Say’s Law

/ / , , , , , , /

Republican Rot?

This is going to sound parochial to those of you not steeped in America’s current internal conversation.

Poor David Brooks, his column in today’s New York Times is entitled “The G.O.P. Is Rotting”. He is correct. His column is a long lament about his sense of loss. The problem is that the thing[s] he thinks he has lost were largely imaginary. The Republican Party he so longs for was never the party he describes. And the populism he subsequently spits at is not the outright evil he proposes it is.

No: Brook’s problem is that his beloved conservative cause was too easily co-opted by the crassness, corruption, misogyny, and outright narcissism of Trump. All the supposed excellence he lists in his article was no defense against the marauding plebeian horde currently trampling those conservative values into the dust.

Perhaps Brooks ought to ask why it was that the uneducated masses so easily stormed the conservative heights.

Let me help explain:

Brooks anchors his lament firmly on post-Reagan ground. He thus conveniently ignores the venality and overt racism of the Nixon Southern strategy which was designed to shake Southern voters who opposed the civil rights movement of the 1960’s free from their lifelong adherence to the old Democratic party and scoop them safely into the Republican embrace. This is hardly excellence. Nor does Brooks note that Reagan launched his campaign for the presidency in true Nixonian fashion by heading to the same Southern states that Nixon had pandered to. Racism sits squarely at the heart of the modern GOP. It is inescapable. It is rotten populism writ large, but apparently not part of Brook’s preferred trope. So it banished from his memory.

Here’s where he gets going:

“The Republican Party I grew up with admired excellence. It admired intellectual excellence (Milton Friedman, William F. Buckley), moral excellence (John Paul II, Natan Sharansky) and excellent leaders (James Baker, Jeane Kirkpatrick). Populism abandoned all that — and had to by its very nature. Excellence is hierarchical. Excellence requires work, time, experience and talent. Populism doesn’t believe in hierarchy. Populism doesn’t demand the effort required to understand the best that has been thought and said. Populism celebrates the quick slogan, the impulsive slash, the easy ignorant assertion. Populism is blind to mastery and embraces mediocrity.”

If he were to compose a defense of patriarchy or of elitist arrogance he could hardly have chosen better words. Damn the ignorant masses he is telling us, what do they know? They are shallow, lazy, stupid, selfish, and have too short an attention span to undertake the great works of office. The Republican Party he suggests was populated by wise elders who knew how to run things in the interests of the nation as whole and not simply in the interest of the plebes.

The trouble, I would gently suggest to Brooks, is that those self-same wise elders screwed things up royally. Well, they certainly screwed things up for the vast majority of folks many of whom are not ignorant, lazy, shallow and so on. Not at all: indeed many of those whom the wise elders have royally screwed are intelligent and motivated enough to call and end to the games played by the elders.

And that end is called populism.

Now I would never defend Trump’s populism, largely because I think he is a lying, conniving, and incompetent fool. He isn’t motivated to solve the problems of the masses. He is motivated by the acquisition of power and the accompanying grandiosity. He is besotted with himself and nothing, or no one, else. And he is a perfect representation of the modern, rotten, GOP. He has no belief beyond money. He has no worldview beyond what fits on a napkin after a good New York City steak dinner eaten in the company of his cadre of misogynist hangers-on. He has a tenuous grasp of the complexity of economic policy. He has no interest in, or empathy with, the people whose emotions he stirred up; and no interest in solving any major problems. His entire approach is one that assumes anything that predates his ascension to the throne needs to be broken by virtue of predating him. There is no philosophy of governance.

And that’s Brook’s issue.

The modern Republican Party has no philosophy of governance either. It is simply the tool of the plutocratic elite. It does the bidding of the few even when that bidding causes it to contradict its heritage. So the GOP attacks deficits when those deficits might have a social purpose and defends them when they are produced by tax cuts for the rich. It has no theory about the efficacy of deficits. All that matters is channeling the benefits of growth into the hands of its benefactors.

Then there’s this:

“Compare the tax cuts of the supply-side era with the tax cuts of today. There were three big cuts in the earlier era: the 1978 capital gains tax cut, the Kemp-Roth tax cut of 1981, and the 1986 tax reform. They were passed with bipartisan support, after a lengthy legislative process. All of them responded to the dominant problem of the moment, which was the stagflation and economic sclerosis. All rested on a body of serious intellectual work.

Liberals now associate supply-side economics with the Laffer Curve, but that was peripheral. Supply-side was based on Say’s Law, that supply creates its own demand. It was based on the idea that if you rearrange incentives for small entrepreneurs you are more likely to get start-ups and more innovation. Those cuts were embraced by Nobel Prize winners and represented an entire social vision, favoring the dispersed entrepreneurs over the concentrated corporate fat cats.”

There’s a couple of choice pieces in there. Stagflation I will concede. Sclerosis I will not. GDP grew about 3.2% in the Carter years and about 3.5% in the Reagan years. That small increase came at the cost of a massive sea of red ink — never before experienced without crisis as a cause — and the headlong rush into inequality and insecurity that characterizes the long arc of the post-Reagan era through to today. I would argue that the cost was too high. Brooks would too if he could get himself to understand that contemporary populism is rooted in that inequality and insecurity rather than being an expression of lowlife ignorance.

