There has been a lot of talk about a double-dip recession recently by people like Paul Krugman and Nouriel Roubini, how to define it, and what it means. What is missing from these discussions is the most obvious question of all: why won't the economy recover?
Capitalism is supposed to be self-correcting - or so we've been told - and a recession like the one we've had is supposed to be that reset button. So why aren't businesses hiring?
I'm going to try to answer that question in the simplest way possible.
There are two primary reasons why the economy isn't recovering, one reason is cyclical, the other is secular.
The Cyclical Problem
The curious inability of politicians to use the term "credit cycle" when discussing fixes to our economic problems is a disturbing condition.
It not only reveals that our political leaders have no intention of attacking the problems head-on, but also that we can't look to them for solutions. What's more, it also distracts the public away from what is actually wrong with the economy, and instead gets them arguing over useless trivialities and tangents, like the size of a new stimulus package.
Forget the political spin. Forget the happy-talk, bullsh*t from talking heads on financial news shows. Forget all the distractions and focus on the most important point about our economy: how we got here.
Plain and simple, what got us here was the credit cycle, and until that credit cycle is played out we are not going to have a recovery no matter how many tax cuts and stimulus packages are created. Period. End of story.
The sooner we face up to that fact the better off we will be.
So what is the credit cycle? Consider for yourself the Minsky Moment.
When a market fails or falls into crisis after an extended period of market speculation or unsustainable growth. A Minsky moment is based on the idea that periods of speculation, if they last long enough, will eventually lead to crises; the longer speculation occurs the worse the crisis will be. This crisis is named after Hyman Minsky, an economist and professor famous for arguing the inherent instability of markets, especially bull markets.
What Hyman Minsky described is exactly what happened to the American economy. In fact, Minsky described it almost too well, as if he was an economic Cassandra, writing the future that everyone refuses to believe.
The economy from the mid-90's to August 2007 was defined by cheap money and easy credit. Everyone took on more and more debt in order to speculate on asset values, first stocks, then housing. As asset prices kept going up, credit based on those overvalued assets got easier to obtain.
Once everyone is "in", when the number of new speculators runs dry, prices begin to fall. "Weak hands", such as subprime borrows, begin to default. Speculators try to dump assets, but the number of suckers aren't enough to buy up all the excess supply. Prices collapse. As asset values drop, so does liquidity, because everyone runs to cash in order to cover their bad debts. That includes the banking system.
This is where we are now. Note how housing prices have fallen, but the debt behind those houses remains despite an avalanche of bankruptcies and foreclosures. The economy is overloaded with bad debts that will never be paid. The government stepped in to stop the collapse of these asset values in order to save the banking system that made the stupid loans. This transferred some of the bad private debt to public pockets. The bad debt didn't go away. It merely changed locations. The economy is still burdened with it.
It is for this reason why the Cash4Klunkers program and the Federal Home Tax Credit were so ineffective as stimulus. The programs merely induced consumers to go more heavily into debt by buying overpriced assets.
The only way the economy can move on and start growing again is if: a) the debt is paid off, or b) the debt is defaulted on.
It is this choice that is being decided now. The sudden concern about public deficits is a reflection of the power of the holders of that bad debt - the wealthy class.
The top 1% owns nearly half of all the financial wealth of this country. The bottom 90% of the population owns less than 7% of business equity, less than 19% of stocks, and less than 2% of all the bonds. On the other hand, the bottom 90% own 73% of all the debt, most of it in the form of unproductive mortgage debt.
It is the rich of the world that own those overvalued debt obligations and they want to be paid in full, even if it means that the real economy is stripped bare and tens of millions of working class people suffer to accomplish this.
The thing is, even if all the social services of the industrialized world are gutted, even if taxes on the poor are raised to crushing levels, the bad debt is simply too large to ever be paid. The loans should never have been made in the first place. In a country with real capitalism the wealthy people who made the loans should have to take their losses.
But instead, the rich are trying to suspend capitalism and using the government to force the working class to bail them out.
