On Friday, Demand Side looks back at the year that wasn't, in our annual review of stories that did not happen but were widely reported or assumed. Today we inaugurate another annual event. The look ahead, featuring the morose and hopeless rant.
First, lets start with some observations from a couple of Nobel economists, Joseph Stiglitz and Paul Krugman. First from AP, on December 15.
CNBC (AP) 12.15.09Next, from one of last Sunday's talk shows, Paul Krugman.
Nobel Prize-winning economist Joseph Stiglitz warned there's a "significant" chance the U.S. economy will contract in the second half of next year, and urged the government to prepare a second stimulus package to spur job creation.
"The likelihood of this slowdown is very, very high," Stiglitz told reporters in Singapore. "There is a significant chance that the number will be in the negative range."
Stiglitz, a professor at Columbia University, called on Washington to make more funds available to state governments who face a drop in tax revenue.
The U.S. economy, the world's largest, must grow at least 3 percent to create enough jobs for new entrants into the labor force, he said.
The unemployment rate fell to 10 percent in November from 10.2 percent in October.
"If you don't prepare now, and the economy turns out to be as weak as I think it's likely to be, then you'll be in a very difficult position," he said.
The economy grew at a 2.8 percent rate in July through September, after a record four straight quarters of contraction.
[SUBSEQUENTLY REVISED DOWN TO 2.2 PERCENT]
KRUGMAN COMMENTING ON STIGLITZ
We are in a world of trouble, my friends.
Of the total population, perhaps 20 percent are aware of what is going on at any meaningful level. The rest of us are distracted by football, beer, personal vices, ignorance, depression and fear, youth, old age, family, health, or self-centered confusions and distractions of one kind or another.
Of this 20 percent, perhaps three-quarters have pre-cooked explanations based on religion, political slant, personal history, bad or no education, or childhood traumas.
Of the remaining five percent of the total, at least half have occupations or positions which would be adversely affected by a progressive resolution of the mess. And half of the remainder are marginalized for their political views or were not able to purchase the education that would have put them in their appropriate positions.
Of the remaining, say, one and one-quarter percent, most are too busy or too frazzled or too broken or too insecure to make a difference in local settings.
Sorry, it is up to the broken and the busy and the frazzled and the insecure to turn this thing around.
Then there is the problem of the unchanging blather from the Right.
We would have put up another dozen idiots of the week, but it is too discouraging.
When we began the podcast in the fall of 2007, we rushed to air from fear that we would be only one voice in a chorus calling down the Supply Side nonsense. Decades of stagnation in the middle class had been justified by the assurance that the way to stable growth was to make sure the rich could get richer and entrepreneurs could prosper by favorable tax treatment and cutting the legs out from under the public sector.
When the collapse came in housing, then in the financial sector, we were sure the entire gamut of policies favoring the corporate greed would be thrown out and a new, enlightened age of education, infrastructure, climate change action and the rest would flow naturally into the policy plan.
Nothing at all like that has happened. The Obama campaign seemed to be the course of reform and renovation, but it stalled as soon as it got into office, not all because of corruption. The so-called liberal wing of economics, aside from a very few like Stiglitz and James K. Galbraith, seem as stuck in schemes that did not work as the conservatives. In particular, we see faith in stimulus packages absent the willingness to eliminate the collapse of states and municipalities as a self-contradiction. Anything that fails to generate big new private investment will fail. And big, new private investment will never come back in the consumer goods sector for two reasons. One, the consumer will not be coming out from under his debt any time soon. Two, there is already plenty of capacity in consumer goods production facilities, not all of it in the U.S., so there is little need to invest in new capacity even if consumers could spend.
Nothing is so stupid as "We cannot afford ..." We have a quarter of the economy standing idle and we need to put it to work. We have the pecuniary needs of one profligate sector, the banking sector, standing in the way. This is worse than nonsense, it is diabolical. If we do not put it to work, we will not be able to provide for ourselves in the future. Like a farmer who cannot get grain because the bank needs it. Absent the planting and irrigating and harvesting, nobody is going to get nothing.
