The Fear of Secular Stagnation
I love the prospect of secular stagnation (raised by Bob Reich) primarily because the answers are so easy. :Let's keep our eyes on the ball. The problem in this picture is that we are capable of producing more goods and services than we want to consume. It's a problem of too little money chasing too many goods and services.
Well, there are two really simple answers to this problem:
1) Work fewer hours - while workers in other wealthy countries can count on 4-6 weeks a year of vacation, workers in the United States are guaranteed no paid time off. As a result, the average work year in the United States involves almost 20 percent more hours than the work year in Western European countries. As fringe benefits a shorter work year can be more family friendly and also we can be less polluting if we take the benefits of our productivity growth in leisure instead of income.
2) Support growth in the developing world - back in the good old days economists used to think that capital should flow from rich countries to poor countries so that they could build up their capital stock and infrastructure at the same time that they fed and clothed their populations. This thinking conveniently disappeared from view when the United States began to run large trade deficits in the late 90s.
I would argue that this old-fashioned view still holds water. Countries obviously can develop without importing capital as China and other East Asian countries have shown, but that doesn't mean that they should have to follow this route. If we had an international monetary system that was operating effectively, capital flows could go from rich countries to poor countries and more quickly provide people in the developing countries with a decent standard of living.
So, for these reasons I don't worry about the risks of secular stagnation. If that is our main economic problem, then we should consider ourselves fortunate.
. . . we are capable of producing more goods and services than we want to consume.
Nonsense!
The appetite of the human species is infinite.
December 16, 2008 4:11 PM | Reply | Permalink
I wouldn't say it's infinite but a study of the Long Island garbage dump gave credence to the idea that humans will adjust their consumption according to availability. Meaning when an item was in short supply they would slow consumption, and when an item was is oversupply they would increase consumption until supply was used up. Gasoline is an example of this.
December 16, 2008 9:42 PM | Reply | Permalink
Maybe that was Statin Island.....Oh well
December 17, 2008 12:09 AM | Reply | Permalink
Grow, grow, and grow. Grow what? It does not matter keep growing so that we can keep making bigger profits. But the consumers are getting dumber, fatter and sicker! It does not matter. Humans in America are a renewable resource. We can always import more eager consumers. Don't you know the poor, hungry, great unwashed of the world are just "dying" to come over here so they can become dumber, fatter and unhealthier on the road to consumption heaven?
December 17, 2008 12:10 AM | Reply | Permalink
The appetite of the human species is infinite.
Presumably, Ellen is being sarcastic. But, as we know, the insatiability axiom is fundamental to economics-as-we-know-it. It's the best reason I know for bringing an end to that economics-as-we-know-it.
Although appetite may indeed be insatiable, there's nothing to insure that it be channeled into marketable goods and services. Some of the most enjoyable goods and services derive a large part of their utility from being outside of the market exchange process.
December 17, 2008 2:10 PM | Reply | Permalink
If 10 cows have enough food in front of them for only 5 cows, they will all eat merrily until the food is gone. Each will get 1/2 what he/she needs or wants. The stronger dog will protect all the food in front of him until he is full, then move aside and let the smaller dog eat. Only a human will horde 100 times what he could possibly eat, and let 99 around him starve. Our species has not at all went to the dogs. We are worse than dogs.
December 16, 2008 4:22 PM | Reply | Permalink
Leisure instead of income? I think they call that unemployment.
December 16, 2008 4:40 PM | Reply | Permalink
I love this idea on its own merits, but there's something missing from it: where does the money come from? Businesses have to get the money for paid vacation time from somewhere, and while I wouldn't disagree that many of them could take it out of lavish executive compensation packages, for many that genuinely isn't an option. Who pays for this?
I don't see how this necessarily follows. A shorter work week isn't family-friendly if you have to accept a smaller income in order to do so, not unless the cost of living for that family also goes down--see the above question about who pays for this mandate of paid PTO. Nor does it follow that people who have more vacation time are likely to consume and pollute less--on the contrary, discretionary spending tends to go /up/ when people have time on their hands.
The problem is indeed that there is too little money chasing too many goods and services. Unfortunately, a big part of the reason for that is that a grossly inflated amount of money that never really "existed" in the first place was injected into the economy through the CDS market and the availability of easy credit, and now the bottom has fallen out of this and the market is waking up to the fact that an unfathomable amount of the economy is smoke and mirrors, and people can sustain that lifestyle anymore--the lifestyle that in turn sustained the economy.
I don't really see an "easy" answer to this that does not involve years of hardship while Americans readjust to a different standard of living and the businesses that were artificially booming due to unsustainable consumer consumption contract to a sustainable level. It's going to hurt, and about the only thing that will make it better is the improvement of our social safety nets.
December 16, 2008 4:52 PM | Reply | Permalink
It's been my thought that the restriction in family income since about 1970 has had the result of forcing families to work longer hours. The primary worker works more, then a secondary family member enters the work force.
I have also suspected that this results from the larger companies not sharing the additional income that results from greater productivity and instead passing it to executives and investors.
By making primary workers work more hours, the work force gets the more experienced and efficient workers to do more of the total work of production. Presumably this adds to productivity.
The problem with this is that the redirection all of the return to greater productivity is sent to executives and investors who do not consume it. Increased consumption has come from population growth, reduced savings (caused by extremely low interest paid by banks) and the flood of credit cards being sold in the last four decades. But of course, the usurious fees and interest rates charged for credit cards themselves reduce consumption by redirecting money that should have gone into consumption to bank profits.
A better share of the profits from increased productivity given to the workers who actually do the productive work (a group which obviously does not include bankers) would both increase consumption and at the same time provide more time off for workers.
