A considerable body of economic data supports the thesis that the American Empire's decline began in the early 1980s. For general purposes, saying "30 years ago" is close enough. Additional confirmation for this dating comes from a surprising new source. Lance Roberts, host of Street Talk Live, recently published The Breaking Point: The End Game Of Keynesian Economics. Roberts of course does not refer to "the Empire" let alone its "decline", but that's what he's talking about. He starts by discussing the success of Keynesian economics in the decades after World War II.
... when there is a lack of demand from consumers due to high unemployment then the contraction in demand would therefore force producers to take defensive, or react, actions to reduce output.
In such a situation, Keynesian economics states that government policies could be used to increase aggregate demand, thus increasing economic activity and reducing unemployment and deflation. Investment by government injects income, which results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.
This seemed to work. From the 1950’s through the late 1970’s interest rates were in a generally rising trend with the Federal Funds rate at 0.8% in 1954 and rising to its peak of 19.1% in 1981. When the economy went through its natural and inevitable slowdowns, or recessions, the Federal Reserve could lower interest rates which in turn would incentivize producers to borrow at cheaper rates, refinance activities, etc. which spurred production and ultimately hiring and consumption. [See Figure 1 below.]
As the economy recovered and began to grow again the Fed would need to raise interest rates. This program seemed to work fairly well as interest rates went to a level higher than the last as the economy grew at an increasingly stronger level. This provided the Federal Reserve with plenty of room to maneuver during the next evolution of the business cycle.
Roberts' Figure 1, edited by me (blue) to indicate increasing interest rate stimulus after the early 1980s. Ben Bernanke called the period indicated The Great Moderation. He meant that in a good way—technocratic management of the economy had been perfected!
So far so good for both Roberts and the American economy, but then "something happened on the way to the coliseum"—
However, beginning in 1980 that trend changed with what we call the “Breaking Point”. We are not entirely sure what created this breaking point specifically whether it was deficit spending by the Reagan Administration to break the back of inflation, deregulation, exportation of manufacturing and a shift to a serviced based economy, or a myriad of other possibilities or even a combination of all of them. Whatever the specific reason, the policies that have been followed since the “breaking point” have continued to work at odds with the “American Dream” to the benefit of Wall Street.
Well done! Lance has got the point.
America was once a country built on the solid foundation of the hard work, satisfaction and pride in the building of stuff. We aren't talking about "namby pamby" stuff - we are talking about real stuff. We used to produce everything from automobiles to steel to blue jeans; right here in America. We ran telephone lines, built roadways and bridges, drilled for oil and constructed buildings. It was the sweat of the brow and the strain on the back that built America into its former shining self. A country made up of opportunity and prosperity with a solid moral foundation and a strong military to back it up.
That was then. Beginning in 1980 our world changed as we discovered the world of financial engineering, easy money and the wealth creation ability of successful use of leverage.
However, what we didn't realize then, and are slowly coming to grips with today, is that financial engineering had a very negative side effect — it deteriorated our economic prosperity.
As the use of leverage crept through the system it slowly chipped away at the savings and productive investment. Without savings — consumers can't consume, producers can't produce and the economy grinds to a halt as the cycle of economic growth is thrown into a "balance sheet recession" strangle hold that is slowly pushing the economy towards unconsciousness.
Regardless of the specific cause, each interest rate reduction that was used from that point forward to stimulate economic growth did, in fact, lead to a recovery in the economy; just not at levels as strong as they were in the previous cycle.
Roberts' Figure 2, edited by me to show the bubbles on the way down.
Roberts wants to argue that Keynesian economics is dead. He goes on to contrast it with the Austrian School, but that's not the interesting part as far as I'm concerned. It is enough to recognize that our decline is nothing new, that it has been ongoing for three decades now. What is new is the acceleration of that decline in that last decade, and particularly since 2008.
Roberts leaves out a host of relevant stuff, including both the Tech and Housing bubbles, and the unchecked growth of astonishing income & wealth inequality in America over the past 30 years. As you can see in the second figure above, the change in wages growth (year-over-year percent change) followed changes in GDP growth (year-over-year percent change). Most importantly, almost all of that wage growth went to the top 10% of American wage earners, and most of that went to the top 5%, and within that fractile, the top 1%.
From Econbrowser's sarcastic The Moral Imperative For The Continuation Of Low Tax Rates For The Top Income Fractiles
It is a pity that more Americans do not take the long view of America's economic problems. Failing to recognize that the Empire's decline started in the early 1980s has consequences. Human beings are already prone to short-term thinking, and the absolute refusal to look at our longer-term problems only reinforces that tendency. In this kind of thinking, the car battery is dead. If we attach some jumper cables to it, and get the juice flowing, the car will run again.
But all such efforts to stimulate the economy by fiscal or monetary means are doomed to failure because of the underlying structural problems created over the last 30 years (e.g. the financialization of the economy as Roberts describes). Interestingly, Keynesian policies endorse (and thus reinforce) the human tendency to focus on short-term solutions.
Unfortunately, few can remember how the economy used to work before the 1980s, and the powerful few have a strong vested interest in maintaining the status quo now. So America will continue to apply band-aids to a severed limb and hope that stops the bleeding. Of course, it will not.
Only us older folks who paid attention saw this going on for the last 30 years. Congress has been taken over by the corporations and so all the laws were changed over time to favor the rich and screw the poor and middle class. The laws keeping the financial industry in check were gutted and every time the banks fail they now get saved instead of going to jail. Congress still gives tax breaks to companies that outsource or move their headquarters out of the country. And we're spending billions to fix the infrastructure of Afghanistan (so the contractors can get rich) while America crumbles. That's why the rest of America is asking, "where's my bailout?"
Posted by: sharonsj | 07/25/2011 at 11:04 AM