Misunderstanding the Great Recession

Yves here. This post is a bit heavy on the economese, but because it is short and focuses on the history of economic theories about the Great Depression and how they were recycled in the Great Recession, should actually help in becoming more buzzword compatible. But you’ll still notice the requirement of economists, even left-leaing ones, speak in code. For instance, “wage rigidities” translates as “workers will not accept less than starvation wages even when conditions are desperate.” And even though this post does not use the expression “structural reforms,” their purpose is to reduce those supposedly deleterious labor market rigidities, which include anything that resembles labor bargaining power.

Another high-level frame for reading this post is that that neoliberal economics at its core believes that every problem can be solved by price, which then leads you to simple-minded “get out of the way and let the market do its work” approaches. This post explains why it is not so simple. Or to quote that great philosopher Yogi Berra, “In theory, there is no difference between theory and practice. In practice, there is.”

By Mario Seccareccia and Marc Lavoie, both Professors in the Department of Economics at the University of Ottawa. Originally published at the Institute for New Economic Thinking website

Just as the Great Depression remained etched in the minds of both economists and policy makers for a very long time, undoubtedly so will the experience of the post-financial crisis Great Recession. In the case of the former, what most mainstream economists had inferred as principal lesson from the Great Depression was that wages and prices had just not fallen sufficiently to get real wages down to ensure a return to high employment and to generate sufficient positive wealth effects as A.C. Pigou had defended in 1943. Consequently, the culprit was wage and price rigidities and what was needed was a strong dose of deflation. But since the market mechanism was just too slow to get wages and prices to adjust downward, some form of New Deal fiscal policy was required to reduce unemployment.

While this argument still remains today, and, in a curious twist, actually came to be described as the textbook “Keynesian” explanation of involuntary unemployment (characterized by sticky wages resulting from workers’ money illusion), there was also another explanation that one finds discussed as early as in 1937 in Hick’s IS-LM analysis, which was subsequently developed by Patinkin in 1948. The problem was also one of downward price rigidity but, in this latter case, it was because of nominal interest rates being stuck at their lower-bound (or in a so-called liquidity trap). The culprit now became interest rate rigidity in preventing the self-adjustment of the product market. While pointing to the lower bound in his analysis at the time, Patinkin rescued the Pigouvian prescription against Fisherian and Kaleckian criticisms that the wealth effects must also have as counterpart debt effects that would negate the former. Patinkin built a more-focused argument in his defense of Pigou and the need for deflation in periods of recession. He did so by erecting a policy framework that rested on the dubious significance of a particular type of wealth effect, normally described as the real balance effect, which pointed to the existence of central bank base money (or so-called “outside” money). In this case, much as with the Pigou effect, the real value of these money balances would rise as prices fell and thus, as long as prices fell sufficiently, households would feel wealthier, thereby stimulating household spending and eventually pulling the economy out of the recessionary trap. Essential reliance on these wealth effects and/or real balance effects still form the core of the explanation nowadays in traditional macroeconomics textbooks of the all-important downward-sloping aggregate demand relationship in price level-real output space.

If we now jump forward some seven decades to the recent Great Recession the arguments have changed very little within the mainstream story. There are some, especially the neo-Hayekians, who would rely on a strong dose of deflation to “cleanse” the system of mal-investment; and there are those, especially some of the modern neo-Wicksellians, who argue that the problem is that, even with a deflation, you will not be able to get real rates of interest sufficiently into negative territory to induce investment, because of the very low negative Wicksellian natural rate of interest. If one cannot get prices to fall, and stubborn real interest rates will not decline sufficiently, then one solution that was offered, for example, by maestro Ben Bernanke starting in 2009, was quantitative easing (QE). In a way, this latter policy plays an analogous role in getting real base money to rise. In this case, however, it is not because of Patinkinesque reasoning about induced consumer spending from the measly real balances held by households. In the case of QE, it is predicated on the belief that billions of dollars of new “helicopter money” falling onto commercial banks’ balance sheets might induce banks to lend more, thereby stimulating private spending. This policy, which has done little to stimulate lending, is based on the mistaken belief that the banking sector is somehow reserve-constrained and is just waiting for some extra liquidity from the central bank to make out loans to unsatisfied hordes of creditworthy borrowers knocking on their doors.

