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The Progressive Economics Forum

Why the Great Recession Will Go On and On…

The cover of last week’s Economist magazine boasted the headline “Grow, dammit, grow!” above a picture of a bald man looking up at a tiny sprout of hair on his pate.

As the Great Recession continues to grind on with no end in sight – with growth remaining anemic and unemployment stubbornly high in North America and Europe – mainstream economic thinkers seem stumped about what to do about this state of affairs. In spite of low inflation, miniscule interest rates and government stimulus packages, the world economy refuses to get off the mat. Things are so dire that US Federal Reserve chairman Ben Bernanke is now floating the idea of pumping more money into the American economy by resuming purchases of government and private debt in order to lower interest rates, hoping this will give things a boost.

Meanwhile, in recent months, liberal economists like Princeton’s Paul Krugman and Columbia’s Joseph Stiglitz have been calling on governments to spend more stimulus funds to get the wheels moving again.

While Bernanke’s remedies and government stimulus will lower the threat of  unemployment and ease some pain, they won’t actually end this recession. In fact, the Great Recession will go on and on for one simple reason – its real cause is being overlooked. As is the real solution to bring it to a close.

The real cause of the Great Recession is the fact that workers, consumers and the middle class are simply too broke to buy the goods necessary to stimulate the global economy and get people back to work. They  no longer earn enough disposable income and are swimming in too much debt to accomplish this.

In a broader sense, the Great Recession is really the consequence of the long and excruciating death of Fordism, that century-old notion that you need to pay workers a decent wage in order to have a market for your goods. Or, to put it more bluntly, the Great Recession is the result of the brilliantly effective plan by the corporate elites and their minions in government to impoverish and disempower the working class over the past 30 years. A plan that has had the consequence of destroying the very market capitalists need.

It’s not news, of course, that economic crises are usually caused by an overproduction of goods and an underconsumption of those same goods by workers. Now we are just seeing this phenomenon on a global scale.

Indeed, the past 60 years could by bifurcated by two important periods of economic history. The first period spanned from the late ‘40s  to the late ‘70s when Fordism flourished: workers and the middle class saw an unprecedented growth in their standard of living and wages kept up with the cost of living. This was largely due to the strength of organized labour, progressive social programs, the dominance of American capital, and the fear of socialism. By the end of the ‘70s, your average CEO earned about 30 times what your worker made. Back then, workers could afford the goods that capitalists wanted to sell them.

Beginning in the 1980s, however, with the rise of Reagan, Thatcher, Mulroney and other neo-conservative politicians, and the move by the corporate sector to wage a brutal war against labour, the last 30 years has been a period marked by  the erosion of those post-war gains. Labour was effectively cowed and social programs weakened. One consequences was wage stagnation. In 1980, the median family income was $58,000. In 2006, that number had actually dropped to $57,700. (Both figures are expressed in 2005 dollars to remove the effects of inflation.)

To keep wages down and workers in fear for their jobs, free trade deals and globalization made it possible for capital to move manufacturing and service sector jobs to low-wage developing countries.

The result of these actions was a widening gap in wealth between rich and poor, with more of the wealth concentrated by the elites. The average CEO now earns 300 to 350 times what your average worker makes. In the late 1970s, the richest 1 percent of American families took in about 9 percent of the nation’s total income; by 2007, the top 1 percent took in 23.5 percent of total income. Naturally, this has meant less money in the pockets of workers, and therefore less money to spend on goods. In 1972, the middle 60 per cent of families accounted for about 57 per cent of all income earned in Canada. By 2006 that number had dropped to 53 per cent.

And  the wealth the rich were collecting? Where did it go? Most it ended up in the hands of the financial industry. By 2000, there was $36-trillion sloshing around the global financial system. By 2008, it was up to $50-trillion. And this money was put to work.

In fact, the only reason the Great Recession didn’t occur earlier was because capital decided to lend its money to the increasingly impoverished middle and working classes. After all, banks and brokerage houses could securitize this debt and increase their wealth. Suddenly cheap credit became readily available to anyone who wanted it. Which led to the emergence of things like subprime mortgages and the expansion of consumer debt.

As recently as 1990 we socked away 13 per cent of our disposable incomes—but the average debt carried by Canadian households has jumped 71 per cent since then to $90,700, growing six times faster than the average household income. Today we only save 3% of the money coming in the door. According to the consulting firm Deloitte & Touche, the average Canadian family now owes more than 1.3 times its disposable income. Overall, Canadian households owe a staggering $1.3-trillion in consumer debt.

This access to credit allowed the economy to boom during the ‘90s and early 2000s. But it was a false boom.

