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What's Wrong With This Economy?

By   Follow Me on Twitter     Message Richard Clark     Permalink
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In a nutshell, here's the way economist Jared Bernstein explains it:

  • Expectations for better results are continuously dashed;
  • GDP growth never reaches "escape' velocity;
  • housing is at best bumping along the bottom;
  • the engine of job growth has shifted from first gear to neutral;
  • unemployment is UP, not down, from the official 8.8% in March, to the official 9.2% last month.   (Real unemployment rates are much higher.)

 

But how to explain these things?  

As Paul Krugman and Brad DeLong point out, the liquidity trap and fading stimulus are of critical importance.  

Here's why:

The usual anti-recessionary move by the Fed is to lower the interest rate until they get some traction in investment, home buying, etc.   But what if that doesn't work, owing to the fact that industry has so much excess production capacity, excess inventory, and excess corporate cash reserves (as a result of corporations and the rich having systematically taken the lion's share of national income for so long) that workers no longer have enough money to buy enough of the products that are for sale, with the result of this being that:

  • there's huge excess supply of labor (i.e. growing millions who can't find jobs)
  • there's huge excess supply of housing that is not selling, because:
  • after bingeing on debt, folks want to get out of debt by paying down their debts instead of taking on any more debt

 

The Fed was able to keep jacking down interest rates for awhile, but they can't take them below zero (or else lenders would be paying you to borrow their money).   And that's where things have stood for a while now.  

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What this means is,   traditional monetary policy is ineffective, i.e. it's no longer operational.   It's no longer functional.

That leaves fiscal policy, i.e., economic stimulus, which is facing two big problems right now:

First, the Recovery Act is winding down, so no help there.   But even worse, the realization that we really need to do more on this front is under attack by politicians of all stripes.   For political purposes (winning the election next year), the Repugs want to argue that the Dem's Recovery Act has failed.  

Meanwhile, prominent Dems, by way of political cowardice, either seem to largely agree, or, lest they jeopardize future campaign contributions from fat cats, are afraid to get near anything that smells or looks the least bit Keynesian.  

Major problems that must be dealt with:

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The weak job market:   We live in a 70% consumption economy (i.e. 70% of our growth in the US economy comes from the purchases made by individuals and businesses), and if jobs and paychecks are scarce, and fiscal/monetary stimuli are fading, that purchasing is going to be minimal.   Even worse, a self-reinforcing weak-demand cycle gets set into motion that's very hard to break out of without enormous government spending.

Productivity and technology:   There used to be something called "labor hoarding" where even when demand faltered, firms would hold on to many of their workers, either because of union contracts or because they wanted to make sure their skilled workforce was around when things began to pick up.

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Several years after receiving my M.A. in social science (interdisciplinary studies) I was an instructor at S.F. State University for a year, but then went back to designing automated machinery, and then tech writing, in Silicon Valley. I've (more...)
 

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