from their former neoliberal globalist stance, but they are not going to come out as Robin Hood populists. They know that class warfare and the income distribution caused by it is the problem. But when they go to parties, it ain't with a bunch of beer drinking blue collar workers. FDR was denounced as a traitor to his class. That is not going to happen to Summers or Krugman.
cawleyThere is plenty of pent up demand. There are plenty of things that need to be done.
We need the political will to move the cash from those who are hoarding it to those who will stimulate demand by buying goods and services that will improve their lives.
to bakho...david sWell said.
to bakho...Darryl FKA RonI think Summers looks around DC and sees that 70% taxes and that sort of thing isn't even on the radar's radar. Neither political party is anywhere near thinking like that.
So, bubbles it will have to be.
to david s...bakho:
"...We need the political will to move the cash from those who are hoarding it to those who will stimulate demand by buying goods and services that will improve their lives."
david s
to bakho...Dave"...Neither political party is anywhere near..." "...70% taxes and that sort of (wealth redistribution) thing..."
[Five years on since the financial system crashed and some things do not change. The only difference for me has been that in 2008 I wondered why the Federal government responded so badly to circumstances both before and after? Since then I have stopped wondering why.]
to bakho...Second Best:Or another way of describing the problem, in somewhat less technical language: - We have a few people and organizations sitting on billions of dollars who would be willing to lend it out at unusually cheap rates. - We have millions of people desperately looking for work to do. - We have lots of work that desperately needs to be done: rebuilding infrastructure, caring for senior citizens, educating our population, scientific research, modernizing our electric grid, etc etc.
Why is it that we're so unwilling to borrow a portion of the billions of dollars doing nothing to hire the people that desperately need work to do the jobs that desperately need doing?
ilsm:In terms of simple boom bust cycles, others have already noted the standard approach can be seriously flawed in terms of what the correct norm is, the so called potential.
Some say the boom exceeds potential while others say it matches it which then determines particular monetary and fiscal targets which can be way off the mark. If so the result can contribute to secular stagnation if true potential is never met.
For example note how GNP before the Great Depression of '29 was below the trend line then exceeded it by about the same amount before settling down to trend for a long period of stability at full employment.
There's not much talk today about intentionally overshooting the trend in the short run to meet the trend over the long run. Instead everytime the economy appears to move towards trend the result is a highly risk averse correction to avoid overshooting it.
Dan:Too much Zumwalt welfare (pentagon trough), too little butter for the rest.
Declare war on poverty and recede from war on the Kharzai's opposition.
Hold a wake for the "supply side".
Eric377This doesn't feel like it is new ideas at all. Just a new way of saying the same thing from a slightly different perspective.
Everyone has known for decades that wages have lagged productivity. Precisely during this period. Everyone knows income earned by sectors with lower MPCs are deflationary.
I don't think its been determined that the 90s were a bubble economy. They were a bubble stock market. The economy was strong because of huge investment spending from corporates.
If Larry wants a strong economy, get corporates to invest. How? by forcing them to raise wages in line with productivity, and thus forcing them to invest in productivity.
This is a well known story
to Dan...EMichael:Perhaps there has been a significant realization of productivity via pricing of goods and services and the wage/productivity gap is high but the net impact on economic activity isn't. The economy was perceived as much healthier in 2005 and I think the wage/productivity trend isn't so different now as compared with then. Would a very generalized increase in incomes manifest itself as mostly a similarly sized increase in prices with littel impact on jobs?
Darryl FKA RonIt is the ultimate success of trickle down economics.
Spend thirty years making sure the makers get all of the rewards. When that is done all they have left is a mountain of cash that has nowhere to go. Field of Dreams economics.
They have built it. And people most definitely are not coming.
to EMichael...Darryl FKA Ron:Correction:
It is the ultimate success of trickle UP economics.
[That is a fallacy of composition that I recognized before the first time that I ever heard it expressed in those precise terms. Popular wisdom had always held that the rich get richer and the poor get poorer. The rich hoard wealth by shutting off as much of the trickle as they can.
Moreover, I always saw the capital gains tax preference as the source of most (all cash profer) merger deals, which inevitable lead to layoffs, reduced wages, and higher profits for capital through both expense reductions and reduced competition in the market for goods and services. The capital gains preference changes the primary competition of firms from the product markets to the financial markets, which insures profits will mostly trickle up rather than down.]
raskolnikov:"...Again, the evidence suggests that we have become an economy whose normal state is one of mild depression, whose brief episodes of prosperity occur only thanks to bubbles and unsustainable borrowing.
Why might this be happening? One answer could be slowing population growth..."
[Yeah, that will remain a condition until a lot more boomers have died off given a new baby boom is not likely to ignite in a prolonged deflationary state of the economy. Population growth might cure the problem, but you cannot have population growth until the problem is cured. Catch 22.]
...Another important factor may be persistent trade deficits, which emerged in the 1980s and since then have fluctuated but never gone away...
[OK, that is another part of the answer. Whither go the Washington Concensus on low taxes and "free trade?" Reformed neoliberals may now tentatively admit trade deficits might matter.
Oh, oh, oh, Mr Krugman. How about income distribution? When the vast majority of consumption is done by working class households, then doesn't worker pay come into play on setting the level of "inadequate demand" to generate economic growth and reflation? If the rich have been getting richer and the middle class has been getting poorer, then wouldn't this have an effect on effective demand? And didn't neoliberals and multi-national corporations construct this effect by using global labor wage arbitrage as a part of offshoring production? Did we export capital, technology, and jobs to developing economies packaged for them more like endentured servitude for the desperate depressed world poor instead of uplifting Fordism largely because we need to replace our own domestic demand for domestic production with domestic demand for import production in order to provide a seed market for MNC offshore capital investment? Didn't we know that this would put downwards pressure on wages and in turn demand at home?
Krugman and Summers are talking pretty radical here about secular stagnation and long term monetary policy. They might even be supportive of counter-cyclical fiscal policy (well more than might - just not mighty). On the more fundamental issues of income distribution and the whole sale theft of the political economy from the middle class by the robber barons of finance and industry, not so much.]
ken melvin:This is the biggest crybaby column Krugman's ever written. He should be ashamed of himself and return his Nobel prize immediately.
Has he ever put down Keynes long enough to read a little Marx?
Here's Robert Brenner summing it up in 2009: What mainly accounts for the long-term weakening of the real economy is a deep, and lasting, decline of the rate of return on capital investment since the end of the 1960s. The failure of the rate of profit to recover is all the more remarkable, in view of the huge drop-off in the growth of real wages over the period. The main cause, though not the only cause, of the decline in the rate of profit has been a persistent tendency to overcapacity in global manufacturing industries." There's more, too.
Instead of siding with crackpot Summers, Krugman should expand his research and be of some use to us all.
grizzled:The idea of permanent growth was always absurd, even before automation and off-shoring. Now, with China able to manufacture more goods than the world needs, the work force here being replaced by 'intelligent' machines, and our running out of places to build self-storage units to house the excess consumption, it is past time to discard the model. Bakho's on to something with his it isn't about goods, never was really beyond the necessities, there's a lot of room in the services/quality of life area as a new form of demand. Still, there's the thingee about distribution of wealth; the prying of it out of the cold clammy hands.
Lance:Command Socialism is looking better; who would have thought? Command economies are very poor at micro allocation compared to market economies, but they don't go through periods where nothing is done because nothing is being done. They can avoid depressed equilibria. When a high enough absolute level is reached perhaps macro efficiency is more important that micro efficiency. And of course there are mixed variants possible.
I'm not claiming this to be true, but it's been a long time since I even considered that it might be.
anne"... Many who have been vociferous in criticizing income and wealth inequality such as Paul Krugman and Joseph Stiglitz have not pointed to the increase income inequality as the cause of the depression. Those on the left who might be the natural proponents of a more progressive tax system have not connected the dots. They have a different theory as to the cause of the depression. They are adherents to the regulatory fallacy, the belief that the depression was caused by insufficient regulation.
To determine if someone is an adherent of the regulatory fallacy ask this question: Do you believe that given the degree that the tax burden was shifted from the rich to the middle class, was there any type of regulatory policy which would have prevented the financial crisis? If they answer yes, they are adherents to the regulatory fallacy
In Paul Krugman's 2012 book "End this Depression Now!" he comes heartbreakingly close to connecting the dots between the reduction in the progressivity of the tax system and the cycle of overinvestment that caused the depression. He states that the book is much less concerned with the cause of the depression than what should be done to end it. His prescription is fiscal stimulus focused on the spending side that has even less of a chance of being enacted than the tax cuts suggested above.
Those on the right have their own version of the regulatory fallacy. They blame the government sponsored enterprises Federal National Mortgage Association Fannie Mae (FNMA) and Federal Home Loan Mortgage Corp. (FMCC) and the Community Reinvestment Act. According to their theory, regulation such as the Community Reinvestment Act resulted in a vast increase in subprime mortgage lending that caused the financial crisis. Possibly the non-bank private entities that originated and securitized the most of the subprime loans mistakenly thought the Community Reinvestment Act applied to them.
A slight variation on the regulatory fallacy is the financial innovation fallacy. As with the regulatory fallacy, both left and right versions, there is a miniscule grain of truth to it. Financial innovations such as credit default swaps and regulatory changes like repeal of the Glass-Steagall Act slightly affected the exact timing of the onset of the depression. However, once the tax burden was shifted from the rich to the middle class it was just a matter of time before middle-class consumers became unable to absorb the increased production and service the debt that accompanied the overinvestment. Different regulatory policies might have shifted the bubble more towards commercial real estate rather than residential real estate or visa versa but the outcome would have been similar.
Blaming regulatory policies and financial innovation for the depression is like blaming the armaments manufactures and soldiers for World War II. In order for the war to occur there had to some weapons made and some soldiers to fight. If those particular armaments manufactures and soldiers were not available, others would have taken their place.
Equally unhelpful in terms of addressing the income and wealth inequality which results in the overinvestment cycle that caused the depression are those who emphasize various non-tax factors. Issues such a globalization, free trade, unionization, problems with our education system and infrastructure can increase the income and wealth inequality. However, these are extremely minor when compared to the shift of the tax burden from the rich to the middle class. It is the compounding year after year of the effect of the shift away from taxes on capital income such as dividends over time as the rich get proverbially richer which is the prime generator of inequality..." http://seekingalpha.com/article/1543642
to Lance...Darryl FKA RonThis is not a reference but an advertisement, being set as spam through the Internet.
Reply Monday, November 18, 2013 at 06:50 AMto Lance...Darryl FKA RonThere is a bit of validity to that piece although "the overinvestment cycle that caused the depression" has been discussed so much that it spawned the euphemism "global savings glut." Then it totally falls apart with "the compounding year after year of the effect of the shift away from taxes on capital income such as dividends over time." Tax rates on dividends were only lower notably by the Bush tax cuts over recent decades. Why not mention capital gains instead, since they apply to derivatives rather than just equities. Besides all those other factors that he dismisses helped to lower wages.
There is a lot wrong with developed economies these days. Wealth distribution is in general the over arching cause of it all. But there were a lot of reasons that contributed to it, but none more that the 1954 tax reform which rescinded the tax credit on dividend which were taxed at ordinary income progressive rates, but credited for taxes paid by the issuing firm. That was not about fairness or double taxation of corporate income. It was about giving shareholders a reason to buy and hold equity instead of just buy and then sell to realize capital gains. It was about preventing a rush of mergers and PE leverage buyouts. It was about encouraging competition and internal investment. After the dividends tax credit was rescinded (in 1954 when Republicans controlled every branch of the Federal government in a temporary New Deal reactionary swing) then capital gains tax rates tended to be lower and holding terms for discounts shorter. Volatility and speculation increased. P/E ratios increased on average over the long term.
Reply Monday, November 18, 2013 at 07:07 AMto Darryl FKA Ron...Nicolas:none more that the 1954 tax reform which rescinded the tax credit on dividend which were taxed at ordinary income progressive rates
[Outside of the US only a few countries give a tax break on dividends. Just about everyone gives a break on capital gains tax rates relative to income including dividends. Fear of capital flight and following the example of US success are the primary reasons that our stupidity has reached a global scale.]
Reply Monday, November 18, 2013 at 07:11 AMDrDick:"More broadly, if our economy has a persistent tendency toward depression, we're going to be living under the looking-glass rules of depression economics - in which virtue is vice and prudence is folly, in which attempts to save more (including attempts to reduce budget deficits) make everyone worse off - for a long time."
I don't get that. I thought the whole idea behind Keynesian economics (with which I agree) is to temporarily increase public debt while in slumps, and save more during good times. If we are in the new normal, isn't it time to start balancing the budget then?
Reply Monday, November 18, 2013 at 06:36 AMThis is a great column, but I was rather disappointed that Krugman has ignored the elephant in the room. The reason we have inadequate demand (and, as others have noted, there are massive unmet needs and pent up demand) is because of the increasing concentration of wealth at the top over the last 35 years. The wealthy simply do not spend as much of their income as the working classes, which automatically depresses demand. The concentration of wealth was also partially accomplished by slashing taxes on those at the top, thus limiting the capacity of the government to offset the lack of private demand. Offshoring of production and other jobs (to maximize capital rents), has also furthered this condition. The solution is simple. Return to Eisenhower's top marginal rates on individuals and corporations, eliminate all tax dodges and loopholes that allow them to avoid taxes, treat inheritances and capital gains the same as other income, and invest in massive infrastructure upgrades.
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Economist's View
John Cummings:
This represents everything wrong with "public debt and growth". It isn't public debt what the economy needs, but public sector services that make up for the private sector structural issues at the time. This kind of "spending" is cheaper and more effective than consumption subsidization and it manageable by private sector growth demographics.
Consumption subsidization is kicking the can down the road and nothing more.
Kievite
I am not sure that it is correct to think about public debt as internal debt. It's all about energy.
That means that public debt is to a large extent foreign due to unalterable oil consumption (and related trade deficits). And that completely changes the situation unless you are the owner of the world reserve currency.
But even in the latter case (exorbitant privilege as Valéry Giscard d'Estaing called it ) you can expect attacks on the status of the currency as world reserve currency. The growth is still supported via militarization, forced opening of foreign markets (with military force, if necessary) and conversion of the state into national security state. But as Napoleon admitted "You can do anything with bayonets except sit on them"
One positive thing about high public (and to a large extent foreign owned) debt in the USA is that it undermines what Bacevich called "new American militarism" (http://www.amazon.com/The-New-American-Militarism-Americans/dp/0195173384). Bacevich argues that this is distinct political course adopted by the "defense intellectuals," the evangelicals, and the neocons. And they will never regret their failed efforts such as Iraq invasion.
From Amazon review:
=== Quote ===
Bacevich clearly links our present predicaments both at home and abroad to the ever greater need for natural resources, especially oil from the Persian Gulf. He demolishes all of the reasons for our bellicosity based on ideals and links it directly to our insatiable appetite for oil and economic expansion. Naturally, like thousands of writers before him, he points out the need for a national energy policy based on more effective use of resources and alternative means of production.
=== End of Quote ==
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The Blorch
Actually, what happens is that the country issuing the debt allows the currency of its trading partners to be manipulated creating an unfair advantage in the global trade of goods. This is an effective way to pacify the people. In a democracy the key is to impoverish your political rivals. This impoverishment demoralizes the electorate making their minds more socially malleable and susceptible to strategic political messaging. Shipping jobs overseas is to key this system of impoverishment, pushing the middle class seamlessly into squalor.
Meanwhile, in China, plentiful jobs and wage gains stifle social unrest keep the streets quiet.
Huge national debts must be understood in terms of international trade and the domestic policy goals of the political elites of each trading partner. Percentage numbers and thresholds are a distraction meant to entertain the wanderlust of meandering minds.
John Cummings:
This represents everything wrong with "public debt and growth". It isn't public debt what the economy needs, but public sector services that make up for the private sector structural issues at the time. This kind of "spending" is cheaper and more effective than consumption subsidization and it manageable by private sector growth demographics.
Consumption subsidization is kicking the can down the road and nothing more.
btg:
This is like the Laffer curve - something that at one level is common sense somehow morphs in stupid specific rules about policy...
With the Laffer curve, it is obvious that at a zero percent tax rate, taxes collected are zero, at a 100% tax rate, taxes collected are zero (other than people cheating and getting caught, etc.) and somewhere in the middle there is a peak and then above this peak, tax increases are counterproductive - but there is no evidence that this is at 50%, or that this is constant from country to country or that some taxes are different.
In the case of debt, at some extreme level, high debt (and continued deficit spending) has to result in either hyper-inflation, massive cuts to government spending, of debasement of the currency - or all of the above, which can all create an economic crisis/recession.... otherwise interest payments on the debt could eventually end up as being equal to or greater than gdp itself.... or possibly a handful of people (oligarchs?) end up owning the government and calling in the debt.
the other choice is to repudiate debt (Russia 1917?) and essentially start a new country/government from scratch!
The debt of the US and other Allies (Canada, Britain) at the end of WW2, or Japan today, should be enough to put this 90% issue to rest...
Maybe it all goes back to this "common sense" idea that what is true of individuals or corporations is also true of governments...
these "zombie" ideas, as Krugman calls them, require some sort of massive public education effort, perhaps.... maybe some of the PACs and Super-PACs onthe democratic side should be running TV ads to dispell these myths... too bad Colbert folded up his Super-PAC!
DrDick -> btg...
Both DeLong and Krugman have pointed out that British public debt has gotten as high as 250% of GDP without disastrous results.
http://krugman.blogs.nytimes.com/2011/12/04/british-debt-history/?_r=0
There is also this for a longer view: http://en.wikipedia.org/wiki/File:UK_GDP.png
Randy said in reply to btg...
It is indeed much like the Laffer curve, which demonstrates to the political class that there is a peak level at which exploitation of the working class produces maximum benefits for the political class. Paying interest on debt has exactly the same effect on the working class as higher taxes, in that both reduce the ratio of services provided to price paid for political services.
DeDude:
That 90% threshold thingy was utterly discredited when it turned out that R&R had accidentally left out 3 data points that messed up the stats. Furthermore, even if the correlation had held up statistically, it would never have answered the question of whether the high debt caused the low growth or the low growth caused the high debt. The simples and best supported mechanistic models are for low growth causing high debt - not the other way around.
The Blorch said in reply to DeDude...
NO, NO, NO! The 90% threshold is discredited by me. I discredit it by correctly identifying if as irrelevant. What's relevant is the use to which the debt is put to: Not the absolute size of the debt as a percentage of GDP.
The whole argument is an artifice allowing idiot savant, Rain Man number nerds to high jack the public policy debate away from the real narratives describing political warfare.
Dryly 41:
Rogoff and Reinhart, of Harvard University, did a tremendous amount of damage with their bogus "research" which went undetected primarily because it was published in a "prestigious" economic publication that was not peer reviewed. I was more than 3 years before they were outed, and, then deliciously by a grad student and his professors an U. Mass. Even though it was a great scandal they had policy makers justifying austerity on the basis of this stuff.
But, Republican economists still insist that hyperinflation, that they predicted five years ago is just around the corner, still.
We still have "snake oil salesmen" and "Charlatans and Cranks" masquerading as Republican economists peddling "supply side" economic theory even though it has been proven to be "Voodoo Economics".
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Economist's View
I'm visiting my son Paul in Seattle today (he works at Amazon as an analyst), so just a quick post for now on two topics. First is Jim Hamilton on oil prices. He explains why the "boom in domestic drilling is bringing some real benefits to the U.S. economy. But a lower gasoline price for U.S. consumers isn't one of them":
Lower gasoline prices: "U.S. gasoline prices have fallen to their lowest level in nearly 33 months amid a boom in domestic oil drilling", the Wall Street Journal declared last week. That's a true statement, but there's more to the story.Americans are indeed facing the lowest gasoline prices in almost three years, but not by much. ...Second, at the risk of having a thin set of links for tomorrow, Paul Krugman's discussion of Larry Summer's recent talk on secular stagnation has generated quite a few responses:
Summer's presentation at the IMF Research Conference Krugman's first post: Secular Stagnation, Coalmines, Bubbles, and Larry SummersResponses:
Dean Baker: Bubbles Are Not Funny Paul Krugman: Me Too! Blogging Gavyn Davies: The implications of secular stagnation Jared Bernstein: Paul, Larry, Secular Stagnation, and the Impact of Negative Real RatesSandwichman:It will be overlooked, as usual. Disregarded. Ignored. But Dean -- in his understated, almost resigned way -- once again made a gentle plea for looking at "secular stagnation" from the supply side:
"Finally, as an alternative to trying to increase demand to deal with secular stagnation, countries could try to reduce supply. This should not sound too crazy. Western Euroepans work on average 20 percent fewer hours a year than do people in the United States. These countries mandate paid vacation (at least four weeks a year), paid sick days, paid parental leave and other forms of paid time off. France has a 35-hour work week. Remember, the problem is too much supply not too little. Reduced work hours (i.e. more leisure) is an easy way to deal with this "problem."