Today, things are much worse. Unable to take on any more debt, and with wages continuing to decline, workers simply don’t have the cash on hand to pay for all the goods corporations want to sell them. In effect, the economy is in a corner, trapped by its own contradictions.

Thus, unless workers earn bigger paycheques, and unless wealth gets more evenly distributed, the Great Recession will go on indefinitely. More stimulus dollars from governments and lowering interest rates won’t address this reality.

Comments

Comment from Paul Tulloch
Time: October 16, 2010, 11:22 pm

QE2 will make money cheaper- however companies are lush with cash and therefore I don;t see how cheap money helps private investment. As you state, consumers are over leveraged already, so cheaper money will not help. The only one cheaper money helps is govt spending.

Listening to Tim Geitner the other night he disclosed that indeed the solution is to get private investment back into action to open up the terrain for jobs that actually pay enough to get us back to say the fordist era compromise.

I will agree with you Bruce that stimulus of the recent memory variety will not be of much good, fending off the deaflationary monster for a few more quarters- similar to the first stimulus will be the result. Shovel ready half measures for stimulus will not get us there.

This due to the fundamental fact that with over 7 million high paying/ high value adding manufacturing jobs have disappeared in the US and proportionately a similar 600k+ gone in Canada, over the last 8 years has produced a situation whereby the very nature of consumer demand cannot be achieved with the types of precarious jobs that have replaced these high quality jobs.

However I do believe and so to does a growing chorus, that we need to have a comprehensive industrial strategy similar in size to the New Deal era, with targeted industrial investment to bring along the types of changed need to restore the fordist compromise.

Training, education, health care, technology, sectoral approaches, combined with a core focus on greening the economy, could bring about a new terrain where we can tackle the innovation challenges needed to engage the newly expanding global infomation and knowledge based economy. We are still a ways from such transitioning- I would point to some such as Shoshana Zuboff for guidance on why we have failed to make such promising transitions.

I also would say to have a look at Krugman’s work on the international financial mechanisms to understand why we also need a huge reworking of the rules to the financial system to bring about an end to the casino like economy where productive investment is the dog faced boy who is put in the corner be laughed at. We need to have a resurrection in the locus of productive investment into the forefront.

We will never get there as long as we have investment banks and the financial establishment more interested in fiction than non-fiction.

THere was a fairly decent article in the new left review by Gowan that gets at some of this.

The bottomline is- you are right that we do need to get back to the fundamental issue of a worker must get an adequate pay packet to be the requisite consumer.

It is simple enought, but when Reagon launched his assault on the air traffic controllers- that was the beginning of the end of the new deal and the destruction of organized labour as the instrument of balance. SO again a restoration and strengthening of trade union rights both in the US and Canada would also be a requirement under some comprehensive change package.

I had thought Obama had some kind of labour bill coming, but have not heard much about that of late- probably waiting until after November as it is politically a bit sensitive. Makes one wonder how they ever passed some of the legislation and policy back in the 1930s that they did. I know Obama will have a hell of a time getting and serious labour bill passed.

Paul

Comment from Purple Library Guy
Time: October 17, 2010, 1:31 am

“In 1980, the median family income was $58,000. In 2006, that number had actually dropped to $57,700. (Both figures are expressed in 2005 dollars to remove the effects of inflation.)”

In my opinion, this actually seriously understates the problem. In the intervening time, the number of hours worked per year by a “household” rose markedly. Presumably the figure for individuals and per hour worked must have dropped rather more.
Also, there is strong evidence that for a number of years now, official inflation figures have been systematically understated. I’m not sure about Canada, but in the US I understand that if one can substitute a less-expensive alternative (e.g. hamburger for steak) and end up not paying more, the indicator is taken to show no inflation. If one based the income figures on alternative sources of inflation numbers such as “Shadow Government Statistics” (http://www.shadowstats.com/) I expect the shrinkage in income would look noticeably larger.
Finally there is the problem of “core” inflation. While I can see the arguments in general for not including certain things in inflation figures, if we’re looking at a particular time period and the purchasing power of real people during it, leaving out, for instance, the rising cost of shelter when thinking about whether ability to buy is compromised does not give us a true picture. I believe there has also been a considerable rise in the incidence of certain expenses such as user fees for government services, which I don’t believe is reflected in inflation numbers but has had a significant (and very regressive) impact on costs.

If all this were factored in, I think the picture of eroding purchasing power for the typical consumer would be much more dramatic.

