Notes for my comment at the URPE-AEA session: “Causes of the Great Recession and the Prospects for Recovery”
Notes for My Comment at the URPE-AEA Session: Causes of the Great Recession and the Prospects for Recovery
- Presiding: Fred Moseley
- David M. Kotz and Deepankar Basu: Stagnation and Institutional Structures
- Robert McKee [Michael Roberts]: Recessions, Depressions, and the Rate of Profit
- Mario Seccareccia and Marc Lavoie: Understanding the Great Recession: Keynesian and Post-Keynesian Insights
- Discussants: Robert J. Gordon, Brad DeLong, David Colander
The most constructive thing I can do here is to back up and lay out what the three live mainstream interpretations of what our current macroeconomic problems here in the North Atlantic are, and then to lay out how URPE critiques position themselves in and around the mainstream-interpretation space.
(I should note, in passing, that there are actually four mainstream interpretations. One of them, however, is, in my estimation, dead. That one is the position of John Taylor and others—the position that I summarize these days as “everyone needs to shut up and fall in line.” It has, I think, no intellectual weight. The claim is, essentially, that Say’s Law has been working since 2010. Thus our problems have not been and are not those of slack demand but of insufficient motivation. Our problems need to be solved by taxing the rich less so that they can work to acquire more riches. Our problems need to be solved by taxing the poor more so that they must work harder to escape dire poverty. That is a mainstream perspective. But I think it is intellectually dead. And, anyway, I am tired of dealing with it.)
There are, however, as I said, three mainstream perspectives that I regard as live: intellectually interesting, and at least suggesting possibly productive directions in which policy ought to move. Today I will identify those three positions with three people: (1) our—unfortunately absent—discussant here Bob Gordon; (2) my friend Tim Geithner, former U.S. Treasury Secretary; and (3) my long-time friend and patron Larry Summers. But in so doing I should issue a warning: I firmly expect that when I post this discussion on my weblog, all three will protest. All three will say: “that’s not fair”. They will hunt me with nunchucks and Bowie knives. They will say that in stripping down their thought to something that will fit in this discussion, I have not stripped it down to its essentials but rather stripped it down to much less than its essentials in a very unfair and misleading way—that I have presented a mere caricature, so much so as to be unrecognizable, unhelpful, and destructive, of what they actually think.
To parody Bob Gordon: Bob Gordon on our current economic malaise is the second coming of David Ricardo. In Gordon’s case, however, the scarce resource that we are running out of is not Ricardo’s arable land that can be productively farmed, but rather fertile fields for technological innovation and economic development. Technology is in Gordon’s thought, the deus. Whether it will actually emerge ex machina is not something we can control. It emerged first in the age of the Industrial Revolution in the coal-steam-iron-machinery (plus Eli Whitney’s cotton gin and the American cotton south) complex. It emerged, more powerfully, in the late-nineteenth century era of the Second Industrial Revolution. It stuck around for a century or so. Now it has gone away. This is the song that Bob Gordon has been singing for the past six years. This is the song that he will sing, albeit in absentia, in his discussion to follow.
Whether Gordon’s view that we are facing a kind of Ricardian exhaustion of innovation possibilities considered as an exploitable natural resource is true or not is up for grabs. I doubt it. But he can ably defend himself, and does. I am fairly confident it is not true of measured economic growth. Measured economic growth omits the overwhelming bulk of the value inherent in the invention of new types of goods and services. Measured economic growth is simply how much more cheaply and efficiently we can this year make the things that people were willing to pay for last year. There are extraordinary amounts of money to be gained by figuring out how to make more cheaply things that were made, priced, sold, and that people were willing to pay for last year. That is what we measure as economic growth, no matter whether it is true growth or just labor speed-up, increased relative surplus-value, or simply not goods but bad: confusing your customers or deceiving them or addicting them or giving them cardiac problems.
I do not see how the absence of startling major new inventions and innovations bears on that process. Gordon’s arguments are about the prevalence and salience of major new macro inventions. But our numbers are about an ongoing process of micro-efficiency-innovation that is, I think, largely orthogonal to the big issues Gordon worries about.