Keynes in the 1930s and his post-Keynesian supporters never accepted these arguments. The private sector stabilizers defended by Pigou and Patinkin associated with falling prices are empirically of no importance in a world of endogenous money, as Michal Kalecki made very clear as early as 1944. But this does not mean that there are no private sector stabilizers that can work themselves out in times of recession. In contrast to the mainstream, we wish to argue that one such important private sector stabilizing influence is the behavior of real wages. For Post-Keynesians, the viscosity of wages has a stabilizing macroeconomic effect. Indeed, in a world of wage stickiness and falling prices that characterized the Great Depression, real wages of the employed labor force rose tremendously and pushed up somewhat consumption spending. Moreover, in contrast to the stories about rising real wealth resulting from deflation, what actually took place during the Great Depression was the massive destruction of wealth as prices fell and business enterprises collapsed under the burden of rising real debt, as emphasized by Irving Fisher and Hyman Minsky. On the other hand, we find that because unemployed households were not as heavily in debt as they are in today’s financialized world, they sought to maintain their consumption spending during the early years of the Great Depression by depleting their savings or building up their debt, as institutionalist economists such as James Duesenberry argued. This phenomenon of rising real wages together with a declining saving rate, were important private sector stabilizers which, in the absence of public sector stabilization policies, were important in building up demand during the early years of the Great Depression.

Neither of these two stabilizing patterns of behavior characterized the Great Recession. On the contrary, real wages either remained relatively flat as in the US, or actually fell significantly as for instance, in the UK. In addition, households already had been so heavily in debt and had reached historically-unprecedented levels before the crisis. As soon as output and employment fell, households quickly sought to deleverage in what was described by Richard Koo as a balance sheet recession. The lack of real wage growth and the immediate deleveraging were important destabilizing factors that had not been characteristic of the early 1930s. This would suggest, therefore, that there existed less private sector stabilizers during the recent Great Recession than at the beginning of the 1930s. We wish to argue that one important reason for the more mitigated recession was because, unlike the 1930s where activist macroeconomic policy was almost non-existent in the early years, this was not so this time around. In fact, both on the monetary and fiscal fronts, policy makers acted swiftly in both bringing real interest rates down into negative territory thereby softening the blow on debtor households, and pursuing what we have described as an activist “fiscalist” policy position immediately after the financial crisis. While this was sufficient to soften the impact of the recession it was insufficient to prevent the economy from stagnating, as governments began to reverse their fiscal stance as early as 2010. Unless there is strong support primarily on the fiscal side, in the absence of real wage growth and strong household consumption spending, modern industrial capitalist economies may remain stuck in a more prolonged state of long-term stagnation than what had occurred in the 1930s. Without some important makeweight measure in the form of long-term public investment, and because of the inadequacy of private sector stabilizers in modern financialized economies, the private system may be even more vulnerable to further collapse than during the Great Depression.

* Pedants will point out that this quote probably did not come from Yogi Berra….but why mess with a popular attribution?

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    1. Synoia

      Glad you appreciated it.

      Could you publish the English version? I fear we only have the American version to read, despite it lacking a fair sprinkling of acronyms.

  1. JEHR

    I am truly impressed with our PM’s first budget (delivered on March 22) which will give Canada a deficit of $29.4B to build up the infrastructure of cities and provinces. The conservatives are blatting away about how terrible it is to not balance the budget (which they only attained through jiggery-pokery) and how we are going to suffer economically. Why can’t they understand that in order to “grow” the economy, monies have to be spent and once the economy sustains full employment, we can have balanced budgets (maybe)?

  2. Jim Haygood

    During the past seven glorious years of ZIRP, numerous links have been posted asserting that the yield curve is broken as a recession indicator, since a zero overnight policy rate basically guarantees an upwardly-sloped curve.

    Now Planet Japan has proven that this isn’t so. Against a short-term policy rate of 0.10%, the 10-year JGB has sunk to -0.12%, inverting the yield curve in negative territory.


    With a gov’t debt to GDP ratio of 230%, it’s a good thing lenders are paying gov’t for the privilege of lending to it.

    If rates ever go positive again in Planet Japan’s alternate universe — where water flows uphill and people eat radioactive corn flakes for breakfast — then the financial chain reaction goes critical in a few milliseconds.

    1. Eduardo Quince

      “Against a short-term policy rate of 0.10%, the 10-year JGB has sunk to -0.12%, inverting the yield curve in negative territory”

      Actually, the BOJ has 3 deposit (IOER) rates, one negative (-0.1%), one positive (+0.1%) and one at 0%. How convenient to choose the positive one to claim that the yield curve is inverted. Yield curves normally comprise market rates, not central-bank-set rates. Short-term market rates are presumably negative (given that JGB yields are negative out to 10y).