Then there’s the reference to the intellectual framework offered by Say’s Law: “Supply will create its own demand”. Really? So, after several massive tax cuts (Brooks mentions only three, he ignores GW Bush) each designed to shovel money into the maw of the capitalist class and thus, presumably to set in motion that great creation of demand, why is it that we suffer from a chronic and crippling lack of demand? Say’s Law is habitually trotted out by the ideologically committed right as cover for the distribution of wealth upwards. An excellent case can be made that it is thoroughly disproven by history and ought to be consigned to the rubbish heap. Keynes long ago said as much. But the right has not much else to offer. So it keeps repeating that same mistake over and over again.

Except, of course, it is not a mistake. It is the consequence of the rot within the modern GOP. The intellectual virtues that Brooks parades before us have been shown to be errors by history. The Republican project he so lauds is a failure. It needs replacing and modernizing. The current ramshackle legislation called “tax reform” is an example par excellence.

To paraphrase Brook’s hero Ronald Reagan: “There they go again”.

Yes, David, the GOP is rotten. But it was back in the era you imagine as its finest hour. This isn’t news.

/ / , , , , /

Stagnation

I will keep this short: I have been taken aback by all the talk about the apparent onset of something called secular stagnation. Today’s Financial Times gives us another dose of it in an article by Gavin Davies. The basic argument seems to be that since both population growth and worker productivity are declining somewhat in the biggest economies we ought expect those economies to grow more slowly than in the past. This shift downwards is a sharp break with what orthodox economists had assumed the norm to be: that economies would chug along nicely because productivity is driven by technology change, and because populations have been relatively stable.

The downscaling is said to fit with the empirical evidence, and in particular with the trends that seem to have set in since around 1980.

In other words, a sputtering economic performance over the past few decades is seen as proof that we now live in more constrained times, where limited growth puts a cap on our latitude in dealing with economic issues. People drawing this conclusion almost inevitably then jump into discussions of how this reduced latitude implies a more austere role for government, and – naturally – that everyday folks just will have to manage on less.

I have a slightly different perspective.

The onset of the downward shift coincides quite neatly with another great beginning. That of an era of economic policy focused on supply side initiatives, giveaways to the rich, and of corporate welfare. Is it simply a strange coincidence that the entire post-Reagan era is exactly that we are now describing as one of lower growth? Or is it that the right of center free market policies that have dominated policy making throughout the west since the early 1980’s, are to blame?

You can imagine what I think.

The US economy right now is awash with cash. The resources clearly exist to invest in new technologies were the demand there to justify that investment. Instead businesses prefer to let their cash hoards sit idle, or if they use them at all, they invest in buying back their own stock. Apparently they are unable to locate profitable business opportunities so they avoid risky investment or they give their cash to their shareholders believing, presumably, that those shareholders can use it elsewhere.

I see this as a demand constrained economy. Plain and simple. After decades of downsizing, offshoring, cost cutting, and other wheezes to limit wage growth in order to boost profits, corporate America has created an economy so bereft of realizable purchasing power that it can no longer identify enough potential customers. So it sits on its hands. To resort to cliche: it has killed the golden goose.

It is telling that orthodox economists are throwing up their hands when they try to explain what is going on. Within the domain of their own theory they have no explanation. Demand isn’t a consideration for them. They see everything through the eyes of market magic and supply side initiatives. They stay close within the bounds set by the old Say’s law. Even if they claim they don’t.

For the uninitiated Say’s law states, in brief, that production creates demand because the wages paid to workers in the creation of product will be sufficient to ensure there is a market for that product. Thus there can be no shortfall in demand. All that is needed in times of a slowdown is to boost production and all will come right.

This absurdity, which is purely ideological and has no empirical basis, is central to right wing thinking and lurks everywhere behind all secular stagnation arguments.

The ideological blinkers that prevent orthodox economists engaging with reality are, yet again, causing economics to advocate anti-social and profoundly anti-democratic policies. By denying that lack of demand can even be a consideration in policy construction, orthodox economists are driven to conclusions that, in turn, harm us all. They act befuddled because their theories have no ability to mirror actual circumstances, they then grasp at a line of reasoning that conforms with their misshapen view of the world and impose policies upon us that only serve to make matters worse.

That Keynes correctly identified what to do in our current circumstances has been long forgotten by the orthodox. Indeed they make fools of themselves by trying to mock his remedies. They are ignorant. Deeply and deliberately ignorant. They are not educated in economics. They are indoctrinated and ideologically pure. They are thus dangerous and ought to be ignored.

We may of may not be entering a radically different period in our economic history. One aspect of which might be that growth is harder to come by. It might also be that part of the slowdown is attributable to the lower productivity improving capacity of modern technology changes. But that is not the only explanation. We ought to consider the damage of free market economics since 1980. We ought to take into consideration the dramatic and deliberate depression of the return to work – i.e. wages – and the long term implications of rising income inequality. We ought then adjust the empirical record for those impacts. What would growth have been had unbalanced theorists like Milton Friedman and his acolytes been ignored? Only then can we assess whether the economy has taken a permanent turn for the worse.