The techno-utopians are wandering around today arguing against Gordon. They say that it may or may not be true that major new macro inventions in making new types of goods may now be scarce. However, they say that societal and human economic well-being is not produced by the piling-up of stuff in some contest of “who dies with the most toys wins”. Rather, they say, societal and human economic well-being are produced by combining the material products of our civilization with information and communication in order to accomplish our valid purposes. And, they say, leaps ahead at distributing information and amplifying communication in our age are astounding. They allow us to do what we really want to do usefully much more cheaply and at much greater scale. They are thus plausibly at least as important for the true production of societal and human economic well-being as were the leaps ahead at producing stuff of past generations.
They have a powerful case, as does Gordon. I think Gordon’s task, however, is somewhat harder to make than is the techno-utopian.
To parody Tim Geithner: He is essentially the second coming of Alfred and Mary Marshall, who in their Economics of Industry back in 1895… or was it 1885… Michael Perelman, you would know… 1885… said that the real problem in the business cycle, in the failure of Say’s Law, was the disappearance of business confidence. If only, they wrote, confidence would reappear, and would fly around, and would touch businessmen with her magic wand, then all would be well again. I count this as the first mention of the “confidence fairy”. The word “fairy”, it is true, is not used. But female, flying, magic wand—come on! I thus reject both Paul Krugman’s and Joe Stiglitz’s claims to have invented the concept, and assign it to Alfred and Mary Marshall.
Tim Geithner is the second coming of Alfred and Mary Marshall: His view is that that the capitalist economy runs at full employment with rising wages and general prosperity only when corporate executives are confident enough to invest on a large scale—and not in financial engineering or labor outsourcing but in productive capital the installation of which raises the bargaining power of labor—and only when financiers are confident enough that they are willing to unlock the keys to finance and fund the projects of corporate executives, either through raising new money on the capital markets or postponing their demands for dividends and stock buybacks. Thus, in Geithner’s view, the bankers and the corporate executives have us all by the plums. All we can do is try to make them as happy and confident as possible. If we do not, then we face what earlier generations of URPE’s ancestors would have called a capital strike.
Hence: low interest rates, low taxes, regulatory forbearance with respect to finance, and a desperate desire not to send any bankers or executives to jail for representations on documents that were perhaps economical with the truth—that is, in the Geithner view of the situation, the most effective and indeed the only road to restoring general prosperity in the North Atlantic economy as it stands today. The waves of Obama administration policy that people in this room like least comes out of this view that I have associated with the name of Tim Geithner: confidence is essential, anything we can do to restore confidence is well-done, and anything that might do something to restore confidence on the part of the business and the finance structure is worth trying as the only practical-political way out of our current dilemmas.
To parody Larry Summers: Summers is the second coming of John Hobson. Hobson identified the problems of the pre-World War I western European economy as due to an excess of savings relative to opportunities for productive and profitable investment. This chronic excess savings created a world in which booms could only come during times of unrealistic bubbly overestimates of possibilities for profitable investment. These then led to crashes, malinvestment, and so forth. Most of the time, however, you had chronic semi- or full-depression.
Hobson saw only one practical solution that pre-WWI western European governments had adopted to deal with this savings glut: imperialism. Governments could soak up savings money and restore full employment by borrowing to build up their armaments. Governments could use those armaments to conquer, and then force those regions to serve as vents for surplus in the form of exports. Those governments that adopted such imperialist policies and focused on armaments, expansion, and exports to captive markets found themselves more prosperous. Those governments tended to survive. Governments that did not embrace imperialism found themselves with poorly-performing economies, and tended to fall. That was the world as Hobson saw it.
Thus, Hobson said—back before WWI—western Europe was facing a very dangerous situation. At some point these armaments might be used. And they were.
Summers is neither as radical nor as pessimistic as Hobson. He does not see socialist revolution as the only ultimate escape. He does not see global total war as an increasing likelihood along our current path. But he sees the same strong excess of savings over investment. In Summers’s view, the source of the excess savings driving secular stagnation has four origins:
- The rise in the price of consumption and wage goods relative to investment goods, so that the same savings rate in wage good terms can fund a larger and larger rate of increase of the real capital stock. Compare the amount of wage-good value diverted to create a Kodak or a GM then with the amount diverted to create a Google or an Amazon now. We have become yugely good at making the physical objects that embody the technologies of our Third Industrial Revolution.
- The rapid rise in income inequality—how can our plutocracy possibly spend in consumption what they currently earn? How many houses has Mitt Romney? Seven? How many houses did his father George Romney have? Two? Three? And John McCain? 11? They are doing their job in terms of trying not to have too-high a savings rate—they are trying to spend their money—but it is difficult.