  3. Charley

    Remember Bill Clinton’s boast in his last State of the Union address that (thanks to him) the US could run a budget surplus for years into the future? The next day Goldman Sachs angrily announced that no, our financial system runs on debt, so he was threatening to evaporate our bond markets. No more wacky threats of a balanced budget ever since.

    1. fresno dan

      economics is a strange religion (well, I think they’re all strange, but I digress)
      people who don’t make enough money to keep the economy going….are suppose to borrow…though they actually don’t make enough money to pay back the loans. The idea that your not gonna solve nuthin until you pay people more is never, ever breached

        1. Synoia

          Economics is a social science

          I believe you need a quick review of the scientific method:

          Experiment (Repeatable)


          Thesis (Laws)

    2. Ed

      What you and Fresno Dan in the other reply pointed out are among the “contradictions” of capitalism that Marx said would eventually sink the system.

      One unstated premise of a capitalist system, that even Marx may have accepted, given when he lived, is perpetual growth, meaning perpetual growth in population and technology. Of the nineteenth century economists, only Malthus seems to have had some understanding that this couldn’t always be the case. Capitalism itself is an engine for growth, with the debates over what is the most efficient way to amass sufficient capital to fund growth. With growth you build in debt, and the debt can be paid back in the future from the increase in production. Its really just a mechanism to move some of the increased future production today so you can pay for whatever you have to do to increase production in the future.

      Use debt for consumption, or as some unstated substitute for wages, then at best you have found a way to bring back feudalism through the back door. Now with a declining economy you are going to wind up with feudalism anyway. There are better ways to manage the process than to start replacing wages with debt, and creating debt serfs.

      The public policy reason to maintain bond markets, and to have Goldman Sachs itself around, is to fund the government. If the government can be funded without debt, then the bond markets can go away. Now Clinton’s actual claimed surplus was, well, fake. With declining population and production, the future will mean different arrangements to fund the government.

      1. RabidGandhi

        Yes, in some idealised universe the growth eventually has to reach its limit. But how can that limit be said to be anywhere near in countries like the US that have trillions of dollars in infrastructure needs?

        And why on earth does the US Gov’t– which can print its own currency– need to be funded by Goldman Sachs?

        1. Ishmael

          Blah, blah, blah infrastructure needs. Basically when I hear people say infrastructure needs I think more porkbelly spending. First because of the Davis Bacon law every dollar spent only buys about 1/3 that it should.

          Second, what are you going to spend infrastructure on — roads. People are driving significantly less than they did a few years ago. How about airports. Well traveling a lot I will tell you that most cities have far more airports than they need with a few exceptions like NYC. Why does NYC’s airports look like crap — see number one and three.

          Third, who do you think gets paid to perform that infrastructure building. Those that grease the politicians palms. Also organized crime. Ever seen what Philly looks like. That is because organized crime is ingrained into the so called infrastructure spending.

          Nancy Pelosi and her gang threw a trillion dollars into so called shovel ready infrastructure spending and puff before you knew it, the money was gone. So please give it a rest!

          There are two things holding back the economy. One property is significantly over priced. It started to adjust and quickly but the govt and Federal Reserve jumped in to save the promoters and the banks and pushed it back into unaffordable levels and the cost of govt. Over priced govt is every where. To many people in govt and people in govt are significantly over paid. Also, those people have to do things so what they do is stand in the way of change and make sure that change does not upset the apple cart.

          Marx, Marx, Marx an idea that should have stayed dead and buried. If you like Marx so much check out the implosion of Venezuela and Brazil. Or check out how the Soviet Union did under Marx doctrine or even China. No one here can ever tell me even though I have asked repeatedly, name one country that is doing Marx right and don’t say Sweden. Having lived in Scandanavia I know a little bit about it. I was doing the work that Scandanavians would not like advising the largest corporations there. Sweden had a significant capitalistic society 60 years ago but it has been in steady decline since. 10% of Sweden’s GDP is Ikea. Besides till recently every one was related to one another there. Now it is imploding and I expect to see National Socialists to take over soon. Under Hitler there were a couple of Waffen SS divisions formed by Nazi Scandanavians and 30 years ago there was a large number of Nazi’s.

          Basically, those that keep throwing around Marx are probably sitting in their parents basements pounding away on their computer.