I would be more emphatic. Reduced hours is not only "an easy way to deal with this 'problem';" it is the only way to deal with it. It is the only way because the alternative, boosting demand through deficit spending, requires the consumption of more fossil fuel (which is no longer "cheap oil") and the emission of more carbon dioxide into the atmosphere.
The era of "economic growth" fueled by cheap energy is over. Done. Finished. Kaput.
The Blorch said in reply to Sandwichman...
That's the beauty of Obamacare. It provides an incentive for employers to reduce employees to part-time.
Sandwichman said in reply to Sandwichman...
"The decline in EROI among major fossil fuels suggests that in the race between technological advances and depletion, depletion is winning. Past attempts to rectify falling oil production i.e. the rapid increase of drilling after the 1970 peak in oil production and subsequent oil crises in the US only exacerbated the problem by lowering the net energy delivered from US oil production (Hall and Cleveland, 1981). Increasing prices, thought by most economists to negate depletion through increasing incentives for exploitation, cannot work as EROI approaches 1:1, and even now has made oil too expensive to support the high economic growth it once did."
"Thus society seems to be caught in a dilemma unlike anything experienced in the last few centuries. During that time most problems (such as needs for more agricultural output, worker pay, transport, pensions, schools and social services) were solved by throwing more technology investments and energy at the problem. In many senses this approach worked, for many of these problems were resolved or at least ameliorated, although at each step populations grew so that more potential issues had to be served. In a general sense all of this was possible only because there was an abundance of cheap (i.e. high EROI) high quality energy, mostly oil, gas or electricity. We believe that the future is likely to be very different, for while there remains considerable energy in the ground it is unlikely to be exploitable cheaply, or eventually at all, because of its decreasing EROI. Alternatives such as photovoltaics and wind turbines are unlikely to be nearly as cheap energetically or economically as past oil and gas when backup costs are considered. In addition there are increasing costs everywhere pertaining to potential climate changes and other pollutants. Any transition to solar energies would require massive investments of fossil fuels. Despite many claims to the contrary- from oil and gas advocates on the one hand and solar advocates on the other-we see no easy solution to these issues when EROI is considered. If any resolution to these problems is possible it is probable that it would have to come at least as much from an adjustment of society's aspirations for increased material affluence and an increase in willingness to share as from technology.
Unfortunately recent political events do not leave us with great optimism that such changes in societal values will be forthcoming."
"EROI of different fuels and the implications for society" (in press: http://www.sciencedirect.com/science/article/pii/S0301421513003856 )
anne said in reply to Sandwichman...
http://www.cepr.net/index.php/blogs/beat-the-press/bubbles-are-not-funny?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+beat_the_press+%28Beat+the+Press%29
November 16, 2013
Bubbles Are Not Funny
Paul Krugman tells us * that Larry Summers joined the camp concerned about secular stagnation in his I.M.F. talk last week, something that I had not picked up from prior coverage of the session. This is good news, but I would qualify a few of the points that Krugman makes in his elaboration of Summers' remarks.
First, while the economy may presently need asset bubbles to maintain full employment (a point I made in "Plunder and Blunder: The Rise and Fall of the Bubble Economy"), it doesn't follow that we should not be concerned about asset bubbles. The problem with bubbles is that their inflation and inevitable deflation lead to massive redistribution of wealth.
In the case of the housing bubble in particular we saw millions of people lose much or all of their wealth from buying homes at bubble-inflated prices. The loss of housing wealth is especially devastating because housing is a highly leveraged asset even in normal times and it is an asset often held by middle and moderate income households. It was great that the bubble was able to spur growth and get the economy close to full employment, however the subsequent crash was pretty awful. It would be incredibly irresponsible to go through another round like this.
The second qualification is that it is reasonable to believe that aggregate consumption levels will depend at least in part on the distribution of income. The upward redistribution in the last three decades, from middle and lower end wage earners to the high end wage earners in the 80s and 90s, and to corporate profits in the last decade, likely had an effect in depressing consumption. The question here is whether the marginal propensity to consume out of income is higher for a retail clerk or factory worker than a doctor or CEO. I would be willing to argue that it is, which means that the upward redistribution of income over this period had a depressing effect on consumption. (As a practical matter, this depressing effect was offset by the asset bubbles in the 1990s and 2000s.)
The third qualification is that Summers and Krugman seem to be leaving net exports out of the picture. In the old textbooks, rich countries like the United States were supposed to be net exporters of capital to developing countries. This implies that instead of running trade deficits we should be running surpluses This would both mean a higher return on capital in rich countries and more rapid growth in developing countries, which would be able to use imported goods and services to build up their capital stock even as they sustained a decent level of consumption for their populations.
The real world never followed the textbook story very closely, but it followed especially badly in the years following the 1997 East Asian financial crisis. The harsh terms of the bailout (led in part by Larry Summers) led to a situation in which developing countries began to accumulate massive amounts of reserves to protect themselves from ever being dictated to by the IMF in the same way. Instead of being importers of capital from rich countries developing countries became huge exporters of capital. This meant that the United States in particular had a huge trade deficit that created a huge drag on demand.
Finally, as an alternative to trying to increase demand to deal with secular stagnation, countries could try to reduce supply. This should not sound too crazy. Western Europeans work on average 20 percent fewer hours a year than do people in the United States. These countries mandate paid vacation (at least four weeks a year), paid sick days, paid parental leave and other forms of paid time off. France has a 35-hour work week. Remember, the problem is too much supply not too little. Reduced work hours (i.e. more leisure) is an easy way to deal with this "problem."
The long and short of the matter is that secular stagnation is really a story of too much wealth. It is absurd that this ends up impoverishing countries and leading to mass suffering. Keynes taught us how to deal with this problem almost 80 years ago. We know how to prevent the suffering, we just lack the political force to stop it.
* http://krugman.blogs.nytimes.com/2013/11/16/secular-stagnation-coalmines-bubbles-and-larry-summers/
-- Dean Baker
anne said in reply to Sandwichman...
Reduced hours is not only "an easy way to deal with this 'problem';" it is the only way to deal with it. It is the only way because the alternative, boosting demand through deficit spending, requires the consumption of more fossil fuel (which is no longer "cheap oil") and the emission of more carbon dioxide into the atmosphere.
The era of "economic growth" fueled by cheap energy is over. Done. Finished. Kaput.
-- Sandwichman
[ To begin with then how will policy changes that this supposition will mean for developing countries be made acceptable? ]
anne said in reply to Sandwichman...
http://www.cepr.net/index.php/blogs/beat-the-press/todd-stern-president-obamas-special-envoy-on-climate-change-says-us-can-take-lives-and-destroy-property-in-developing-world-with-impunity
November 17, 2013
Todd Stern, President Obama's Special Envoy on Climate Change, Says U.S. Can Take Lives and Destroy Property in Developing World With Impunity
It would have been useful if the New York Times had made this point in an article * that discussed the impact of global warming on the developing world. After noting the destruction caused by events related to climate change, like the typhoon that hit the Philippines and the droughts afflicted wide areas across Africa and the Middle East the piece tells readers:
"The United States and other rich countries have made their opposition to large-scale compensation clear. Todd D. Stern, the State Department's envoy on climate issues, bluntly told a gathering at Chatham House in London last month that large-scale resources from the world's richest nations would not be forthcoming.
"'The fiscal reality of the United States and other developed countries is not going to allow it,' he said. 'This is not just a matter of the recent financial crisis. It is structural, based on the huge obligations we face from aging populations and other pressing needs for infrastructure, education, health care and the like. We must and will strive to keep increasing our climate finance, but it is important that all of us see the world as it is.'
"Appeals to rectify the injustice of climate change, he added, will backfire. 'Lectures about compensation, reparations and the like will produce nothing but antipathy among developed country policy makers and their publics.'"
The position that the United States finds it inconvenient to compensate poor countries for the damage it has caused them runs directly counter to the United States usual position in international forums where it typically is the strongest proponent of property rights. In this case the United States is effectively arguing that it will not compensate poor countries for the damage it has done to their property (and lives) because they can't force it do so. It would have been helpful if the article had explicitly noted this departure from the normal U.S. position.
It would have also bee useful to note that Stern is 100 percent wrong on the economics. For the foreseeable future the United States, along with most wealthy countries, face no realistic budget constraints. With economies operating well below full employment additional government spending would help to boost demand, employment, and growth. The only obstacle to more spending is a bizarre cult of budget balancers that dominates politics in the United States and Europe in defiance of all available economic evidence and theory.
* http://www.nytimes.com/2013/11/17/world/growing-clamor-about-inequities-of-climate-crisis.html
-- Dean Baker
pgl:
James Hamilton's posts on gasoline prices are excellent. A great source of data can be found here:
http://www.eia.gov/petroleum/gasdiesel/gaspump_hist.cfm
Hamilton notes that since there are about 40 gallons of gasoline per barrel of oil, the change in the price per gallon of gasoline can be approximated by the change in the barrel price of oil divided by 40. It turns out that a rough estimate of the level of the price of gasoline can be found by noting that on average the sum of taxes, the refinery margin, and the distribution margin is about $1 per gallon. So with oil prices being near $100 a barrel, this simple estimate = ($100/40) + $1 = $3.50.
North Dakota oil is only a part of the world supply so it is not surprising that we are not seen record low prices - even if the Wall Street Journal and its incredibly short memory claim we are.
Peter K.:
http://krugman.blogs.nytimes.com/2013/11/17/what-to-do-when-youre-wrong/?_r=0
What To Do When You're Wrong by Krugman November 17, 2013, 1:08 pm
"Barry Ritholtz reminds us that we've just passed the third anniversary of the debasement-and-inflation letter - the one in which a who's who of right-wing econopundits warned that quantitative easing would have dire consequences. As Ritholtz notes, they were utterly wrong. Also, rereading the letter now, you have to wonder what kind of economic model they had in mind. They asserted that
The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment.
So they'd be inflationary without being expansionary? How was that supposed to work? There were a few actual economists in the group; do they subscribe to the doctrine of immaculate inflation? ..."
Three years ago. What is their model? Or were they just trolling?
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Paul Krugman is annoyed (each of the four points below is discussed in detail):
Secular Stagnation, Coalmines, Bubbles, and Larry Summers, by Paul Krugman: I'm pretty annoyed with Larry Summers right now. His presentation at the IMF Research Conference is, justifiably, getting a lot of attention. And here's the thing: I've been thinking along the same lines, and have, I think, hinted at this analysis in various writings. But Larry's formulation is much clearer and more forceful, and altogether better, than anything I've done. Curse you, Red Baron Larry Summers!anne:OK, with professional jealousy out of the way, let me try to enlarge on Larry's theme.
- When prudence is folly ...
- An economy that needs bubbles? ...
- Secular stagnation? ...
- Destructive virtue ...
I could go on, but by now I hope you've gotten the point. What Larry did at the IMF wasn't just give an interesting speech. He laid down what amounts to a very radical manifesto. And I very much fear that he may be right.
http://krugman.blogs.nytimes.com/2013/11/16/secular-stagnation-coalmines-bubbles-and-larry-summers/November 16, 2013
Secular Stagnation, Coalmines, Bubbles, and Larry Summers By Paul Krugman
I'm pretty annoyed with Larry Summers right now. His presentation at the IMF Research Conference is, justifiably, getting a lot of attention. And here's the thing: I've been thinking along the same lines, and have, I think, hinted at this analysis in various writings. But Larry's formulation is much clearer and more forceful, and altogether better, than anything I've done. Curse you, (Red Baron) Larry Summers!
OK, with professional jealousy out of the way, let me try to enlarge on Larry's theme.
1. When prudence is folly
Larry's formulation of our current economic situation is the same as my own. Although he doesn't use the words "liquidity trap", he works from the understanding that we are an economy in which monetary policy is de facto constrained by the zero lower bound (even if you think central banks could be doing more), and that this corresponds to a situation in which the "natural" rate of interest – the rate at which desired savings and desired investment would be equal at full employment – is negative.
And as he also notes, in this situation the normal rules of economic policy don't apply. As I like to put it, virtue becomes vice and prudence becomes folly. Saving hurts the economy – it even hurts investment, thanks to the paradox of thrift. Fixating on debt and deficits deepens the depression. And so on down the line.
This is the kind of environment in which Keynes's hypothetical policy of burying currency in coalmines and letting the private sector dig it up – or my version, which involves faking a threat from nonexistent space aliens – becomes a good thing; spending is good, and while productive spending is best, unproductive spending is still better than nothing.
Larry also indirectly states an important corollary: this isn't just true of public spending. Private spending that is wholly or partially wasteful is also a good thing, unless it somehow stores up trouble for the future. That last bit is an important qualification. But suppose that U.S. corporations, which are currently sitting on a huge hoard of cash, were somehow to become convinced that it would be a great idea to fit out all their employees as cyborgs, with Google Glass and smart wristwatches everywhere. And suppose that three years later they realized that there wasn't really much payoff to all that spending. Nonetheless, the resulting investment boom would have given us several years of much higher employment, with no real waste, since the resources employed would otherwise have been idle.
OK, this is still mostly standard, although a lot of people hate, just hate, this kind of logic – they want economics to be a morality play, and they don't care how many people have to suffer in the process.
But now comes the radical part of Larry's presentation: his suggestion that this may not be a temporary state of affairs.
2. An economy that needs bubbles?
We now know that the economic expansion of 2003-2007 was driven by a bubble. You can say the same about the latter part of the 90s expansion; and you can in fact say the same about the later years of the Reagan expansion, which was driven at that point by runaway thrift institutions and a large bubble in commercial real estate.
So you might be tempted to say that monetary policy has consistently been too loose. After all, haven't low interest rates been encouraging repeated bubbles?
But as Larry emphasizes, there's a big problem with the claim that monetary policy has been too loose: where's the inflation? Where has the overheated economy been visible?
So how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures? Summers's answer is that we may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest. And this hasn't just been true since the 2008 financial crisis; it has arguably been true, although perhaps with increasing severity, since the 1980s.
One way to quantify this is, I think, to look at household debt. Here's the ratio of household debt to GDP since the 50s:
[Ratio of household debt to GDP]
There was a sharp increase in the ratio after World War II, but from a low base, as families moved to the suburbs and all that. Then there were about 25 years of rough stability, from 1960 to around 1985. After that, however, household debt rose rapidly and inexorably, until the crisis struck.
So with all that household borrowing, you might have expected the period 1985-2007 to be one of strong inflationary pressure, high interest rates, or both. In fact, you see neither – this was the era of the Great Moderation, a time of low inflation and generally low interest rates. Without all that increase in household debt, interest rates would presumably have to have been considerably lower – maybe negative. In other words, you can argue that our economy has been trying to get into the liquidity trap for a number of years, and that it only avoided the trap for a while thanks to successive bubbles.
And if that's how you see things, when looking forward you have to regard the liquidity trap not as an exceptional state of affairs but as the new normal.
3. Secular stagnation?
How did this happen? Larry explicitly invokes the notion of secular stagnation, associated in particular with Alvin Hansen. He doesn't say why this might be happening to us now, but it's not hard to think of possible reasons.
Back in the day, Hansen stressed demographic factors: he thought slowing population growth would mean low investment demand. Then came the baby boom. But this time around the slowdown is here, and looks real.
Think of it this way: during the period 1960-85, when the U.S. economy seemed able to achieve full employment without bubbles, our labor force grew an average 2.1 percent annually. In part this reflected the maturing of the baby boomers, in part the move of women into the labor force.
This growth made sustaining investment fairly easy: the business of providing Americans with new houses, new offices, and so on easily absorbed a fairly high fraction of GDP.
Now look forward. The Census projects that the population aged 18 to 64 will grow at an annual rate of only 0.2 percent between 2015 and 2025. Unless labor force participation not only stops declining but starts rising rapidly again, this means a slower-growth economy, and thanks to the accelerator effect, lower investment demand.
By the way, in a Samuelson consumption-loan model, the natural rate of interest equals the rate of population growth. Reality is a lot more complicated than that, but I don't think it's foolish to guess that the decline in population growth has reduced the natural real rate of interest by something like an equal amount (and to note that Japan's shrinking working-age population is probably a major factor in its secular stagnation.)
There may be other factors – a Bob Gordonesque decline in innovation, etc. The point is that it's not hard to think of reasons why the liquidity trap could be a lot more persistent than anyone currently wants to admit.
4. Destructive virtue
If you take a secular stagnation view seriously, it has some radical implications – and Larry goes there.
Currently, even policymakers who are willing to concede that the liquidity trap makes nonsense of conventional notions of policy prudence are busy preparing for the time when normality returns. This means that they are preoccupied with the idea that they must act now to head off future crises. Yet this crisis isn't over – and as Larry says, "Most of what would be done under the aegis of preventing a future crisis would be counterproductive."
He goes on to say that the officially respectable policy agenda involves "doing less with monetary policy than was done before and doing less with fiscal policy than was done before," even though the economy remains deeply depressed. And he says, a bit fuzzily but bravely all the same, that even improved financial regulation is not necessarily a good thing – that it may discourage irresponsible lending and borrowing at a time when more spending of any kind is good for the economy.
Amazing stuff – and if we really are looking at secular stagnation, he's right.
Of course, the underlying problem in all of this is simply that real interest rates are too high. But, you say, they're negative – zero nominal rates minus at least some expected inflation. To which the answer is, so? If the market wants a strongly negative real interest rate, we'll have persistent problems until we find a way to deliver such a rate.
One way to get there would be to reconstruct our whole monetary system – say, eliminate paper money and pay negative interest rates on deposits. Another way would be to take advantage of the next boom – whether it's a bubble or driven by expansionary fiscal policy – to push inflation substantially higher, and keep it there. Or maybe, possibly, we could go the Krugman 1998/Abe 2013 route of pushing up inflation through the sheer power of self-fulfilling expectations.
Any such suggestions are, of course, met with outrage. How dare anyone suggest that virtuous individuals, people who are prudent and save for the future, face expropriation? How can you suggest steadily eroding their savings either through inflation or through negative interest rates? It's tyranny!
But in a liquidity trap saving may be a personal virtue, but it's a social vice. And in an economy facing secular stagnation, this isn't just a temporary state of affairs, it's the norm. Assuring people that they can get a positive rate of return on safe assets means promising them something the market doesn't want to deliver – it's like farm price supports, except for rentiers.
Oh, and one last point. If we're going to have persistently negative real interest rates along with at least somewhat positive overall economic growth, the panic over public debt looks even more foolish than people like me have been saying: servicing the debt in the sense of stabilizing the ratio of debt to GDP has no cost, in fact negative cost.
I could go on, but by now I hope you've gotten the point. What Larry did at the IMF wasn't just give an interesting speech. He laid down what amounts to a very radical manifesto. And I very much fear that he may be right.
Paine Q said in reply to anne...
Larry has revealed the establishment respecting limits of pk messaging
By this burst of maverick Jeremiah stuff
Larry has challenged PK to toughen up his game rhetoric
It's already having an effect Imagine pk cheering
"Long live full blast financial repression" In particular I love the comparison of rentier "real return "props to crop support
The Blorch said in reply to david...
Basically, what Paine is essentially saying is that you have no right to risk free return other than negative zero and how dare you indulge your inflated sense of entitlement to entertain such thoughts.
Spend whatever money you have. The spending will contribute to the general prosperity by stimulating the economy.
You belong in a pauper's grave.
Matt Young:
When the baseline points to negative interest rates then it points to negative growth. It says the aggregated growth rate will not sustain the aggregate. If the aggregate is not sustained, then the disaggregate happens. Restructuring time.