One way or another, it isn't going to work. Just look at what happened with Japan for the last 20 years. Very few of those bad debts will ever be paid off. Efforts to avoid this eventual outcome will only prolong the hardship. Banks, burdened with these toxic loans, will suck every last dollar out of the economy that they can. The point that economist Michael Hudson has made so often: "Debts that can't be repaid, won't be repaid".
Japan repeatedly tried to stimulate their way out of the bad debt burden and it failed. All it did was raise the national debt levels to 200% of GDP. Yet we seem determined to try the exact same methods. Stimulus is not, and never will be, a real solution.
Let's not kid ourselves, we've deployed an enormous amount of stimulus. TARP was only a small percentage of the bailouts. Trillions of dollars of bailouts was funneled through the Federal Reserve. Hundreds of billions more was needed to bailout Fannie Mae and Freddie Mac. Then there was all sorts of tax breaks on both the federal and state level to prop up the housing market.
All of this, every part of it, was done to prop up the unrealistically over-inflated prices of assets that are almost entirely owned by the top 10% of society.
What the stimulus does is burden the economy with more and more debt, which has become increasingly less effective in stimulating anything. The more debt society takes on, the less the real economy can grow. Once the debt/GDP growth ratio falls below long-term interest rates the game is over.
As economist Steve Keen puts it:
Debt-financed growth is also highly unlikely, since the transference of the bubble from one asset
class to another that has been the by-product of the Fed’s too-successful rescues in the past ((Minsky 1982, pp. 152-153.)) means that all private sectors are now debt-saturated: there is no-one in the private sector left to lend to.
Instead of a sign of economic success, the "Great Moderation" was a sign of failure. It was the lull before the storm of the Great Recession, where the lull was driven by the same force that caused the storm: rising debt relative to GDP in an economy that had become beholden to Ponzi finance.
The real solution is to write off the bad debts. Yes, pension funds will get hit. 401k's will get hit. Banks will be closed down. Foreclosures will increase for a while. Things might get real bad for a while.
All the surplus capital dedicated to servicing bad, unproductive debt would be released to create jobs and make working people's lives better once a default happens. When it is done both businesses and consumers could function without the legacy weight of all that debt. Jobs would finally come back.
When I mention default I mean on every level, including on the municipal level. Contrary to what you may have read in the news, this country has a history of states defaulting on their debts. The world didn't end.
Politicians don't talk about this inevitable outcome and how we got here because it would expose their complicity.
The Secular Problem
Most Americans aren't aware that America once had a national economic plan, and it existed from the days of President Lincoln to President Nixon in one form or another. During that 112 year period America grew from an agrarian, frontier nation, to the most mighty economic power the world had ever seen.
Obviously there had to be something good in that economic plan.
The roots of the American School of Economics go back to Alexander Hamilton, Friedrich List, and Henry Clay of the Whig Party.
The American School of Economics was far different from the dominant economic thought of today.
The key components of the American School directly confront, deny and refute the economic imperialism that the so-called "Free Trade" school championed then by England and imposed by means mostly foul upon Europe over the years. It rejects free trade by imposing a system of duties, tariffs and other measures designed to defend the nation against economic threats by foreign predators. It uses government-directed spending projects meant to provide the infrastructure necessary for individuals to develop into the highly-educated and highly-trained people capable of being the ambitious and enterprising productive people we are famous for being. It chartered a national bank, owned wholly by the government, that administered the lines of credit necessary to get all of this done and otherwise oversaw the monetary policy of the state- and thus remained utterly accountable to the people by way of Congress and the Presidency.
The American School of Economics also involved government support for the development of science and a public school system. Through this economic philosophy America set the standard in manufacturing, higher education, scientific research and development, finance, and general standard of living.
So what happened? Under President Nixon the decision was made to remove protective trade barrier and go to a Free Trade model in 1973.
According to The Myth of Free Trade by Dr. Ravi Batra:
"Unlike most of its trading partners, real wages in the United States have been tumbling since 1973, the first year of the country's switch to laissez-faire...Before 1973, the U.S. economy was more or less closed and self-reliant, so that efficiency gains in industry generated only a modest price fall, and real earnings soared for all Americans....Moreover, it turns out that 1973 was the first year in its entire history when the United States became an open economy with free trade.