      2. John

        People forget how compound interest works. If the global economy were to grow at 3% a year, it would double by 2060, and then double again around the turn of the century. Even the mainstream accepts that we’re in for a long period of ‘secular stagnation,’ and I have no idea the economy could possibly double in the next few decades. Yes, there will be huge opportunities in Africa, but not enough to drive the entire global economy. We’re going to be stuck with relatively low growth rates indefinitely, at best like Japan’s last (lost) two and a half decades, at worst like the PIIGS’ performance since the crisis. Unless of course there’s a world war or something.

        Capitalism needs to the economy to grow ad infinitum at a reasonable rate for the system to function healthily. There is a finite amount of space and resources on the planet, however. At some point, capitalism will reach a limit, and the global economy will crawl forward at a snail’s pace (or bad economic policy will make things even worse) until there is a world war to reset the system or the people revolt. Unfortunately I think drone technology will make the latter impossible and the former more likely.

        1. RabidGandhi

          “Secular stagnation” is econo-babble for a conscious decision not to make needed investment. The PIIGS could be pulled out of their “secular stagnation” immediately by putting their unemployed masses to work on real needs that will improve peoples’ lives: building solar power plants in Puglia, building houses for immigrants in Andalucía, installing free internet for all in Portugal, a high speed rail connection from Málaga to Barcelona… In all of these cases we are nowhere near the “finite resource limit” you mention.

          Sorry to sound like a broken record, but this is a case of the elites making an excuse not to implement the fiscal policies recommended in the article, and you are letting them off the hook because “well we can’t grow forever”.

          1. Ishmael

            My wife being Greek, I know a little bit about it. What holds it back? Well let me quote a Greek relative, “Don’t move here it is too corrupt!” There it is. Govt is huge in Greece. Please see other post for the problems this causes. The ratio of govt workers and people on Welfare is one of the highest in the world (the ratio in the US is even higher than Sweden). Try to start a business in Greece, now I am not talking about some polluting business let’s talk about an internet business it takes 10 times longer than the US. Why govt bureacracy. All those people in govt have to have something to do. The only way anything happens in the PIGs is black market. The other problem is the rule of law is weak so there is no incentive to do something because someone will just take it away from you. No reason to hire someone because if they just sit around and do nothing you can not fie anyone. Oh, and one other reason Greece does poorly, everyone there is either a socialist or a communist. Please see previous post on Marx.

            1. Tsigantes

              Ishmael, there is no social welfare system in Greece and never has been, what on earth are you talking about?

              I am writing from Athens by the way, where we are in Year 7 of meltdown and are now an occupied zone (Troika governance, NATO).

              Just to keep our terms clear, by ‘social welfare’ I mean the dole and social housing etc. English-French-German-Scandinavian style. Where if you are unemployed you can still live somewhere with heating, running water & electricity, have money to eat, and get medical care. Greece has none of that and never did.

              Maybe you are referring to public schools and pensions…these might offend you?

          2. John

            First of all, thanks to the monetary union, that’s politically impossible. Second, sure, those projects would employ a lot of people in construction and would boost aggregate demand, but what would happen after those projects were finished? Who will hire those construction workers? Both the global and, in particular, the European economies are very labor abundant and are in a condition of low employment. Sure, a government can permanently hire a ton of people to replace the chairs on the subways and fill potholes and stuff like that, but the realities of the capitalist system will eventually catch up to and punish that economy.

            The New Deal worked so well because the entire West was hardly populated and the infrastructure projects there laid the groundwork for a tremendous period of capital accumulation through settlement, urbanization, and industrialization. The same goes for the Marshall Plan and post-war Europe, they were completely rebuilding their societies from the ground up. But without new cities to build, with our industry already developed (and shrinking thanks to global competition), no new infrastructure projects will open up the possibilities for a huge new bout of capital accumulation. They will temporarily boost aggregate demand but will not change the fundamental conditions that created the crisis in the first place.

            What we’re facing is clearly not a “liquidity crisis” or a lack of demand. It is obvious that serious structural issues plague the economies of the developed world. There is no way could a financial crisis alone wreak so much havoc on the global economy; we still show no signs of recovering from this mess (the US is the best off and we’re awaiting another massive financial crisis). The root of the problem is that we haven’t had any real growth since the 1970’s–it has all come from asset bubbles since then (Japanese real estate in the 80’s, US stock market in the 90’s, US real estate in the 00’s). This is because the manufacturing sector around the globe, the base of any modern economy, has seen its profit rates steadily fall since then as the world has reached a crisis of overproduction/under-utilization of capacity. Agriculture is no longer a huge part of a developed economy, and industry is shrinking, leaving us with “services” (which is entirely dependent upon the wealth created by agriculture and industry) and finance (which simply moves money around rather than creating real value).

