Thursday, April 2, 2009

Inequality and Underconsumption

Here's a nice quote from Palagummi Sainaith's lecture "The Age of Inequality"

"For two decades now the United Nations Development Program, and other organs of the United Nations have been telling us that an additional expenditure of 60 to 80 billion dollars a year will help the human race sort out all the basic problems of hunger, health, sanitation, education, literacy, and issues like that... and it has never happened, because governments have told us "There's no money. There's just no money. We can't do it. Where's the money going to come from?" But when crisis struck The Suits in Wall Street, governments figured out that they could raise one and a half trillion dollars in seven days."
"Every great Depression, every economic catastrophe, every major economic collapse in history has been preceded by years of absolutely unsustainable levels of inequality."

Now the question of what causes Depressions is a complex and thorny one. Keynesians have several possible theories (Goodwin's profit-wage oscillation model, Minski's credit-interest rate oscillation cycle, etc.) The "real business cycle" model of Kynland and Prescott imagines fluctuations mostly resulting from after effects of technological changes. Older economists often blamed "external" influences like changes in legal frameworks, warfare, labor union activity, etc. Kalecki even argues for a political business cycle theory, that political interference in the business world has a cyclic effect. The Austrian school of economics still holds that all business cycle effects are results of government interference in money supply and interest rates, and Friedman certainly made that line popular among American and British economists too. Marx thought that periodic depressions were a natural part of capitalism, caused by the nature of capitalism itself, but if you ask him exactly why, he gets cagey and has 3 main theories each of which he explores a little but he never really decides which if any are the underlying cause of depressions, or if perhaps all three are: the underconsumption problem, the full employment profit squeeze, and the tendency of the rate of profit to fall. Now I'm a big fan of Strauss-Howe theory, which sees generational dynamics causing 80-100 year cycles in politics and culture. This in turn could easily be an underlying cause of the business cycle of periodic major depressions, ala real business cycles, or other externalist accounts. Or then again, the Strauss-Howe cycles could simply be correlative rather than causative. Or perhaps changes in generational attitude lead to changes in governmental attitudes towards interest rates, money supply and interventionism, which leads to the depressions via the Austrian picture. Even if Strauss and Howe are right, it doesn't really answer this particular question. And of course, I strongly oppose single etiology theories so probably different depressions are caused in different ways and most depressions have many different causal factors.

But today I want to explore the "underconsumption" hypothesis a little more. Marx toys with it, but he is neither the first nor the last to do so, Malthus had already discussed the issue back in 1820, and Foster and Catchings had fairly non-Marxian interpretations of it in the 1920s pre-saging some of Keynes' ideas. The basic "underconsumption" argument goes like this. Suppose that the capitalists are successful in pushing the wages of labor down and the productivity of labor up. This will increase the rate of surplus value and lead to wealthier capitalists. However, eventually the workers dependent on wages will not be able to afford to buy as much, and the aggregate demand (demand in the sense of what can actually be afforded) will go down, leading to a recession or depression. If the upper class are capitalists, and are too successful at impoverishing the rest, then everyone else won't be able to afford to buy the things the capitalist's companies produce, and slowdowns will occur. Too much economic inequality is itself bad for a capitalist economy.

Now this line of thought gets a lot of criticism. Keynes, famously points out that consumer demand is not the only factor in aggregate demand and that it is possible that even though consumer demand is declining, you can prevent a recession by increasing some other part of aggregate demand enough to counter balance it (the 3 main other parts being fixed investment, government spending, and exports net of imports). That's part of the whole rationale for government "stimulus" spending when a recession is looming. But, there are 2 problems with applying this reply to today's situation. First, unless you can permanently increase government spending (as FDR did), or fixed investment, or the export-import balance, that is a temporary solution, you STILL need to get consumer spending back up, and that often requires increasing real wages, and actually clawing some of the wealth back from the wealthiest to the put it in the hands of the consumers. Consider the advice of Simon Johnson, who worked for years at the IMF, and wrote "The Quiet Coup" in the May 2009 issue of the Atlantic. He argues that emerging economies get into trouble because they borrow too much, and then there are deep allainces between the elites of the political class, and elites of the economic class. As things get bad, you get "public-private partnerships" become "crony capitalism" and things get worse until the only way out is to "squeeze the Oligarchs."