We've made enough to-do about the relative sizes of the federal debt and private household debt and private business. Those who are constrained, businesses and households, have by far the biggest debt, and somehow it is the federal debt that is going to drag us down.
So, at the end of the day, we have not done thing one about fixing what brought on the mess or mitigated the shock to any great degree on actual Americans. Instead we've run more chips up to the casino so the high rollers can continue to make their bets, and maybe they'll let us park their cars.
The heroes of the low-tax high-growth strategy used to be the Irish and before them the Japanese.
The fundamental opinion that the private sector produces wealth, while the public sector hangs on like a predatory parasite ought to have been reversed.
We have garages full of crap and houses too big for two people, but the economy is on the rocks. Everything that is working has a government support. Education, infrastructure, public security and safety, public health such as it is, are the muscle and bone upon which the veneer of private profit pretense attempts to take credit.
It is hard to see the private investment that is so robust, or at least more robust than the highways, bridges, water works, state and municipal organization, educational systems and structures and the intellectual capital inherent in them. To me it seems that the productive investment is entirely on the public side, while the private investment that is still paying off is extracting one hundred percent of its value and more in purchase price.
We have come to the conclusion that there will be no voluntary sharing of the burden of debt, that the banks and the owners of the securities, the creditors, will not agree to write down the debt or to take any of the burden on themselves, and expect the productive real economy to bear the entire burden. In the absence of an inflation that would float the real economy off these debt rocks, it is necessary to address the problem at its structural level.
As we come up to the New Year, we are going to celebrate with the following hard look at what needs to be done.
As you are aware, we at Demand Side do not believe the tepid growth -- originally announced at 3.5 percent, now down to 2.2 percent -- of the third quarter constitutes an end to the Great Recession. It is nothing more than the activity around huge government deficits, the automatic and discretionary stabilizers. There is no recovery in investment or in employment. The business cycle is broken.
The economy is sinking productive end first while the bankers who devised the course and failed at captaincy are still playing in the casino. Perhaps they realize, perhaps not, that the economy has hit an iceberg. It could well be that the intoxication of greed has let them think that the resumption of their own cash flows is evidence that the worst is over.
The growth evident in Q3 is composed entirely of federal deficit spending. Statistically, 300 percent of the growth is composed of federal borrowing.
We are not going to debate too long the question of whether the economy is in recovery. Suffice it to say that Demand Side is not as alone as it may have appeared. Notables such as the redoubtable Martin Feldstein and the dark-minded David Rosenberg are in our little lifeboat. Equally confirming is the absence of victory dances among those who made the call. And the fact that recovery has slipped from the lead into paragraph five of news copy.
The issue is the debt. We have to come to grips with the fact that there will be no voluntary sharing of the burden. Though two hands built the monument to greed, the authorities have so far assigned the duty to one to tend to its collapse. That has to change. Not only for reasons of justice and equity, but because it is not practical. It is not workable. The economy cannot recover unless its machinery is balanced. It remains to be seen how long profits can be supported by downsizing before this is realized.
Without another financial crisis, however, it seems unlikely the big banks will be vulnerable enough to wholesale destruction. The Commercial Real Estate crash is apparently concentrated in smaller banks, but the issues and the fundamentals and the optics could be confused enough to make it the entry point.
Continued Depression-level numbers in labor and housing markets cannot but inculcate more difficulties, if not crises.
And again, it is not simply a political calculation, me being from the Left and the banks being from the Right. It is an economic calculation. This is where the debt is stored. These are the financial landlords, supported by a few in government, who would make perpetual share-croppers of the rest of the economy. That means not only working the fields on their behalf, but being obliged to buy supplies and seed at their stores.
So. How will it work out? We cannot see from here. It will not be pretty. Let's hope it is fair and just and workable. And get ready.