Paine Q:
Why is pk so affrighted by this conjecture ?
Looks like system sublation time to me Yip eeee
anne said in reply to Paine Q...
http://en.wikipedia.org/wiki/Aufheben
In philosophy, aufheben is used by Hegel to explain what happens when a thesis and antithesis interact, particularly via the term "sublate".
[ Good grief. ]
Paine Q said in reply to anne...
Peter K.Sublation is the time bound resolution
-----thru the institution of superseding novel structures ---
of the existing concrete conformation of class contradictions \
It interesting to compare and contrast Baker and Krugman.http://www.cepr.net/index.php/blogs/beat-the-press/bubbles-are-not-funny
Bubbles Are Not Funny by Dean Baker Saturday, 16 November 2013 17:31
Paul Krugman tells us that Larry Summers joined the camp concerned about secular stagnation in his I.M.F. talk last week, something that I had not picked up from prior coverage of the session. This is good news, but I would qualify a few of the points that Krugman makes in his elaboration of Summers' remarks.
First, while the economy may presently need asset bubbles to maintain full employment (a point I made in Plunder and Blunder: The Rise and Fall of the Bubble Economy), it doesn't follow that we should not be concerned about asset bubbles. The problem with bubbles is that their inflation and inevitable deflation lead to massive redistribution of wealth.
In the case of the housing bubble in particular we saw millions of people lose much or all of their wealth from buying homes at bubble-inflated prices. The loss of housing wealth is especially devastating because housing is a highly leveraged asset even in normal times and it is an asset often held by middle and moderate income households. It was great that the bubble was able to spur growth and get the economy close to full employment, however the subsequent crash was pretty awful. It would be incredibly irresponsible to go through another round like this.
The second qualification is that it is reasonable to believe that aggregate consumption levels will depend at least in part on the distribution of income. The upward redistribution in the last three decades, from middle and lower end wage earners to the high end wage earners in the 80s and 90s, and to corporate profits in the last decade, likely had an effect in depressing consumption. The question here is whether the marginal propensity to consume out of income is higher for a retail clerk or factory worker than a doctor or CEO. I would be willing to argue that it is, which means that the upward redistribution of income over this period had a depressing effect on consumption. (As a practical matter, this depressing effect was offset by the asset bubbles in the 1990s and 2000s.)
The third qualification is that Summers and Krugman seem to be leaving net exports out of the picture. In the old textbooks, rich countries like the United States were supposed to be net exporters of capital to developing countries. This implies that instead of running trade deficits we should be running surpluses This would both mean a higher return on capital in rich countries and more rapid growth in developing countries, which would be able to use imported goods and services to build up their capital stock even as they sustained a decent level of consumption for their populations.
The real world never followed the textbook story very closely, but it followed especially badly in the years following the 1997 East Asian financial crisis. The harsh terms of the bailout (led in part by Larry Summers) led to a situation in which developing countries began to accumulate massive amounts of reserves to protect themselves from ever being dictated to by the IMF in the same way. Instead of being importers of capital from rich countries developing countries became huge exporters of capital. This meant that the United States in particular had a huge trade deficit that created a huge drag on demand.
Finally, as an alternative to trying to increase demand to deal with secular stagnation, countries could try to reduce supply. This should not sound too crazy. Western Euroepans work on average 20 percent fewer hours a year than do people in the United States. These countries mandate paid vacation (at least four weeks a year), paid sick days, paid parental leave and other forms of paid time off. France has a 35-hour work week. Remember, the problem is too much supply not too little. Reduced work hours (i.e. more leisure) is an easy way to deal with this "problem."
The long and short of the matter is that secular stagnation is really a story of too much wealth. It is absurd that this ends up impoverishing countries and leading to mass suffering. Keynes taught us how to deal with this problem almost 80 years ago. We know how to prevent the suffering, we just lack the political force to stop it.
Peter K. said in reply to Peter K....
"We know how to prevent the suffering, we just lack the political force to stop it."
What has lessened the available demand in the economy?
Upwards income redistribution over past 30 years.
Government austerity: 50 little Hoovers are now gone. State and local government currently providing slight tailwind. Sequester. Federal deficit and debt no longer an issue so probably no more austerity depending on politics.
Trade deficit / currency policy. ---------------------- Clinton scrapped his middle class spending legislation because of fear that Greenspan would tighten prematurely, raising borrowing costs.
If the Democrats could get a spending bill through, Yellen (unlike Greenspan) could allow it to go through and promise not to raise rates until full employment / moderate inflation. Then we exit the liquidity trap.
Bubbles must be prevented via regulation (of leverage, fraud, etc.)
Charlie Baker said in reply to anne...
anne, I think Baker has been offering the solution to the issues Summers is pointing out for a while now. The key issues are inequality, currency valuations, and monopoly protections. He's been arguing for policies to reduce inequality, allow currencies to find proper balance, and to challenge monopoly protections that concentrate wealth and income.
I think that the value of Summer's speech is that it points out the folly of the status quo. Too bad he wasn't talking this way in 2009 but what's done is done.
Peter Dorman:
Secular stagnation? The US has been running systematic trade deficits, and this is a drag on domestic demand; it also entails higher levels of net domestic debt. I explored this six years ago in http://econospeak.blogspot.com/2007/09/bubblicious.html.
The problem with sec-stag is that it's a closed economy concept. I'll believe the world is experiencing sec-stag when I see evidence of aggregate demand shortfalls at a global level. Until then, I'll assume this is the problem of a chronic deficit country with an unlimited ability to borrow in its own currency
mrrunangun said in reply to Peter Dorman...
Profs. Summers and Krugman are finding difficulty resolving the tension between their beloved global trading system and their beloved domestic democratic welfare state. The global trading system is the enemy of social justice in our domestic arrangements by its effects on wages and employment in the tradable goods and services sectors.
Dan Kervick:
If we are experiencing secular stagnation, the solution lies in a more economically aggressive state, the mobilization of the population behind a progressive national mission and an assault on the plutocratic concentration of the means of production.
There seems to a an organized effort taking place among the High Church Macroeconomists of the neoliberal old guard to double down on capitalism.
Paine said in reply to Dan Kervick...
I agree with paragraph one. And Not sure in paragraph two if you include PK and LS as neo lib old guards
Dan Kervick said in reply to Paine ...
Yes. Somehow Krugman has managed to use his NY Times gig to give himself a skin-deep makeover as something that passes for a progressive thinker in our current Age of the Troglodytes. But he's still an unimaginative and conservative 20th century neoliberal with his head us his a**.
We're floating on an ocean of human suffering, choked with the rotting carcasses of socio-economic failure and decline, and all mainstream macroeconomists see is are problems real rate of interest and inflation expectations! Talk about sleep-walking through history. I'm really starting to think they are brain-damaged.
david s said in reply to Dan Kervick...
Maybe this is Larry Summers forecasting that there isn't going to be a new New Deal any time soon.
He's looking realistically at the political scene in the US, and sees zero FDRs.
DeDude:
The basic problem is that we have a huge lower and middle class that are unable to consume as much as they are able to produce – not for lack of want but due to their low compensation. The solution is a massive transfer of income and wealth into a sustainable pattern where ability to produce equals ability to comsume. Otherwise, you will need the huge pain and waste of bubbles. The only reason to contemplate the need for bubbles to sustain the economy is that we refuse to contemplate a massive transfer of wealth and income to obtain a fair balance and a sustainable economy.
Randy said in reply to DeDude...
I think it will also be necessary to transfer such that many will have an ability to spend far above their ability to produce.
Actually, this is already true for most of the upper income collectors. So the answer seems rather obvious to me, transfer from the top layer who already collect incomes far greater than what they produce, to the bottom layer to allow them to have at least a reasonable income even though they don't produce.
ilsm said in reply to gordon...
The US needs to stop betting that it will need to fight WW II again.
What Ike said in 1953 in spades.
"Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed."
US won't get Tang from the $1500B to operate the F-35 for 40 years, making smoke and noise, punching holes in the atmosphere.
Pentagon spending is 19% of all federal government outlays in 2012. Other discretionary was 17% (including "security" not in the pentagon). That was about 9% of GDP.
Interest was 6%.
http://en.wikipedia.org/wiki/File:U.S._Federal_Spending_-_FY_2011.png
gordon:
Second, Prof. K's suggestion to stimulate private spending by either paying negative interest rates on deposits or pushing up interest rate expectations strikes me as forced and unnecessarily complicated ("Destructive Virtue"). I would rather say, very simply; "If people aren't spending, maybe it's because they don't have much money".
Dean Baker, in the piece quoted by Peter K, observes – correctly, IMHO – that increasing inequality might have something to do with this. But Baker doesn't go the extra mile and say that the solution is to put more money in people's pockets. That strikes me as being the obvious course of action, not financial manipulations of interest rates as suggested by Prof. K. And that, I think, brings the argument back to fiscal measures.
The Raven:
So…if this view is correct…what is an appropriate way to manage an economy?
For as long as I can remember, I've been hearing that growth is enough. Yet we know very well that nothing can grow forever. And--"The raw materials of the world are finite."[1]
What are humane economic and political policies for a world which has matured?
[1] OK, yes, I suppose we could go to interplanetary space. But that seems an extreme solution, and it is not guaranteed.
The Raven:
"Cameron made the announcement during the annual Lord Mayor's Banquet speech in the Guildhall, where he said austerity should last forever, and Britain must get used to being a 'leaner, more efficient state,' British media reported."
"What I didn't know when I wrote about it was that he made these comments from a gilded throne."
I suppose that's one solution. Let's bring back feudalism!
(http://digbysblog.blogspot.com/2013/11/rich-and-shameless-doesnt-begin-to.html)
Randy:
Re; "...spending is good, and while productive spending is best, unproductive spending is still better than nothing."
Re; "Saving hurts the economy – it even hurts investment, thanks to the paradox of thrift."
These ideas take my mind to the ACA. That is, what the ACA will effectively do beginning next year is take a large amount of spending and saving off the table. A whole lot of people will be sending the equivalent of a new car payment to the insurance companies, leaving them short the same amount of money for any other spending or saving that they might have done. And what will the insurance companies do with it? In the short term, probably just park it in cash, at least until they get a better feel for how this is all going to play out.
ilsm -> Randy...
kievite:Savings good if invested in things that do for people.
The $2,600B of cash parked in the SSTF went to war, blowing up expensive smart bombs from expensive drones is utterly unproductive.
ACA has a limit to how much cash the insurance companies can "park"!
Mixture of high energy prices with neoliberalism is a very toxic combination. Might be even deadly.
And high energy prices are "secular" (I don't like this stupid usage of English word "secular" by economists, "long term" might be better).
Vae victis... Looks like a mousetrap for poor and middle class for me.
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It is not over until it is over…. We may well need, in the years ahead, to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity, holding our economies back, below their potential…
Elwood Anderson · Cal Berkeley
The macroeconomists with their models have concluded that interest rates need to be negative. Let's examine what this means in terms that a layman can understand. The economy needs demand and investment to produce goods and services. Demand and investment come from the same source, income. If more income is saved, there is less available to create demand and vice versa. Production will be restrained if investment is not sufficient to produce the goods and services that are demanded. The solution to this problem is to raise interest rates so more of the national income is directed to savings and less to spending, which creates demand. Now what if demand is too low because too much income is going to savings? Savings need to be reduced to increase demand. The means to do this would be to lower interest rates. But this measure is limited, since rates near zero won't cause savers to start spending. So what will cause more spending? Taking money from the savers and giving it to people who want to spend. So what is the mechanism to do this? Tax the savers, and reduce the taxes on spenders, to zero, if necessary. Or, provide the infrastructure, free health care, education, and retirement benefits to the spenders, so more of their income can go to spending.
This is essentially what was done in the decades immediately after WWII, when the highest marginal tax rates were near 100% and the government was spending on roads, education, the GI Bill, and Social Security and Medicare were implemented. Instead, what we have done since the 1980's is reduce high marginal tax rates and taxes on capital gains, allow offshore tax haven's, privatize education, let our infrastructure deteriorate, bust unions, and deregulate business to allow more of the rewards of productivity to go to savers. And, now the austerity advocates are on a path to destroy Social Security and Medicare. Isn't it clear that all we have to do is restore the conditions that existing the fifties and sixties?
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Zero Hedge
The Baptists
The lapse of time during which a given event has not happened is…alleged as a reason why the event should never happen, even when the lapse of time is precisely the added condition which makes the event imminent.
~ George Eliot in Silas Marner
We were all worried about these issues in 1927, but you can only worry about things for so long.
~ Anonymous
Prior to any financial dislocations there are many who preach of the coming crisis. In 1924, Roger Babson warned of credit excesses that would lead to catastrophe. Charlie Merrill of Merrill Lynch fame sought psychiatric help due to his inexplicable bearish views; as legend goes, he and his psychiatrist emptied their investment accounts and dodged the carnage. The stock futures speculation in the 1920s was so obvious that Congress held hearings to discuss it well before the crash.88 The crash and subsequent multi-decade global devastation arrived to the total shock of many. Town criers could be heard screaming of a coming tech crash in the late '90s by those who listened. We had congressional hearings on derivatives speculation wherein Brooksley Born methodically laid out the plotline for the coming storm in unregulated derivative markets.89 I wrote a 2002 email describing the coming subprime crisis and banking collapse.90 Prescient? Not really. I was simply parroting ideas scattered over the Internet. The few who played the housing bust with leverage get the limelight; countless thousands saw the housing excesses in the years leading up to 2007.
This year had its share of preachers of unassailable credibility telling us of more trouble to come. Are they farsighted or fooled? I haven't a real clue. I can say, however, that their advice demands your attention.
Let's begin with the most prolific of doomers, David Stockman, former Wall Street insider and Reagan budget genius. Stockman was omnipresent, telling anybody who would listen of a coming mayhem in the bond market and accompanying pension crisis, labeling our current economic status as "the end of a disastrous debt super cycle that has gone on for the last thirty or forty years."93
David places blame squarely on the Fed by suggesting "if we don't drive the Bernankes and the Dudleys and the Yellens and the rest of these lunatic money-printers out of the the Fed and get it under the control of people who have at least a modicum of sanity, we are just going to bury everybody deeper." Somewhat paradoxically, he noted, "if the Fed doesn't keep printing, it's game over."
John Hussman undermines the very foundations of monetary easing in one of the most cogent arguments that I have read.94 He is a deep-value guy whose analyses have refreshingly long-time horizons and whose portfolios have been bludgeoned in the short term.
George Soros rattled Newsweek readers when he suggested the global credit retrenchment is "about as serious and difficult as I've experienced in my career…comparable in many ways to the 1930s. We are facing now a general retrenchment in the developed world, which threatens to put us in a decade of more stagnation, or worse. The best-case scenario is a deflationary environment. The worst-case scenario is a collapse of the financial system."95 He predicts a collapse of social order, suggesting that "it is about saving the world from a downward economic spiral." George is known for talking his book, but what position is he talking up? This is not a trick question...well maybe it is. (Answer: Gold. Lots and lots of gold.)
Bill Gross suggests that "a 30-50 year virtuous cycle of credit expansion which has produced outsized paranormal returns for financial assets-bonds, stocks, real estate and commodities alike-is now delevering because of excessive 'risk' and the 'price' of money at the zero-bound."96 He concludes that "we are witnessing the death of abundance and the borning of austerity, for what may be a long, long time." Detractors like to pick on Bill's DOW 5000 call years ago. With inflation adjustment-accurate inflation adjustment-that decade-old call is approaching spot on.
Jim Rogers predicted that some of the Ivy League institutions would go bankrupt.97 Harvard had a terrible credit seizure in 2007-09 due to their hedge-fund-like endowment, but Jim's prediction was made in 2012. Jim doesn't think we are done yet.
Nomura's Bob Janjuah is always good for brutal assessments.99 Bob noted that "markets are so rigged by policy makers that I have no meaningful insights to offer." Bob goes on to note in a later piece that "central bankers are intentionally mispricing the cost of capital, in an attempt to push the private sector to misallocate capital into consumption and into asset purchases at the wrong time and at the wrong price." He blames Greenspan and Bernanke explicitly for tens of millions of American citizens who are "either homeless and/or on food stamps." Bob can really turn a phrase. "Financial anarchy" is always good for a few chuckles. Say what you really think, Bob. The world's central bankers are reserving their own special place in hell.
Ray Dalio, head of Bridgewater Associates-the largest hedge fund in the world-has been bearish for awhile and is becoming quite the gold bug. In January he noted that he was bearish "through 2028."100 In subsequent presentations, he seemed to change his tune by referring to our global state of affairs as a "beautiful deleveraging ," which he defines as some sort of optimal inflation/deflation cross-dresser operating through a combination of defaults and debt monetization.101 I guess beauty is in the eyes of the beholder. One prominent market watcher-me-suspected that Ray had an eye on a Romney-cabinet-level appointment. We'll never know.
Legendary investor Jeremy Grantham with $150 billion under management, Thomas Brightman of Research Affiliates, and Robert Gordon of NBER lit up the blogosphere late in the year with conclusions that global growth would drop to the 1% zone.104 Their predicted durations-decades or more-were newsworthy. Grantham suggests that demographics and resource depletion will cause us to never regain our previous growth rates. He had previously amplified a notion first presented by Adam Smith in The Wealth of Nations by showing that a sustainable 3% compounded growth rate, rather than the "greatest invention of all time," is total mathematical nonsense.105 A cubic meter of physical wealth expanding at 3% over the Egyptian dynasty-admittedly a long time-would fill ten solar systems-a large volume.
Billionaire Richard Branson joins Grantham in predicting that capitalism is destroying the planet, focusing in particular on the perpetual growth model that will consume everything. The great story about Richard is that he is rumored to have tried to hit up Obama for some weed in a recent trip to the White House.106 We don't know if Obama's "Choomwagon"107 was in the shop.
Richard W. Fisher, President and CEO of the Federal Reserve Bank of Dallas Texas, was a buzzkill for the fluffers at the Fed, noting that there is "a frightful storm brewing in the form of un-tethered government debt."108 He says that he chose the phrase "frightful" to "deliberately avoid hyperbole." Fisher suggests that the long-term fiscal situation of the federal government will be unimaginably more devastating to our economic prosperity than the subprime debacle and the recent debauching of credit markets that we are working so hard right now to correct.
2012 was a big year for taking the bear case to the Halls of Power. Jim Rickards, author of Currency Wars, presented his concerns about currency debasement to Congress.109 James Grant and Robert Wenzel in speeches at the Federal Reserve both hammered the Fed for horrendous monetary policies that are destroying our currency and capitalist system.112 Jim is a total genius, and he is very attention-worthy.115
Legendary hedge fund manager and cherished confidant David Einhorn poked at the Fed with his "jelly donut" speech.116 It was Silence of the Lambs at the Buttonwood Conference when he pointed out what they should have known: Artificially low interest rates drive up commodities and reduce income streams to a trickle, forcing consumers to save more and spend less.117 He throws in a little money multiplier logic and-voilà!-stimulus is totally negated.
Einhorn accuses the Fed of "offering some verbal sleight-of-hand worthy of a three-card Monte hustle." David wonders out loud: "We have just spent 15 years learning that a policy of creating asset bubbles is a bad idea, so it is hard to imagine why the Fed wants to create another one." I wonder out loud: How much did Fed policy have to degenerate to force the Einhorns of the world to focus on monetary theory rather than investing?
We had several bootleggers-turned-Baptists. The technical term is "tranny." John Reed confessed his sins while CEO of Citibank, explaining how Citibank and Travelers, with the aid of a very friendly administration, destroyed the Glass-Steagall safeguards that had protected consumers from financial disaster since the '30s.118 Sandy Weill, the next CEO of Citigroup, shocked the world by suggesting that big banks "be broken up so that the taxpayer will never be at risk." What's gotten into these Citi-boys? Would it be too much to ask for a mea culpa from Robert Rubin? Yes.
William Cohan, former Wall Street investment banker and author of several best sellers including a comprehensive history of Goldman Sachs, pointed out the cracks in the seams - the omerta - at Goldman, flaws in the FINRA arbitration system, the mathematically nonsensical $100 million IRA of Mitt Romney, the SEC's lack of oversight on nefarious activities at Citigroup, and a striking exposé of Robert Rubin's deep-seated political power.122
These guys are some of the sharpest knives in the drawer. They view the world through darker lenses than most. Whether they are right or not, you've been warned.
