The Congressional Budget Office just released a new report that has Republicans very excited, but its key finding is that the deficit continues to shrink, suggesting that the short term emphasis on austerity continues to be wrong-headed. Indeed, a second CBO report released today on the state of the labor market concludes: “The slow recovery of the labor market reflects the slow growth in the demand for goods and services.”
Which is to say that people don’t have jobs because people don’t have money — because five years after the meltdown, the jobs emergency continues to be all about weak aggregate demand.
And yet, despite this, the big story of our current age is that U.S. firms are doing well in spite of weak demand. As Kevin Drum puts it: “Earnings are up nearly 10 percent—because companies are cutting staff—and revenues are essentially flat—because workers have no money.” In other news, countries like Turkey, South Africa and others are right now going through what looks like a classic emerging-markets crisis, where huge inflows of capital from overseas have suddenly dried up, leading to a economic collapse.
These things are related, and they raise a deeper question for US policymakers and liberal champions of economic justice. The US economy doesn’t work as advertised anymore for anyone but the very rich, and relying on Congress to pass laws to ensure full employment doesn’t work. It’s time to start constructing institutions which can work without the need for constant action from our janky and dysfunctional legislature.
Paul Krugman described the situation this way:
[There is a] big debate among economists about whether we face “secular stagnation.” …one way to describe it is as a situation in which the amount people want to save exceeds the volume of investments worth making. When that’s true, you have one of two outcomes. If investors are being cautious and prudent, we are collectively, in effect, trying to spend less than our income, and since my spending is your income and your spending is my income, the result is a persistent slump.
Alternatively, flailing investors — frustrated by low returns and desperate for yield — can delude themselves, pouring money into ill-conceived projects, be they subprime lending or capital flows to emerging markets. This can boost the economy for a while, but eventually investors face reality, the money dries up and pain follows. If this is a good description of our situation, and I believe it is, we now have a world economy destined to seesaw between bubbles and depression.
Izabella Kaminska and Francis Coppola both have great posts about the toxic effects of this hot money sloshing erratically around the globe, causing untold havoc, and what is to be done about it. Though I won’t get into the weeds of their posts, one thing is for sure: the classic Washington Consensus/IMF view that free movement of capital is always and everywhere a good thing looks not just wrong, but positively offensive.
Krugman places the blame for this situation on the policy failures of the developed world. In the US, we effectively did the minimum needed to prevent full-blown depression, while spending vast sums to stabilize the financial system. This has turned the economy into a machine for generating vast sums at the very top of the income ladder and almost nothing else. Profits are colossal but new jobs are few, and often part-time and low-paying. Investors, wanting some return on these massive piles of money, send them sloshing crazily around the globe, causing violent booms and busts.
If we had fixed our labor market with sufficient stimulus after the 2007 crisis, by contrast, then US firms would have the demand necessary to support new investment. Such domestic investment is historically far more stable than the hot money flows into emerging markets that we see today. (Indeed, a key reason for the feared “contagion” in this type of crisis is how ignorant investors typically put entire regions or continents in the same mental basket. “Crisis in Namibia? Well, better pull our investments out of Algeria too, just to be safe!”)
In any case, this situation demonstrates the need to start coordinating around some kind of fundamental reform which can direct some of the fruits of the Great Money Machine down the income ladder; things like a universal basic income. Monetary policy hasn’t had a great deal of traction, and Congress has been making everything worse since 2010. Passing such a policy would be very hard, to be sure, but at least it would only have to happen once. Though it’s still highly possible for Congress to spend its way to full employment (as it did turning WWII), such action looks nigh-impossible now. Keynesian economics works great, when tried, but Keynesian politics runs into massive psychological and political headwinds. Even when Congress went Keynesian briefly in 2009 it didn’t go nearly far enough, and then turned to aggressive austerity almost immediately. It’s time to start thinking.