John Buell

Is Tepid Growth the New Norm?

Why has the US recovery from the world financial crash been so tepid? Much of the business press blames government regulations such as Dodd Frank and the Affordable Care Act. Some liberals, most visibly Paul Krugman, argue that an inadequate stimulus package and premature budget cuts are to blame.

Krugman can justifiably compare US and European experience. Though far from adequate in his eyes, the so called 2009 stimulus package contrasted sharply with the harsh austerity imposed by the IMF and the European Central Bank on those nations close to default on their sovereign debt. Unemployment in Europe runs far ahead of the US, with Spain and Greece mired in a 1930s-type catastrophe and the latter now nourishing a small but growing fascist movement. Important as the differences between Krugman and the business press are, the former shares some of the latter’s key assumptions. Both believe the market economy fundamentally works. For the business press, just leave it alone and it will resolve its current problems and return to steady growth. Krugman counters that once a sufficiently severe shock has hit an economy, interest rates approach zero and the Fed cannot further lower them to induce new investment. The government must spend to fill the demand gap. Once it does, however, the normal rate of growth can be restored. Neither builds the possibility of a crash into their theories. Shocks come from the outside. And once addressed, either by letting nature take its course, or by an injection, smooth sailing can be assured.

James Galbraith has a different view, elaborated in The Predator State and most recently in The End of Normal. In his estimation, the prosperity of the immediate post World War II period, which is often cited by modern Keynesians like Robert Reich, Krugman and Joseph Stiglitz, was owed not merely to a Keynesian-inspired acceptance of labor unions and occasional government expenditures to sustain demand but to a set of special historical circumstances not easily duplicated. The instabilities that result from the possible demise of such circumstances need to be part of our basic understanding of modern US capitalism and our reform proposals.

Our “market economy” has really been sustained in large part throughout the post World War II period by a set of institutions Galbraith calls parapublic. These include the university system, the earned income tax credit, much of the health-care system, the housing industry, suburbanization and the private auto. All receive both direct subsidies from government and benefit from tax deductibility and various forms of government guaranteed loans. These, along with the more traditional New Deal program of Social Security, have served to keep consumption going during economic downturns. They were efficient and sustainable during an era of easy access to cheap energy sources, primarily oil and coal, and US military dominance securing that access worldwide.

The 1970s represented a challenge to both of these pillars of post-WWII prosperity. OPEC drove up the price of oil. Vietnam demonstrated the limits of military power. And its expenditures, financed by deficits, combined to weaken the dollar and spur inflation even as many jobs were threatened.

Paul Volcker, who was then Fed chairman, restored the dollar to its holy place via sky high Federal Reserve interest rates,. This had contradictory effects. The strong dollar hurt US manufacturing but the sluggish world economy also broke commodity prices once again and reinforced the US as the world’s deepest and most secure and lucrative capital market. The US was given the gift of a free credit card for as long as the world was willing to recirculate surplus cash to our capital markets. The oil and consumer intensive society was given new legs.

Under Clinton, a new high tech revolution powered the US economy. It was, however, neither based on a sound foundation nor a long term source of perpetual growth. Tech stocks were pushed to impossible valuations and the wealth effect powered further consumer spending. This was bound to crash. In a more long tern sense, the high tech revolution is viewed by many as a source of continuing economic expansion.

Galbraith, however, presents a convincing case that this is part of the secular stagnation problem. Any technological revolution creates some jobs before it destroys the older technology. Autos created new jobs before the buggy makers were driven out of business. High tech initially creates new jobs, but its long-term effects are less beneficial. Once the auto industry had been established it left behind several continuing needs. Roads require continual repair, as do autos even in this computerized era. High tech gadgetry is seldom repaired, often replaces entire job categories, and is both capital and labor saving.

Finally as deregulation moved from the manufacturing world to finance and the tech bubble collapsed economic growth was sustained by financial products and processes encouraging even the most unqualified to enter the housing market. These escape mechanisms could not go on forever.

On the energy front, the issue is not the absolute shortage of oil. The more immediate problem is that once its relative scarcity had become clear it became a speculative commodity subject to all the manipulation deregulated finance could muster. The very volatility of its price discourages new energy investments, especially in alternative energy and constitutes a drag on necessary response to climate change, an event with even more dire implications for long- term growth.

What might be done in the face of these structural limits is my next column.

John Buell lives in Southwest Harbor, Maine and writes on labor and environmental issues. Email Jbuell@acadia.net.

From The Progressive Populist, December 1, 2014