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April 21, 2013
In his pathbreaking 2001 book Resource Wars, Michael Klare wrote: "Natural resources are the building blocks of civilization and an essential requirement of daily existence. The inhabitants of planet Earth have been blessed with a vast supply of most basic materials. But we are placing increased pressure on those supplies, and in some cases we face, in our lifetimes, or those of our children, the prospect of severe resource depletion." More than ever, as he points out today, this remains a planetary reality with which we have still not truly come to grips. Since the beginning of this new century, however, climate change has joined resource scarcity in a way that will make for a far more combustible and explosive reality in the coming decades.
As John Vidal reported recently in the British Observer, leading scientists now believe that, by 2050, the pressures of climate change -- of record floods, intensifying extreme heat, and droughts -- could change the face of farming on this planet and lead to a doubling of prices for food staples, the very basics of life, as populations continue to rise. This, in turn, will undoubtedly mean destitution or worse for millions of the poor, particularly in Africa and Asia.
On a planet rapidly changing in ways that have not been part of our repertoire in the rest of human history, TomDispatch has been, and will be, asking some of its regulars to peer into the murkiness of the human future and offer us a sense of what we may face. From the next stages of weaponry in the American high-tech arsenal and the future aridification of the American Southwest to Washington's limited view of a world roaring toward 2030, our writers have already begun doing so. Today, Michael Klare, author most recently of The Race for What's Left, and a man always ahead of the curve, offers his views on a world too potentially explosive not to be attended to. Tom
Entering a Resource-Shock World How Resource Scarcity and Climate Change Could Produce a Global Explosion By Michael T. Klare
World enters a resource-shock era By Michael T Klare
Brace yourself. You may not be able to tell yet, but according to global experts and the United States intelligence community, the earth is already shifting under you. Whether you know it or not, you're on a new planet, a resource-shock world of a sort humanity has never before experienced.
Two nightmare scenarios - a global scarcity of vital resources and the onset of extreme climate change - are already beginning to converge and in the coming decades are likely to produce a tidal wave of unrest, rebellion, competition, and conflict.
Just what this tsunami of disaster will look like may, as yet, be hard to discern, but experts warn of "water wars" over contested
river systems, global food riots sparked by soaring prices for life's basics, mass migrations of climate refugees (with resulting anti-migrant violence), and the breakdown of social order or the collapse of states. At first, such mayhem is likely to arise largely in Africa, Central Asia, and other areas of the underdeveloped South, but in time all regions of the planet will be affected.
To appreciate the power of this encroaching catastrophe, it's necessary to examine each of the forces that are combining to produce this future cataclysm.
Resource shortages and resource wars Start with one simple given: the prospect of future scarcities of vital natural resources, including energy, water, land, food, and critical minerals. This in itself would guarantee social unrest, geopolitical friction, and war.
It is important to note that absolute scarcity doesn't have to be on the horizon in any given resource category for this scenario to kick in. A lack of adequate supplies to meet the needs of a growing, ever more urbanized and industrialized global population is enough. Given the wave of extinctions that scientists are recording, some resources - particular species of fish, animals, and trees, for example - will become less abundant in the decades to come, and may even disappear altogether. But key materials for modern civilization such as oil, uranium, and copper will simply prove harder and more costly to acquire, leading to supply bottlenecks and periodic shortages.
Oil - the single most important commodity in the international economy - provides an apt example. Although global oil supplies may actually grow in the coming decades, many experts doubt that they can be expanded sufficiently to meet the needs of a rising global middle class that is, for instance, expected to buy millions of new cars in the near future.
In its 2011 World Energy Outlook, the International Energy Agency claimed that an anticipated global oil demand of 104 million barrels per day in 2035 will be satisfied. This, the report suggested, would be thanks in large part to additional supplies of "unconventional oil" (Canadian tar sands, shale oil, and so on), as well as 55 million barrels of new oil from fields "yet to be found" and "yet to be developed".
However, many analysts scoff at this optimistic assessment, arguing that rising production costs (for energy that will be ever more difficult and costly to extract), environmental opposition, warfare, corruption, and other impediments will make it extremely difficult to achieve increases of this magnitude.
In other words, even if production manages for a time to top the 2010 level of 87 million barrels per day, the goal of 104 million barrels will never be reached and the world's major consumers will face virtual, if not absolute, scarcity.
Water provides another potent example. On an annual basis, the supply of drinking water provided by natural precipitation remains more or less constant: about 40,000 cubic kilometers. But much of this precipitation lands on Greenland, Antarctica, Siberia, and inner Amazonia where there are very few people, so the supply available to major concentrations of humanity is often surprisingly limited.
In many regions with high population levels, water supplies are already relatively sparse. This is especially true of North Africa, Central Asia, and the Middle East, where the demand for water continues to grow as a result of rising populations, urbanization, and the emergence of new water-intensive industries. The result, even when the supply remains constant, is an environment of increasing scarcity.
Wherever you look, the picture is roughly the same: supplies of critical resources may be rising or falling, but rarely do they appear to be outpacing demand, producing a sense of widespread and systemic scarcity. However generated, a perception of scarcity - or imminent scarcity - regularly leads to anxiety, resentment, hostility, and contentiousness. This pattern is very well understood, and has been evident throughout human history.
In his book Constant Battles, for example, Steven LeBlanc, director of collections for Harvard's Peabody Museum of Archaeology and Ethnology, notes that many ancient civilizations experienced higher levels of warfare when faced with resource shortages brought about by population growth, crop failures, or persistent drought.
Jared Diamond, author of the bestseller Collapse, has detected a similar pattern in Mayan civilization and the Anasazi culture of New Mexico's Chaco Canyon. More recently, concern over adequate food for the home population was a significant factor in Japan's invasion of Manchuria in 1931 and Germany's invasions of Poland in 1939 and the Soviet Union in 1941, according to Lizzie Collingham, author of The Taste of War.
Although the global supply of most basic commodities has grown enormously since the end of World War II, analysts see the persistence of resource-related conflict in areas where materials remain scarce or there is anxiety about the future reliability of supplies. Many experts believe, for example, that the fighting in Darfur and other war-ravaged areas of North Africa has been driven, at least in part, by competition among desert tribes for access to scarce water supplies, exacerbated in some cases by rising population levels.
"In Darfur," says a 2009 report from the United Nations Environment Programme on the role of natural resources in the conflict, "recurrent drought, increasing demographic pressures, and political marginalization are among the forces that have pushed the region into a spiral of lawlessness and violence that has led to 300,000 deaths and the displacement of more than two million people since 2003".
Anxiety over future supplies is often also a factor in conflicts that break out over access to oil or control of contested undersea reserves of oil and natural gas. In 1979, for instance, when the Islamic revolution in Iran overthrew the shah and the Soviets invaded Afghanistan, Washington began to fear that someday it might be denied access to Persian Gulf oil. At that point, president Jimmy Carter promptly announced what came to be called the Carter Doctrine.
In his 1980 State of the Union Address, Carter affirmed that any move to impede the flow of oil from the Gulf would be viewed as a threat to America's "vital interests" and would be repelled by "any means necessary, including military force".
In 1990, this principle was invoked by president George H W Bush to justify intervention in the first Persian Gulf War, just as his son would use it, in part, to justify the 2003 invasion of Iraq. Today, it remains the basis for US plans to employ force to stop the Iranians from closing the Strait of Hormuz, the strategic waterway connecting the Persian Gulf to the Indian Ocean through which about 35% of the world's seaborne oil commerce passes.
Recently, a set of resource conflicts have been rising toward the boiling point between China and its neighbors in Southeast Asia when it comes to control of offshore oil and gas reserves in the South China Sea. Although the resulting naval clashes have yet to result in a loss of life, a strong possibility of military escalation exists.
A similar situation has also arisen in the East China Sea, where China and Japan are jousting for control over similarly valuable undersea reserves. Meanwhile, in the South Atlantic Ocean, Argentina and Britain are once again squabbling over the Falkland Islands (called Las Malvinas by the Argentinians) because oil has been discovered in surrounding waters.
By all accounts, resource-driven potential conflicts like these will only multiply in the years ahead as demand rises, supplies dwindle, and more of what remains will be found in disputed areas. In a 2012 study titled "Resources Futures", the respected British think-tank Chatham House expressed particular concern about possible resource wars over water, especially in areas like the Nile and Jordan River basins where several groups or countries must share the same river for the majority of their water supplies and few possess the wherewithal to develop alternatives.
"Against this backdrop of tight supplies and competition, issues related to water rights, prices, and pollution are becoming contentious," the report noted. "In areas with limited capacity to govern shared resources, balance competing demands, and mobilize new investments, tensions over water may erupt into more open confrontations."
Heading for a resource-shock world Tensions like these would be destined to grow by themselves because in so many areas supplies of key resources will not be able to keep up with demand. As it happens, though, they are not "by themselves". On this planet, a second major force has entered the equation in a significant way. With the growing reality of climate change, everything becomes a lot more terrifying.
Normally, when we consider the impact of climate change, we think primarily about the environment - the melting Arctic ice cap or Greenland ice shield, rising global sea levels, intensifying storms, expanding deserts, and endangered or disappearing species like the polar bear. But a growing number of experts are coming to realize that the most potent effects of climate change will be experienced by humans directly through the impairment or wholesale destruction of habitats upon which we rely for food production, industrial activities, or simply to live.
Essentially, climate change will wreak its havoc on us by constraining our access to the basics of life: vital resources that include food, water, land, and energy. This will be devastating to human life, even as it significantly increases the danger of resource conflicts of all sorts erupting.
We already know enough about the future effects of climate change to predict the following with reasonable confidence: •Rising sea levels will in the next half-century erase many coastal areas, destroying large cities, critical infrastructure (including roads, railroads, ports, airports, pipelines, refineries, and power plants), and prime agricultural land; •Diminished rainfall and prolonged droughts will turn once-verdant croplands into dust bowls, reducing food output and turning millions into "climate refugees". •More severe storms and intense heat waves will kill crops, trigger forest fires, cause floods, and destroy critical infrastructure.
No one can predict how much food, land, water, and energy will be lost as a result of this onslaught (and other climate-change effects that are harder to predict or even possibly imagine), but the cumulative effect will undoubtedly be staggering. In "Resources Futures", Chatham House offers a particularly dire warning when it comes to the threat of diminished precipitation to rain-fed agriculture.
"By 2020," the report says, "yields from rain-fed agriculture could be reduced by up to 50%" in some areas. The highest rates of loss are expected to be in Africa, where reliance on rain-fed farming is greatest, but agriculture in China, India, Pakistan, and Central Asia is also likely to be severely affected.
Heat waves, droughts, and other effects of climate change will also reduce the flow of many vital rivers, diminishing water supplies for irrigation, hydro-electricity power facilities, and nuclear reactors (which need massive amounts of water for cooling purposes). The melting of glaciers, especially in the Andes in Latin America and the Himalayas in South Asia, will also rob communities and cities of crucial water supplies. An expected increase in the frequency of hurricanes and typhoons will pose a growing threat to offshore oil rigs, coastal refineries, transmission lines, and other components of the global energy system.
The melting of the Arctic ice cap will open that region to oil and gas exploration, but an increase in iceberg activity will make all efforts to exploit that region's energy supplies perilous and exceedingly costly. Longer growing seasons in the north, especially Siberia and Canada's northern provinces, might compensate to some degree for the desiccation of croplands in more southerly latitudes.
However, moving the global agricultural system (and the world's farmers) northward from abandoned farmlands in the United States, Mexico, Brazil, India, China, Argentina, and Australia would be a daunting prospect.
It is safe to assume that climate change, especially when combined with growing supply shortages, will result in a significant reduction in the planet's vital resources, augmenting the kinds of pressures that have historically led to conflict, even under better circumstances. In this way, according to the Chatham House report, climate change is best understood as a "threat multiplier... a key factor exacerbating existing resource vulnerability" in states already prone to such disorders.
Like other experts on the subject, Chatham House's analysts claim, for example, that climate change will reduce crop output in many areas, sending global food prices soaring and triggering unrest among those already pushed to the limit under existing conditions.
"Increased frequency and severity of extreme weather events, such as droughts, heat waves, and floods, will also result in much larger and frequent local harvest shocks around the world... These shocks will affect global food prices whenever key centers of agricultural production area are hit - further amplifying global food price volatility." This, in turn, will increase the likelihood of civil unrest.
When, for instance, a brutal heat wave decimated Russia's wheat crop during the summer of 2010, the global price of wheat (and so of that staple of life, bread) began an inexorable upward climb, reaching particularly high levels in North Africa and the Middle East. With local governments unwilling or unable to help desperate populations, anger over impossible-to-afford food merged with resentment toward autocratic regimes to trigger the massive popular outburst we know as the Arab Spring.
Many such explosions are likely in the future, Chatham House suggests, if current trends continue as climate change and resource scarcity meld into a single reality in our world. A single provocative question from that group should haunt us all: "Are we on the cusp of a new world order dominated by struggles over access to affordable resources?"
For the US intelligence community, which appears to have been influenced by the report, the response was blunt. In March, for the first time, Director of National Intelligence James R Clapper listed "competition and scarcity involving natural resources" as a national security threat on a par with global terrorism, cyberwar, and nuclear proliferation.
"Many countries important to the United States are vulnerable to natural resource shocks that degrade economic development, frustrate attempts to democratize, raise the risk of regime-threatening instability, and aggravate regional tensions," he wrote in his prepared statement for the Senate Select Committee on Intelligence. "Extreme weather events (floods, droughts, heat waves) will increasingly disrupt food and energy markets, exacerbating state weakness, forcing human migrations, and triggering riots, civil disobedience, and vandalism."
There was a new phrase embedded in his comments: "resource shocks". It catches something of the world we're barreling toward, and the language is striking for an intelligence community that, like the government it serves, has largely played down or ignored the dangers of climate change. For the first time, senior government analysts may be coming to appreciate what energy experts, resource analysts, and scientists have long been warning about: the unbridled consumption of the world's natural resources, combined with the advent of extreme climate change, could produce a global explosion of human chaos and conflict. We are now heading directly into a resource-shock world.
Michael Klareis a professor of peace and world security studies at Hampshire College, a TomDispatch regular and the author, most recently, of The Race for What's Left, just published in paperback by Picador. A documentary movie based on his book Blood and Oil can be previewed and ordered at www.bloodandoilmovie.com. You can follow Klare on Facebook by clicking here.
Follow TomDispatch on Twitter and join us on Facebook or Tumblr. Check out the newest Dispatch book, Nick Turse's The Changing Face of Empire: Special Ops, Drones, Proxy Fighters, Secret Bases, and Cyberwarfare.
Copyright 2013 Michael T. Klare
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Submitted by Tyler Durden on 03/19/2013 - 17:20
We all know what's supposed to happen in the global economy: we get more of everything: more stuff manufactured, more coal dug up and burned, more "aggregate demand" i.e. insatiable desire for more of everything, more innovation, more wealth, more money printed, more debt taken on to buy more stuff and more education, more tourists occupying more beaches sipping more drinks, more strip malls built, more airports expanded, more jobs created, more taxes collected-- more "growth" of everything, in every way and every day. But what if this baseline scenario doesn't appear and the center cannot hold, and the Status Quo devolves - there will be less of everything, not more, and a gradual but steady erosion of all "growth" baselines: fewer jobs, lower wages, fewer taxes collected, less profits, fewer retail outlets. In this case, printing more money and spewing more reassuring propaganda will no longer tamp down the crisis. Rather, the failure of these Status Quo responses will unleash an even more destabilizing crisis.
Baseline Scenario #2 is the center cannot hold, and the Status Quo devolves.Those living through Scenario #2 will not notice any sudden changes; financial, political and geopolitical crises become the background noise to daily life.
The changes will be gradual and incremental: things will stop working as well, the homeless population will increase, stores will close, government offices will shorten their hours of operation, streets will remain unrepaired, hours will be cut, benefits will be trimmed, stadiums will no longer be filled during sporting events or musical extravaganzas.
There will be less of everything, not more, and a gradual but steady erosion of all "growth" baselines: fewer jobs, lower wages, fewer taxes collected, less profits, fewer retail outlets.
Faced with a shrinking pie to plunder and skim, the Aristocracy and its Upper Caste of technocrats will be forced to increase their share of the dwindling national surplus. Taxes and junk fees will rise, squeezing legitimate small enterprises into the informal economy, and the gulf between the Aristocracy/technocrat Upper Caste and the bottom 90% will widen: this can be characterized as the "third-worldization" of developed economies.
The disposable income of the top 10% will continue to rise, enabling them to retreat to the security of gated communities and luxury urban highrises, just like in Third-World megalopolises, while the gradual impoverishment of the bottom 90% erodes life outside the protected circles of the Elites and their well-paid worker-bees.
Anger and frustration rise, but food stamps, unemployment and transfer payments privatize the social mood: people are paid to stay home and watch TV or otherwise amuse themselves in political isolation. Nothing is sharp enough or drastic enough to spark a politically meaningful response. As long as the bread and circuses are ample, the masses are content to "get the best of what's still around" and go about their business without threatening the top 10%'s dominance of the national surplus.
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2/26/2013
cdresearch:
Housing Smoke And Mirrors | Global Economic Intersection
"The consensus opinion on the US Housing Market is that it is in recovery mode. Closer analysis of the data reveals that this recovery is artificial; and that the tools that made the recovery have built in a self-destruct mechanism.......
........ The slow death is easy to visualize. Loans with vintages from 2005-2007, when the bubble was inflating, were the first to have problems. Federal programmes have now got the delinquency rate of these 2005-2007 vintages falling. Loans taken out after 2008 are all accelerating into delinquency. This signals that borrowers since 2008 cannot afford to meet their current debt obligations. This could be because the economy is weak. It could also be because the size of the loans (i.e. the value of the underlying houses) is still too large.
Federal programmes have stopped the market from falling; and combined with easy money have actually made prices rise. People buying with mortgages however still can't really afford the current sales price. Only vultures with cash can afford the price, because they have no debt........
....... The current rising delinquency line, albeit less steep than in 2008 and 2009, still signals that the housing market is in stress and prices are still too high for buyers. Even with modifications and low interest rates, thanks to the Government and the Fed, the market remains unsustainable.
The Federal Programmes and the Federal Reserve have prevented true price discovery from occurring in the present; this price discovery however cannot be avoided. They hope that the discovery will be made in conditions of economic growth, so that the adjustment to realistic market prices for houses is higher rather than lower. The housing market is therefore the hostage of economic growth and not the signal of economic growth."
energyecon:
cdresearch wrote:
The housing market is therefore the hostage of economic growth and not the signal of economic growth.
Overgeneralization. As in, true in some (perhaps many or even possibly most) markets, but not all.
ResistanceIsFeudalsum luk wrote:
why Ben's fiat is an insufficient replacement for the "pre-recession money" that set those asset prices
Well, let's think about it... the new fiat went to a very select group of market participants, all of whom already have many more houses than they can use. I think that there is some point where the value of a house cannot exceed what someone will pay to live in it. Even if the market is entirely set by holders of new fiat competing with each other for houses, there is no case for appreciation unless someone downstream can pay more to live in that house than what was paid during the bubble.
Obviously, we are all gazing in stunned amazement at how slowly this other shoe has been falling, but it has been falling and I believe it will continue to fall. The only scenarios that could result in appreciation of value of housing stock, on a bulk basis (that is, including the houses occupied by the 99%), are
1) Demographic demand pressure. Eventually this will be a positive, but I think it is a wash or a negative for the next 15 years or so, depending on the choices the boomers make re: where to get old.
2) Supply destruction. Already happening in the swampy parts of the country, this could become a positive much faster than demographics, but don't hold your breath for this in the coastal areas or the Midwest.
3) Redistribution: 'Bama gonna pay everyone's mortgage. The more this helps the banks, the more likely it becomes, but I think it's still pretty far off. But don't be surprised when it comes up again, because if it was implemented, the money would go directly to banks to prop up house prices.
bearly wrote:
Go to a coin shop and tell that to the guy that has the Liberty $20 coin in a display case behind the counter.
I have several dozen pieces of cardboard that I could sell for upwards of $100 apiece on ebay tomorrow and a handful for more than that.
