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The Book of Jobs
THE ECONOMIC CRISIS JANUARY 2012
Forget monetary policy. Re-examining the cause of the Great Depressionthe revolution in agriculture that threw millions out of workthe author argues that the U.S. is now facing and must manage a similar shift in the real economy, from industry to service, or risk a tragic replay of 80 years ago.
(snip)
We knew the crisis was serious back in 2008. And we thought we knew who the bad guys werethe nations big banks, which through cynical lending and reckless gambling had brought the U.S. to the brink of ruin. The Bush and Obama administrations justified a bailout on the grounds that only if the banks were handed money without limitand without conditionscould the economy recover. We did this not because we loved the banks but because (we were told) we couldnt do without the lending that they made possible. Many, especially in the financial sector, argued that strong, resolute, and generous action to save not just the banks but the bankers, their shareholders, and their creditors would return the economy to where it had been before the crisis. In the meantime, a short-term stimulus, moderate in size, would suffice to tide the economy over until the banks could be restored to health.
The banks got their bailout. Some of the money went to bonuses. Little of it went to lending. And the economy didnt really recoveroutput is barely greater than it was before the crisis, and the job situation is bleak. The diagnosis of our condition and the prescription that followed from it were incorrect. First, it was wrong to think that the bankers would mend their waysthat they would start to lend, if only they were treated nicely enough. We were told, in effect: Dont put conditions on the banks to require them to restructure the mortgages or to behave more honestly in their foreclosures. Dont force them to use the money to lend. Such conditions will upset our delicate markets. In the end, bank managers looked out for themselves and did what they are accustomed to doing.
Even when we fully repair the banking system, well still be in deep troublebecause we were already in deep trouble. That seeming golden age of 2007 was far from a paradise. Yes, America had many things about which it could be proud. Companies in the information-technology field were at the leading edge of a revolution. But incomes for most working Americans still hadnt returned to their levels prior to the previous recession. The American standard of living was sustained only by rising debtdebt so large that the U.S. savings rate had dropped to near zero. And zero doesnt really tell the story. Because the rich have always been able to save a significant percentage of their income, putting them in the positive column, an average rate of close to zero means that everyone else must be in negative numbers. (Heres the reality: in the years leading up to the recession, according to research done by my Columbia University colleague Bruce Greenwald, the bottom 80 percent of the American population had been spending around 110 percent of its income.) What made this level of indebtedness possible was the housing bubble, which Alan Greenspan and then Ben Bernanke, chairmen of the Federal Reserve Board, helped to engineer through low interest rates and nonregulationnot even using the regulatory tools they had. As we now know, this enabled banks to lend and households to borrow on the basis of assets whose value was determined in part by mass delusion.
(snip)
Many have argued that the Depression was caused primarily by excessive tightening of the money supply on the part of the Federal Reserve Board. Ben Bernanke, a scholar of the Depression, has stated publicly that this was the lesson he took away, and the reason he opened the monetary spigots. He opened them very wide. Beginning in 2008, the balance sheet of the Fed doubled and then rose to three times its earlier level. Today it is $2.8 trillion. While the Fed, by doing this, may have succeeded in saving the banks, it didnt succeed in saving the economy.
Reality has not only discredited the Fed but also raised questions about one of the conventional interpretations of the origins of the Depression. The argument has been made that the Fed caused the Depression by tightening money, and if only the Fed back then had increased the money supplyin other words, had done what the Fed has done todaya full-blown Depression would likely have been averted. In economics, its difficult to test hypotheses with controlled experiments of the kind the hard sciences can conduct. But the inability of the monetary expansion to counteract this current recession should forever lay to rest the idea that monetary policy was the prime culprit in the 1930s. The problem today, as it was then, is something else. The problem today is the so-called real economy. Its a problem rooted in the kinds of jobs we have, the kind we need, and the kind were losing, and rooted as well in the kind of workers we want and the kind we dont know what to do with. The real economy has been in a state of wrenching transition for decades, and its dislocations have never been squarely faced. A crisis of the real economy lies behind the Long Slump, just as it lay behind the Great Depression.
(snip)
http://www.vanityfair.com/news/2012/01/stiglitz-depression-201201
This is a great analysis by Nobel Prize in Economic Sciences winner; Joseph Stiglitz in explaining the most fundamental cause and remedy for our economic crisis.
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The Book of Jobs (Original Post)
Uncle Joe
Oct 2015
OP
fasttense
(17,301 posts)1. Yes, capatalism is a big ship that turns very slowly
It's a ship that has many, many ups and downs. Every time something goes out of balance, capitalism has either a big crash or a little one. But crashes are in the nature of capatalism.
Sooooooo let's find and use an economic system that does NOT crash every time something new happens.