Comment from Purple Library Guy
Time: October 17, 2010, 2:08 pm

I would agree with Mr. Tulloch on the need for an industrial strategy. But I suspect it may need in some ways to go beyond the New Deal era North American approach. Let’s face it, Canada has been largely deindustrialized, and was arguably never as fully industrialized as the US to begin with.
We might need the kind of approach taken by such places as South Korea and so forth–specifically, not just an industrial strategy, but an industrial strategy aided by import substitution policies. The Asian countries that industrialized successfully did so with the aid of both the public sector “picking winners” the way we’re not supposed to, and a considerable dose of protectionism in the sectors they wanted to win. We may need to consider that approach. It’s lucky for us that the United States has also dumped their industry–we don’t really need to worry about NAFTA so much because the US isn’t the competition we’d need to protect against.

Comment from thwap
Time: October 17, 2010, 4:35 pm

My problem with your essay is that it makes it seem like the capitalists just decided to start trashing the post-war compromise because they’re greedy assholes.

Seems that the crisis of Fordism was about how more modern European and Japanese manufacturing was taking market-share away from the giants of US manufacturing, and global competition in many other different areas, combined with this, was eroding profits.

Government attempts to please elites and ordinary voters eventually produced inflationary pressures which eroded the saved wealth of the top 1%.

In my view, we don’t just need new economic policies, but a transformative revolution in power relations between the classes, to get off this tread-mill of boom and bust.

Comment from Tommy Thompson
Time: October 17, 2010, 4:54 pm

Countries that want jobs have zero taxes on returns to investment; dividends, interest, and capital gains.

Additionally the US has the highest or second highest taxes on business. Really silly because those taxes are passed through to the consumer, but make our companies non-competitive in the world.

Add in the anti-business ethic of the Progressives implemented through EPA and OSHA and you have a formula for job destruction in the US.

The business of America used to be business; not today; it is Welfare and the Eco-Nazis. We started down this path with FDR and then LBJ in the sixties.

Unions represent only 7% of the private workforce for a reason; they can’t change with technology.

Half of GDP now is intellectual property; yet out schools continue dumbing down the kids with environmental farce propaganda.

Comment from Travis Fast
Time: October 17, 2010, 6:53 pm

“My problem with your essay is that it makes it seem like the capitalists just decided to start trashing the post-war compromise because they’re greedy assholes.”

Capitalism has been known to induce greedy asshole like behaviour. Call it the profit motive under the constraint of competition and you might find that you do not have problem with article.

Comment from Purple Library Guy
Time: October 17, 2010, 8:29 pm

To some extent it’s my firm opinion they actually did decide to start trashing the post-war compromise because they’re greedy assholes. I mean, look at the top financial guys today: They’re greedy assholes. It wouldn’t surprise me so much if the top guys thirty years ago also were.
But also, even the uncompetitiveness of US manufacturing began partly because the bosses were being greedy assholes. The US steel sector’s decline was an early example of what people have started calling financialization, or something. Anyway, the point is that profits in the steel industry were predictable but low–steel is a commodity. The big steel bosses decided they could make more money in flashier sectors. So, they started to relentlessly pull short-term profits out of their factories by stopping capital investment and skimping on maintenance, running their factories into the ground. After a while, also by creaming the workers. With the short term profits, they invested in sexier sectors. The big US steel companies basically became conglomerates. But their steel business languished because their underinvested, poorly maintained plants lost productivity relative to overseas competitors who were in the steel business to be in the steel business and invested in making steel rather than in buying unrelated businesses. This was already happening back in the seventies.
I would argue that had American hard industries continued to focus on production rather than short term profits, loss of market share would have been far less significant.

Comment from Travis Fast
Time: October 18, 2010, 5:07 am

PLG,

You make a really good point. It is true for example that given the productivity differentials between manufacturing and (many, most?) services it is rather evident that manufacturing as a percent of employment, GDP or value added would decline in relation to the total economy. But there are plenty of examples of countries that nonetheless continually reinvested at relatively high rates, rationalized and invested in new product lines such that the rate of decline was half to a third of the North American and British manufacturing sectors and remained viable precisely because they had invested in leading means of production and thus remained internationally competitive. And in the case of both Germany and Japan and to some extent Sweden this was not done via an assault on workers share of output or value added.

It is clear that Anglo American manufacturers threw in the towel decided that M-M’ was much more seductive then the messy process of M-C…P…C”-M’. And even where they remained wedded to touching real things many have simply turned themselves in to warehousing, distribution and retailing concerns, M-C’-M’.

Comment from rcp
Time: October 18, 2010, 6:15 am

Does anyone know what the average family size was in 1980 and 2006? That might be of some help in interpreting the $58,000 and $57,700 income figures.