The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.

So even for a Keynesian, stimulus can't lead to real recovery from a severe recession or a depression, unless you can find the political will to squeeze the oligarchs enough to reverse the economic inequality that led to the collapse in consumer demand in the first place. But, second notice that to even soften the blow of the recession/depression, for a Keynesian, you have to have increases in trade balance, government spending or fixed investment that are enough to counter-balance the decrease in consumer spending. But right now, fixed investment sure isn't increasing much, and the US isn't repairing its trade balance issues much (nor are most other places in the world) and government spending increases are real, but nothing on the order of magnitude of the decreases in consumer wealth or consumer spending. Keynesianism isn't getting us out of the underconsumption problem this time, if indeed it ever really works.

What about Marxian critiques of underconsumption? Marx has 2 main objections. First, the underconsumption problem is often put in ways that make it a pure redundancy, an analytic truth rather than an empirical fact about economies. If we say the economy is declining because people are buying less; the danger is we may have said the same thing twice in 2 different ways, rather than saying one thing which explained another thing. Fair enough, so we need to phrase things in ways that make the inequality issue clearer. The economy is going down, because non-ultra-wealthy people are so much poorer than ultra-wealthy people that they no longer feel they can afford to buy as much, and are cutting back. If we respond to this situation by replying "well then get banks lending again so that non-ultra-wealthy people will trick themselves into feeling wealthy than they really are and buy things they can't really afford some more" we are either evil bastards, or have missed the point of the underconsumption problem. Even if we could get the banks lending again, it would only delay the issue a little. What the underconsumption problem really hypothesizes is that excessive economic inequality is decreasing aggregate demand.

Marx's second criticism is also interesting
When people attempt to give this redundancy an appearance of some deeper meaning by saying that the working class does not receive enough of its own product and that the evil would be dispelled immediately if it received a greater share,i.e., if its wages were increased, all one can say is that crises are invariably preceded by periods in which wages in general rise and the working class receives a relatively greater share of the annual product intended for consumption. From the standpoint of these valiant upholders of 'plain common sense,' such periods should prevent the coming of crises. It would appear, therefore, that capitalist production includes conditions which are independent of good will or bad will. . . " [in Das Kapital vol II, quoted by Franz Mehring in his biography of Karl Marx, p. 404 of the 1935 Covici, Friede edition, tr. Edward Fitzgerald]

Now I don't know if Marx is right "that crises are invariably preceded by periods in which wages in general rise and the working class receives a relatively greater share of the annual product intended for consumption" at the time when he wrote Das Kapital in 1893 (although I doubt it). But that sure isn't true of 20th century financial crises, and it sure isn't true of THIS ONE. Quite to the contrary, real wages have been stagnating, and inequality has been increasing, for decades. And the effect is much clearer when we look at the global picture of inequality, even though it also hold for looking at the recent history of 1st world workers and capitalists. Marx is just wrong.

Another insight that the underconsumption hypothesis can give us on depressions/recessions, is that over-production is the flip side of the underconsumption problem. In a sense, the current global problem is that Germany, China, and Japan all want to keep producing the things they are producing, even though the market signals are telling them to switch to different products. An easier way to see this is to look at Iceland's story. There was a really insightful article on what happened to Iceland in surprising mainstream women's magazine last month, and I can't remember the reference. But the journalist kept digging and eventually suggested that the root of the problem lay in the success of the reforms of Icelands fishing market in the 70s. For centuries Iceland had focused on fishing, and fishing has long been a very non-lucrative field. Then in the 70's Iceland tried a novel new way of regulating fishing, that was well designed to increase profits. And it worked, Iceland became fairly wealthy. And they invested the wealth largely in education. People sent their kids to school, and there was an explosion of highly educated Icelanders. And these Icelanders by and large didn't want to go into fishing, and their parent's agreed don't become a fisherman if you can go on to bigger and better things. But there were all these highly educated Icelanders without many bigger and better things to do or produce. Some turned to the arts, and we got Bjork. But eventually they discovered that high finance was another good way for educated people to spend their time. Iceland had all this excess productive capacity, and it didn't really want to go into more fishing, so it wound up producing complex and ultimately risky and poorly understood financial products. But in a sense, China and Germany have the same problem. All this excess productive capacity looking for something to do that will be worth doing. What is China going to say? Sorry we have enough factories to fulfill world demand go back to your villages and farm some more? It could. But there'd be grumbling, and it doesn't really want to. The American consumer doesn't really want to cut back consumption, even though they know they are over-extended and probably ought to, but equally the German or Chinese producer doesn't really want to cut back production (and thus switch to a crappier job) even though they also know that they ought to. One function of economic crisis is to force changes in consumption and production, despite our resistance to them. But this is true both directions.

