John Buell

Is US Economy Doomed to Persistent Stagnation?

Now more than five years into the worst slump of the post World War II period, economists and commentators are increasingly concerned that the US economy is in a permanent slump. These concerns are well taken, especially because the solutions being offered by conventional conservative as well as liberal leaders are bromides that fail to address the impacts of globalization, the role of technology, and environmental and resource constraints.

Politicians in D.C. offer little more than what European central bankers term “expansionary austerity,” the notion that reductions in budget deficits will increase business and consumer confidence and thus lead to gradual recovery. Though polls show that citizens are more worried about joblessness than the deficit, Republicans and many centrist Democrats are in a race to show who can inflict the most severe reductions in the deficit. Debate centers primarily around whether tax increases or reductions in spending — primarily for the safety net—will be the primary tool. Though genuine social justice issues are at stake in this debate, deficit reduction in the midst of a demand- constrained economic cycle will hardly stimulate new corporate investment. Europe’s long experiment in draconian austerity has thrown the continent into virtually zero growth and near Great Depression levels of unemployment in Spain and Greece. Europe’s only growth industry now would appear to be the rise of right wing nationalist parties.

To their credit, academic liberal economists, Paul Krugman most visibly, have highlighted the role that public austerity plays in exacerbating the recession. Yet Krugman’s alternatives, though better than mainstream D.C. discourse, may offer little reason for optimism about the future. Krugman argued from the very beginning of the crisis that even the Obama Administration underestimated the depth of the demand shortfall and requested too small a “stimulus package.” He also correctly argued that the package was too heavy on tax reductions and too light on direct job creation measures like grants to state governments to retain the public sector workers being laid off at a torrid pace.

There is little doubt in my mind that had we followed Krugman’s advice, unemployment would be lower. But would we be in a sustained period of economic growth like that of the twenty- five years following WWII, US capitalism’s so-called golden age? A little background about academic discourse in the US might be helpful here.

Krugman is often labeled as and calls himself a Keynesian. Yet in the phraseology of Joan Robinson, a colleague of Keynes, Krugman is a “bastard Keynesian.” Mainstream US economists, most famously Paul Samuelson, sought to reconcile microeconomics’ faith in the ability of markets to bring supply and demand into socially optimal equilibrium with Keynes’s recognition that governments must engage in direct job creation during recessions. Conventional economics before Keynes had argued that money markets operate just like any other. The price of money, the interest rate, is determined by the demand of investors for money and the supply of money by savers. If the demand for investment suddenly falls, interest rates will decline, thereby encouraging more investment. American Keynesians argued that in circumstances of a sharp fall in investment demand, the full employment equilibrium interest rate would have to fall below zero, an impossibility. In these liquidity traps, government would have to spend money to restore demand and full employment. Yet they retained their claim to conventional status with the assumption that relatively predictable and temporary stimulus would restore investment-led growth and that in most circumstances interest rates could assure full employment.

Nonetheless, at least since the 1970s, economic growth and job creation has been weaker than during the golden age (1945-1970). Looked at from peak to peak of the business cycle even the Reagan era prosperity saw weaker productivity and GDP gains than earlier cyclical recoveries. And the Bush years were even weaker.

These considerations have led some left and ecological economists to question the ability of fiscal and monetary stimulation to deliver predictable GDP and job growth. They have also rediscovered Keynes’s deeper insights that investors hardly follow interest rates or even fiscal stimulus in some mechanical/predictable fashion. Investors face an uncertain future and a collective herd mentality can often govern their actions. Full employment might well require more than merely periodic changes in interest rates or even short- term fiscal injections.

One modern economist who seems to have grasped — now if not earlier in his career — more of the spirit of this Keynes and applied it to a world of environmental and resource constraints is Jeffrey Sachs. Thus he argued recently in Huffington Post: “Macroeconomists trained in the past 30 years believe that demand increases depend mainly on interest rates and deficit or tax levels. Yet increased spending on renewable or nuclear power plants, a robust power grid, carbon-capture and sequestration, wastewater treatment facilities, fast inter-city rail, higher education, urban co-generation of electricity and heat, green buildings, and countless other new sustainable technologies, will depend on establishing a policy framework that harmonizes regulations, land use, public financing, and private investment … The new tools of macroeconomics, therefore, are quite different from the existing tools. The new tools begin with a medium-term (say, ten-year) budget framework, so that tax policies are not pulled out of thin air or campaign rhetoric, but reflect the calculated needs for public outlays; a medium-term set of income distributional goals and strategies, especially to break the back of child-poverty, rising school drop-out rates, and training for low-skilled workers; structural objectives regarding the rebuilding of infrastructure and the transition to a low-carbon economy; and a new set of institutions to carry out these policies….”

Unfortunately neither a new approach to growth nor to jobs creation is likely to emanate from Washington in the future. This does not mean that we must be consigned to the combination of slow growth and environmental degradation, this worst of both possible worlds, implicit in our present course. I’ll discuss alternatives in 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, August 1, 2014