A Perspective on Our Economic Malaise
22 December 2014 | Pago Pago, American Samoa
Kimball Corson
It has been almost seven years since the financial crash and the beginning of the Great Recession in the United States, and while the Recession is officially over, the core economies of the world remain in a deep economic malaise, moving from one crisis to another. For example, Europe now hovers at the edge of a triple dip recession and it faces very high bank and public debt. Both threaten the Eurozone and yet another crisis. As for the US, we are more stable, but still also live in a new lower normal state with a crisis now and then.
To be sure, as a capitalistic economy matures and population growth stabilizes, less real new capital formation or real investment is called for. That makes new investment progressively less profitable and discourages it. Inasmuch as less real investment today means commensurately less national income tomorrow, economic growth becomes damped simply by this maturation process, especially where government does not make up for the difference in expenditure, but indeed, goes in the opposite direction and cuts the deficit. This is the starting point for our ills.
The next component of our malaise is the badly skewing distribution of income since which began in the early 1970’s. Initially, it derived from the off-shoring of American jobs as companies looked for cheaper labor and fatter profits overseas, abandoning the USA, starting with NAFTA and cheaper labor in Mexico. This lowered Labor’s share of national income and increased Capital’s. It created much new real unemployment in the US (not the bogus numbers the government feeds us). It also resulted in relatively less consumption expenditure in the US further braking the economy.
But then something else happened. As the rich discovered they had more money than they could spend, they started to hoard and off shore part of it as cash, leading the government to adopt QE and other programs to maintain the money supply, and they dumped the rest of it into secondary financial markets on Wall Street, leading to the finanancialization of America, as I will explain. At the same time, middle and lower class consumers, who faced lower real incomes started going further into debt in an effort to maintain their standards of living.
These developments created a boom on Wall Street and it responded by creating and diversifying an ever broader array of financial assets to meets the needs of the new consumer debtors and of the rich seeking financial investments for money not spent on consumption, investment , nor off shored. This in turn caused the finanancialization of the American economy. Wall Street now markets a dizzying array of new and diversified financial assets and the old days of simple banking finance are gone forever.
The real economy has stalled, but the financial economy has risen to new heights. It is a financial house of cards, grounded on leverage and speculation, that is built on top of the real economy. It floats on a sea of derivatives, where for a fee, anyone will guarantee anything and sell that risk to yet someone else. Also, in the process, Labor has become the debtor and Capital has becomes its creditor. The idea of a company town with its company store comes to mind, but regardless, the skew is enhanced.
So our malaise then has several earmarks. Minimal new real investment. High de facto unemployment. Slow if any growth. A badly skewing distribution of income. Stalled consumption expenditure. A falling share of national income for Labor, A rising share of the same for Capital. Labor becomes the debtor. Capital becomes the creditor. We are stuck then in our new lower normal, with relatively compromised consumption expenditure, real investment expenditure and government expenditure, while finanancialization of the economy carries the money economy to new heights and Wall Street, being too unregulated, as usual over-reaches.
Against this backdrop, government has had a tendency to try to stimulate economic growth, and the financial sector has generated multiple economic ups and downs as well. The net result is a hapless series of booms and busts as we bump the ceiling that has the economy and consumers oscillating between hope and dismay, all while smart guys get richer and hoard even more.
Moreover, historically, capitalism has used wars to take up the slack after a bust. World War II followed the great depression; the Korean Conflict (1950-53), the double dip recession of 1945-46 and 1949; and the Vietnam War (1960-1975), the double dip recession of 1958-60. Since the dot com bust (2000) and the recession that ensued then, although the technical end of the Great Recession was in 2009-10, we have invaded Iraq twice, Afghanistan once and are now posturing for a war against the Islamic State.
War outlays are always a boost to the real economy and make up for reduced real investment and for slipping consumption to maintain national income. War expenditure are a lame substitutes for otherwise stalled expenditures. We look harder for excuses to fight a war when the economy has been struggling.
We are indeed stuck in a new lower low. Wall Streets’ efforts to hijack the economy with finanancialization and federal efforts to improve it with wars and stimulus packages have only created more cyclical turmoil. The real economy remains stuck in the mud as we furtively look for a way out of the mess created by our broken system.