Thursday, April 12, 2012

Twice Trapped

We are caught and having one hell of a time shaking free.  Why?  Is it because the thing holding us back is beyond our understanding or just too damn powerful to break from?  Let's give it some thought and see what turns up.

By now, the central economic malady is very plain.  There is a terribly insufficient demand in the private sector to produce a healthy rate of economic growth, or perhaps any persistent growth at all.  The arguments over what is needed to get us out of this mess have been blowing at full gale since the collapse of 2008. 

But anyone with an open mind realizes that the serious debate part of the economic storm has long passed.  The liberals, with Noble-Prize winner Paul Krugman in the lead, have the wind at their backs, and the conservatives have been blown away.  What we need, what the global economy needs, is to follow the same prescription which rescued a gone to rot, moribund capitalist system from being measured for a shroud during the Great Depression.

We need the public sector to step in massively and revive an impotent and wasting private sector, which otherwise will bury all but the Romneyrich in poverty and pain for generations to come. 

The present crisis has in no way been occasioned by government debt.  On the contrary, the crash was completely a function of towering private debt, brought on by largely unregulated piratical financial sector excesses, combined with the most wide-spread and ridiculously unsustainable real estate bubble in history.  Now, the vast majority of citizens here, and in other parts of the developed world, are significantly less flush than before the fall.  Millions are still drowning in underwater mortgages, while remaining shackled to other forms of consumer borrowing for household expenses as well as education.  In such circumstances, almost everyone tries to cut back, pay-off old bills, and save for the future.  But a society in which everyone wants to be a saver is one in which the economy essentially stops growing.  Hiring stops.  People lose jobs by the millions.  Opportunities for new investment dry-up.  And when the chances of maintaining, let alone improving income disappears, the difficulty of working off debt increases exponentially.  This is known to economists as the paradox of thrift.

In a healthy economy, individual saving can be a sound strategy for improving one's financial health.  But in a crash, wide-spread retrenchment produces much slower potential for growth on the upswing, a much delayed upswing, or even no upswing at all, meaning intractable stagnation possibly marinated in a double-dip decline.

This is where we are.  Even though most people don't have a lot of money, more people are trying to save it than almost ever before.  So, on balance there is a lot more of it than what is needed or desired for investment.  Hence, interest rates have remained at historically low levels for years, without regard to the growth of government debt, which results from declining tax revenues and climbing safety net expenses, exacerbated by the general economic pain. 

The Federal Reserve has virtually pulled out the stops and used all of its tools to restore growth, by pushing even harder to lower interest rates, but there is a limit against which the Fed is leaning, it is known as the zero bound.  Money simply can't get any cheaper than free.  And, after accounting for the albeit scant inflation we are experiencing,  short term interest has been essentially zero for some time.  But the private economy does not want the money, because it sees no sufficiently profitable opportunity for investment when no one is in the market to buy whatever new goods and services may be produced.   The only quick way out of such a sticky patch is for the government to use a lot of this free money to put millions of businesses and people back in business and working to repair and rebuild the innumerable areas of our common physical and social needs, so long neglected during the long dark night of mindless conservative economic confusion and corruption.  For now, we are stuck in this mire known to economists as a liquidity trap.  We have a lot more money piled up than the private sector is willing to use.  So we save and suffer, and save and suffer some more.

This is not only obvious, but is daily proven over and over again by examples throughout Europe, wherein the austerity regime has produced only greater pain and suffering, along with a second round of the catastrophic recession.  Here at home, even though we have thus far managed - because of the too small, yet literally life saving Obama stimulus - to avoid a double-dip, we are barely limping along, and easily could stumble again if the radical reactionary right has any political success in the near term.

Not a pretty picture.  But the second trap is even uglier.  It grew out of the great and noble successes of the progressive movements in the middle part of the last century, which were embodied in the general policies of the Democratic Party.  The backlash by white working class people against the civil rights victories of the 1960s led to their wholesale abandonment of every decent and sound social and economic principle, which had provided the basis for a middle class lifestyle and a progressively better economic outlook generation after generation.  So we are in the mess we have today. 

To be sure, the typical working class conservative is probably no longer as given to crass racism as once was the case, but that was the juice which produced their allegiance to the suicidal hatred of all things the government can do and must do in the interest of justice and social stability.  We remain trapped in grave error because too many have imbibed a discredited economic and political theory like a delicious poison and been overtaken by it.  They cannot be persuaded by mere facts.

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