            What’s the next step? The reality is that without a huge source of external demand, there’s little room for growth or development in a post-industrial society. What makes us think that we’ll be different from Japan (or Argentina)? Why do we think we can overcome the limits to growth that they couldn’t? (And let’s not forget that Japan is attempting deficit spending on a massive scale.)

            Japanese-style stagnation is our future, but the business class won’t accept that (they want higher growth rates) and will push the government for more and more extreme economic policies that will most likely make things worse (see the Abe government). At that point, in the midst of long-term depression, we must start to ask ourselves if there is a better system available, if capitalism after all was supposed to mark the end of history.

        2. Left in Wisconsin

          We just need better measures of growth. Even if we are trying to measure “economic growth,” the traditional indicators are p1ss-poor: If paying someone else to look after your kid or parent counts in the economy, then so should looking after them yourself. If we simply monetized unpaid care work, we could generate (the data that would suggest) serious growth. Not suggesting that we do, but just as an indication of how flawed the measures are. And then there is the mismeasurement of pollution.

          1. washunate

            Yeah, I’ve never understood how obtuse people can be on that front. If the goal is to produce bigger numbers, then pay people for activity in the informal economy, like childcare and painting and daydreaming about the origin of the universe.

            Voila, instant GDP.

            Well, okay, I do understand: no one actually cares about the economy; the point is concentration of wealth and power :)

            1. John

              The problem is that people are used to 2-3% growth rates under capitalism, and capitalism is supposed to provide us with a great deal of prosperity. That’s why we accept things like income inequality and a grueling workweek. What happens if we don’t get 2-3% growth rates? What if we get Japanese-style stagnation for decades (and even mainstream economists are beginning to accept that this is the most probable outcome)? Both the business class and the public will grow restless, remembering the good old days, and will try lots of new and crazy economic policies to try to get the economy growing like it used to. This is precisely what is happening in Japan; after over two decades of little to no growth, they’ve decided to deficit spend and print money at an unprecedented scale. What if catastrophe results?

              What if the same happens all over the developed world, and we’re stuck in a permanent depression? Are we supposed to simply “measure growth differently?” Maybe instead of trying to view the current system with a different lens to make it look better, we should think about overthrowing it and starting a new one.

              1. washunate

                Who are these people expecting aggregate growth in the quantitative terms employed by the economics world? People don’t say, hey, I want the economy to grow 2.4% over the next 12 months. They say, hey, I want some of those magical newfangled technological inventions I’ve been hearing about, like a dishwasher and cable TV.

                You are making a connection between GDP and the general public that I have trouble following. Which is where I thought Left in WI was making a very important point. The problem is in the measurement, the definitions. People are restless about things that actually require far less GDP than what we already have. We live in a time of abundance, not scarcity. The economy is plenty large enough to provide every American with decent housing, quality medical care, a good education, an efficient transport network, outdoor recreational activities, hobbies, intellectual pursuits, artistic endeavors, and so forth. The depression is a matter of distribution of resources within the economy, not the total size of the economy.

                1. John

                  Capital wants 2.4% growth. The professional class does. Those are the most powerful groups in society. They’ll put up with secular stagnation for awhile, but they’ll get restless eventually. To get what they want, they are willing to try anything, especially if it’s print tons of money (and maybe a lot of deficit spending too). Not only will those short-term stabilizers fail to mix the malaise in the long-run, they could make things worse. What if we’re stuck in a permanent depression? The public will start to wonder if there is a better possible system, if there is a future after capitalism or if we’ve already reached the end of history.

      3. washunate

        You may like this essay from Keynes. He was very much thinking about the implications of long term capital accumulation. His solution was quite simple, if not exactly popular in mainstream economics today. Instead of pursuing growth in the economic sense of trying to work ever more hours, let’s stop working so much. Shift focus from economic production to enjoying our time in the universe.


        1. John

          This is one solution for the employment crisis that I like: let’s simply hire more people and for shorter hours. Unemployment falls, the distribution of wealth improves, and people get to spend more time with their families and less time slaving away at the office.

      4. Mike Sparrow

        The surplus wasn’t fake. They just used SS as revenue(as always). Which lead toward a debt pay down.