Comment from Darwin O’Connor
Time: October 18, 2010, 7:07 am

Very interesting article and discussion.

One argument about focusing on manufacturing is that it consumes more natural resources then service based industries.

Many people argue the economy needs to shrunk in order to preserve the environment. I think it doesn’t have to shrunk if we focus more on industries that have less impact, like services.

Manufacturing is a high wage industries, but I don’t think the skills are much greater then many low wage service jobs. The difference is the unionization of manufacturing. If labour instead focused on unionization of service jobs, people’s lives could be improved cause the environmental problems caused by manufacturing.

Comment from thwap
Time: October 18, 2010, 7:19 am

Well, to take steel for an example, … didn’t Stelco invest in a huge, state of the art steel plant at Nanticoke?

I agree that systemic capitalism produces assholeish behaviour. I wasn’t trying to excuse any of this behaviour.

What I’m trying to say is that profit maximization made financialization, liberalization, globalization rational. There was a declining rate of profit as Europe and Japan came to be able to compete with the USA again by the 1960s.

The increases in investment that you’re asking for can’t be achieved without the public sector doing most of the investing or a revolution in social relations between labour and capital.

I’m just saying that the political conditions for what you’re asking for are greater than you think.

Comment from Glen
Time: October 18, 2010, 9:19 am

Since we are talking about steel production, we should not overlook the fact that labour costs are negligible. China has been able to undercut western producers for many reasons, none of them are related to labour costs.

Comment from Paul Tulloch
Time: October 18, 2010, 9:19 am

I disagree very strongly with Darwin and I do think Jim S. and some of the researchers at McMaster labour studies could produce a bevy of evidence towards the evolution of skill under the “post-fordist” labour process. Workers are now integrated with a high value adding production system, and are responsible for a production process that is a whole lot more capital intensive than any service worker. I would also make the argument that the actual skill is pent up in the knowledge over the process, and what to do when the system fails- i.e. the shop floor direction with future of the knowledge worker is not about deskilling- it is about integrating the human and the machine into a system that makes use of both the workers and the machine skill. And that is where many systems that have degrees of automation and semi autonomous knowledge and processing within them.

The future is the worker and the machine, not just the machine. And that is a huge mistake macro economists make. There is no lights out factory and that is the industrial lesson we are still learning with the current production models.

So the difference between high wage industry is not some simplistic notion of unionization density rates.

Let the bosses run the factories- and you will see. Human computer interaction is the key to the future.

And it is from that micro approach that we must continue to build the high value adding economy- it is the lynch pin of a wealthy economy- and any economist that does not understand that should pack up and move to China, because they will be right at home with their theories of human capital.

Comment from rcp
Time: October 18, 2010, 10:00 am

If we can believe Statscan, after-tax median family income actually went up 13.2% over the period 1980-2006. See:

http://www.statcan.gc.ca/daily-quotidien/080505/dq080505a-eng.htm

Can anyone explain this?

Comment from Glen
Time: October 18, 2010, 10:02 am

That was nicely said Paul! Workers are certainly more than statistics and degrees.

Comment from Darwin O’Connor
Time: October 18, 2010, 10:06 am

Perhaps if unionization pushes wages up and reduces turn-over in the service sectors, you will see the same “evolution of skill” that has been seen in manufacturing.

Comment from Paul Tulloch
Time: October 18, 2010, 11:29 am

Darwin

I wish it were all that simple- however if you need to persist with such simplicity China has a room with a view for you.

Comment from Brian Dell
Time: October 18, 2010, 2:54 pm

“economic crises are usually caused by an overproduction of goods and an underconsumption of those same goods by workers”

It is rather unconventional to say the least to assert that policy should privilege consumption. The alternative explanation for the recent crisis is that OVERconsumption was to blame, a consumption level that was unsustainable because it used finance to bring consumption forward in time from the future. Politicians aided and abetted goosing demand by trying to shovel credit to the masses, which was a far easier out than increasing SUPPLY, given that increasing supply inevitably means corporate friendly policy that sells well with economic think tanks but doesn’t sell at all with North America’s populist electorate.

If you want to push a left wing agenda, try pushing land value taxation or unproductive wealth in general instead of going after productive entrepreneurs.

Comment from Paul tulloch
Time: October 18, 2010, 9:23 pm

Brian,

I must say that I truly do not understand the logic of your comment. We are all somehow supposed to be better off with under consumption? I have heard of right wing regressiveness but this truly is getting a bit absurd.

Potentially if the decrease in consumption was replaced by quality then maybe I could etch out a bit of logic.