"Since 1973 and free trade, the link between real wages and productivity was severed, where its commitment to free trade soared faster than domestic economic activity. Real wages for 80% of the labor force have been steadily shrinking in spite of rising productivity. Free trade skews the real value of manufactured goods, through cheaper foreign labor or weaker foreign currencies in relative prices, despite increased productivity and innovation, in turn creating a shrinking consumer base."
A good example is NAFTA. Despite predictions that NAFTA would create 170,000 American jobs in just the first two years, Congress set up the NAFTA-TAA (Trade Adjustment Assistance) program for displaced workers. Between 1994 and the end of 2002, 525,094 specific U.S. workers were certified for assistance under this program. Because the program only applied to certain industries, only a small fraction of the total job losses were covered by this program.
Remember those car companies that the American taxpayer saved so we could keep some well-paying manufacturing jobs in America? Well, guess what?
General Motors and Volkswagen have invested billions in China, starting more than a decade ago. Ford is rushing to catch up by adding production capacity and expanding its dealer network in China. Ford and its joint-venture partner, Chang'an Ford Mazda Automobile, plan to start producing next-generation Ford Focus models at a new, $490 million plant in Chongqing in 2012.
How can American workers compete with Chinese workers making $5 a day? You can't live on that in America. You literally couldn't keep a roof over your head on that wage. Our "free trade" philosophy is killing the working class of this country.
Any serious national economist who objectively reviews the reality of free trade must eventually come to the conclusion that it is ruinous to a nation. Granted it may seem to work short term in providing "cheap goods" but in the longer perspective it destroys the productive wealth-creating base of a community.
The only ones who benefit from the free trade policy are multi-national corporations and the the wealthy who own them. The workers of this country were never meant to benefit from the free trade policies, but there is an entire industry of talking heads who try to convince you not to believe your own "lying eyes".
The free trade model is a fallacy and every thinking person knows it. However, our corrupt and compromised politicians can't admit it because they are owned by the very people who benefit the most from it.
Besides adopting a free trade model, America has turned away from the other tenants of the American School of Economics. Specifically, it has neglected public infrastructure projects in the hope that privatization of public assets would do a more capable and efficient job. This strategy has also failed miserably.
The third leg of the American School of Economics was to create a financial infrastructure that would "use of sovereign powers for the regulation of credit to encourage the development of the economy, and to deter speculation."
In a trifecta, our rejection of this principle has been an utter failure.
Even after the credit cycle finally runs its course, the country has to overcome its more intractable systemic problems. Fortunately, we have a working model with 112 years of success to operate from.
The primary obstacles between our present situation and a return to wealth-producing prosperity is our politicians and the wealthy class who own them.
global labor arbitrage
That's a great piece of information, the American School. The evidence it's pure global labor arbitrage now is tough to proof, a real research project. One can see in India they are hiring in droves, their GDP is soaring, the same with China. Much of that growth in India is our old jobs, i.e. BPO. Also, corporations like IBM and many others, are busy firing Americans and hiring in India, China.
So, while now the jobs may not be directly offshore outsourced, the new hires are going on there.
Unfortunately getting at these statistics in a nightmare. Our government, in denial or worse, refuses to collect the kind of metrics needed. So one has to go off of corporate press releases, many not in English, released in the U.S. that show new investments, new plants in these countries and hew hires, new contracts in these countries.
Once the China PNTR kicked in, and telecommunications enabled offshore outsourcing, I personally believe the economy never recovered. It was more masked by a huge housing and debt bubble, while the real economy was shipped offshore.
This government and of course Republicans will not confront these problems and do a change of course to put this economy first. It's pretty much only the Populists/Progressives and the Paleo-conservatives, all in a minority (put together).
One of the more succinct and clearly explained analysis of why this economy is doing so poorly and will continue for quite a while.. Solid.
This viewpoint (why the economy is not recovering) reminds me of trade protection discussions that occurred during the 1930s. In addition, I read an article today linking Jews to the 2008 financial crisis. It sounds like history is repeating itself.
I take offense to that
If you want to discuss actual facts and ideas, I am more than open.