    3. Adam Eran

      “No more wacky threats of a balanced budget…”? Really? Our congressman recently sponsored a “budget workshop” put on by Pete Peterson’s Concord Coalition. The object: balancing the budget and reducing the “debt”….

      FYI, if you have a checking account, that’s your asset, but the bank’s liability. What’s the asset counterpart to the national “debt”? How about the dollar financial assets in the economy (now concentrated in the plutocrats’ hands)?

      Peterson and his vulture capitalist colleagues continue to press for deflation, and crushing the debtors. Oh yes, and my congressman is a “Democrat.”

  4. Ed

    To add to my earlier comment, the reason growth stops is that human population can’t grow forever. No capitalism (as we know it) without growth. Japan will probably point the way to what happens next. Now in theory there can be growth of production but not population, though in practice this is very difficult, but what you get in this case is “Star Trek”, not capitalism.

    This is of course very long term thinking, but the economic system is already running into ecological limits and starting to break down.

    1. John

      The crisis you speak of has actually been around since the 1970’s. Since then, capacity utilization rates have dropped and the global manufacturing sector has become one pie with the US, Germany, and Japan getting bigger or smaller pieces depending on the value of their currency. In order to undercut competitors, these firms invest in more capacity (for higher efficiency), which only exacerbates the problem. In fact, growth since the 1970’s hasn’t been ground in reality but in asset bubbles: Japanese real estate in the 80’s, the US stock market in the 90’s, US real estate in the 00’s, etc. The industrial sector is the heart of a developed capitalist economy yet has no potential for growth in the developed world (without a world war). Japan’s past (the last 25 years) is our future. There is no next step; without a huge amount of external demand, the first world countries simply get stuck there without prospects for real growth. This is a real, physical limit that capitalism cannot overcome without a huge bout of destruction.

      For further reading, check out Robert Brenner’s The Boom and the Bubble. It was written in 1999 but predicted the crisis perfectly.

      1. Mike Sparrow

        To add on, demographics counted for much of the late 20th century growth.

        Maybe it is time to let “growth” go. It does not work. It didn’t work in 1890. It doesn’t work today.

    2. Fiver

      One thing’s certain – not to the current Titans of capital will they trace the stream of humanity capable of building a starship.

  5. TomD

    This seems a reasonable summary of what things were different about 1930 and 2009, but it stops short of having real suggestions about what should have been done differently in response. That the government should have spent more money seems agreed upon in many quarters, but it’s so vague as to be nearly meaningless. What should the government have spent money doing?

    1. david s

      A bailout for homeowners would have gone a long way.

      Think of how much better the economy would be today had Washington helped the many millions of Americans who found themselves trapped in underwater mortgages, paying down debts with stagnant or falling wages.

      1. washunate

        But that gets at Tom’s point. Why would we bail out homeowners specifically? The subset of people who own their own home has vastly more wealth (both median and mean) than the subset of people who rent. What you mean, perhaps, is that we should bail out people in need? Note that is very different than bailing out homeowners.

        That’s the problem with these kinds of approaches. The call for spending in aggregate is so vague as to be effectively useless.

        1. TomD

          Even within bailing out homeowners as a proposal, what would that look like? Would the government pay off their mortgages with the banks? Would they force the banks to writeoff the mortgages? Would they helecopter money to homeowners?

          1. washunate

            Agreed, that’s where I think the econ crowd as demonstrated by both these authors and more generally in the MMT/deficit spend camp has missed the mark. They go to such great lengths to avoid describing what concrete proposals would look like that as you said it is so vague as to be meaningless.

    2. James McFadden

      If you are really interested in seeing a recovery program that would have revived the real economy (as opposed to propping up the parasitic rentier economy), I suggest you read Chapter 9 of Jack Rasmus’ Epic Recession. He published a pretty detailed and well thought out plan which could still be implemented.

      Of course the net result of such policies would be real financial gains for the 99%, deflation of financial assets and the resulting loss of fictitious wealth for the 1%, and the end of the neoliberal dream of creating a feudal state of wealth extraction by debt.

      1. washunate

        I get what you’re saying in general, but how does a policy that produces real financial gains for the 98th percentile also help those at the 8th percentile?

        This is the limitation of the rhetorical framework of the 1% vs. 99%. Concentration of wealth and power isn’t just an issue in the top 1% of households, as if the remaining wealth and power is equally divided within the 99%. It’s an issue in the top 5%, top 10%, and top 20%, as well.

