Stagnation

I will keep this short: I have been taken aback by all the talk about the apparent onset of something called secular stagnation. Today’s Financial Times gives us another dose of it in an article by Gavin Davies. The basic argument seems to be that since both population growth and worker productivity are declining somewhat in the biggest economies we ought expect those economies to grow more slowly than in the past. This shift downwards is a sharp break with what orthodox economists had assumed the norm to be: that economies would chug along nicely because productivity is driven by technology change, and because populations have been relatively stable.

The downscaling is said to fit with the empirical evidence, and in particular with the trends that seem to have set in since around 1980.

In other words, a sputtering economic performance over the past few decades is seen as proof that we now live in more constrained times, where limited growth puts a cap on our latitude in dealing with economic issues. People drawing this conclusion almost inevitably then jump into discussions of how this reduced latitude implies a more austere role for government, and – naturally – that everyday folks just will have to manage on less.

I have a slightly different perspective.

The onset of the downward shift coincides quite neatly with another great beginning. That of an era of economic policy focused on supply side initiatives, giveaways to the rich, and of corporate welfare. Is it simply a strange coincidence that the entire post-Reagan era is exactly that we are now describing as one of lower growth? Or is it that the right of center free market policies that have dominated policy making throughout the west since the early 1980’s, are to blame?

You can imagine what I think.

The US economy right now is awash with cash. The resources clearly exist to invest in new technologies were the demand there to justify that investment. Instead businesses prefer to let their cash hoards sit idle, or if they use them at all, they invest in buying back their own stock. Apparently they are unable to locate profitable business opportunities so they avoid risky investment or they give their cash to their shareholders believing, presumably, that those shareholders can use it elsewhere.

I see this as a demand constrained economy. Plain and simple. After decades of downsizing, offshoring, cost cutting, and other wheezes to limit wage growth in order to boost profits, corporate America has created an economy so bereft of realizable purchasing power that it can no longer identify enough potential customers. So it sits on its hands. To resort to cliche: it has killed the golden goose.

It is telling that orthodox economists are throwing up their hands when they try to explain what is going on. Within the domain of their own theory they have no explanation. Demand isn’t a consideration for them. They see everything through the eyes of market magic and supply side initiatives. They stay close within the bounds set by the old Say’s law. Even if they claim they don’t.

For the uninitiated Say’s law states, in brief, that production creates demand because the wages paid to workers in the creation of product will be sufficient to ensure there is a market for that product. Thus there can be no shortfall in demand. All that is needed in times of a slowdown is to boost production and all will come right.

This absurdity, which is purely ideological and has no empirical basis, is central to right wing thinking and lurks everywhere behind all secular stagnation arguments.

The ideological blinkers that prevent orthodox economists engaging with reality are, yet again, causing economics to advocate anti-social and profoundly anti-democratic policies. By denying that lack of demand can even be a consideration in policy construction, orthodox economists are driven to conclusions that, in turn, harm us all. They act befuddled because their theories have no ability to mirror actual circumstances, they then grasp at a line of reasoning that conforms with their misshapen view of the world and impose policies upon us that only serve to make matters worse.

That Keynes correctly identified what to do in our current circumstances has been long forgotten by the orthodox. Indeed they make fools of themselves by trying to mock his remedies. They are ignorant. Deeply and deliberately ignorant. They are not educated in economics. They are indoctrinated and ideologically pure. They are thus dangerous and ought to be ignored.

We may of may not be entering a radically different period in our economic history. One aspect of which might be that growth is harder to come by. It might also be that part of the slowdown is attributable to the lower productivity improving capacity of modern technology changes. But that is not the only explanation. We ought to consider the damage of free market economics since 1980. We ought to take into consideration the dramatic and deliberate depression of the return to work – i.e. wages – and the long term implications of rising income inequality. We ought then adjust the empirical record for those impacts. What would growth have been had unbalanced theorists like Milton Friedman and his acolytes been ignored? Only then can we assess whether the economy has taken a permanent turn for the worse.

Only after we reflate demand can we discuss grand theories of stagnation. If it then exists. Which it might well not.

We certainly ought not act on the basis of half baked notions of market magic. It never existed in the first place.