But if you want to make more snide innuendos and character assasinations, then f*ck you to.
shows the mentality out there
People who really haven't cracked a trade theory text who insult the minute one mentions the trade deficit and the millions of jobs offshore outsourced come out of the woodwork the minute someone does.
They don't get that trade was already collapsing in the Great Depression. Unfortunately some pundit tried to claim Smoot-Hawley was the problem...
and it's stuck. If they bothered to look at the data it would be obvious Smoot-Hawley did not cause the Great Depression.
The inference that anyone who wants the U.S. to win on trade is somehow a genocidal Nazi sounds like we have a drive-by tea partier. I think they believe everything they decide to target without understanding is somehow "Hitler".
Things are 100% different now
And if the guy actually wanted to debate facts I would have pointed that out.
In 1930 the debate was level of trade protection. Now the debate is how to have free trade with as many 3rd world nations as possible.
World trade collapsed in 1914 and never recovered. The reason once the guns stopped firing was because of the war debts. America was demanding huge sums of money from our allies. Sums so high that they couldn't pay it off.
Most Americans don't know this: Britain and France defaulted on its debts to America before Germany stopped trying to pay off its reparations.
It's those war debts that caused all the other nations to enter the beggar-thy-neighbor trade strategy, because they needed the trade surplus to pay interest on the war debts, that was killing world trade.
But these are all facts, and some people simply don't want to hear them.
They don't want any damn facts
That has to be the #1 reason to keep EP going. We have uneducated sound bytes. We have TV pundits who can't do basic arithmetic. We have fictional reporting.
From every flavor of the political spectrum we have people arguing, extreme behavior, when they don't have their basic facts straight on whatever issue they are ranting on.
I watch CNN to see brazen falsehoods, same is true with Fox, MSNBC quite often. They spin it. People are outraged over spending! Well, uh, no, they are outraged over the corrupt of the spending, i.e. saving the banksters while letting the people rot.
Meanwhile, China has an economic strategy team that has on it a host of engineers, all running models, calculating, targeting....all in their national interest, along with buying our Congress. In terms of buying our government, it's even more true with India.
Then people, uneducated, take these sound bytes, pushed over and over by corporate lobbyists, their public relations (propaganda teams) and MSM conduit and think this is somehow truth.
Oy vey! Peterson and Rockefeller...Jewish????
I wasn't aware David Rockefeller and Peter G. Peterson were Jewish. In fact, I believe Rockefeller is Protestant and Peterson started out as Greek Orthodox.
Great article post, BTW. We can't have an economic recovery....without an economy to begin with.
Seems obvious to most of us.
Excellent Article. I agree with part one — The Cyclical Problem — of your assessment. But I think with part two — The Cyclical Problem — you are wrong.
From an economic view point imports are a benefit and exports a cost. The problem with free trade is, that its proponents praise always the overall gains from it which so outweigh any downside but always forget to mention the implication of this appraisal.
Given that the overall gains to society outweigh any losses there are still winners and losers. Now this losers must be compensated for their loss by society. So much the free trade theory. Unfortunately this compensation actually never happens. That's the problem.
imports are a benefit and exports a cost?
That's the standard economic theory, but I strongly suspect that actual investigation would disprove it. Had U.S. wages and earnings continued to grow in the past three decades as the same annual rate they were growing in the decades before 1980, the average American household would be earning DOUBLE what it is now. How much of those missing wages is attributed to loss of jobs to foreign trade? So far as I know, no economist has even tried to ask the question, let alone answer it. Hell, I have yet to see any economist that even raises the issue of the dramatic slowdown in the growth rate of working class earnings - I had to gather the data and perform the calculations myself.
How about measuring the lost opportunity cost of all those missing earnings? How many Americans kids the past three years have slipped into a resigned acceptance that they will never get a decent paying job in their small town or blighted inner city neighborhood, and turned instead to dealing drugs? Economists would have us count the "underground economy" as a net benefit, with ever inquiring about the costs of such trade offs.
What makes overseas labor cheaper? I suspect and believe, is the lack of environmental, consumer, and workplace regulations. I've seen travelogues on TV to places like Vietnam and India, that showed people using acetylene torches without a helmet or visor or other eye protection. It just boggles my mind. A decent welding helmet easily costs $150.00 or more, and that's just the minimum of protection. And by now, everyone should know about the horrible pollution problems China has created in the past two or three decades. No environmental equipment on a factory easily saves millions, even tens of millions, of dollars.