Duke:
In the previous post it was argued that too much austerity too soon is the key downside risk to housing. I would think that the biggest risk is the interest rate. As soon as that trends back to normal (7+%) we are looking at another giant wave of under water properties.
Mix in the fact that the GSAs are still THE buyer of MBS and the fact that the millennials are disproportionately affected by the on-going crisis and thus it does not seem that household formation will recover to historic levels anytime soon. I am much more negative to the prospects of housing.
Then again, CR is the expert.
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Feb 21 2013, The Atlantic
With the U.S., Japan, and Europe facing lost decades and hundreds of millions of frustrated middle-class workers, it's worth asking: How much does capitalism need growth to survive?
Everywhere we look, economic stagnation is staring us in the face. The United States seems headed for a "lost decade" (some would say our second in a row), Europe and Japan are doing arguably even worse, and economists like Robert Gordon are proclaiming the "end of growth."
David Graeber, the anthropologist sometimes described as the "anti-leader" of Occupy Wall Street, wrote in August 2011, "There is very good reason to believe that, in a generation or so, capitalism itself will no longer exist -- most obviously, as ecologists keep reminding us, because it's impossible to maintain an engine of perpetual growth forever on a finite planet."
This is a common refrain. When we bump up against our planet's resource limits, the story goes, capitalism goes bye-bye. But is it true? Maybe, but I have my doubts.
First off, it's just false that growth requires infinite resources. Economic growth comes in two flavors: (1) "extensive," where we use more inputs; (2) "intensive," where we use inputs in a more clever way to do more interesting stuff. The former must eventually hit a wall. The limits of the latter are completely unknown. Deride the "information economy" all you want, but it makes people happy and it sucks up a lot less energy than what came before it.
But this is a side point. The real question is: If growth does end, does our economic system go with it?
DOES CAPITALISM NEED GROWTH?
Ask any economist of the free-market persuasion to justify capitalism, and the word "growth" probably won't even be part of his spiel. The simple Econ 101 theories that are used to justify free markets don't even have growth in them! In Econ 101, capitalism works because people gain from trade, not because they have more and more to trade over time. Efficiency, not growth, is the gold ring. In those simple toy economies, people just keep on cheerfully making their bargains of cattle and grain until the Sun explodes.
In fact, some of the earliest challenges to the free-market orthodoxy came from adding growth to the models. Back in the 1950s, Paul Samuelson showed that growth provides a rationale for Social Security. Later, "endogenous growth" theories called for a government role in supporting research and development.
Noah Smith is an assistant professor of finance at Stony Brook University. He blogs at Noahpinion.
R T
I'm not sure if I agree with that assessment. Wages have been stagnating for decades and living standards having been dropping, the end of growth means continually deteriorating conditions. In a democratic society a growing underclass and an ultra-rich upper class is not a recipe for success, it is a recipe for constant conflict.
Maybe that is why the GOP keeps failing, they are in a class war and they keep losing because the majority of people are losing faith in a market that doesn't grow for them.
Jozef_2 > R T
"living standards have been dropping" where? Indonesia? India? Cambodia? Brazil? Eastern Europe? Nope! Granted all these countries have capitalism, but even if you look at the static slice of the US, the middle class and underclass, is their health and healthcare worse? Do not many of them get subsized housing far better than their parents and grandparent had; more choices of food (that they could afford if they did not eat junk); free cellphones and computers access; access to higher education, though the content is often inane. No, I do not even buy the arguement that real living standards are dropping only that relative living standards are and the expectation of hope (growth) is fading. The society - economists included - used to think that we could grow our way out of problems: nation debt, funding Social Security, etc. We likely cannot but the professor is correct that we can function quiet well with better not more.
R T > Jozef_2
You're right, living standards are not exactly dropping society wide, but they have for many in the working class and the uneducated.
These are people that are growing so poor as to not have access to healthy food, good healthcare, good education and housing that they would have had before de-industrialization and globalization.
I guess the invisible poor is growing because fewer people seem to take notice of them assuming that the world is progressing wonderfully for everyone.
Also, the boomer generation often points to technology as if that makes up for the problem that many millennials can't afford cars or homes and go deeply into debt for a college education that is worth far less now than 20 years ago.
TheBrett > R T
You're right, living standards are not exactly dropping society wide, but they have for many in the working class and the uneducated.
People in the working class and working poor actually do have higher household incomes and living standards than they did, say, 20 years ago - it's just that growth in income for them is much slower than it used to be.
Mark Jackson > TheBrett
But you're actually talking about a period in which there was economic growth.
R T > TheBrett
I'm not sure what I've read comes to that conclusion.
http://www.theatlantic.com/bus...
http://www.washingtonpost.com/...
What I get from these and many similar sources are that wages are indeed stagnating (when inflation is added in) or plummeting while key living costs have risen steadily.
Meaning that people are either going further into debt to continue the living standards of the boomers, or going without in many cases, leading to my assumption that living standards are in some form of decline.
TheBrett > R T
I agree that median wages have stagnated or shrunk, aside from a brief period in the 1990s. I was talking about real median household/family income, which has continued to grow - albeit slower than it used to.
R T > TheBrett
Yeah family incomes have grown because in the 70's, family opened up to include two earners in order to keep up.
Xerographica > R T
trythemiddle > Xerographica
That was a very enjoyable article, thanks. It did remind me of the old saying "economists stay poor because they think people act rationally, lawyers grow wealthy because they know they don't"
Xerographica > trythemiddle
Markets allow resources to flow to where they create the most value. Why? Simply because people have the freedom to spend their time/money on the things that they value most. Take away people's freedom to shop for themselves and value will be destroyed.
Shopping for yourself gives you the opportunity to use your own dollars/time to help answer the question of how society's limited resources should be used. Every second of every day you're helping to answer this fundamentally important question...which is why the answer is exceptionally accurate.
So it stands to reason that, if your spending decisions are taken away from you, if somebody chooses for you, then the answer will be marginally less accurate. Just like if you enter the wrong inputs into a computer program, then the output will invariably be wrong.
With this in mind, it should be clear that the problem with the government has absolutely nothing to do with its size...and everything to do with the fact that you're not given the freedom to shop for yourself. You're not given the freedom to use your own tax dollars to express the intensity of your preferences. The result is that we end up with too much national defense and not enough public healthcare. In other words, we end up with an extremely suboptimal provision of public goods.
There is no optimal without you. That's why pragmatarianism is the solution to the preference revelation problem. If you're interested in maximizing the amount of value we all derive from society's limited resources...then you should really like tax choice on facebook. But the choice is yours...as it should be!
jmaurobu > Jozef_2
It's a very hard thing to measure. On one hand people see the high end success of others at the top and feel shorted even though they have good and housing security (and that might even be a stretch). But on the other side it's a given that both a husband and wife must work to afford a decent home and not only do they have to work but they also have to put in well above 60 hours of work and commenting, meaning the quality of the time they have for themselves and their children is hurt, therefore lowering their quality of life in actual but hard to quantify terms.
TimC255 > jmaurobu
Define a decent home. Many people in more densely populated areas seem to live happily with much less space than the average American. You don't have to live in a large house in suburbia with an hour or more commute to live a happy life.
R T > TimC255
Densely populated areas usually mean renting, which actually denies people the benefits of home ownership and mortgages that allow people to pay for college, business creation, and so much more in that sphere.
I'm not saying that's for everyone, but home ownership and college education has been the traditional avenue into middle class society, especially since de-industrialization and the neutering of unions for benefits to new younger members.
jmaurobu > TimC255
That's why I started my comment with "It's a very difficult thing to measure". I've been living happily in cities (Boston, San Francisco, Los Angeles and now back in Boston) since 1999 but I also have a skill set an education matches to the higher paying jobs in those areas and I still don't own land or a piece of a building despite the fact that as an individual I earn 3x the avg household income. So to take the top 5-10% of the population which is able to succeed living in cities (many people in cities don't succeed) isn't a good measure of the 310+ million people of the US
TimC255 > R T
Wages have stagnated because benefits have taken up an increasing share of total compensation. Total compensation has not stagnated, it has risen along with health care costs which was the impetus for health care reform.
TheBrett > TimC255
Do you have a chart for growth in the value of non-wage benefits over time? I do agree that they're eating up an increasingly huge chunk of overall compensation, but I don't have any numbers to prove/disprove it.
In any case, as I pointed out up-thread, overall family income has slowed down in growth, although it hasn't stagnated (individual worker income is another story).
Olga Musayev
I'm just going to start listing problems with this article;
Capitalism is not the same thing as a market economy. Markets exist under all systems.
The beginning of the 20th century saw rapid growth in the US. Most people at the time were screwed by it (think farmers, displaced workers, etc).
Stock traders care very little for dividends. No growth means no reason to invest for the sake of selling later.
Im sure there's more.
TheBrett > Olga Musayev
They're not, but that doesn't mean that capitalism can't survive a very-low-growth era (assuming one ever happens). It started in a very low growth period, after all.
Baltiron > Olga Musayev
Markets do not exist under socialist systems whom are explicitly against markets. Most people's conditions improved, the loser's were usually trying to resist change. Stock traders care for dividends, more so during recessions. Furthermore, even if there's no total growth some companies will grow individually.
ThePolyCapitalist
Noah,
Our current system is not capitalism. It is a mixed economic system.
True 'capitalism', if there ever was such a thing in the modern period, started to end around WWI and pretty much was gone by WWII.
So rather than discussing a shift away from capitalism what you're really asking is whether we'll shift from a mixed economy, a subtle but important distinction.
piyush2
The growth disease has corrupted capitalism. I like how James Howard Kunstler describes capitalism - a set of rules for the allocation of surplus wealth. A non-growing and non-dying civilization i.e a stable civilization can choose to keep surplus as a buffer for emergencies, choosing to live well below the long term carrying capacity e.g a wise civilization can choose to overproduce food (well below carrying capacity though) and let it waste (actually become compost) instead of growing population or using the surplus to degrade carrying capacity.
History shows that civilizations go through long growth-fast collapse cycles, and the one we are in has now reached a point where growth based largely on degrading the planet and using ancient stored energy seems to have reached its peak and is threatening a massive die-off and extinction if the foot is not taken off the accelerator. We need to transition to a steady-state economy which does not mean end of capitalism but wise allocation of surplus wealth to attain steady state. Steady state does not mean static, there is lot of potential for dynamism as long as the peaks are well below the long term carrying capacity of the planet. The moral discussions should not be centered on whether steady state is the right thing to do (because there is no other choice on a finite planet if humanity wants to survive), but on how much of carrying capacity to leave to other creatures that don't seem to directly help humans materially, because they have the right to live on their own accord. Google growthbusters, see the movie.
Doly Garcia
This is a typical article of somebody who hasn't thought much on the subject and is just typing away the first ideas that come into his mind.
First, there are roughly known limits to "intensive" economic growth. Google "physicist talks with economist" to see the full argument. The fundamental idea is that essential goods, such as energy (but also food) cannot be allowed to drop below a certain fraction of the economy, or it would allow a sufficiently rich person or company to corner the whole market of the essential good. If the amount of essential goods cannot go below a certain fraction, and the production of essential goods isn't growing, the economy cannot grow.
Second, the author talks about "free markets" and "capitalism" as if they were synonymous. They aren't. "Capitalism" is a term invented by Karl Marx to describe the differences between the economy of industrialized countries and pre-industrial, or non-industrialized, countries. Free markets existed long before industrialization and the economic changes brought by it. Free markets are a necessary part of capitalism, but not all free-market systems are capitalism. Romans had free markets, but not capitalism.
Third, arguments based on modern history when we don't know how history is going to develop are invalid. Sure, we haven't seen the fall of capitalism... yet. People hadn't seen the rise of any republic in Europe until the French Revolution, either. A French man who, in the late 18th century, claimed that in spite of riots and revolts monarchy was stronger than ever would have been terribly, terribly wrong.
Fourth, it's factually incorrect that historically, anti-capitalist movements happened in periods of rapid growth. It's far more correct to say that they happened after periods of rapid growth, and as a consequence of recessions. The early 20th century was characterized by deep recessions (including the Great Depression) after spurts of growth.
Fifth, while debt and a good banking system are necessary for capitalism, debt and banking existed well before capitalism. It's true that moneylending almost certainly wouldn't disappear as a consequence of the end of growth, but that has nothing to do with the point being argued.
Sixth, it's highly questionable that stocks would be a worthwhile investment in a no-growth period. The main reason that people invest in stocks is that, while they are more risky, the average profits are greater than bonds. I don't see clearly how, in a no-growth situation, when capital gains on average are around zero, they would still be more profitable than bonds. Why would dividends pay more than bonds?
Seventh and final, the point that countries that experimented with alternatives to capitalism ended in worse places than countries that stayed capitalist is irrelevant. If capitalism needs growth (and this article makes no valid argument to support that it doesn't need growth), then the end of growth implies the end of capitalism. That might take us to an ugly place, but just because nobody wants to go to an ugly place, it doesn't mean that people can't end up there.
Geenius_at_Wrok
I would not say that the United States has "learned how to quietly restrain capitalism's excesses."
Mark Jackson > Geenius_at_Wrok
Perhaps more fair to say that the US has learned how to do this, but over the past 30 years the corporations have learned how to change the law so that, increasingly, not all of these lessons are followed.
mateo > Geenius_at_Wrok
We have restrained the excesses quite a bit in the US. It is no longer legal for corporations to dump unlimited amounts of mercury into our air and water or employ children in the coal mines. There is obviously a lot of things that could still be better regulated.
Bernard HP Gilroy > mateo
You mean it is not CURRENTLY legal to dump mercury or employ children. It is not unthinkable, given the trends on the right, that we will face this again in the future -- Gingrinch's child janitors, for example.
TheBrett
If we hit some point where intensive growth due to productivity declines greatly because of technological limits, then I suspect we'd still some growth from cycling fashions and trends in consumer spending. Or we might be in a situation where more and more of our "consumption" happens in some synthesis of augmented reality, video games, and entertainment, where your only limit is how much data you can process with the energy and computer networks you can build.
And, of course, there's always space. Spaceflight is incredibly expensive for our current global society, but it might not be so expensive for a richer future society. It's sort of like how the Great Pyramid of Giza was a hugely expensive project requiring tons of man-hours and many years for Ancient Egypt to build, but it's something that we could build for a tiny, tiny fraction of our overall wealth today.
mateo > TheBrett
What are these technological limits? I agree GDP growth may stop because most of our consumption will be of digital goods that do not count toward GDP, but that is just a limit of an outdated definition of growth.
Buckland
The problem is the end of growth creates social and political upheaval. Our federal government is predicated on 3-4% growth in the economy. That allows government that much growth without consuming an ever larger share (as it has done in recent years).
Noteworthy is that the alternatives you mention -- " communism, anarchism, and socialism" were all conceived during times and in places of economic upheaval.
Without growth the protesters turn into rioters, bombers and assassins. With growth the protesters turn into silly Occupiers showing people how to twinkle and use a human microphone. Given a choice I'll take the latter.
theartistformerlyknownashandle > Buckland
When was the last time a libertarian quit whining about the government wrecking everything and took a long hard look at the arrogant and incompetent management class in this country, who seem to think mismanaging everything into the ground gives them license to tie up all the money? "Buckland" certainly deserves an exorbitant bonus for incessant and creative misdirection.
Chucklepants > theartistformerlyknownashandle
"arrogant and incompetent management class in this country,"
Then why don't geniuses such as yourself, start a company and, with all your management brilliance, create lots and lots of well paying jobs for people. Since corporate management is, according to you, so incompetent, it will be easy for one as samrt as yourself, to be quite successful.
R T > Chucklepants
The management class and the capitalist class are actually two different concepts.
Starting a company as you've suggested is not the same as the incompetent management that destroys their company for short term profits to get awarded bonuses.
And they don't care because they have golden parachutes and a bank account full bonuses earned by destructive measures, capitalists do not have golden parachutes, only a failed business.
theartistformerlyknownashandle > R T
Very good point!
Chucklepants > R T
If all these "incompetent" managers were "destroying" their companies, we'd have public companies going belly up all over the place. They're not. Only a tiny fraction go bankrupt, or are forced to sell out, in any year or even decade.
trythemiddle > Chucklepants
http://www.dandodiary.com/2012...
I don't know, a couple a week worth over $100B doesn't seem like chump change.
R T > Chucklepants
I love you guys, in 2008 when the economy exploded and nearly dragged the entire world into depression it was systematic failure of management that was only stopped by the government.
Yeah we can argue about how much is mismanaged and how many companies go under, but just because a company doesn't go under, doesn't mean it is not terribly mismanaged.
Many large corporations can chug along for decades on market availability and derivatives of past products. I'm not saying I'm 100% right, but it is a debatable argument.
Chucklepants > R T
"in 2008 when the economy exploded and nearly dragged the entire world into depression it was systematic failure of management that was only stopped by the government."
Really? Were Apple, Microsoft, Proctor and Gamble, Coca Cola, Hershey, Johnson and Johnson, and the VAST majority of the over 6,000 corporations traded on NYSE and NASDAQ, bailed out by the government?
R T > Chucklepants
Are you saying that the people at Coca Cola are any smarter than the people at Lehman Brothers or AIG?
The products are different and so is the risk, but the quality of a CEO and executive is pretty much (arguably with more financial/economic training) the same at multi-billion dollar companies. You may have stated a fact, but you have not proven a point.
Also, not all companies are managed badly to assume that they are would mean an entirely different societal course. As of right now, some are and it is very detrimental and the above point of "the artist".
theartistformerlyknownashandle > Chucklepants
I am and it's very difficult because geniuses like yourself long ago decided that it was perfectly ethical to employ offshore workers and put them in direct competition with our own. While I'm sure you think this couldn't be helped I think it could have been nipped in the bud with a system of tariffs. But that's just the tip of the iceberg. What happens when management get's axed? Case in point: Chrysler. The new CEO fired everyone in the failing bloated top heavy executive building, and runs things from engineering. Quite well I might add. Let me guess, it's fine to give our jobs (and therefore control of our economy) to foreigners but not to let them live here, that about right?
Chucklepants > theartistformerlyknownashandle
So you're not only a management genius but, lo and behold, a mind reader. You're able to know all about me due to one post replying to your assertion that American corporate management is incompetent.
With that mind reading ability, you should be able to create a super new company that puts all others to shame.
theartistformerlyknownashandle > Chucklepants
Yeah, it's not like I can click on your profile and magically read your posts or anything.
trythemiddle > Chucklepants
Just because a person does not have the desire, ability or skill set to do something does not mean they cannot comment on the competence or morality of someone else doing it. See athletes and teachers for example. I could probably learn to manage a company, but the smoozing, hours or firing people never really appealed to me.
trythemiddle > theartistformerlyknownashandle
Buck does usually deserve this comment, but he really didn't here.
Harry Stutchbury
Arguing that the Middle/Lower class is worse off in America than 20 years ago is a pretty naive argument. First off, household income figures are fairly irrelevant given that the number of people living in the average household has dropped significantly in that period. Why these figures are used instead of GDP per capita is beyond me. It's a much simpler measurement that removes the distortions caused by changing living conditions.
Noah Smith touches on an important point here. Growth in the global economic powers; countries like the US, Japan, Australia, Germant etc. is now dependent on improvements in technology and productivity, rather than simply adding unused factors of capital and labour.
walstir
"Everywhere we look, economic stagnation is staring us in the face. The United States seems headed for a "lost decade" (some would say our second in a row), Europe and Japan are doing arguably even worse, and economists like Robert Gordon are proclaiming the "end of growth".
Economic stagnation is not everywhere and growth has not ended. In China, average per capita national income in 1990 was around $350. By 2008, the figure had grown to around $3000.
Floyd Earl Smith
Dude, you totally misappropriated "no one ever got fired for buying IBM". The saying refers to the company's products - products are things organizations make so they can have stocks, so you can focus on financial manipulation to the exclusion of any concern with reality. The saying does not refer to the company's stock.
More seriously, really good article; I'd intuited your thesis for myself, but you gave lots of good context and historical examples. Thanks!
