Economics is the attempt to make a happy marriage of the uncertainty of good fortune to the certainty of greed.
THE global economy staggers about like a listless man tired of being locked in that amber condition between decent health and dire sickness. Debilitation pervades the global political economy. Apparently, someone forgot to tell the 2008-2009 Great Recession that it is the past. In some ways, it remains with us more than it has departed. Statistically, the world is no longer in recession. But, people can’t eat, wear, drive or reside in statistics. They eat, wear, drive or reside in whatever their wages can afford or what they can shape by the skill of their hands. For them, the recession has lived close by like a rowdy neighbor. The moment you think you have heard the last of him that you might enjoy a quiet night, he brews even greater commotion.
Statistics are brandished to tell people to ignore their reality. Statistics tell the people to smile and be thankful; things are on the increase. The misery they feel is a horrid self-delusion. Thus, they should not look to government for relief or reprieve. They should forget their shoddy wages and indebted lives in order to rejoice at the accretion of GDP.
It seems a non sequitur that the majority of the people would become their lesser economic selves as GDP becomes greater. We have been fed the tale that all we need consider to determine our economic well being is the GDP rate. While the relevance of GDP to true wellbeing may be mythic, it is not the Golden Fleece. We tend to err when we come to value the measurement more than the thing being measured. Focusing on GDP is like reading every other word of an important missive. This concentration is a half-truth, akin to taking a half-bite of an apple or receiving a half-kiss. It is rather unavailing and unappealing.
It brings into question the overall objective of economic policy. Is the intent to increase aggregate numbers or to improve the living conditions of as many people as possible? This difference is important because the two possible objectives are sometimes interrelated but they are not always synonymous. However, mainstream economics requests that we have faith that the two actually are the same. Because of this inaccurate bias predominating the economic news we receive, I periodically return to this discussion of economic bias in order to pierce the intellectual miasma in which convention wisdom seeks to cloak us. Imagine a street where ten extremely poor families reside. Then one family wins a coveted and enormous lottery. Before the per capita income of the neighborhood was a pittance. Because of the windfall that has graced the one family, the street’s per capita income – the neighborhood GDP – has increased so dramatically to where the entire place is considered the home of the affluent. Yet, something is amiss. The statistics are real but inaccurate. If the lottery winners hold the majority of the funds to themselves as they most certainly will, they have been enriched to the utmost. Without something else happening, the rest of the neighborhood remains immersed in poverty but are told to rejoice because their community has become rich. The neighborhood is rich yet the majority of its people remain bruised by the maw of penury. As with neighborhoods so it is with nations.
Most growth of global GDP has gone to affluent elites. And most of this marginal growth has gone to the even numerically smaller financial sector within the overall elite. The financial sector has won the lottery but the rest of the economy is no better off. The more the financial sector gains, the more it influences government so that economic policy will sustain and increase the rewards given the financial sector.
In economic reality, there is no such thing as the free market. The market is shaped and directed in a manner to profit those who paid for the shape and direction the economy will take. Those who do not invest in how the economy is structured, those who think the economy’s present architecture follows some inexorable principles akin to the laws of natural science, will believe the economy is destined to be as it is. Mistaking this subjective social construct as something immutable as if design by science and logic, they will see no need to invest in its redesign to better suit them. That which they refuse to invest upfront to safeguard their interests will be multiplied then charged against them when the dividends and taxes of reward and burden of our economic processes are allocated among all the players in the system.
We must remember that all fields of human endeavor are ultimately connected. In the abstract, we compartmentalize our activities into social, political and economic categories. In reality, there is no barrier between them that is not always and everywhere violated. The elite would rather you believe that some things are purely economic and therefore scientific. They would have you focus solely on the GDP, solely on aggregate wealth created within the system. For you to fixate on this point is to become “GDP blind” as one would become sunblind by gazing too long at our closest star. Such a condition would blind us to other important things we need to see so that we will not be rendered both blind and ignorant.
To help avoid this tragedy, I prefer the phrase “political economy” instead of trying to split things into artificial political and economic spheres. By acknowledging the interplay between political and economic forces we are led to ask questions that protect against GDP blindness. We come to ask:
1. How is the political economy arranged, by whom and for what purpose?
2. What is the allocation of power, wealth and influence within the system?
3. What goods and services are to be produced, why are these produced, and how are they allocated and why?
4. What are the marginal changes and causal links between the economy’s productive processes, the actual inventory of goods and services produced and allocation of power, wealth and influence among the various sectors of the political economy?
These questions initiate a more curious inquiry and seek a deeper understanding of the political economy than the one dimensional focus on GDP. The more we think in these terms, the more we bring ourselves to the point of realizing the political economy is shaped as is because of the subjective bias of those who have placed themselves in positions to make decisions that determine the fate of all.
We don’t have the space to overview the entire world but a glance at three important economies will indicate what is to unfolding. We have steadily returned to the type of debt-fueled, speculative world that existed immediately prior to the 2008-9 Recession. A few policy miscues in strategic nations and recession may be upon us with such swiftness that we shall feel as if we have been cursed by some deity instead of merely being led astray by unfortunate policy.
Experiencing modest growth, America has been fortunate among the developed economies. But even here, the vast majority — roughly 90 percent of the population — is no better off now than they were the day after the prior recession officially ended. Even with this, America has done better than its peers. This relative good fortune is more the product of good fortune than of good policy. In late 2011, President Obama handed conservative Republicans a stark austerity “Grand Bargain” paring social programs below the bone. He gave it to them on a silver platter.