Hell, there are hardly any economists here who are willing to try and tally up the externality cost of pollution of domestic economic activity, let alone trying to figure out how much the externality cost of pollution is to manufacture something in China and then ship it to the U.S., and what share of that externality cost ought to be assigned to the U.S. as an offset against the supposed "benefit" of the import.
In purchasing power parity, the cost of an hour of labor from one country to another is not that different - a human body needs a certain basic level of calories, sleep, and health care to stay alive and useful for employment. So, the big difference in labor costs has to come somewhere else.
I think these considerations point to how worthless and bankrupt the economics profession is -- it should be a constant source of ongoing studies to compare U.S. safety and environmental regulations and costs with those of other countries, especially those that are the largest exporters to the U.S. Instead, we get professionally trained economists who shriek "protectionist" and "trade war" anytime anyone suggests that free trade is not all that great.
After missing the biggest financial collapse since the First Great Depression, you would think, or at least hope, that most professional economists would have the humility to stfu and begin asking some basic questions about what it is they believe they know.
there are economists
who analyze trade and have been warning for years. Of course they are ignored.
Paul Krugman, max deficit before hyperinflation post
Krugman whipped out the theory and graphs to show there is a maximum in terms of a nation "printing money" but we're not there yet.
I think he's going to have a hear attack over this austerity insanity, when what we really need is very specific, targeted spending and policy.
Spending to fund "green technologies" in China, Germany and France is not the best use of funds. (duh).
A Disease Sometimes Called Offshoring
Think of the macro economy as a vessel into which policy (when actually operating), attempts to pour in the fluid called jobs. Jobs of course are leaking out the sides and bottom of the vessel. So when the fluid is poured in at a slow to-non-existent rate as now, the liquid escapes from the sides quicker than the liquid enters the top.
Enough of metaphors, and let me give a real world description of how offshoring is actually practiced. Welcome to the world of the second biggest U.S. health insurer with 65 million subscribers. The subscriber base is constantly leaking, and the number insured constantly goes down.
Management constantly frets about the loss of subscribers called "capitation". How does management respond? Offshoring its own
employee base and watching its clients like GM send continually more jobs offshore. So the more offshoring, the poorer the insurer and its clients become in terms of top line revenue.
Top line is not the whole story. Management will be paid on the basis of Net Income so here comes even more offshoring, and higher the Net Income. Simple and straight forward Class War.
The only difficulty is that there are fewer and fewer jobs and less and less clients for the health insurers. In other words, the eteology of the disease is understood.
The macro economy withers and dies and every one is left scratching their heads about why there are no jobs and the jobs have no health insurance. Stop wondering.
Our fearless leadership decided to attempt to put more capitation into the health system before the macro economy created jobs and offshoring was stopped. Failing to stop offshoring is a policy that cannot succeed even when job creation is robust.
On health insurance industry
They also refuse to make their systems efficient. Their software/databases are so out of date, records are completely in the stone age. Of course they offshore outsource any software development, which in turns creates more waste and crap.
I suspect they spend more money on people trying to screw their customers than payout. That and lobbyists, PR. Be nice to see their breakdown but that's what happens when one lets a monopoly run amok.
Yes They Do Screw Customers
One of my favorite stories is the entire floor of a big office filled with business analysts devoted to creating green field Routine Denial Systems - the answer's always "No". This is not accidental. UNH Basking Ridge, NJ.
When insurance monopolies are this big (65M customers), we are beyond the annecdotal and solidly macro. Again, the priority of health insurance over economic recovery and jobs is bass-ackwards.
Defaulting on the Debt
We need to think of the way you would default on the debt without causing all kinds of chaos. I believe that is what the Glass Steagal firewall was for and I think we need a plan to triage the debt so that speculators end up losing out because of their bad decision rather being allowed to pass the buck in a Austrian school liquidation. After bankruptcy reorganization, we can go back to a revamped American system.
unemployment extension to pass
Supposedly they have gathered 60 votes. Now, what about the 52% of the people who do not even qualify for UI or all of the other people who are self-employed and the rest?