Mark Jackson > Floyd Earl Smith
No, not really. This is a common saying in describing the mutual fund industry's conservatism and herd mentality. It emphatically does mean-- as it is often used-- buying IBM stock, not IBM's products.
skibum8713
How about we just stop using the word "capitalism"? It's a dated term that has been used so many different ways at this point that it's impossible to tell what someone means when they use it. For instance, someone working from the the M->C->M' definition of capitalism (the original, Marxist one) could tell Noah, fairly, that his claim is wrong by definition.
If you can't express your ideas clearly without using the word "capitalism" you probably don't have much to say anyway.
jmaurobu
I agree that capitalism won't go away because as the author states: there's no better alternative, much like Churchill's remarks about democracy being the worst form of government but better than all the rest.
The challenge will be in preventing people from being seduced by alternatives as growth remains elusive for the bottom 90% and finding the political will and expertise to control it's excesses, which are at an all time high when political and media/social will seems to be in favor of letting them run unabated
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December 18, 2012
Change of Direction, IG Metall Conference – Berlin, Germany Professor James K. Galbraith December 6, 2012 [audio]:
My friends, it is a pleasure and honor to be asked to speak to you this morning. And I want to begin by congratulating you for taking up a theme that I think is a common theme around the world – the idea of the good life.
I suppose I first encountered this theme a year or so ago at a meeting to discuss the future of development in Ecuador. And it reflects a little bit of the concerns my father had late in his life when he wrote a book entitled, "The Good Society."
I think it is a right and resonant theme for the future as we grapple with the problems that we face today. But first we must indeed deal with these problems -with the dark matters and imminent dangers that are before us now. And so I will focus my remarks on the first two words in the title of this conference, the question of changing course.
Five years ago when the great financial crisis broke into public view, those who claimed falsely that no one could have predicted it also claimed that our economies would recover. Standard forecasts foretold rapid growth and high employment within five years. Banks in America would start lending again. Confidence would return in Europe. Those of us who said no, that there would be no return to normal, were for the most part ignored. Yesterday we heard Professor Nouriel Roubini give a magisterial and very high speed tour of the world situation making it clear of course that the promised recovery has not occurred. But if Nouriel is Sir Isaiah Berlin's fox, who knows many things, let me try this morning to be the hedgehog who knows one big thing, and that one big thing is that what we are experiencing is a single, unified, global crisis of the economy and of the financial system. It is not a cluster of distinct and separated events; a subprime crisis in the United States; a public debt crisis in Greece; a bank crisis in Iceland; a real estate bust in Ireland and Spain; nor are there distinct U.S. and European crises, nor can the financial be separated from the real, nor is Germany a country to which crisis has not yet come with the suggestion that there might be some separate way out. There is one crisis, only one crisis, a deeply interconnected crisis of the world system. This crisis has, I think, three deep sources going back not twenty years but forty years to the early 1970s and the end of what we sometimes call the "golden age," the "glorious thirty" years in the immediate aftermath of the second World War.
- The first of the three deep sources is, I think, the rising real cost of the resources that we use, of energy and of everything that we use energy for. This was a problem that emerged in the 1970s and was then submerged again; it was deferred by new discoveries, by the geopolitical situation, and by the financial power of the western countries, which because of the debt crisis in much of the rest of the world had the effect of suppressing demand for these core resources. But this is a problems that can no longer be avoided or deferred. The cost of energy is roughly twice of what it was a decade ago and the future is far more uncertain. Both of these factors, cost and uncertainty, place a squeeze on the surplus or profitability in regions, continents, and countries that are importers of these resources. And as we confront, as we must, the problem of climate change and as we begin, as we must, to pay the price of climate change this problem is going to become more difficult. That's just an economic reality that we have to cope with as we face the imperative before us.
- The second great underlying issue it seems to me is technical change, the particular character of which in our time is quite different from what is was before. If you take the digital revolution together with globalization, the ease of transnational manufacturing and also to some degree the outsourcing of services, we find we live in an era where technology is radically labor-saving. It supplants workers. One thing that we can say without too much exaggeration is that the computer and the many associated technologies that have derived from it are now doing to the office worker what a century ago the internal combustion engine did to the horse.
- And the third great source of our problem is ideological. It is the neo-liberal idea that has given us deregulation and de-supervision; that has given us the notion that markets can function on their own without breaking down or blowing up. It is this notion as applied especially to finance. This is the great illusion of the last generation, and it fostered a form of economic growth that was intrinsically unstable and unsustainable. Why? Because it was based on declining standards for loans and on lax accounting of the proceeds of those loans. Or to put it in simple terms, it was based upon financial fraud, on the most massive wave of financial fraud that the world has ever seen. And the world has seen a lot of financial fraud. It was known to be such to the lenders at the time. This was true of housing loans in the United States made by the tens of millions that were known to the lenders as "liar's loans," as "ninja loans," no income, no job, no assets; as "neutron loans" destined to explode leaving the building intact but destroying the people. This was known at the time. These were loans that had to be refinanced or they would default.
It was also true of loans to the public sector, for example Greece. The fact that Greece had a weak public sector and a weak tax system was not a state secret before the crisis. It was something that was known on both sides of these transactions. This was equally true of commercial real estate in Ireland and of housing in Spain. You simply had to go and observe what was going on. Not to mention the acquisitions of the Icelandic Banks. It's a fundamental fact, I think, that's visible everywhere you look but not spoken of in polite society especially when economists address audiences of bankers. I trust you will indulge me since I am addressing an audience of unionists and friends and speaking this frankly to you, as I think it is very important.
Rising inequality is often linked to these phenomena. But I think we should be clear about what the linkage is. It is not the case that inequality rose and people compensated for it by borrowing more so they could have a higher standard of consumption. This is not what happened. It certainly did not happen in the United States. What happened was, is that the lenders went out to find new markets often fostering fraudulent loans on low-information borrowers, poor borrowers, inner city home owners, for example, forcing those loans to be refinanced so that the recipient only saw a fraction of the debt with which they were ultimately saddled. And the inequality arose from the booking of fees on those loans. This is how bankers get rich. They make their money in this way. And you can see this in their tax statements and you can see it in the geographical distribution of income gains in the United States.
And when the extent of the fraud could no longer be concealed then there was panic and collapse. This happened both in the United States and Europe and it did damage to the financial structure that was, let me suggest to you, essentially irreversible. It destroyed the underlying basis for economic growth that had sustained us for some time. That is to say it destroyed the housing finance market in the U.S. and it destroyed the sovereign credit market in Europe. And because in Europe it destroyed the sovereign credit market, the effects fell on public services and on dependent populations. Millions of jobs of course were also lost in both continents. That was the collateral damage.
These matters have not gone away. And if you wish to ask why we did not experience the predicted recovery over the last five years, I think the answer is because they didn't go away and will not go away.
So we need to ask, how do we deal with them? And the basic choice is between two principles. It's between all-in-it-together or everyone-for-themselves. That's the choice. So while all of the wealthy resource-using, computerized finance-capitalist economies have been hit by the same forces, they have not all been hurt in the same way. The institutions that are available do matter, they have an effect. Here I want to say something you may find surprising, which is that actually my country, the United States, has enjoyed a certain advantage.
And what was it? People have often said that the U.S. has a flexible labor market. This was not it at all. In the United States real wages did not fall in the crisis, actually in the first year they went up. Labor markets did not adjust. We did not restore employment. The employment population ratio was five percentage points lower than it was a decade ago. No, what happened in the U.S. was something quite different.
This is actually my real voice, I'm not sure water will do any good. [Laughter]
What happened in the United States was that we had a very flexible and effective system of public transfer payments which rose rapidly in the crisis. Unemployment insurance, early retirement under social security, disability, lower tax collections, and then on top of that, the expansion package, the stimulus package, the Keynesian policy that came into effect very quickly. And these things broke the fall in incomes and preserved living standards to a very substantial degree.
Now this was also true in parts of Europe as it was I'm sure here. The automatic stabilizers came into effect. It was true in northern Europe. I was in Finland two days ago and they said basically they had a large fall in output but no fall in income. But it was not true everywhere in Europe.
And the second key fact lies in the difference in the underlying debts. In the United States these were largely private debts. And private debts are either paid down -- mortgages are amortized – or they are defaulted, in which case people have to leave their homes but they leave their debts with their homes. They are not pursued afterwards by and large. In one way or another, those debt problems are resolved over time-painfully-but over time they tend to diminish. But with public debt, with sovereign debt, it's not so easy and that of course is the issue here in Europe. Sovereign debts are perpetual until they are forgiven and written off, that is to say, until there is a meeting of minds between the debtors and the creditors on what has to be done. And we've had this experience in the United States with Latin America. It's not news to us.
It is fashionable to say that the U.S. is a free market economy with practically no welfare state. I am sure you have heard that many times, but the facts are actually otherwise. If you look at the numbers, we spend about six percent of our personal income on public pensions. I guess it's about seven percent on public healthcare and another ten or so, on the private side. Overall in 2008, public transfer payments were about fifteen percent of personal income and they went up rapidly in the crisis. So my point is that in this respect the United States, which is a very large continental economy, is as an economy not entirely like Germany but more like Germany than like Greece or Spain.
We do have a system that can sustain and that we can finance. Notwithstanding all you hear about budget deficits, that's obvious. The United States government does not have a financing problem. The simplest evidence for this is the long-term interest rate which is at an historic low in spite of the size of the deficit and the public debt. And again that worked to break the shock of the crisis. We did not recover but we did not fall apart. Why not? Because fundamentally we are working with national institutions that were built a long time ago in the New Deal and the Great Society, and fundamentally those institutions are still there. Deposit insurance, social security, Medicare, Medicaid, and grants-in-aid from the federal government to the states and cities. It's a tested model and it works.
Now what is the situation in Europe? In Europe of course you have national institutions that were built, very strong ones, on essentially the same tradition of social solidarity and social insurance, and that of course is especially true in northern Europe. It is the critical tradition of any successful society in the modern world-of the ability to react to stress. But it's not the case for your continental institutions which were built later in a different time. Those institutions are neo-liberal. I regret to say they are built on ideas that were exported from the United States to a large degree. I apologize to you for that. Your problem was that you accepted the exports and you're paying for them now. You impose arbitrary budget and debt ceilings. You gave your central bank a monetarist price stability charter straight out of the University of Chicago, very different from the one, the dual mandate for full employment and price stability, which is in the legal statutes governing the U.S. Federal Reserve. I mention that all the time because I was a very young member of the staff of the House Committee on Banking when that statute was written and I was actually the person who drafted it.
And you also allowed your banks to over-leverage under the disastrous Basel II arrangements, relying on alleged capital buffers to provide stability. What's wrong with that? Straightforwardly, if the capital buffers are not backed by accurate accounting, they don't exist. And if you aren't supervising the accounting you don't know what's there and what's not.
But most of all, your politics imposes a dysfunctional austerity on the debtors who cannot pay and cannot escape their debts. And your leaders, Europe's leaders, justify this by confusing surpluses with virtue and deficits with vice, an easy transfer to economics from religion, pretending that one can exist without the other, which actually if you were Catholic you would know is not the case. In fact, in economics deficit and surplus are simply the accounting counterparts of each other and you cannot erase the deficits without also erasing the surpluses. In Germany, you, even a few years ago wrote the so-called "debt brake" into your constitution-a balanced budget except in times of severe economic crisis. What is that? It's a constitutional provision that you will always have a severe economic crisis. What a foolish thing to have done, I have to say. [Applause]
I was going to say I was sorry to have to be harsh in those remarks but I can see that's not necessary.
Now in the U.S., as well, these core social institutions are under threat. They have been under threat for years and that threat is acute at the moment. We have the so-called fiscal cliff, a contrived crisis, a reactionary device to force cuts in the programs that have so far survived thirty years of Reaganism -- cuts in Social Security, Medicare and Medicaid, as well as other public spending. But it has not happened yet and there is actually some good political news. I think the reelection of the President by a decisive margin and the results in the Senate were a defeat delivered by the American public to the neo-liberal vulture capitalist ethos. And the President, who was perhaps not as brave as some of us would have liked in his first term – okay that is a very kind remark – has already moved to assert some moral leadership in these matters which he had not done before. The battle is a matter of defense; the case is very clear cut; the people have spoken. I will not predict victory but the position is much better on these core issues than it was a month ago.
But you in Europe, and especially you my friends in Germany, have a much harder task. Europe is moving from stop gap to stop gap, from hypocritical half measure to hypocritical half measure, from false assurance to false assurance as the situation gets worse. Eventually the debtors-turned-victims will rebel but they lack moral standing, political power, and the economic capacity to save Europe. That can only come from here. Solidarity is the prerogative of the strong.
In 1919 in a book entitled, "The Economic Consequences of Peace," John Maynard Keynes addressed his countrymen. He wrote,
"If the European civil war is to end with France and Italy abusing their momentary victorious power to destroy Germany, and Austria Hungary now prostrate, they invite their own destruction also being so deeply and inextricably intertwined with their victims by hidden psychic and economic bonds." And again much later in the book, "The policy of reducing Germany to servitude for a generation of degrading the lives of millions of human beings and of depriving a whole nation of happiness should be abhorrent and detestable. Abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilized life of Europe."
I make no defense of the government in Greece, nor of the property speculators in Spain, Ireland, or the banks in Iceland or anything else you might name. But the flaws and follies at these agencies as I said before were not secret. They were known to those who lent to them just as the fraudulence of the housing loans were known in America to those who were making them. It was common currency. Responsibility is joint, mutual and sustained.
And we know because we have seen it elsewhere, everywhere from 19th century Germany to 20th century American to post-war Europe and the 21st century in China, that economic integration concentrates economic activity, particularly high income activity. Successful banks, advanced technology, machinery making, don't occupy all that much space. This is the principle of increasing returns. Germany is a big beneficiary of this principle inside Europe and indeed in the whole world. You yourself are representative of the world's most successful industrial activity. You're the architects of that. But we also know that relations between a wealthy exporter and a less wealthy importer cannot be regulated on commercial banking terms indefinitely. Nor can surpluses be maintained while deficits are exorcised. It's a mathematically impossibility. The rules of double entry bookkeeping are known to every shopkeeper and cannot be ignored by political leaders.
So what is the alternative? It must first involve a comprehensive restructuring of the debts. There is the Yanis Varoufakis-Stuart Holland "Modest Proposal" which I think is a very good starting place. It insists on three elements. They are: first, a common pool of Maastricht-compliant bonds; second, an European Investment Bank- funded New Deal program-an investment program-a reconstruction program, let us call it a Green New Deal and marry the challenge of economic reconstruction to the challenge of dealing with our larger energy and climate problems; and third a common, an independent banking authority with the authority to supervise and the authority to restructure, as required, including to downsize and rationalize the financial sector. This is something that we should have done in the United States when we had the political opportunity in 2009.
Now, these matters are necessary but I don't think they go all the way to addressing the needs.
I think that the statement made by the Executive Board of IG Metal on the 9th of October, "Change of Course in European Solidarity," is a marvelous document that sets out basic principles that are required for going further to develop a sustainable architecture. So you already know the answer on how to change course, but let me give you some ideas.
Professor Rubery yesterday offered an excellent proposal: A common unemployment insurance fund for Europe. That would support those people who specifically are the most damaged victims of the crisis. Why not?
Let me add to this another idea. A pension union-a European Pension Union to ensure that people who have worked their entire lives, retire decently on the standard of Europe as a whole and not on the past productivity of their own impoverished countries. Perhaps, later on, there could be a topping up scheme for wages on the model of the earned income tax credit in the United States; maybe a continental minimum wage. These are low-impact, easy-to-administer, old-fashioned devices, and they bypass weak and ineffective governments in the periphery. They stabilize incomes, employment, and purchasing power. They can work to save your markets even as they save the countries in which they have their most important effects.
Your document shows that you, as unionists, understand how the principle of solidarity works. It states in general terms what reforms are required and that you are ready to act on the great challenges of inequality, energy, and climate that face and plague us all.
Let's look at this problem with a very hard eye. What will happen if we do not succeed? I think there is a model. It's not so long ago; it's not so very far away. It's Yugoslavia, which was in its day, a very successful middle income country. My brother, as it happens, served as the first United States Ambassador to Croatia from 1993-1998. He told me early on this was not age old ethnic conflict, but new crimes committed for political and economic reasons. That's what kicked off those wars. And when the violence starts in an advanced, in a developed country, it moves quickly and the fractures are not clean. And I can assure you that if you talk to people in certain parts of Europe, and Greece particularly, you can hear already the anxieties that you could have heard in Yugoslavia in the early 1990s.
If you don't like that model, and of course none of us can possibly stand to see this happen, well there's another one also not far away, not long ago, that's the Czechoslovak model-- a civilized, orderly, negotiated divorce. It would be better. But I have to ask, does any country anywhere in the world enjoy the sane, secure, farsighted moral leadership that Czechoslovakia happened to have had at that time?
So I think you came to the right judgment in this document. You came to the right judgment that Europe must be saved.
Let me thank you again for inviting me and for your patience in listening to my remarks. I make them to you again as leaders of one of the world's great unions because the union movement rests on solidarity and courage. And I do so in the spirit of remarks made by Abraham Lincoln to the United States Congress in December of 1862, when he wrote, "I trust you will perceive no want of respect yourselves in any undue earnestness I may seem to prescribe."
Lincoln went on, by the way, to close with what is one of the great texts of American political history. So if you will permit me I'll read just a little more of it. He wrote,
"We can succeed only by concert. The dogmas of the quiet past are inadequate to the stormy present. As our case is new, so we must think anew and act anew. We must disenthrall ourselves, and then we shall save our country...
"Fellow-citizens, we cannot escape history. We will be remembered in spite of ourselves. No personal significance or insignificance can spare one or another of us. The ...trial through which we pass, will light us down, in honor or dishonor, to the latest generation... We say we are for the Union. The world will not forget that we say this. We know how to save the Union. The world knows that we do know how to save it. We-even we here-hold the power, and bear the responsibility. The way is plain, peaceful, generous, just-a way which, if followed, the world will forever applaud."
It is your Union of course that is at issue today, but it is yours, you created it. It may be lost. It will not be saved on its own. I congratulate you again on the leadership you are showing and will continue to show. And I wish you well and I thank you again.
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Heinberg explains how fossil fuels, primarily oil, permeate every aspect of our modern culture - from agriculture to cities and a long-term perspective. In the age of almost 7 billion people demanding more and more of limited resources, the media, politicians and governments tend to only report short-term perspectives and ignore Heinberg's Five Axioms of Sustainability to the extent that these concepts are taboo to be spoken, discussed or thought:
- Any society that continues to use critical resources unsustainably will collapse.
- Population growth, and, or, growth in the rates of consumption of resources cannot be sustained.
- To be sustainable, the use of renewable resources must proceed at a rate that is less than or equal to the rate of natural replenishment.
- To be sustainable, the use of nonrenewable resources must proceed at a rate that is declining, and the rate of decline must be greater than or equal to the rate of depletion.
- Sustainability requires substances introduced into the environment from human activities be minimized and tendered harmless to biosphere functions.
The psychology of peak oil and climate change discussion is like Kubler-Ross' "On Death and Dying." This all lands on the shoulders of "boomers" or the "me" generation. How do you stay optimistic and move forward when most have been conditioned to expect continuous greater wealth and lower cost? Questions and anger are answered by a "A Letter From the Future" - a look back from 2107 CE.
Many of us think, "If only I could be rational and think objectively in light of too much hyperbole and misinformation." I keep this book close at hand and constantly reread specific chapters. I need to keep my head on straight and provide others with constructive, objective, logical, forward thinking in light of the current shift to "peak everything" (oil, coal, water, food, transportation, housing, . . .) and not succumb to emotional, short-term, greed and power struggles. This is excellent.
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Since the Coleman Report, published in 1966, the studies have overwhelmingly shown that spending more on education does not improve academic achievement. The quality of schooling has much less effect on achievement than the quality of family and community life.
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Amazon.com
Uh, yeah, what he said,
June 1, 2011 This book is the ultimate effort in stating the obvious. This does not mean it is not good. I love it. The simple fact that a short work like this that does nothing more than state the obvious can be considered so groundbreaking and eye-opening shows just how big the problem is. How can we think that economics will get better for everyone for ever? A little simple reflection should knock this idea out of the park forever.