I'm not saying that unsustainable levels of economic inequality are a key factor in all recessions and depressions (although Sainaith does), or that unsustainable levels of inequality are the only important factor in this one (it's not). But I do think that along with many other unsustainable practices, our economy has led to unsustainable levels of economic inequality, and these have led to decreases in aggregate demand that Keynesian strategies have not been able to compensate for. I doubt we'll ever get back to a real growth economy, but I also hold that we will not be able to stabilize or move forward until inequality drops to managable levels via a process of "squeezing the oligarchs." If this can be done via the current political system, so be it, if the current crop of politicians cannot find the courage to squeeze the oligarchs (who many of them also depend on and are friends with) in ways that genuinely lead to decreases in economic inequality, then eventually anger will boil over into extra-legal forms of squeezing the oligarchs and things will get even uglier. And economic inequality has 2 faces, the oligarchs are a lot richer than you and I, but you and I are a lot richer than most 3rd worlders. Part of the solution is going to have to be toppling financial racketeers who pretend to be titans (see Max Keiser's brilliant article "Let Them Have Stained carpets, Obama's Marie Antoinette Moment"), but part of the solution is also going to have to be regular 1st worlders living a lot more like 3rd worlders than we do now. And if the 3rd worlders cannot squeeze the 1st worlders any other way, then they will squeeze us with their dying bodies. You can only shoot so many starving desperate people before you start to question the virtue of your own leaders, and the justice of your own priveleges. I don't forsee a world of equality emerging, but given my poor understanding of economics, it looks to me as if there will have to emerge more equality than there is today, like it or not, and that for most of my readers that will feel like being squeezed down.

1 comment:

  1. Hey Brian,

    You managed to put into words some of my thoughts on the matter. I liked this gem:

    "But there were all these highly educated Icelanders without many bigger and better things to do or produce."

    That really goes to the heart of the matter.

    I personally think that government should fully fund all levels of education, from pre-K to PhD. If someone, wants to go all the way to PhD., I don't think money should even be an issue. Then, when all of the fields get enough people, society can focus on moving forward. They just seem to be making money off of the fact that there aren't enough people in a particular field. That is, they're use technology and education as a barrier to entry and if a market is not easily entered, then there's less competition. If there's less competition for a market, then someone who is in that market can charge more for their products or services. For example, a massive amount of investment is required before someone can get into the oil refinery business. On the flip side, it doesn't take much investment at all to start a 7-11 convenience store... just rent out the space, get some shelves and dig some holes in the ground for your gasoline tanke and VOILA, you have just purchased a job. LOL

    It's like John D. Rockefeller said. "Take something common and make in uncommon." Such is the heart of capitalism. This is why capitalists don't like the idea of a national health care system. This is why they don't like Wikipedia and call it "unacademic" (even though there are hyperlinked references in most Wikipedia articles). It makes common that which they have made uncommon. It unties their knot, and they don't like that. I can understand why the government should not get into the lingerie business, for instance, but if human necessities such as health care and food, become too expensive, then yes, it's government's job to regulate such industries.

    Maybe what is needed for humanity is a totally different approach. Maybe we need a society that is not based on money. Maybe we need something the Venus Project.

    Sounds incredible? True. But go check it out and then come back and tell me what you think. One thing for certain is throwing more money at the problem (stimulus packages and "getting the credit markets moving again) is NOT going to do it. Civilization may very well have to be reduced to a pile of rubble before they finally sit down and brainstorm about possible alternatives and hybrid systems.

    I have added this blog to the "Suggested Blogs" list on my blog. You don't have to return the favor as I've just started my blog and all I'm looking to do is fill my list up with progressive bloggers.

    See ya tomorrow!