Regarding Midtowng's excellent piece.
Debt finance has been favored over equity since inflation returned in force starting in the 1960's. Equity finance for banking was the way to go before the occurrence of this cyclical inflationary/debt cycle.
So de-leveraging banks and other debt-resourced financials is well understood. Debt for equity swaps are a way out. Recall how Buffett took preferred shares in GS. Non-financial companies have cash-rich balance sheets and could take equity stakes as well.
The consumer is much more difficult. So we have to ask - rich or poor consumers? The poor do not owe as much on mortgages and the dollar value of defaults is 2/3 or what the rich do. Poorer homeowners could be given reduced value and interest rate term balloon mortgages - common in 19th Century America.
Credit card debt is much worse and I see no way out for the poor except debt forgiveness.
Lastly, the Fed's $19 Trillion stuffed into the banks? Distribute it as equity to the owners.
Neither stimulus spending nor tax breaks for the rich can revive the economy with a wide open leaky plumbing system and a busted blowout preventer If it all goes out the door to China and elsewhere the system cannot maintain useful pressure to do useful work. Nothing is manageable without boundary conditions, or try heating a house in the winter with lousy insulation and drafty windows. Our idiot left/right politicians would rather bicker about whether to direct heat to the livingroom, bedroom or kitchen or crank up the furnace with the windows wide open than address the blatant systemic leakage.
This is the best precis of the economic meltdown and loss of our social net I have read yet. I try to explain to people that the rich (and not just in USA) just don't want to face their losses and thus, they come after our SS/Medicare (and make us feel guilty to boot). But I don't explain it well -- I will print this out and hand out or study closely to be articulate and accurate.
Thanks midtowng - thank you so very much. As well your commentators are enlightening.
Social Security, Bismark, Metternich, Marx
After the Communist Manifesto made the recommendation of a 'national pension system' it became a socialist principle. But the German Conservatives adopted SocSec after Bismark and Metternich saw a way to stop a Paris Commune from hitting Germany in 1870. These are the Burkean, Old Guard, Social Contract Conservatives. Lloyd George and FDR followed suit much later in Britain and the U.S. for exactly the same reasons. So take a hard look at the historical context and what shredding the safety net means for the stability of capitalism.
Social Security was surely never a socialist agenda for the conservatives, but a way to save capitalism, social cohesion and blunt the agenda of the growing socialist movement.
So when you hear the Barbarian Hoards of the Right complaining about the safety net, give them a history lesson. Start with Sarah, P., you know Rosebud.
ESI Study on Economic Insecurity of US Population
The Economic Security Index is registering astounding levels of stress and insecurity for the entire US population with major losses of income and economic security. The study confirms what we have been saying here on these pages, never since the Great Depression have so many lost so much for so long.
ESI broken link
I fixed your link because it was broken in the copy.
It's really true and the politicians, the elites and even a lot of Americans are still divorced from reality, thinking it's 1975.
Shrinking Middle Class
"The Middle Class in America Is Radically Shrinking. Here Are the Stats to Prove it"
by Michael Snyder
This is a great article. The stats are stunning!
This would go well in 'instatpopulus', but I don't know how to put it there so this comment section seems a good alternative.
First maybe learn how to copy URLs and paste them into comments, and format them.
(highlight URL) copy, past.
Formatting is in the user guide on the right hand column.
Here is the article,
but it's as a slide show.
One of the statistics is 10 years old, but regardless, it's assuredly true! The middle class is being wiped out and may already be wiped out.
You can spin the economy many
You can spin the economy many ways,this is a good one & I don`t doubt a lot of it.....BUT the real reason why the US economy isnt picking up is because big buisnes,people with the money are sitting on it just to drag Obama down.Let me make it clear....I`m NO Obama fan,but the man was handed a mess & people flat out scapegoat him and the ones that are not,just flat out him for...other ... reasons.Christ people it`s been a year and half,you all are hysterically delirious..... Did I mention that the SALARY of CEO`s went up in all this ? Pretty obvious whats going on.