John Buell

Daddy, Are We There Yet: Thoughts on the Partial Recovery

Economic recovery is the theme of the moment. Pundits and investors are confident that even if prosperity remains elusive, we have turned a corner. After all, the US economy is much better off than Europe or Japan. These economies, however, set a very low bar, and confidence in future gains may well be misplaced. Its proponents fail to acknowledge the common pathologies that tanked all the major capitalist economies and the continuing weakness and vulnerability even of the US economy.

Though public debt is generally singled out as the cause of economic crises, the evidence is overwhelming that private debt played a far larger role. Those scholars who focused on the role of private debt in economic expansion and contraction were among the very few who foresaw a major economic collapse. Low interest rates, lax lending standards, financial deregulation, and fraudulent mortgage practices helped foster a housing bubble, one that was eventually bond to collapse. As a matter of simple math, debt cannot endlessly continue to grow faster than the rate of the economy itself. When economic growth comes to depend on Ponzi schemes, trouble cannot be far behind.

Though bubbles burst in continental Europe, England, and the US, the policy response was different. Europeans had created a currency union that in effect resembled the 19th century gold standard. It had a central bank pledged to maintain price stability but no common treasury. Indeed, even national treasuries were forbidden to incur deficits of more than 3% per year. Premised on the notion that market economies are self- adjusting, no provisions were made for handling shocks to the system emanating either from inside or outside.

That Spain’s difficulties were the result of market instability and the private sector has been demonstrated by the course of this crisis. Before the collapse of the bubble, Spain’s government debt level was falling and by 2004 its debt level was below America’s. When Spain’s speculative land and housing bubble collapsed, Spain could not count on a European-wide treasury that might provide banking insurance, unemployment and old age pensions etc. When the US land bubble burst, Nevada, Arizona, and Florida—states where housing prices had escalated most—suffered. Nonetheless, the extent of the suffering was mitigated by the federal safety net, especially unemployment compensation and food stamps.

Yet recovery in the US has been a slow process with a tepid outcome so far. Despite recent gains, recovery is slow and uneven. Yves Smith comments recently in her blog Naked Capitalism: “retail sales have fallen three months in a row… analysts quoted on Bloomberg blamed the terrible February weather and were confident consumer spending would pick up soon. Of course this article could simply be Dr. Pangloss meets the job market. It somehow appears to elude most commentators that the economy is creating more jawbs than jobs, and that the labor participation rate actually fell from 62.9% to 62.8%.”

Smith attributes part of this deficiency in spending to actual or proposed cuts in the US safety net: “The other factor leading to lower spending is that the saving rate is up. Well, why shouldn’t the savings rate rise on a secular basis as the public realizes (if they haven’t already) that social safety nets, and most important of all, Medicare and Social Security, are being hollowed out?”

At least two factors may explain the readiness to pronounce the economy as fixed, factors that even some liberals neglect. Paul Krugman has maintained that the consequences of the Federal Reserve’s acting prematurely to slow the recession are more severe than if it waits too long. Fed interest rate tightening, ala Paul Volker, can stop a runaway train but monetary policy has a hard time bucking deflation. These are worthy points, but the Fed also fears full employment, a situation where workers can bargain not only better salaries but more say in their jobs and workplaces.

In addition, concern for public debt — which is generally a symptom rather than a cause of economic malaise— remains a paralyzing theme throughout the capitalist world. Kingston University economist Steve Keen argues that in this regard, Japan is a cautionary tale. Following the collapse of a bubble that would have dwarfed anything the US experienced, Japan avoided a major depression with a huge government stimulus. Yet as Keen points out:” every time the economy appears to recover, the government tried to reduce its own ballooning debt. The removal of cash flow from government spending triggers a return to deleveraging [saving] by the private sector, and the crisis returns. A “Lost Decade” has now become a “Lost Quarter Century.” This lost decade theme is then turned into an argument against government spending even as the role of private debt is neglected.

Keen maintains that just as Japan has attempted to revive its economy without reducing private debt significantly, so now is the US. recovery proceeding from a debt level 25% greater than was the case in 1990. The aggregate level of debt students now must repay, over a trillion dollars, is a major impediment to their career prospects and household formation.

Keen argues in effect that the only way to escape the long term stagnation in which the US is immersed would be major deficit spending over a long period or programs and policies aimed to restructure/repudiate much private debt.

Keen correctly points out that these are moral as much as economic barriers. Americans are often told that just as households can’t run up big debt, so too their governments must learn to save. Yet at the same time, commercial advertising endlessly tries to entice more spending. One way to address both moral and economic concerns is to highlight the double standard regarding debt.

Debt forgiveness is as American as apple pie. One recent massive experiment in debt forgiveness was the so called quantitative easing whereby the Federal Reserve purchased long term debt obligations of questionable worth from the large investment banks. Often improperly described as printing money, these purchases increased bank reserves but seldom flowed into the real economy. It would be far better for the Fed literally to print money. In other works, Keen has proposed the Fed give every citizen $50,000 which must be employed first in retiring debt before any of the remainder was spent or saved. Such a proposal would side step the moral arguments about rewarding spendthrifts while prudent savers are left in the lurch. Both would benefit just as the far more criminal and irresponsible investment banks did during the QE spree.. Without progress on this moral front—as well as addressing the continuing excesses of our banks—the economy will be fortunate to limp along.

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

From The Progressive Populist, April 15, 2015

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