Our lives don't get better for ever. We peak at some point and then we decline and die. Our marriages don't get better for ever. They either reach a peak and decline or they plateau. Companies don't continue to grow forever. There is not an inexhaustible market for whatever widget. There is a finite market. And the desired widgets keep changing. Sol will burn out, the earth will become inhospitable for life, the solar system will be ripped apart and the universe itself will end. Why do we expect economic prosperity to be exempt from this fundamental universal law?
So your pay won't always increase. You won't continue to get promoted. Your house won't always be valued higher every year. Your investments won't always appreciate in value. Sometimes your bonds will default. You know this.
If you build a worldview based on the idea that continuous prosperity for everyone is even possible you are not sane. This book points that out. It is written for a generally educated person. Not written for a wonk. Read it and understand. Then re-evaluate the world from your now saner viewpoint.
M. Rowell (Phoenix, AZ)
Thought Provoking but a little light, May 30, 2011
This is a very thought provoking essay. It is concise and well written. Its brevity is refreshing given how many books these days stretch 50 pages of information across 500 pages (e.g., T. Friedman.) The central thesis of the piece is simply that technological progress has slowed down so economic growth will slow as well. That thesis is rock solid but whether technological progress has slowed to the extent argued here is debatable. That question requires the expertise of an engineer or scientist but they don't seem to write books like this.
I would have rated this higher but there are a couple of big gaffs that I couldn't let go.
- First, Cowen argues that big government requires modern technology and that government by "ox-cart" can't work on a large scale. Given the fact that the Roman Empire lasted as long as it did and that it was as extensive, centralized and powerful as it was this supposed dependence of big government on technology is obviously false.
- Second, Cowen compares modern Singapore with Periclean Athens which is just absurd. The classical Athenian democracy (even in Pericles time) was remarkable for its dysfunction.
The Athenians made so many bad decisions that they drove their brightest citizens to become very anti-democratic (e.g., Plato among many others.) How this remarkably dysfunctional democracy that repeatedly made disastrous decisions has anything to do with modern day Singapore is just beyond me. These two faults don't distract from Cowen's main point at all but that really makes them worse: Why are they in the essay at all? It demonstrates some sloppiness on Cowen's part and a complete ignorance of classical history (a period that should be of some interest to scholars of technology's effect on economic growth.)
Andrew D. Sprung (South Orange, New Jersey United States)
Some questions for Cowen
Why has the U.S. been plagued with a series of jobless recoveries, an extended period of middle class stagnation, and an equally extended rise in income inequality? Tyler Cowen proposes that the United States has already picked all the "low-hanging fruit" of a now-past era of transformative technological development. He claims that we are now living off the wealth (and growth) generated by the life-changing technologies of the late nineteenth to mid-twentieth century, and that we're currently on a technological plateau, where growth is inevitably slower. At the same time, we're living with government institutions that can't be easily funded at the slower real growth levels that have prevailed in recent decades. So we're fighting with understandable bitterness over whether to maintain past levels of redistribution of a not-quickly-enough-growing pie -- or whether, ultimately, to shrink our expectations of what government can do for us. Meanwhile, he is rueful about the efficiency of government where it matters most -- in education and healthcare delivery -- though perfunctorily upbeat about recent attempts to find efficient ways to improve education.These theses are obviously meant to be provocative, all the more so as delivered a a short e-book that's almost an abstract of a potential tome that would fill in the conspicuously lacking evidence. For me, however, the exercise provoked considerable skepticism on key points:
1) I'd question whether we're living in an era in which transformative technological innovation is in short supply. Cowen does allow "the Internet" as the great exception, but points out that the leading-edge tech companies employ relatively few people, and that Internet innovation has been notoriously difficult to monetize. He is strangely silent, though, about the impact of interactive technology computer technology more generally on production and commerce of all kinds -- just-in-time factory production, product customization, bar coding, all the incredible efficiencies of large-scale retail operations that wring out large profits on tiny margins -- and on interactive technology's role in globalizing production. He also doesn't consider transformative technologies hiding in plain sight: personal computers themselves (never mind the Internet) and cell phones. It's true, as Cowen says, that the basic physical components of middle class life in America don't look that much different than they did in the 1960s. But they *are* much different. And the differences have generated a lot of wealth, even if the U.S. middle class hasn't garnered as large a share as it did in the previous generation.
2) Part of our problem in this era of allegedly relatively modest technological innovation, Cowen says, is that "A lot of our recent innovations are 'private goods' rather than 'public s.' (sic)" That is,
"Contemporary innovation often takes the form of expanding positions of economic and political privilege, extracting resources from the government by lobbying, seeking the sometime extreme protections of intellectual property laws, and producing goods that are exclusive or status related rather than universal, private rather than public; think twenty-five seasons of new, fall season Gucci handbags."
No doubt -- but is this a new phenomenon? Since when have innovators not sought private advantage, or not catered to the luxury market? Electricity was a luxury good until government rate regulation forced utilities to make it affordable. I doubt that early trains were packed with common folk, either. And on the other end of the scale, as Cowen himself emphasizes, Internet-related innovations are so egalitarian as to severely crimp profit opportunities. I would need to hear much more to be convinced that "the 'rise in income inequality' and the 'slowdown in ideas production' are two ways of describing the same phenomenon, namely that current innovation is more geared to private goods than to public goods."
In complaining about the proliferation of "private goods," Cowen is thinking largely of the financial industry, the innovations of which, he notes, have primarily benefited hedge fund managers (and presumably traders and Wall Street execs). No question that the financial sector has grown bloated, become a great talent suck, exacerbated raising income inequality -- Cowen emphasizes the vast gap between hedge fund managers and Fortune 500 CEOs -- and created products that did not help allocate capital to productive sources. But it strikes me as at least possible that the malformation in the financial industry is more a product of rapid technological innovation -- the ability to gather and crunch huge amounts of data and trade in nanoseconds, generating high-stakes Darwinian competition among top math minds -- than it is a matter of rent-seeking driven by a dearth of innovation.
Poor regulatory decisions, executed under both parties but driven by Republican free market fundamentalism (with too much Clintonian Democratic buy-in) doubtless also played a part. I don't buy Cowen's claim that since euphoria was so widespread -- shared, for example, by a hypothetical over-enthusiastic museum director -- no one was to blame. Regulations and regulators exist to quell euphoria when it crosses over into fraud -- and regulators who shared Cowen's apparent affection for Ayn Rand seem to have taken it as an article of faith that it rarely does.
3) I would also question Cowen's assertion that diminishing returns are the rule for new government initiatives in a developed society with a legacy set of safety net services. He complains, "when measuring GDP, we treat each dollar of government spending as if it is equal in value to the previous dollars that were spent. We're valuing dollars spent on highway extensions as if they worth as much as the dollars we spent on building the core roads that link major cities."
Granted -- and of course, one new government expenditure may be more efficient than another -- say sewer line repair, or high speed rail, instead of that highway extension. But Cowen also seems to think that new government initiatives cannot be "core" and are inherently inferior to older ones. He puts forward this axiom (his italics):
"The larger the role of government in the economy, the more the published figures for GDP growth are overstating improvements in our living standard."
That's assuming that there will never again be a highly efficient government initiative, worthy of being considered "core" by future generations. I think that's a highly dubious assumption in a country that lacks universal healthcare, not to mention services yet undreamed of (subsidized settlement of far-off planets, anyone?). If the U.S. could devise a healthcare delivery system as efficient as that of France or Japan -- admittedly a big if -- we could cut the per capita cost of healthcare as a share of GDP in half. Cowen is dubious about the likely efficiency of the Affordable Care Act, but he does not really engage the issue in the brief space of this book. What if Atul Gawande is right, and the ACA's experiments in accountable care organizations, efficiency incentives for hospitals, outcomes research (inhibited by a bar on using the data to determine what Medicare will pay for) and a host of other experiments has an effect comparable to the Department of Agriculture's seeding of innovations in farming in the early 20th century? And from a different direction, if the U.S. could muster the political will to accord government the sole power to set pricing and coverage rules for medical procedures-- then ,again, government spending on health insurance would likely reduce the real cost of healthcare.
Cowen himself implicitly admits that new government spending in the right places can have an outsized effect on GDP when he lists recent approaches to education reform as one of the hopeful signs that we are on track to get off the plateau:
"we now see a critical mass in the American electorate favoring concrete steps to bring greater quality and accountability to K-12 education, whether through better incentives, school choice, charter schools, better monitoring, or whatever works...President Obama has opted for an education policy that, on the whole, teachers' unions strongly dislike. We haven't yet seen much in the way of results, but the tide is turning in a positive direction, and over time I expect this to produce results."
Here as in his discussion of health care, we must take it on faith that Cowen has read and thought deeply about the issue on which he expresses a perfunctory policy preference. In any case, it would seem that he believes that the right kind of spending on education as he defines it would have an outsized impact on GDP, "government spending" though it be.
4. Finally, on the core assertion that our economic woes stem from a slowdown (or rather, a "plateau") in productive innovation, Cowen owes us a bit more explanation of two periods of sustained economic growth that he acknowledges to have taken place since we reached the alleged plateau around 1970: the mid-to-late eighties and the Clinton years. I imagine that he might explain the Clinton-era prosperity as in large part a technology bubble -- burst by the failure of Internet innovation to generate revenue and jobs. I suspect that that's only partly true, and that, again, Cowen pays insufficient attention to innovations in business processes that have wrought much creative destruction -- job losses as well as value gains. And that points to a broader question: perhaps more recent technological innovations, including those enabling increased globalization, destroy jobs more quickly than earlier innovations did.
5. Cowen's chief policy recommendation to get us back on the track of innovation is comically inadequate. It's to "raise the social status of scientists" (his italics):
"When it comes to motivating human beings, status often matters at least as much as money. I would like to see both incentives pointing in the right direction. Right now, scientists do not earn enough status and appreciation. While scientists are not, in American society, a low-status group, neither are they thought of as especially high status either. Science doesn't have the cache of law, medicine, or high finance. Few women or men dream of dating or marrying a scientist. Yet, upon reflection, are we not capable of finding Leonardo da Vinci the scientist as sexy and exciting as Leonardo da Vinci the artist?"
Win the future: seduce a scientist. There is a germ of truth here: finance has probably attracted too much talent in the last two decades (though doctors, increasingly, are scientists and innovators, as Atul Gawande notes in his commencement speech at Harvard Medical School today). But it's hard to credit that science suffers from a lack of incentives. The top scientific minds, of the sort that lay the ground for technological breakthroughs, would likely never be attracted to other fields -- at least those whose minds are not wasted in the first place by lack of educational opportunity. And practically or commercially oriented scientists have ample opportunity to turn their creativity to gold in industry, from computer science to biotech to alternative energy and a host of less obvious industries. Being part of a startup team has plenty of cache, and there are plenty of scientists, broadly defined, in U.S. startup companies.
This book's simplicity and brevity are part of its appeal. But it deserves a longer final chapter. In fact, the whole thing needs to be at least two or three times as long to have a real impact on those who don't share many of Cowen's assumptions.
A somewhat different version of this review is posted at my blog, xpostfactoid.
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Amazon.com
5.0 out of 5 stars American Dream or American Fantasy August 1, 2011I read this book over a month ago when it was first released through the Post Carbon Institute website. Then I ordered 2 more from Amazon, one for my town's library and one to loan out. I write this review now as the morning news on NPR reports that the democrats and republicans have come to some agreement on ending the debt ceiling crisis. If only that were good news, but apparently they have not read this book and unfortunately most likely never will. This book is the most important book you can read. It is written in a style that makes for easy understanding and were it not for its premise it could even be considered a pleasant read. But unfortunately it will not be read by enough people, not even enough people who you would like to think should read it. It is not fun entertainment, not even infotainment, and for some it is exactly what they don't want to read, a non-fiction book with dire news.
If you have read John Perkins and understand the difference between dream and fantasy as taught by the shamans of the Amazon, and have read Jared Diamonds "Collapse: How Societies Choose to Fail or Succeed", and you then read this book, you will see how the "American Dream" is really an American "Fantasy" in which we through ignorance, avarice or, worse than either, denial, continue to build our own versions of Moai on a shrinking planet that increasingly resembles Easter Island except that our ocean is the vastly greater and even more inhospitable universe.
If you can read this book without being either an optimist or pessimist, but a rational thinking person, then your biggest battle may just be overcoming denial. Denial will tempt you to see technology and substitutions for energy and other dwindling non-renewable resources saving mankind, or it may allow you to seek the comfort of flimsy arguments claiming why this is just so much alarmist doom and gloom, or it may simply come in the form of going on with your life as you always have done because it is so much easier to simply ignore and deny it. Although Heinberg does offer some actions to be taken, they are not simple in the context of your typical community mentality. So between fighting off the continual temptations of denial, the denial or ignorance of others, or the unpleasant task of doing something other than something entertaining, our lives will never be as easy again.
If you have some knowledge of the difference between the economic philosophies of Keynes and Friedman and you have a tendency to lean toward one more than the other like I had before reading this book, then you should know that we have had a serious problem of not seeing the forest for the trees. Heinberg snapped me out of that blind trance with some simple undeniable facts. The problem now is that I have to wonder sometimes which state I rather be in, denial, in the dark, or aware of the truth.
In Diamond's book "Collapse..." regarding Easter Island he refers to the question "What was the man thinking who cut down the last tree?" Each one of us knows the answer. It is what we are thinking today as we go on with our own lives on a planet with finite resources.
11 Comments5.0 out of 5 stars The Growth of Understanding July 22, 2011
I sent off for an advance copy of [[ASIN:0865716951 The End of Growth: Adapting to Our New Economic Reality] a few weeks ago. Having heard Richard Heinberg give a talk a while back, and receiving his regular Museletters, my expectations were high. I was not disappointed. The man has an incredible gift for making complexity appear simple, and for delivering unpalatable facts with gentle irony. The historical development of the modern economy is laid bare, our current predicament is there for all to see, and the only rational solution is given a thorough airing. Buy it for your friends, buy it for business people large and small. It is an essential primer for building the future.
The Coming Great Contraction September 1, 2011Richard Heinberg's newest book, "The End of Growth," gives an overview of the coming Great Contraction. Heinberg argues that the global economy is at a major tipping point. It is his contention that the global economy is at the end of growth and that growth is absolutely necessary in order for the current economic system to function in a healthy and stable state. Without growth, global economies will contract and civilizations will fail.
The book is well researched and written. However, for those individuals who have been following the literature of impending global civilization collapse, this book holds few surprises. What it does very well is explain in clear language the existing global economic system and how it has arrived at the very unstable and unhealthy state that we find it in. The book then fits this impending contracting and collapsing economic situation in with other trends that are propelling the civilized world toward collapse. In particular, it is based on the author's fervent belief in the physical limits of planet Earth and the necessity of building a new economic system that supports sustainable living.
The author warns readers who are unfamiliar with the literature of global civilization collapse that his book will likely undermine their "mental equilibrium in a way that is both deeply uncomfortable and exhilarating." I agree.
If you wish to read two pages in the book that the author uses to outline exactly how the book is constructed and summarizes the content of each chapter, use the "Look Inside The Book" feature at the top of the main page for this title in Amazon and search for the text string "Chapter 1 is a potted history." Reading this may help you decide on whether or not this book is for you.
The book is designed for readers with little to no formal training in economics. For those of you who are already convinced that we are headed toward global civilization contraction and collapse and desire a focused economic perspective, the book is recommended. For those of you who desire a broader or more academic treatment with rigorous arguments about the why and when of the predicted coming Great Contraction, you will probably want to look for another book.
A far better book that covers this general topic powerfully is Thomas Homer-Dixon's "The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization." That book was published at the beginning of 2008, so it has little light to shed on the current global economic instability other than to establish eloquently the trends that existed that would eventually cause the meltdown. I'd give Heinberg's book a solid three-and-a-half stars, while Homer-Dixon's books would win an enthusiastic five stars. I am not alone in my praise of this other book; it was designated as the "Best Book of the Year" by the "Financial Times" and won the Canadian National Business Book Award. I recommend that you read Homer-Dixon's book first, then, if you desire more on this theme that focuses primarily on the economy, read Heinberg's.
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That Which Is Too Fearful To Speak: The Demise of the Consumer Economy by charles hugh smithAugust 1, 2011 (Mobile version)
The consumer-debt-based economy is doomed; good riddance. It was nothing more than an elaborate cargo cult based on marketable anxiety.
The consumer-debt-based economy is toast, but everyone's too terrified by its demise to acknowledge this reality, never mind consider a new model. The entire creaking economy is based on a few ideas which no longer work:
1) Create "aggregate demand" (i.e. consumer demand, which then creates business demand) and the economy "grows," people are hired and get paid, and that's good.
2) When consumer demand slumps because people are over-indebted and can't afford to buy more of anything, then "stimulate" demand with massive Central State spending to replace the vanished private demand.
3) Demand is endless. You can never have enough stuff, food, vacations, education, healthcare and toys. Give people free money, or the ability to borrow nearly-free money, and they will spend, spend, spend. This creates "growth" which is always good.
A funny thing happened on the way to the infinite demand/consumption model--or actually, two things:
A. People borrowed all they could afford, and then borrowed more. Now they can't borrow any more, even if the interest rate is low. By some estimates, American consumers need to pay down $4 trillion in debt just to restore the income-to-debt ratios of the early 1980s, never mind the early 1960s.
B. Infinite demand met marginal return in a dark alley, and infinite demand is in the gutter, whoozy and bleeding profusely.
That horrendously costly master's degree has only a marginal return in the real world--or perhaps a negative return.
That expensive McMansion provided no better shelter than a much more modest home, and its investment return is atrociously negative.
That $120,000 5-day stay in the hospital paid by Medicare didn't fix the health problem; it made it worse, because the patient didn't need hospitalization or the procedure, and the previously moderately-ill patient caught a drug-resistant bug in the hospital and is now very ill--and therefore needs more treatment at $120,000 a week (this was the actual bill for my friend's father's 5-day stay in a hospital, a stay he was forced into accepting lest he be a "bad patient." He could have easily been treated in an out-patient clinic.) Nice return on a $120,000 "investment" to meet the "infinite demand" for sickcare.
You see the point: "investing" disposable income in debt service to borrow more money to blow satisfying "infinite demand" has left consumers over-leveraged and insolvent, crushed under impossible-to-pay debt loads, while all that debt-fueled spending has yielded increasingly marginal returns.
The amount of debt that can be leveraged has diminished to near-zero, and so has the return on that spending.
There's another deeply pernicious facet to a consumer-based economy: our identity and meaning now flow from consumption, not from production or inner resources. I spent a considerable amount of Survival+ explaining how marketing and consumption are two side of the same coin.
The marketing complex has hijacked our sense of identity by engendering a deep, soul-destroying anxiety that only buying more stuff can assuage: since we are judged and valued solely by our purchased externalities, we are constantly in danger of being rendered worthless if we fail to measure up to the current metric of brand-group identity (wearing all black and a tattoo for one "brand," a BMW and designer clothing for another, reading the New Yorker and claiming to only wear vintage clothing for another, etc.)
What we do in the real world is simply part of the "brand" which we must project, or cloak, to sooth the gnawing anxiety that is the bedrock of a consumer society. The iconography and totems of consumerism define our identity, our strivings, our sense of purpose and our experience of meaning: what I call the politics of experience, a phrase coined by R.D. Laing.
Consumption is our god, our faith and our religion. Like a cargo cult dependent on a magical connection to prosperity, we are terrified by the prospect that our religion is based on a false god--that is, that consumption and consumption alone leads to prosperity and happiness.
Like a cargo cult that we mock in our infinite industrious superiority, we worship the equivalent of rocks painted to look like radios that we can use to "call" the gods of endless prosperity.
This rock that's painted to look like a radio is called "debt," and we call upon it to magically provide us with prosperity from over the seas.
This other rock that's painted to look like a radio is called "aggregate demand," and it's carefully worshipped by a special troop of voodoo-wielding witch doctors called Keynesians.
We are chanting magical phrases to these rock-painted "radios," pleading for a return to easy prosperity, but nothing's happening. We fear the magic no longer works, and that possibility terrifies us so much we can't even bear to speak of this loss.
The consumer economy is expiring for two good reasons: we borrowed too much and will never be able to pay it back, never mind borrow even more, and we have too much crap and useless services as it is. Instead of paying people to dig a hole and then fill it, we give millions of tests that serve no real function other than to bill Medicare or the provider.
