I don't talk about solutions that might "fix" the economy because there aren't any, at least in anytime frame policymakers might be willing to consider. In The Root Of All Political Evil, I simply noted that any such solution, if it involved helping ordinary Americans (e.g. through debt restructuring) or borrowing (or printing) trillions of dollars to create jobs and spur consumption, is politically impossible. Corruption and stupidity preclude any such solution.
Even if we pretend, as most people do, that all that corruption and stupidity doesn't exist, there still aren't any solutions that don't involve a major restructuring of our economy that would take at least a decade (but probably longer) to achieve. Today I will pretend everything is politically possible. I will pretend that Washington politicians serve the public interest.
The story goes that a decade of stimulus has yielded nothing but debt. Here's Bloomberg's Caroline Baum—
When George W. Bush took up residence in the White House in January 2001, total U.S. debt stood at $5.95 trillion. Last week it was $14.3 trillion, with $2.4 trillion freshly authorized by Congress Tuesday.
Ten years and $8.35 trillion later, what do we have to show for this decade of deficit spending? A glut of unoccupied homes, unemployment exceeding 9 percent, a stalled economy and a huge mountain of debt. Real gross domestic product growth averaged 1.6 percent from the first quarter of 2001 through the second quarter of 2011.
It doesn’t sound like a very good trade-off. And now Keynesians are whining about discretionary spending cuts of $21 billion next year? That’s one-half of one percent. And it qualifies as a “cut” only in the fanciful world of government accounting.
There's no getting around it: stimulus has created nothing but more debt. (Mike Shedlock lists all the various types of stimulus that have been tried over the last decade.) Why has all this stimulus failed?
Since Republicans have no solutions that do not involve giving their rich patrons more money that "trickles down" to the rest of us, I will ignore them. Almost all supposedly "real" solutions are offered up by various Keynesian economists on the so-called "left".
Keynesians say we are (perhaps) lapsing into recession once again because there is a lack of aggregate demand. To boost consumption, more stimulus must be applied to create jobs to boost spending. (I don't consider an Infrastructure Bank to be a form of stimulus; it is an investment.) Tim Iacono got quite upset with this simplistic view of our problems in On the Decline of Aggregate Demand as the Proximate Cause of our Economic Troubles.
I’ve about had it with the inane theory that the lack of aggregate demand is the primary reason why we are now mired in the worst economic slump since the Great Depression. The latest bit of idiocy on the subject was offered up by Reagan/Bush policy adviser Bruce Bartlett in a New York Times commentary today that, when laid side-by-side with some of Paul Krugman’s writing on the subject (see here, here, here) is truly disturbing because, this “lack of aggregate demand” theory courses through all policymaking debate, on both the left and on the right, in Washington and New York.
The theory posits that it is not important what level of overall demand an economy has reached or how it got there, but that, when all the wheels fall off the wagon as they did back in 2008, the imperative is for the government to somehow restore that level of demand.
Otherwise, you get another Great Depression...
Whether that level of demand was reasonable never seems to come up and the idea that we’ve come to the end of a 30-year debt binge in all areas of public and private finances – where the accumulated debt can no longer be easily serviced, let alone taking on new debt to fuel more consumption – gets only passing notice.
There are lots more examples of this here, here, here , here, here, here, and here, this unfortunately being another example of how conventional wisdom is often wrong.
Tim has hit the nail on the head, but let's go one step further. Only a small shift is necessary to see that it is income that underlies the level of aggregate demand. Servicing debt takes a healthy slice out of disposable income, but the overall income trends make it clear that you can not increase consumption if the incomes of 80% of Americans have been flat for 30 years (chart below).
Based on Congressional Budget Office data. Source. Much (if not most) of the increase in income of the top 20% came from increases in the top 1% (left).