Uncle Joe
(58,364 posts)2. In that regard, Joseph Stiglitz's remedy and Bernie's plans match up.
What this transition meant, however, is that jobs and livelihoods on the farm were being destroyed. Because of accelerating productivity, output was increasing faster than demand, and prices fell sharply. It was this, more than anything else, that led to rapidly declining incomes. Farmers then (like workers now) borrowed heavily to sustain living standards and production. Because neither the farmers nor their bankers anticipated the steepness of the price declines, a credit crunch quickly ensued. Farmers simply couldnt pay back what they owed. The financial sector was swept into the vortex of declining farm incomes.
The cities werent sparedfar from it. As rural incomes fell, farmers had less and less money to buy goods produced in factories. Manufacturers had to lay off workers, which further diminished demand for agricultural produce, driving down prices even more. Before long, this vicious circle affected the entire national economy.
(snip)
Given the magnitude of the decline in farm income, its no wonder that the New Deal itself could not bring the country out of crisis. The programs were too small, and many were soon abandoned. By 1937, F.D.R., giving way to the deficit hawks, had cut back on stimulus effortsa disastrous error. Meanwhile, hard-pressed states and localities were being forced to let employees go, just as they are now. The banking crisis undoubtedly compounded all these problems, and extended and deepened the downturn. But any analysis of financial disruption has to begin with what started off the chain reaction.
The Agriculture Adjustment Act, F.D.R.s farm program, which was designed to raise prices by cutting back on production, may have eased the situation somewhat, at the margins. But it was not until government spending soared in preparation for global war that America started to emerge from the Depression. It is important to grasp this simple truth: it was government spendinga Keynesian stimulus, not any correction of monetary policy or any revival of the banking systemthat brought about recovery. The long-run prospects for the economy would, of course, have been even better if more of the money had been spent on investments in education, technology, and infrastructure rather than munitions, but even so, the strong public spending more than offset the weaknesses in private spending.
Government spending unintentionally solved the economys underlying problem: it completed a necessary structural transformation, moving America, and especially the South, decisively from agriculture to manufacturing. Americans tend to be allergic to terms like industrial policy, but thats what war spending wasa policy that permanently changed the nature of the economy. Massive job creation in the urban sectorin manufacturingsucceeded in moving people out of farming. The supply of food and the demand for it came into balance again: farm prices started to rise. The new migrants to the cities got training in urban life and factory skills, and after the war the G.I. Bill ensured that returning veterans would be equipped to thrive in a modern industrial society. Meanwhile, the vast pool of labor trapped on farms had all but disappeared. The process had been long and very painful, but the source of economic distress was gone.
e parallels between the story of the origin of the Great Depression and that of our Long Slump are strong. Back then we were moving from agriculture to manufacturing. Today we are moving from manufacturing to a service economy. The decline in manufacturing jobs has been dramaticfrom about a third of the workforce 60 years ago to less than a tenth of it today. The pace has quickened markedly during the past decade. There are two reasons for the decline. One is greater productivitythe same dynamic that revolutionized agriculture and forced a majority of American farmers to look for work elsewhere. The other is globalization, which has sent millions of jobs overseas, to low-wage countries or those that have been investing more in infrastructure or technology. (As Greenwald has pointed out, most of the job loss in the 1990s was related to productivity increases, not to globalization.) Whatever the specific cause, the inevitable result is precisely the same as it was 80 years ago: a decline in income and jobs. The millions of jobless former factory workers once employed in cities such as Youngstown and Birmingham and Gary and Detroit are the modern-day equivalent of the Depressions doomed farmers.
(snip)
What we need to do instead is embark on a massive investment programas we did, virtually by accident, 80 years agothat will increase our productivity for years to come, and will also increase employment now. This public investment, and the resultant restoration in G.D.P., increases the returns to private investment. Public investments could be directed at improving the quality of life and real productivityunlike the private-sector investments in financial innovations, which turned out to be more akin to financial weapons of mass destruction.
Can we actually bring ourselves to do this, in the absence of mobilization for global war? Maybe not. The good news (in a sense) is that the United States has under-invested in infrastructure, technology, and education for decades, so the return on additional investment is high, while the cost of capital is at an unprecedented low. If we borrow today to finance high-return investments, our debt-to-G.D.P. ratiothe usual measure of debt sustainabilitywill be markedly improved. If we simultaneously increased taxesfor instance, on the top 1 percent of all households, measured by incomeour debt sustainability would be improved even more.
http://www.vanityfair.com/news/2012/01/stiglitz-depression-201201
fasttense
(17,301 posts)3. Good analysis. And the government spending solution is obvious
But if we followed Stiglitz solution, it wouldn't be capatalism anymore. It would be more like......Socialism. Which is why RepubliCONS want austerity.