It's my understanding that there is no economic theory that determines what the optimal split of the return of profits to labor and capital is, so that dynamic is something that will always be determined by the relative power of labor and capital. The last three decades of union-busting has been the process of taking power away from labor. The result is that increased consumption has been based on getting more labor in the work force (including immigrants and spouses), increased credit and lower savings, the housing bubble. All of those are uncertain ways to maintain consumption.
December 17, 2008 9:04 AM | Reply | Permalink
"The problem in this picture is that we are capable of producing more goods and services than we want to consume. It's a problem of too little money chasing too many goods and services."
How can anyone make such a statement when there are so many destitute people in the world? Surely "we" are producing too little to satisfy the meager living standards of the bulk of the world's population. And why is that? Because the system is over-capitalized with worthless paper claims on existing production and a falling rate of profit.
December 16, 2008 5:31 PM | Reply | Permalink
Consumption is defined as the desire for goods or services by those with the money to pay for them.
People who have no money are not economic consumers. They don't count. The three billion people in the world who live on a dollar a day or less are simply not part of the economic system we are discussing here.
December 17, 2008 9:12 AM | Reply | Permalink
For those of us still employed (cue crickets sound effect), the answer clearly is more paid vacation time. I've been asking the same question all over the internet, and I have finally found an answer I like.
December 16, 2008 8:26 PM | Reply | Permalink
"The problem in this picture is that we are capable of producing more goods and services than we want to consume."
It's just sloppy wording. (Hey, what do you expect? It's a blog post.) I think Baker means to say "we are capable of producing more goods and services than we are prepared to purchase."
By "we" he means we as a society, with our collective purchasing power, whether private or public.
The problem, in other words, is insufficient effective demand. Emphasis on "effective."
December 16, 2008 9:32 PM | Reply | Permalink
Baker's liberal Keynesian notion--so popular now-- that this is a crisis of underconsumption only comes into play AFTER the economic depression materializes when unemployment and a collapsed credit system makes it impossible to purchase the goods. But the economic crisis which has been developing over many years is better identified as a crisis of underproduction, a failure to match physical production with a growing pile of worthless paper issued by a parasitic financial sector.
December 17, 2008 1:56 PM | Reply | Permalink
Countries obviously can develop without importing capital as China and other East Asian countries have shown
I don't get this part at all. It seems like almost every country in the world sent manufacturing jobs and even whole plants to China and back office operations to India. This took a massive amount imported capital didn't it? The Chinese didn't start out with a massive bankroll when they embraced capitalism in 1989. They had cheap labor to offer and invited the rest in.
December 16, 2008 10:44 PM | Reply | Permalink
. . . a massive amount [of] imported capital . . . .
Help me out, here.
I understand how a country like China can import "capital" goods -- it trades currency earned on exports or borrowed from foreigners for goods it imports -- but how does it go about importing "capital"?
Note: Dollars (and yen and marks and pounds) don't buy anything in China.
December 17, 2008 12:10 AM | Reply | Permalink
Uh.... I've been to China in 1996, you could buy things with dollars.... I don't know, just saying. The Chinese government could also be buying oil with dollars.
December 17, 2008 3:25 AM | Reply | Permalink
The Chinese let foreign investors pay for most of it in return for access to slave labor. Everyone talks about their growing middle class but not it's genesis. People think that history is over for some reason. America's slave history speaks volumes about the human psyche. The southern states generated enormous fortunes for a few. We tend to think that all that's behind us. I wholeheartedly disagree.
December 17, 2008 3:36 AM | Reply | Permalink
"Work fewer hours"
Or as J.M. Keynes put it, "It becomes necessary to encourage wise consumption and discourage saving,- and to absorb some part of the unwanted surplus by increased leisure, more holidays (which are a wonderfully good way of getting rid of money) and shorter hours." The Long Term Problem of Full Employment, 1943.
Peter Victor has developed a model showing how we can reduce greenhouse gas emissions, poverty and unemployment without relying on "economic growth" (that is to say, expansion of the output of stuff, GDP; not growth in the sense of maturity or wisdom). His book is called Managing Without Growth: Slower by design, not disaster and he gave a great lecture/summary of his theses at the Royal Canadian Institute for the Advancement of Science.
December 17, 2008 1:56 PM | Reply | Permalink
"we are capable of producing more goods and services than we want to consume.
"Nonsense!
"The appetite of the human species is infinite".
Presumably, Ellen is being sarcastic. But, as we know, the insatiability axiom is fundamental to economics-as-we-know-it. It's the best reason I know for bringing an end to that economics-as-we-know-it.
Although appetite may indeed be insatiable, there's nothing to insure that it be channeled into marketable goods and services. Some of the most enjoyable goods and services derive a large part of their utility from being outside of the market exchange process.
December 17, 2008 2:07 PM | Reply | Permalink
Where is option 3) Redistribute the wealth more equitably.
Since the bottom 40% of the population only owns 1% of our nation's wealth it seems unlikely that they don't "want to consume" more. If there is too little money going around maybe that's because it's all concentrated at the top, in the hands of people who can't spend it.
December 17, 2008 8:09 PM | Reply | Permalink
This is interesting. Whilst just about everyone is stimulating aggregate demand in order to avoid what Nouriel Roubini calls Stag-Deflation, the real problem is excess aggregate supply from global excess capacity emanating from years of cheap funds. The problem isn't knowing a bubble exists. (For example, the CDS bubble was discussed in depth in Barron's in 2006). The real problem is no-one wants to prick it.
Here's a thought - are there enough aggregate funds available world-wide to soak up excess capacity in asian manufacturing, world-wide financial assets, U.S. retail and commercial property, automobiles, ...
December 18, 2008 6:18 PM | Reply | Permalink