- The desire on the part of emerging market governments to accumulate central bank and SWF reserves. They do not trust the organizations of international governance to be proper stewards for either their countries’ economic development or for their elites’ hold on power, position, and wealth.
- The increasing rich of the developing world, most of whom see their great-grandchildren as wanting and needing the option to live in LA, or NY, or London, or Monaco. They are eager to get as much money as possible into the North Atlantic.
All these produce an excess of savings over investment, an excess that is not terribly elastic with respect to the interest rate. So we need to find a vent. Summers sees the vent as not armaments or colonies but, rather, as the moral equivalent of war in the form of investments in infrastructure, biotechnology, and the energy-environment sector.
Now let me position the three papers here on the field created by these three live and the one dead mainstream position as the boundaries.
Mario Seccareccia and Marc Lavoie
David M. Kotz and Deepankar Basu, and also Robert McKee—or Michael Roberts, I have never before discussed a paper written by someone’s secret identity—provide us, I think with a left-wing radical inversion of the Geithner-Marshall perspective. The key is a Social Structure of Accumulation to provide business and finance with the confidence and the reality that investment will be sufficiently profitable on a large scale. They will thus be willing to commit to large-scale investment to make Say’s Law true in practice. The problem Kotz and Basu see is that that is no longer true—the old SSA, the old mechanisms and practices that produced a high demand for investment, are gone. And it cannot be quickly or substantially repaired in any time of less than decades.
This may be a true theory. But it is a politically-unproductive theory. We saw that back in the early 1930s, when Rudolf Hilferding at the head of the German SPD laid down the party line that until the time came for revolution—which was not yet—the most that a socialist party in power could do was try as hard as it could to be a good steward of the capitalist economy. That, he said, required doing whatever was needed to support business and restore confidence: to follow policies or orthodoxy and austerity.
The problem, of course, is that a socialist party in power by definition does not make businessmen and financiers confident.
People protested: people like Wladimir Woytinsky—ending as a staff economist at the 20th Century Fund, before then a staff economist at the U.S. Department of Agriculture, before that a leading economist in the SPD, before then foreign minister of independent Georgia (and lucky enough to be in Paris on a diplomatic mission when Stalin moved in), before that chairman of the post-February Revolution Petrograd Soviet (and lucky enough to get out of town quickly when Lenin moved in). The Nazis had a plan to restore prosperity, Woytinsky said. The Communists had a plan, Woytinsky said. The SPD needed to have a plan too—to offer a “New Deal”—lest voters desert it, and power over Germany’s destiny fall into the hands of Hitler or Stalin.
Woytinsky was right, and Hilferding wrong, in practice if not in theory. And the fact that the policies of FDR, Hjalmar Horace Greeley Schacht, and Takahashi Korekiyo did a remarkably large amount of good given how hobbled they were by their circumstances suggests that Hilferding was wrong in theory too: there are things you can do other than frantically try to restore confidence by making noises pleasing to businessmen. Alternatives are worth trying.
And, of course, the alternative I like is the Summers position: the Keynesian solution to the Hobsonian problem:
Do everything you can think of to soak up savings, ideally in the most societally-productive way possible. Borrow-and-spend by the government. Use taxes and transfers to move as much wealth as you can from people with high to people with low propensities to save. Have the government be willing to bear risk. Raise the target rate of inflation to push the safe real rate of interest negative to make it costly to be a rentier.
All four of the positions I have set out seem to me to have both mainstream-right and URPE-left versions (except possibly for the Taylor position). Geithnerism comes in both a right and a left version. Keynesianism—or Hobsonism—comes in both a right and a left version. I will have to think more about Gordonism, but I see different versions there as well—most notably in Dean Baker’s demands for work-sharing as a way to create a good society given the exhaustion of forces that had previously produced a society that was working too hard at over-full employment.
It is not clear to me what the right answer is. I find myself strongly allegiant to the Summers view. But how much of that is its superiority? And how much of it is simply my own intellectual training and social network position?
What is disappointing to me is the extent to which both the mainstream and URPE are in the same box. They see the same world. They develop very similar analytical perspectives. They evaluate and phrase them differently, true. But there is no magic key in URPE to the lock of the riddle of history that the mainstream has overlooked. And—if you include Hobsonians within the URPE ekumene—there is no magic key in the mainstream that URPE has overlooked.