        And as far as the bottom quintile or so of households, financial gains are essentially irrelevant. They are oppressed through entirely other means, like dehumanizing treatment in our systems of law and medicine.

        1. James McFadden

          Perhaps I picked a poor choice of words – replace “real financial gains” with “real economic gains” (jobs, higher wages, debt reduction, social programs).

          Read the chapter.

          Of course Rasmus’ solutions don’t address all forms of social inequality, injustice and oppression. That is a longer term project.

          1. washunate

            I’m not drawing a distinction between financial gains and economic gains.

            Rather, my question is what value is there in lumping the 99% together as if they were one monolithic group? Wealth and power is quite unequally distributed within the 99% as well. Many people outside the top 1% have cushy jobs with outsized privileges, too.

            It’s the top 20% that are the primary enforcers of social inequality, injustice, and oppression. Saying that is a longer term project makes no sense. They’re the problem, the educated technocrats who are supposed to be running our public institutions for the public good. That’s the only justification for their outsized privileges.

  6. sgt_doom

    I recently read several very good books, but both contained the same myth in them regarding the Roaring Twenties: that Andrew Mellon saw to it that tax rates were cut on the wealthiest, and this lead to a jumping stock market.

    Completely excluding the reality that with the passage of Prohibition (1920 — 1933), alcoholic beverage taxes were no longer available, and that incredibly large sums of money were being washed or laundered through the stock exchange!

    Just as today, they ignore the largest bubble of all, that Securitization Bubble, the bubble of bubbles!

    Also, back in the 1920s, leading up to the Great Crash, they also experienced their own form of CDOs, called mortgage certificates.

    1. Ed

      There is room for a readable (eg jargon and theory free) economic history.

      Stories in standard histories of the “Roaring Twenties” and the Great Depression leave a lot of things out or underplay them. One of the biggies is Prohibition, which if nothing else criminalized an entire economic sector. Repeal of Prohibition and its enabling legislation was the first and most effective New Deal measure.

      Another thing omitted is World War I. The Great War caused a good deal of economic destruction that was going to find its way into lower living standards one way or another. World War 2 actually did this as well, but there were several key differences. For one thing, policy-makers, having been through the first World War, were prepared for the aftermath of the second and got plans in place while the war was still being fought. Second, one of the consequences of World War 1 was a communist regime in Russia which produced a big economic shock, that the world had absorbed by the time World War 2 came around. Third, both alliances in World War 1 planned to pay for the war by plundering their enemies (reparations). As it turned out, the ending was close enough to a stalemate that neither were able to do this, though the British and French tried with Germany (and the Germans with Russia). The Allies had free reign to take what they wanted from the defeated Axis powers at the end of World War 2 and used it.

      In terms of living standards and the middle class and working class were doing, the 1920s really weren’t any better than the 1930s and by some measures worse. The Rube Goldberg system constructed around the reparations payments produced a financial sector bubble in the 1920s.

  7. Jesper

    The market is supposed to be a counter-weight to big business -> if the government never ever interferes then the supposed market is in fact dysfunctional. At the moment and also in the 1930s, it’s argued that there is nothing the government can do about the surplus of labour keeping wages down. Shortening & enforcing the legal maximum working-time would in effect reduce the amount of available labour and would therefore increase the bargaining power of workers. However, it is argued by workaholics that if people would work less then they’d become miserable. It is sad that some people actually believe that the being told what to do in paid work is the highest of bliss….. Many (if not most) people would prefer working less over being forced to choose between being a winner (working unpaid overtime and no paid vacations) or an unemployed ‘loser’. Or maybe shorter: Governments have other tools than fiscal policy to generate the wage-inflation needed to get out of a debt-trap

  8. JDW

    John: If the global economy were to grow by 3% per year, it would double every 23-24 years, i.e., it would double by 2040, then double again by 2064, …

  9. washunate

    neoliberal economics at its core believes that every problem can be solved by price

    I would gently dissent from our fearless leader on this front. Quite the contrary, neoliberalism* generally desires to prevent price discovery. The list of things where the authoritarians prefer command and control, secrecy and coercion, over transparency and voluntary exchange is enormous, from IP law to housing subsidies to bank bailouts to hospital chains to prison sentences. The list of jobs where neoliberals create wage differentials based upon policy goals, rather than market forces, is also enormous, from economists and doctors to home health aides and school cooks.

    *Assuming we’re using neoliberal as a catch-all term meaning the existing power structure. No one in power is an actual neoliberal in the Friedman/Hayek/whatever sense. Just look at the drug war. Or the TSA. Or TARP. Or E-Verify. Or Ferguson. Or Occupy.