An economy can only sustainably spend what it generates in surplus. The U.S. has been exchanging paper with funny green ink on it for real stuff, far in excess of the surplus generated by our own labor and production. That is our trade deficit. To extend "aggregate demand" to the moon, we borrow trillions of dollars via Federal deficits to fill the gap left by imploding consumer borrowing. This is not spending a surplus we have earned, it is borrowing against future surpluses, surpluses of national income which we are now committing to debt service.
Future generations won't get to spend their surplus; they will have to devote it to servicing the debts we have gaily borrowed and blown on digging holes and refilling them, part of our worship of the magical painted rocks of our false and hollow religion, Consumerism.
By degrading ourselves from producers to consumers, we have not only lost our identity and our meaning, we have lost the ability to create surpluses and invest those surpluses wisely.
My new book An Unconventional Guide to Investing in Troubled Times is an attempt to chart a path from the anxious, unhappy dead-end of consumerism back to a decentralized, self-reliant productive economy.
That is the transformation that terrifies the Status Quo, for it is a transformation for which there is no model of control and exploitation: the demise of the consumer economy and the rise of a productive economy with no need for Wall Street or rocks painted to look like magic radios.
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Heinberg explains how fossil fuels, primarily oil, permeate every aspect of our modern culture - from agriculture to cities and a long-term perspective. In the age of almost 7 billion people demanding more and more of limited resources, the media, politicians and governments tend to only report short-term perspectives and ignore Heinberg's Five Axioms of Sustainability to the extent that these concepts are taboo to be spoken, discussed or thought:
- Any society that continues to use critical resources unsustainably will collapse.
- Population growth, and, or, growth in the rates of consumption of resources cannot be sustained.
- To be sustainable, the use of renewable resources must proceed at a rate that is less than or equal to the rate of natural replenishment.
- To be sustainable, the use of nonrenewable resources must proceed at a rate that is declining, and the rate of decline must be greater than or equal to the rate of depletion.
- Sustainability requires substances introduced into the environment from human activities be minimized and tendered harmless to biosphere functions.
The psychology of peak oil and climate change discussion is like Kubler-Ross' "On Death and Dying." This all lands on the shoulders of "boomers" or the "me" generation. How do you stay optimistic and move forward when most have been conditioned to expect continuous greater wealth and lower cost? Questions and anger are answered by a "A Letter From the Future" - a look back from 2107 CE.
Many of us think, "If only I could be rational and think objectively in light of too much hyperbole and misinformation." I keep this book close at hand and constantly reread specific chapters. I need to keep my head on straight and provide others with constructive, objective, logical, forward thinking in light of the current shift to "peak everything" (oil, coal, water, food, transportation, housing, . . .) and not succumb to emotional, short-term, greed and power struggles. This is excellent.
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Preservation Institute
Since the Coleman Report, published in 1966, the studies have overwhelmingly shown that spending more on education does not improve academic achievement. The quality of schooling has much less effect on achievement than the quality of family and community life.
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Amazon.com
Uh, yeah, what he said,
June 1, 2011 This review is from: The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History,Got Sick, and Will (Eventually) Feel Better:A Penguin eSpecial from Dutton (Kindle Edition)
This book is the ultimate effort in stating the obvious. This does not mean it is not good. I love it. The simple fact that a short work like this that does nothing more than state the obvious can be considered so groundbreaking and eye-opening shows just how big the problem is. How can we think that economics will get better for everyone for ever? A little simple reflection should knock this idea out of the park forever.
Our lives don't get better for ever. We peak at some point and then we decline and die. Our marriages don't get better for ever. They either reach a peak and decline or they plateau. Companies don't continue to grow forever. There is not an inexhaustible market for whatever widget. There is a finite market. And the desired widgets keep changing. Sol will burn out, the earth will become inhospitable for life, the solar system will be ripped apart and the universe itself will end. Why do we expect economic prosperity to be exempt from this fundamental universal law?
So your pay won't always increase. You won't continue to get promoted. Your house won't always be valued higher every year. Your investments won't always appreciate in value. Sometimes your bonds will default. You know this.
If you build a worldview based on the idea that continuous prosperity for everyone is even possible you are not sane. This book points that out. It is written for a generally educated person. Not written for a wonk. Read it and understand. Then re-evaluate the world from your now saner viewpoint.
Thought Provoking but a little light, May 30, 2011 M. Rowell (Phoenix, AZ) - See all my reviews (REAL NAME) Amazon Verified Purchase(What's this?)
This review is from: The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History,Got Sick, and Will (Eventually) Feel Better:A Penguin eSpecial from Dutton (Kindle Edition)
This is a very thought provoking essay. It is concise and well written. Its brevity is refreshing given how many books these days stretch 50 pages of information across 500 pages (e.g., T. Friedman.) The central thesis of the piece is simply that technological progress has slowed down so economic growth will slow as well. That thesis is rock solid but whether technological progress has slowed to the extent argued here is debatable. That question requires the expertise of an engineer or scientist but they don't seem to write books like this.
I would have rated this higher but there are a couple of big gaffs that I couldn't let go.
- First, Cowen argues that big government requires modern technology and that government by "ox-cart" can't work on a large scale. Given the fact that the Roman Empire lasted as long as it did and that it was as extensive, centralized and powerful as it was this supposed dependence of big government on technology is obviously false.
- Second, Cowen compares modern Singapore with Periclean Athens which is just absurd. The classical Athenian democracy (even in Pericles time) was remarkable for its dysfunction.
The Athenians made so many bad decisions that they drove their brightest citizens to become very anti-democratic (e.g., Plato among many others.) How this remarkably dysfunctional democracy that repeatedly made disastrous decisions has anything to do with modern day Singapore is just beyond me. These two faults don't distract from Cowen's main point at all but that really makes them worse: Why are they in the essay at all? It demonstrates some sloppiness on Cowen's part and a complete ignorance of classical history (a period that should be of some interest to scholars of technology's effect on economic growth.)
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Andrew D. Sprung (South Orange, New Jersey United States) - See all my reviews (REAL NAME)
Amazon Verified Purchase(What's this?)This review is from: The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History,Got Sick, and Will (Eventually) Feel Better:A Penguin eSpecial from Dutton (Kindle Edition)
Why has the U.S. been plagued with a series of jobless recoveries, an extended period of middle class stagnation, and an equally extended rise in income inequality?Tyler Cowen proposes that the United States has already picked all the "low-hanging fruit" of a now-past era of transformative technological development. He claims that we are now living off the wealth (and growth) generated by the life-changing technologies of the late nineteenth to mid-twentieth century, and that we're currently on a technological plateau, where growth is inevitably slower.
At the same time, we're living with government institutions that can't be easily funded at the slower real growth levels that have prevailed in recent decades. So we're fighting with understandable bitterness over whether to maintain past levels of redistribution of a not-quickly-enough-growing pie -- or whether, ultimately, to shrink our expectations of what government can do for us. Meanwhile, he is rueful about the efficiency of government where it matters most -- in education and healthcare delivery -- though perfunctorily upbeat about recent attempts to find efficient ways to improve education.
These theses are obviously meant to be provocative, all the more so as delivered a a short e-book that's almost an abstract of a potential tome that would fill in the conspicuously lacking evidence. For me, however, the exercise provoked considerable skepticism on key points:
1) I'd question whether we're living in an era in which transformative technological innovation is in short supply. Cowen does allow "the Internet" as the great exception, but points out that the leading-edge tech companies employ relatively few people, and that Internet innovation has been notoriously difficult to monetize. He is strangely silent, though, about the impact of interactive technology computer technology more generally on production and commerce of all kinds -- just-in-time factory production, product customization, bar coding, all the incredible efficiencies of large-scale retail operations that wring out large profits on tiny margins -- and on interactive technology's role in globalizing production. He also doesn't consider transformative technologies hiding in plain sight: personal computers themselves (never mind the Internet) and cell phones. It's true, as Cowen says, that the basic physical components of middle class life in America don't look that much different than they did in the 1960s. But they *are* much different. And the differences have generated a lot of wealth, even if the U.S. middle class hasn't garnered as large a share as it did in the previous generation.
2) Part of our problem in this era of allegedly relatively modest technological innovation, Cowen says, is that "A lot of our recent innovations are 'private goods' rather than 'public s.' (sic)" That is,
"Contemporary innovation often takes the form of expanding positions of economic and political privilege, extracting resources from the government by lobbying, seeking the sometime extreme protections of intellectual property laws, and producing goods that are exclusive or status related rather than universal, private rather than public; think twenty-five seasons of new, fall season Gucci handbags."
No doubt -- but is this a new phenomenon? Since when have innovators not sought private advantage, or not catered to the luxury market? Electricity was a luxury good until government rate regulation forced utilities to make it affordable. I doubt that early trains were packed with common folk, either. And on the other end of the scale, as Cowen himself emphasizes, Internet-related innovations are so egalitarian as to severely crimp profit opportunities. I would need to hear much more to be convinced that "the 'rise in income inequality' and the 'slowdown in ideas production' are two ways of describing the same phenomenon, namely that current innovation is more geared to private goods than to public goods."
In complaining about the proliferation of "private goods," Cowen is thinking largely of the financial industry, the innovations of which, he notes, have primarily benefited hedge fund managers (and presumably traders and Wall Street execs). No question that the financial sector has grown bloated, become a great talent suck, exacerbated raising income inequality -- Cowen emphasizes the vast gap between hedge fund managers and Fortune 500 CEOs -- and created products that did not help allocate capital to productive sources. But it strikes me as at least possible that the malformation in the financial industry is more a product of rapid technological innovation -- the ability to gather and crunch huge amounts of data and trade in nanoseconds, generating high-stakes Darwinian competition among top math minds -- than it is a matter of rent-seeking driven by a dearth of innovation.
Poor regulatory decisions, executed under both parties but driven by Republican free market fundamentalism (with too much Clintonian Democratic buy-in) doubtless also played a part. I don't buy Cowen's claim that since euphoria was so widespread -- shared, for example, by a hypothetical over-enthusiastic museum director -- no one was to blame. Regulations and regulators exist to quell euphoria when it crosses over into fraud -- and regulators who shared Cowen's apparent affection for Ayn Rand seem to have taken it as an article of faith that it rarely does.
3) I would also question Cowen's assertion that diminishing returns are the rule for new government initiatives in a developed society with a legacy set of safety net services. He complains, "when measuring GDP, we treat each dollar of government spending as if it is equal in value to the previous dollars that were spent. We're valuing dollars spent on highway extensions as if they worth as much as the dollars we spent on building the core roads that link major cities."
Granted -- and of course, one new government expenditure may be more efficient than another -- say sewer line repair, or high speed rail, instead of that highway extension. But Cowen also seems to think that new government initiatives cannot be "core" and are inherently inferior to older ones. He puts forward this axiom (his italics):
"The larger the role of government in the economy, the more the published figures for GDP growth are overstating improvements in our living standard."
That's assuming that there will never again be a highly efficient government initiative, worthy of being considered "core" by future generations. I think that's a highly dubious assumption in a country that lacks universal healthcare, not to mention services yet undreamed of (subsidized settlement of far-off planets, anyone?). If the U.S. could devise a healthcare delivery system as efficient as that of France or Japan -- admittedly a big if -- we could cut the per capita cost of healthcare as a share of GDP in half. Cowen is dubious about the likely efficiency of the Affordable Care Act, but he does not really engage the issue in the brief space of this book. What if Atul Gawande is right, and the ACA's experiments in accountable care organizations, efficiency incentives for hospitals, outcomes research (inhibited by a bar on using the data to determine what Medicare will pay for) and a host of other experiments has an effect comparable to the Department of Agriculture's seeding of innovations in farming in the early 20th century? And from a different direction, if the U.S. could muster the political will to accord government the sole power to set pricing and coverage rules for medical procedures-- then ,again, government spending on health insurance would likely reduce the real cost of healthcare.
Cowen himself implicitly admits that new government spending in the right places can have an outsized effect on GDP when he lists recent approaches to education reform as one of the hopeful signs that we are on track to get off the plateau:
"we now see a critical mass in the American electorate favoring concrete steps to bring greater quality and accountability to K-12 education, whether through better incentives, school choice, charter schools, better monitoring, or whatever works...President Obama has opted for an education policy that, on the whole, teachers' unions strongly dislike. We haven't yet seen much in the way of results, but the tide is turning in a positive direction, and over time I expect this to produce results."
Here as in his discussion of health care, we must take it on faith that Cowen has read and thought deeply about the issue on which he expresses a perfunctory policy preference. In any case, it would seem that he believes that the right kind of spending on education as he defines it would have an outsized impact on GDP, "government spending" though it be.
4. Finally, on the core assertion that our economic woes stem from a slowdown (or rather, a "plateau") in productive innovation, Cowen owes us a bit more explanation of two periods of sustained economic growth that he acknowledges to have taken place since we reached the alleged plateau around 1970: the mid-to-late eighties and the Clinton years. I imagine that he might explain the Clinton-era prosperity as in large part a technology bubble -- burst by the failure of Internet innovation to generate revenue and jobs. I suspect that that's only partly true, and that, again, Cowen pays insufficient attention to innovations in business processes that have wrought much creative destruction -- job losses as well as value gains. And that points to a broader question: perhaps more recent technological innovations, including those enabling increased globalization, destroy jobs more quickly than earlier innovations did.
5. Cowen's chief policy recommendation to get us back on the track of innovation is comically inadequate. It's to "raise the social status of scientists" (his italics):
"When it comes to motivating human beings, status often matters at least as much as money. I would like to see both incentives pointing in the right direction. Right now, scientists do not earn enough status and appreciation. While scientists are not, in American society, a low-status group, neither are they thought of as especially high status either. Science doesn't have the cache of law, medicine, or high finance. Few women or men dream of dating or marrying a scientist. Yet, upon reflection, are we not capable of finding Leonardo da Vinci the scientist as sexy and exciting as Leonardo da Vinci the artist?"
Win the future: seduce a scientist. There is a germ of truth here: finance has probably attracted too much talent in the last two decades (though doctors, increasingly, are scientists and innovators, as Atul Gawande notes in his commencement speech at Harvard Medical School today). But it's hard to credit that science suffers from a lack of incentives. The top scientific minds, of the sort that lay the ground for technological breakthroughs, would likely never be attracted to other fields -- at least those whose minds are not wasted in the first place by lack of educational opportunity. And practically or commercially oriented scientists have ample opportunity to turn their creativity to gold in industry, from computer science to biotech to alternative energy and a host of less obvious industries. Being part of a startup team has plenty of cache, and there are plenty of scientists, broadly defined, in U.S. startup companies.
This book's simplicity and brevity are part of its appeal. But it deserves a longer final chapter. In fact, the whole thing needs to be at least two or three times as long to have a real impact on those who don't share many of Cowen's assumptions.
A somewhat different version of this review is posted at my blog, xpostfactoid.
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charles hugh smith-Weblog and Essays
That Which Is Too Fearful To Speak: The Demise of the Consumer EconomyAugust 1, 2011 (Mobile version)The consumer-debt-based economy is doomed; good riddance. It was nothing more than an elaborate cargo cult based on marketable anxiety.
The consumer-debt-based economy is toast, but everyone's too terrified by its demise to acknowledge this reality, never mind consider a new model. The entire creaking economy is based on a few ideas which no longer work:
1) Create "aggregate demand" (i.e. consumer demand, which then creates business demand) and the economy "grows," people are hired and get paid, and that's good.
2) When consumer demand slumps because people are over-indebted and can't afford to buy more of anything, then "stimulate" demand with massive Central State spending to replace the vanished private demand.
3) Demand is endless. You can never have enough stuff, food, vacations, education, healthcare and toys. Give people free money, or the ability to borrow nearly-free money, and they will spend, spend, spend. This creates "growth" which is always good.
A funny thing happened on the way to the infinite demand/consumption model--or actually, two things:
A. People borrowed all they could afford, and then borrowed more. Now they can't borrow any more, even if the interest rate is low. By some estimates, American consumers need to pay down $4 trillion in debt just to restore the income-to-debt ratios of the early 1980s, never mind the early 1960s.
B. Infinite demand met marginal return in a dark alley, and infinite demand is in the gutter, whoozy and bleeding profusely.
That horrendously costly master's degree has only a marginal return in the real world--or perhaps a negative return.
That expensive McMansion provided no better shelter than a much more modest home, and its investment return is atrociously negative.
That $120,000 5-day stay in the hospital paid by Medicare didn't fix the health problem; it made it worse, because the patient didn't need hospitalization or the procedure, and the previously moderately-ill patient caught a drug-resistant bug in the hospital and is now very ill--and therefore needs more treatment at $120,000 a week (this was the actual bill for my friend's father's 5-day stay in a hospital, a stay he was forced into accepting lest he be a "bad patient." He could have easily been treated in an out-patient clinic.) Nice return on a $120,000 "investment" to meet the "infinite demand" for sickcare.
You see the point: "investing" disposable income in debt service to borrow more money to blow satisfying "infinite demand" has left consumers over-leveraged and insolvent, crushed under impossible-to-pay debt loads, while all that debt-fueled spending has yielded increasingly marginal returns.
The amount of debt that can be leveraged has diminished to near-zero, and so has the return on that spending.
There's another deeply pernicious facet to a consumer-based economy: our identity and meaning now flow from consumption, not from production or inner resources. I spent a considerable amount of Survival+ explaining how marketing and consumption are two side of the same coin.
The marketing complex has hijacked our sense of identity by engendering a deep, soul-destroying anxiety that only buying more stuff can assuage: since we are judged and valued solely by our purchased externalities, we are constantly in danger of being rendered worthless if we fail to measure up to the current metric of brand-group identity (wearing all black and a tattoo for one "brand," a BMW and designer clothing for another, reading the New Yorker and claiming to only wear vintage clothing for another, etc.)
What we do in the real world is simply part of the "brand" which we must project, or cloak, to sooth the gnawing anxiety that is the bedrock of a consumer society. The iconography and totems of consumerism define our identity, our strivings, our sense of purpose and our experience of meaning: what I call the politics of experience, a phrase coined by R.D. Laing.
Consumption is our god, our faith and our religion. Like a cargo cult dependent on a magical connection to prosperity, we are terrified by the prospect that our religion is based on a false god--that is, that consumption and consumption alone leads to prosperity and happiness.
Like a cargo cult that we mock in our infinite industrious superiority, we worship the equivalent of rocks painted to look like radios that we can use to "call" the gods of endless prosperity.
This rock that's painted to look like a radio is called "debt," and we call upon it to magically provide us with prosperity from over the seas.
This other rock that's painted to look like a radio is called "aggregate demand," and it's carefully worshipped by a special troop of voodoo-wielding witch doctors called Keynesians.
We are chanting magical phrases to these rock-painted "radios," pleading for a return to easy prosperity, but nothing's happening. We fear the magic no longer works, and that possibility terrifies us so much we can't even bear to speak of this loss.
The consumer economy is expiring for two good reasons: we borrowed too much and will never be able to pay it back, never mind borrow even more, and we have too much crap and useless services as it is. Instead of paying people to dig a hole and then fill it, we give millions of tests that serve no real function other than to bill Medicare or the provider.
An economy can only sustainably spend what it generates in surplus. The U.S. has been exchanging paper with funny green ink on it for real stuff, far in excess of the surplus generated by our own labor and production. That is our trade deficit. To extend "aggregate demand" to the moon, we borrow trillions of dollars via Federal deficits to fill the gap left by imploding consumer borrowing. This is not spending a surplus we have earned, it is borrowing against future surpluses, surpluses of national income which we are now committing to debt service.
Future generations won't get to spend their surplus; they will have to devote it to servicing the debts we have gaily borrowed and blown on digging holes and refilling them, part of our worship of the magical painted rocks of our false and hollow religion, Consumerism.
By degrading ourselves from producers to consumers, we have not only lost our identity and our meaning, we have lost the ability to create surpluses and invest those surpluses wisely.
My new book An Unconventional Guide to Investing in Troubled Times is an attempt to chart a path from the anxious, unhappy dead-end of consumerism back to a decentralized, self-reliant productive economy.
That is the transformation that terrifies the Status Quo, for it is a transformation for which there is no model of control and exploitation: the demise of the consumer economy and the rise of a productive economy with no need for Wall Street or rocks painted to look like magic radios.
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