Stagnation Ahead

“Things are going fine.  The economy is finally moving in the right direction and there is no need for any new government initiatives.” Don’t believe that?  How about: “Just wait, it will take a while, but if we can hold down government spending and let market forces regain their balance, things will really pick up.”  If you don’t believe that one as well, I don’t blame you.

As has been widely acknowledged, our recent economic growth was largely driven by debt supported consumer demand.  Beginning in the 1980s, government and corporate policies combined to drive down wages and working people turned to borrowing in order to sustain their standard of living.   The outcome has been generally weak growth–for example, the 2001-2007 expansion was one of the weakest on record in every way but profits–and an ever higher family debt load.

The chart below illustrates the steady rise in household debt as a percentage of disposable (after-tax) income.  Not surprisingly, this ratio has begun to fall as a result of the Great Recession.  As the New York Times explains: people “have deleveraged through a combination of paying down their debt (by spending less of their paychecks) and having some debts expunged.”  The resulting decline in consumption will not be easily reversed.  In fact, while no one knows how far the process will go it is pretty clear that deleveraging still has a ways to go.


Reinforcing this conclusion is the fact that unemployment remains high and businesses remain reluctant to hire.  The chart below highlights monthly changes in business payrolls (in thousands).  Ominously, non-farm payrolls continue to shrink.


Equally important, banks appear determined to sit on the money that they have received (most of which came from government subsidies and bailout programs).  As Robert Pollin notes:

In the US, the private banks, as of the most recent data, are sitting on $1 trillion in reserves….By comparison, before the crisis started in 2007, they were holding $20 billion of reserves.  So that’s a reversal of $980 billion that could be injected into the spending stream.

Well, if consumer spending is not going to drive growth, what about investment by non-financial corporations.  Unfortunately, there is little good news on that front either.  As Bob Herbert describes:

The recession officially started in December 2007. From the fourth quarter of 2007 to the fourth quarter of 2009, real aggregate output in the U.S., as measured by the gross domestic product, fell by about 2.5 percent. But employers cut their payrolls by 6 percent…..

“They threw out far more workers and hours than they lost output,” said Professor Sum. “Here’s what happened: At the end of the fourth quarter in 2008, you see corporate profits begin to really take off, and they grow by the time you get to the first quarter of 2010 by $572 billion. And over that same time period, wage and salary payments go down by $122 billion.”…

In short, the corporations are making out like bandits. Now they’re sitting on mountains of cash and they still are not interested in hiring to any significant degree, or strengthening workers’ paychecks….

Having taken everything for themselves, the corporations are so awash in cash they don’t know what to do with it all. Citing a recent article from Bloomberg BusinessWeek, Professor Sum noted that in July cash at the nation’s nonfinancial corporations stood at $1.84 trillion, a 27 percent increase over early 2007. Moody’s has pointed out that as a percent of total company assets, cash has reached a level not seen in the past half-century.

The remaining sources of potential demand are exports and government spending.  Given the state of the world economy, there is little reason to expect much from exports.  So, that leaves government spending.  And that brings us to the claims that we should reject a new federal stimulus.  Tragically, the reality is that once the existing stimulus runs its course (which will be early 2011) we face a situation in which there are no obvious spurs to growth.  Stagnation may be the best we can hope for.

If we want to avoid this outcome, we need a new round of government spending and one significantly larger than the previous one.  There is no secret about where the money should go—state and local governments so that they can maintain employment and vital social programs; public employment programs directed at energy efficient investments and modernization of our infrastructure; a meaningful national health care program and so on.

Such spending, while necessary to keep things from getting worse, cannot solve our economic problems.  Creating an economy that can promote meaningful employment, community security and stability, well-financed and accountable social programs, environmentally responsive production, and solidaristic relations with other countries requires something much bigger, and something that elites will resist even more than a new stimulus: economic restructuring.  If we are going to truly create an economy that works for the great majority of us we have little choice but to to stop relying on market forces and the pursuit of private profit to direct our economic activity.

Developing new trade relations, new public controls over finance and investment decisions, a new foreign policy, and new labor and social policies will not be easy.  However, similar struggles are taking place in other countries and we should do what we can to learn about and from them (something made much harder by current media policy).  Most importantly, we must find ways to use our immediate fight for more public spending to initiate the wider public debate required to put real economic change onto the public agenda.


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