Only after we reflate demand can we discuss grand theories of stagnation. If it then exists. Which it might well not.

We certainly ought not act on the basis of half baked notions of market magic. It never existed in the first place.

/ / , , , , , , , , /

Upbeat News – Maybe

This morning’s release of the Conference Board’s Index of Leading Indicators brings us more good news: last month was the fifth straight month that the index gained. Yes the August increase of 0.6% was weaker than either July (0.9%) or June (0.8%), but it keeps the upbeat rhythm going and helps to confirm the growing sentiment that the recession finally ended in the third quarter.

By now there is, of course, no surprise in this. For several weeks now it has been clear that the economy reached its nadir sometime this summer and is now slowly edging away from the abyss.

The Conference Board also publishes two other indices that are supposed to track the economy one coincidentally and one with a lag. Both those are showing the same trend. The Coincident Index has now stopped declining and is essentially flat, while the lagging index is still falling, but now at a much slower rate.

Things are evidently looking up.

Up to what?

Here the difficulty arises.

I have written before about the variety of interpretations concerning the direction and strength of the economy from here on out. Depending upon your degree of inherent optimism we are now rebounding nicely, or we are teetering on the brink of falling backwards. Neither position will be exactly correct and the most likely course for growth seems to be ‘patchily and slowly upward’.

The current phase of growth depends heavily on a combination of inventory adjustment – businesses re-stocking depleted shelves – and the administration’s stimulus plan. Take those two elements away and we are still mired in recession. In other words the economy has not yet entered a self-sustaining growth cycle where consumption is sufficient to drive job, incomes and hence spending growth.

The degree of optimism built into anyone’s forecast at the moment depends entirely upon their view as to what happens when the ‘training wheels’ of inventory adjustment and stimulus plan are taken away.

My own view is that once those effects fade, as they will towards the middle of next year, the risk of a second contraction – renewed recession – remains high.

I say this for two major reasons that are inter-linked:

  1. Unemployment hangs very heavily over us and will continue to exert a negative drag on spending.
  2. Related to this: the economy has accumulated enormous excess capacity, which has to be used up before we can return to a more normal cycle of expansion.

As long as that capacity overhang exists business can expand and meet growing sales without either investing in new factories and other forms of capital, or, and this is crucial, investing in an expanded labor force. So the outlook for job growth is spotty to say the least. In fact I think it likely that unemployment will continue to edge up throughout this year even though we are out of recession. Last week’s unemployment data – new claims for unemployment insurance – concerns me. That fact that we seem stuck and are still losing half a million jobs every week or so gives me great pause. There is no sign whatever of the private sector re-hiring. On the contrary belt tightening still seems to be the order of the day.

Setting aside the obvious attendant human misery that this unemployment trend is creating, we need to focus on the drag this places on the recovery. It appears as though businesses are still in a defensive mode. If this is the case throughout the next few months then there is no way that a recovery can become self sustaining: as each business seeks to preserve its own profit it acts to diminish the sum total of all profits – a cut cost for you is lost income for me. This is what caused us to sink so low, and it could be sufficient to sink us again.

In other words the private sector still is fearful enough that it could self destruct and derail the recovery next year some time.

Think of it this way: businesses have to make guesses about their future sales – let’s dignify this and call them ‘forecasts’ – they then make decisions about buying raw materials and hiring workers based upon those forecasts. So the economy of late 2010 depends heavily upon business expectations today. To a very large degree those expectations become self fulfilling: if the forecasts were for higher sales then the act of tooling up to meet those expectations creates much of the growth – the new jobs and raw material purchases generate incomes which, in turn, create the sales that the businesses were forecasting.

Economists have a fancy name for this: ‘Say’s Law’, which roughly translates into the supply side mantra that ‘production will create its own demand’. This idea lies at the heart of classical economics. The problem comes when expectations are for insufficient sales: then it seems that Say’s Law breaks down and, instead we enter a Keynesian world that he called ‘the paradox of thrift’ – cuts lead to more cuts and so on downwards. This is the exact opposite of what the classical textbook predicts.

So business expectations are vital to the recovery, and a key variable informing those expectations is the availability of disposable income which, in turn, depends highly upon job growth.

Advocates of a more robust recovery are clearly predicting a much stronger uptick in employment. I just don’t see anything to support that view – remember that the last two recoveries have also seen very weak job growth, and it was one of our major criticisms of the Bush era that it simply failed to generate enough jobs. Clearly the US economy has a different tenor than it did a few decades ago and those job growth surges so characteristic of earlier recoveries are no longer ‘normal’.

So, while there are many anecdotal signs of jobs ‘out there’, the aggregate story remains both dull and challenging.

We will get more information on Thursday when the weekly claims for unemployment insurance numbers are published. Most people are forecasting another drop, but the relevant question is whether that drop is large enough to undermine my more cautious outlook.

Stay tuned.