Pt

Comment from Brian Dell
Time: October 18, 2010, 10:12 pm

The opportunity cost of increased consumption is increased investment

Comment from thwap
Time: October 19, 2010, 7:32 am

Brian,

Your position makes absolutely no sense. We have had high levels of debt-fueled consumption and this was made available via easy credit from the financial sector. The financial sector has been awash in cash but have not pursued the course of productive investment but, instead, derivatives and housing bubbles (see the easy credit mentioned earlier).

Have you been asleep for the past two years (at least)?

There is no shortage of investment finance. There’s a shortage of the desire by the holders of capital to benefit society with it.

Comment from Travis Fast
Time: October 19, 2010, 8:35 am

Overproduction = under-consumption = overproduction

In non credit economy you can only cure the above by increasing wages because cutting output will, CP, cut aggregate wages. In a credit based economy Brian is quite right, future consumption can be pulled into the present giving the illusion that there is not overproduction = under-consumption problem. This can go on until workers are over-leveraged and then you get a forced resolution via cuts / stagnation in consumption and therefore cuts / stagnation in output which means, in classical terms, that crisis of overproduction = under-consumption gives rise to a devalorisation crisis.

Welcome to Japan’s lost decade and a half.

Comment from Paul Tulloch
Time: October 19, 2010, 6:49 pm

I can understand Travis that it can be done- but why would one advocate for it as seemingly Brian has.

Comment from travis fast
Time: October 19, 2010, 7:34 pm

Paul,

I just extracted what I took to be the salient point from Brian. If you read what he wrote, it was completely contradictory. Supply side policies to juice up production in absence of real wage growth. How could that possibly solve the FP? It is indeed the problem: 30 years of juicing up the supply side with little to no concern for the demand side save for through credit provision and tax cuts. The US is the neoliberal model and look how that turned out. Brian is trying to maintain that government juiced up consumer credit which is utter nonsense. Consumers wanted more credit because of near stagnant *individual* wages. All Brian is doing is trying to throw up a smoke screen. So what? In doing so he inadvertently hit on the contradiction at the heart of neoliberalism.

Me, I can take from Peter without feeling compelled to give to Paul.

Comment from Paul Tulloch
Time: October 20, 2010, 6:30 am

right- I was getting side tracked on another issue, but the bottom line is- 30 years of neo-liberalism has meant stagnant wages and the need for alternative means to keep income at a pace that the population is not sliding backwards- and production is allowed to match consumption in a virtuous manner hence the unsustainable level of personal debt.

Kind of weird when you think about it in a different way- if the ends are such as they are- the neo-cons would have been much better off, leaving the unions alone and rather than going on a massive union busting worker wage busting, social security smashing 30 year class war. Think about the outcomes- we now have a world in upheaval- and regardless of how badly the left is organized and potentially lack any replacement infrastructure within most developed economies, the power structures and hence the economic control will be threatened by a chaotic series of events- well outside of the range than what say, the end of the 70′s had produced in terms of threats to the established order by the then substantively more powerful organized labour unions.

Neo-cons would have been better off handing out the pay raises and keeping the fordist compromise in tact. Given the chaos and the probabilities for more and unknown outcomes- in game theoretic terms- the strategic choice is definitely sub optimal.

However, I do think the Neo cons do love a good crisis and chaos- just look at wwII and the profits made.

I just finished Krugman’s The Return Depression Economics Book- it is a pretty good read.

Comment from Glen
Time: October 21, 2010, 1:31 pm

Here is good example of synthetic comparative advantage influencing trade…….

China’s government-owned steel industry has reached a new level of domination, accounting for 46 percent of global steel production. It is now entering a new phase of global expansion.

China intends to expand steel production throughout the world through a program called “Going Abroad,” putting further pressure on companies that operate in the free-market without government subsidies, according to the American Iron and Steel Institute and the Steel Manufacturers Association.

….
The Chinese government continues to provide its steel companies with financial subsidies, cash grants, land grants, conversions of debt to equity, debt forgiveness, preferential loans and tax incentives. In the area of materials subsidies, Chinese prices for coke in December 2008 were $241 per metric ton lower than export prices. “Production of one ton of steel requires approximately 0.6 tons of coke,” says the study. “This means that Chinese steel producers enjoyed a cost advantage of nearly $145 per metric ton over their international competitors.” This advantage flows not only to Chinese producers, but to Chinese manufacturers that use steel in their products — another “unfair advantage,” says Wiley Rein.

http://www.manufacturingnews.com/news/newss/steel109.html

Comment from Paul Pugh
Time: October 22, 2010, 1:17 pm

R. Brenner’s “Economics of Global Turbulence” is a well researched work on the origins of the long decline. Worth a read.

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