Due to their neuralgia toward the gift bearer, they refused to accept his offering although he had gone so far as to offer them greater long-term budget cuts than they requested. Instead of accepting the conservative feast he presented, they trashed the offered smorgasbord then crammed the silver platter down his throat. Had they taken the deal, America would have started feeling economic contraction by mid-2012, giving a blow to the President’s reelection bid. President Obama could have lost the election that year but for Republican blind hatred. During these last two years in office, he still might renew this fiscal austerity offer for two reasons. He is a more midstream Republican than liberal Democrat regarding economic policy. Despite the mountain of empirical evidence against it, he believes austerity leads to growth. Second, he wants to accomplish something big to enhance his flagging chance at a memorable legacy. Thus, he may be more concerned with demonstrating he can hatch a bipartisan economic deal than he is concerned about the actual economic consequences of the deal. This time, the Republicans may accept the offer. Downturn looms at a time the world can least afford it.
A second reason America has logged growth is because of the monetary policy called quantitative easing (QE). The media incorrectly calls QE a stimulus program. This willful error is to entice the public to conflate this monetary action with expansionary fiscal policy. They prevaricate because they want the public to believe all “stimuli” are the same. This is a serious intellectual fraud. Basically, monetary policy focuses on the financial elite with the implicit hope that something will trickle down to the common folks. Monetary policy is almost always geared toward the affluent. Fiscal policy is different because its direct targets can be more diverse. The rich are still usually the major beneficiaries but the poor and working classes are sometimes directly benefitted. In short, both monetary and fiscal policy generally favor the rich but fiscal policy sometimes is used to help the common man.
QE is not a stimulus program as much as it is an asset swap for the affluent. A fiscal stimulus program would hire the unemployed to engage in public projects or would provide social welfare services for the needy. It would provide money in exchange for labor or because of a person’s impoverished condition. In contrast QE was a mechanism by which the American Federal Reserve purchased bonds and other financial paper from investors. As such, it merely substituted one form of financial asset for a more liquid one, that of money.
To some extent, this allowed some people to remove assets of questionable value from their balance sheets without suffering the loss they would have incurred if forced to the sell the paper at true market value. In effect, this amounted to a government prepayment of investors, giving them money for the securities they were willing to release from their financial portfolios. It enabled the investor class to take new funds and reinvest them in another round of financial speculation. Consequently, QE helped bid up stock market prices and also devalued the dollar. This damaged the export industries of developing nations; at the same time, it brought another wave of speculative investment to many developing nations. However, with the ending of QE and the slowdown of the global economy, that money is leaving the developing world and heading home as it always does at the sign of hard times. This flight will damage the financial stability of those nations that were careless enough to quickly welcome the fast money, once again forgetting that speculative money is always of the “easy come, more easily gone” variety. The net effect of QE was to artificially enhance financial asset prices. It raised the ceiling on financial assets without doing much to repair the floor of the productive sector of the economy. The investor class benefitted handsomely, the working class not at all.
Japan introduced a program akin to QE on amphetamines. Going much farther the American edition, the Japanese version included the Central Bank’s purchase of even stock market equities. This has been a boon for the speculative investment class. As in America, it placed downward pressure on the Yen, making imports more costly. Yet, at the same time, the government imposed high consumption taxes on a population that was already too frugal and a nation with weak aggregate consumer demand. Thus, the Japanese government has almost literally torn the economy in two, purposely profiting the financial class while undermining the average person by unduly taxing their consumption. This will further lower aggregate demand, serving to deflate the real sector of the economy.
The Euro zone has been an experiment in austerity. The experiment has failed. The zone teeters again on the edge of recession. Even German’s economy is fragile. Its usual trading partners are so cash-strapped that they cannot purchase higher volumes of German exports. Meanwhile, some people possessed by a mortician’s wit have begun celebrating because Greece experience roughly 2 percent growth the past two quarters. They claim this shows austerity’s effectiveness. They are right but not in the way they intend.
Due to austerity policies, Greece slumped from recession into depression six years ago. Its depression was the worst in modern times; Grecian output and employment fell more steeply than America’s during the Great Depression. The austerity program was intended to reduce the nation’s debt/GDP ratio which stood around 125 percent at the time austerity was first applied. Austerity worsened the ratio to over 175 percent by the beginning of this year. Austerity –cutting the budget – increased government debt! This misstep was taken because decision makers exalted conservative theory over empirical evidence and rational practice. Self-strapped to conservative orthodoxy, they assumed government expenditures had a negative multiplier effect. Thus, any budgetary savings would result in an even greater increase in overall growth. This was worse than conservative myth; it was a lie injurious to those who had to live it. Empirical evidence showed that the multiplier regarding government expenditure was closer to 2.5. For every euro slashed from the budget, the overall economy shrank by 2.5 euros. Implicitly recognizing this, the international troika (IMF, EU and World Bank) allowed Greece to engage in some expansionary budget engineering through an ambitious highway reconstruction program at the beginning of the year. This fiscal expansion is the primary reason for the slight new growth Greece has experienced. Thus, after six years of depression, Greece has tasted a bit of growth only because it was given a small dose of fiscal expansion.
The global economy walks toward renewed recession because it has been engineered to do so. In too many nations, government policy has been to elevate financial asset prices and encourage speculation among the investor class. The valuations of their assets have hit the roof. For them, happy days abound. Meanwhile, governments choke fiscal policy, claiming discipline is in order. Why it is in order fiscally but not monetarily they dare not divulge. This discrimination has nothing to do with objective economic principle. It has everything to do subjective bias. They believe the best and easiest policy is to cosset the wealthy while allowing the rest to lunge at and fight over whatever crumbs may descend from the table of plenty. Unless this policy course is altered, aggregate global demand will remain suppressed. Most people will live as if in a recession but the global GDP will still be in the black due in part to the overvaluation of financial assets and other speculative activity. The elite and their hired experts will not only have their cake they will still be eating it as well. They will have also taken a good portion of slice intended more fairly intended for the rest of us.
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