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THE NEW (OR OLD) NORMAL IN THE AMERICAN ECONOMY (PART II)

December 2, 2013

THE NEW (OR OLD) NORMAL IN THE AMERICAN ECONOMY (PART II)

We saw in Part I of this essay that traditional measures of our economy are not reliable in the world of globalization we have concocted with our trade pacts, exports of capital and production to cheap labor venues. We are, in varying degrees, measuring economic performance of some sectors of foreign economies and importing them into our Dow and S & P, thus skewing the results to such a degree that they may be ignored by ordinary Americans who are not members of the investment class. We also saw that Wall Street is prospering greatly these days and that the rest of us are in the grips of near-recession. Finally, we began to describe what economists say the future holds. I will continue that description here in Part II.

Larry Summers, former Secretary of the Treasury and whose ideas were touched upon in Part I, is a pessimist. I think we are in real long-term economic trouble because of our refusal to adopt Keynesian policies, but I don’t think we are as far gone as Summers does. He has given up on balancing budgets and has asserted that “Prudence is folly.” This suggests that we are down and out and that there is nothing we can do about it. I disagree. We are down but not out – not yet.

Summers, according to Peter Coy, feels that “the economy is incapable of producing full employment without financial bubbles or massive stimulus, both of which tend to end badly.” The idea is that the Fed cannot reduce interest rates any further, since they are hovering near zero already, but that assumes that there are no other weapons in the Fed’s arsenal. The Fed, for instance, is currently buying $85 billion in federal paper every month. That is a not so massive stimulus which helps keep interest rates low with the further design to stimulate home-buying and other aggregate demand items which in turn, the theory goes, helps reduce unemployment. The theory awaits proof.

I don’t know whether such back door stimulus is working or not, because the alternative is not available to us, i.e., we can’t know what this economy would look like if there were no such stimulus. Jared Bernstein points out that central banks can only do so much. While he agrees that “the head of the Federal Reserve is one of the most powerful people in the world,” he notes that “The Fed can’t create jobs. It can’t invest in infrastructure. It can only try to create the conditions for other people to do so.”

Bernstein further notes that if our economy is ever to get back to full employment, then “it needs complementary fiscal policy to stimulate the missing demand that would be taking advantage of the low-interest rate environment.” He finally notes that forging such policies falls not to the Fed, but to Congress. He is right, and if Congress were really interested in returning full employment and broad prosperity to this country for all and not just for Wall Street, then we would adopt Keynesian policies which would not only bring full employment and prosperity to America; such adoption would also repair our infrastructure, repair both our budgetary and long-term debt problems, provide funding for important federal initiatives such as health care, education, research and development, and overcome the millstone of globalization in doing backed-up work here, work that cannot be exported to China and the tender mercies of multinational corporations and Wall Street.

One of the better analyses I researched in connection with saving our economy from ruin was found in an article written by Kevin Drum in Mother Jones.com. He correctly writes that somewhere along the way, we shifted from an economy that valued real goods and services to one obsessed with paper profits. He writes that “There simply aren’t enough promising real-world investments available, which means that lots of money is either sitting on the sidelines or else getting diverted into financial rocket science.” He theorizes (and I disagree with him on this specific view) that Wall Street’s greed isn’t enough to explain this, and that the financial industry “would happily allocate more money to real-world investment opportunities if the demand were there. But it’s not, even with essentially free money.”

Drum is right to point out that the big money these days revolves around the exchange of paper and not the financing of the production, distribution and sale of tangible goods. Nothing is produced by exchanges of paper on Wall Street, of course, and those so involved in such exchanges are therefore parasites. However, I do not agree that there is a shortage of investment targets.

With automation and cheap foreign labor venues, one could argue that production of tangible goods is so cheap that it cannot soak up available capital resources, and indeed corporate America holds nearly two trillion dollars in cash in its coffers, by far more than has ever been so held in history, but not all capital resources need be allocated to production of tangible goods. Our crumbling infrastructure (public buildings, schools, roads, bridges, power grids etc.) is one such example crying out for allocation.. We also need massive capital injections for investment into our people’s public health and public education systems.

I disagree with Drum and am of the opinion that there are ample investment targets for our excess capital resources. Not all such targets are shops and factories. New targets emerge. Drum is wrong; “the demand is there.” We simply choose not to recognize it for fear that we will have embraced public expenditures via Keynesianism – apparently a forbidden exercise – even though (unlike our embrace of present austerity policies) it works. Ideologues prevent any consideration of Keynesianism as policy.

So where are we? Why should our domestic economy be in the doldrums and our family median wages remain at best stagnant or even falling while prices steadily march upwards? Why isn’t demand in the marketplace stimulated when the Fed has provided us with essentially free money? Why is Wall Street prospering with giant Dows and S & Ps while the rest of us are mired in near-recession? Are we stuck in a persistent situation in which the “norm” is that of a depressed economy (per Secretary Summers)? Is the new norm any different from the old norm where capital controls our world? Is there no escape?

I think there is an escape, but we cannot escape with the austerity policies we are currently pursuing. Here we sit with historic capital resources available to us to bring prosperity out of chronic recession but without the political backbone to do the necessary – to invest in America and its people. Were we to abandon austerity economics and instead pursue Keynesian fixes for our problems, using every weapon at our disposal and not just cheap money stimulation (which isn’t working anyway – even free money doesn’t stimulate aggregate demand), this economy would not only hum; we would be investing in our country and its people – not paper – and both wage rates and revenues to government would zoom.

Will we decide to adopt Keynesian policies to put America and its people back on the road to economic recovery? Not a chance – not as long as the influential few prosper under the existing system. GERALD  E

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One Comment
  1. I wish there was some way, Gerald, to get your comments into larger circles (I.e. National leadership) for serious discussion. I find it terribly depressing to see the same old bullshit passed off as economic and international news on NBC, ABC, CNN, etc. It amazes me that this country has a history, not that long ago, of investing in its people for work. The GI Bill, to me, is one the best core examples of this. It was an investment in people, not only for education, but also business loans and grants. World War 2 itself was an investment (albeit for war) into people and all things war related from food to clothing to armament. War Bonds paid for it!!! We didn’t sell our debts to China, as we do now. So here we have this incredible history of a post war boom, expansion of unions, the creation of the middle class…. and one cannot find this discussion ANYWHERE in the so-called “liberal press.” Now today I read where our education lags so far down globally, we are lower than Vietnam! Irony? Makes me think Karma is true. We decimate that country, killing millions (mostly civilians), spreading agent orange from to hell and back that continues to deform their peoples, and now they are doing better than we in educating their young people! Wow. I am so thankful there are a few (too few) voices of reason and wisdom like yours that will not go away. I think of the biblical word: remnant. You represent that for me, a remnant who hold to what is true and what is real in the midst of chaos. If I were a publisher, I would find a way to get your essays into book form for mass consumption. However, the way things look, we will not have a population capable of reading, much less critical thinking and analysis. Thanks Gerald, as always, for your faithfulness and commitment to keep the word of truth out here in the world. Peace.

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