What would boost the incomes of 80% of Americans? In the short- or medium-term, nothing. Considering the stimulus case where we throw trillions of dollars at the economy to boost consumption, we have to ask some relevant questions. For example, how much would these newly created jobs pay? Minimum wage? Twice minimum wage? How much would they pay above the unemployment insurance some people still receive? How do stimulus jobs lead to the creation of what David Stockman calls breadwinner jobs, jobs which provide enough income to run a household? See my posts No New Jobs Is The New Normal, and In Jobs, Temporary Is Becoming Permanent.
A moment's reflection tells us that a boatload of fiscal stimulus does nothing to address America's stagnant income problem, yet it is this problem which dooms the resuscitation of a consumption-based economy. If incomes for the bottom 80% do not rise, additonal consumption necessarily leads to more debt in these American households. Finally, stimulus would only have marginal effects on the spending of those in the top 20% of all wage earners.
This is all bad enough, but there is also the longer term problem of downward pressure on wages in the United States. This problem is related to America's long term loss of manufacturing jobs, as I described in Manufacturing — A Story Of America's Decline. Ultimately, the downward pressure on wages is directly related to so-called "free" trade policies associated with globalization. See my posts The American Jobs Machine Is Broken and A Long Term Jobs Recovery? — Outsourcing. It is ironic (and disturbing) that those in favor of applying more stimulus are often the same suspects who were strong advocates of "free" trade and other globalization policies.
Unless there is a coherent plan in place that would gradually lift incomes for 80% of working Americans, and thus restore the Middle Class, any stimulus applied to boost consumption would only result in a concomitant increase in household debt. All other talk amounts to tilting at windmills. The latest CareerBuilder survey shows that 42% of American workers usually or always live from paycheck to paycheck. You can not squeeze water from a stone.
This latest number is down considerably year-over-year because “the majority of U.S. workers (72 percent) reported they are more fiscally responsible since the recession and have made a variety of changes to their living and spending habits.” This is a trend we want to encourage, not discourage, as I discussed in The Death Of Keynesian Economics. Need I say it? Keynesian stimulus seeks to promote fiscal irresponsibility, not only for governments but in households as well.
If there were a plan to boost incomes, and I know of no such plan, it would obviously take a very long time to implement. (Debt restructuring doesn't boost income; it merely lowers current interest payments.) We would need to reverse 20 years of policy which has made China the world's top manufacturer, start making things in America again, and pay good wages to the Americans who make them. As economist Michael Mandel pointed out in The Consumption Economy Is Dying — Let It Die, the big problem with consumer spending is that if you buy a product made outside the U.S., it doesn't encourage domestic investment. And that's what we really need.
With the stock market plunging, we've heard plenty of warnings that a "pullback" in consumer spending could trigger another recession. Let me suggest an alternative.
The last thing this economy needs is more debt-fueled consumer spending which mainly creates jobs overseas. Instead, we should be focused on boosting investment in physical, human, and knowledge capital...
It's true that consumer spending creates economic activity. But it's not true that all that economic activity is in the United States. Many of the consumer goods we buy are imported. If you buy a shirt or television, you are stimulating manufacturing jobs in China, or perhaps Mexico. You aren't doing as much to stimulate jobs at home.
This is true across the economy, but a helpful example is the clothing, or apparel, industry. Since the fourth quarter of 2007, clothing purchases by consumers have increased by about 5% in real terms, according to the latest figures from the Bureau of Economic Analysis. Over roughly the same period, shipments from U.S. apparel factories fell by 31% in real terms, while apparel jobs fell by 26%. The winner: Factories in China and elsewhere making clothes for the U.S. market.
Not only is a plan to restructure income inequality politically impossible for reasons that are all too obvious, but it would also require a major restructuring of the American (and global) economy. Now we know why, as Caroline Baum said, a decade of stimulus has yielded nothing but debt.
I think debt fueled consumer spending is akin to when I tell my wife that if beer is on sale, the more I drink the more money we save!
Posted by: John D | 08/21/2011 at 12:35 PM