    1. Mike Sparrow

      True, but if you found out what that “price discovery” entailed, you wouldn’t be so happy. Capitalism is really a artifact of the industrial revolution to be exact, where the technological revolution was innovating production modes so fast, you had the next investment boom ready to stop the old depression.

      Think the 1920’s of capitalism going Red Giant phase. Then came the final collapse in the early 30’s as the industrial revolution was over and they couldn’t innovate away the depression no matter the price discovery. So the only answer by your own admission is mass starvation and death to bring the potential size of the population to its economic size.

      1. washunate

        I’m the wrong person to take up on that bet. What makes me unhappy is when government is used to prevent price discovery in order to line the pockets of connected insiders. I don’t see how you can have private ownership of resources without price discovery. So unless you advocate communism or anarchy, I don’t follow what you’re saying.

        Yes, I understand not subsiding the housing market would mean that housing would have cost less over the past couple decades than it did. Yes, I understand that removing waste from our healthcare system would mean fewer highly paid specialists would be employed by our nation’s hospital franchises. Yes, I understand that de-scheduling recreational drugs would make them available at legal retail outlets and reduce the need for lawyers, police chiefs, prison wardens, and other public officials. Yes, I understand that simplifying IP law would mean drug makers and computer companies couldn’t make so much money. Yes, I understand that equalizing spending between roads and rails would shift employment and usage from automobiles to trains. Yes, I understand cutting the budget for the national security state would mean less intervention in American foreign policy and surveillance at home.

        I don’t see any of the above as problems. In fact, I see them as solutions. Much of the preventable human suffering in our system is caused by government meddling where it shouldn’t and government inactivity where it should be involved.

        If the government actually prevented anti-competitive behavior, ended the two-tiered justice system, and had a universal safety net, that would largely address the transition/distribution issues of capitalism without encountering the much more significant problems found with communism and anarchy.

        1. TomD

          Most IP law is not very complex. Fair use is the only complexity to the general rule which is don’t use something someone else made for X number of years.

          The problem with patents is not that it’s complex, but that too many things are patent-able. The problem with copyright is mostly that it’s too long. There are no real problems with trademark law imho.

          I don’t think there’s much evidence that computer companies make large amounts of money from their patents. It’s mostly just moving money around the big players and keeping the small players out than anything else.

          1. washunate

            don’t use something someone else made for X number of years

            Yeah, I agree that’s the principle. But that principle has been so warped by actual practice that it no longer resembles the original intent of promoting the production of creative and inventive works. It is now used primarily to prevent the production thereof. Large companies in computing, healthcare, and entertainment especially have perverted the concept of intellectual property to mean keeping ideas out of the public domain rather than contributing to it.

            And the question of what someone else made has become a rather tricky thing in and of itself. What is it about the API’s connecting Office to Windows, exactly, that Microsoft made? What was special about them was not their unique contribution to the public good, but rather simply that Microsoft controlled them. The government protecting the IP of Office and Windows translated directly into Microsoft’s ability to overcharge customers by billions of dollars. The actual cost of producing Office and Windows, in other words, is much less than the price Microsoft was able to charge. And that is also a great example of where IP issues intersect with other failures, like insufficient enforcement of anti-competitive behavior.

            Same thing with movies and drugs and GMO crops and sports and so forth. There is no real-world connection between the relatively small contribution made to the public good and the massive wealth transfer from the general public to private interests.

    2. Left in Wisconsin

      neoliberal economics at its core believes that every problem can be solved by price

      I would gently dissent from our fearless leader on this front. Quite the contrary, neoliberalism* generally desires to prevent price discovery.

      This is the distinction between business and economics. Neoclassical economics (not sure why they use “neoliberal”) is merely the theology that justifies “free market capitalism” even though the real business world operates in almost direct opposition to the theory that justifies it.

      1. jsn

        Neo liberalism is what you get when you shear the opposition to rent seeking from neoclassical economics, its the move that makes a virtue of greed. See Hudson and Hedges today.

        1. David

          “Neoclassical” economics is precisely the attempt to “shear” the problem of rent as developed in classical economics from the realm of respectable discourse. The first thing they did is to remove “land” as a distinct factor of production. So instead of land, labor and capital there was only labor and capital. “Neoclassical” and “Neoliberal” are basically synonymous in the context of economics.

    3. H. Alexander Ivey

      I read her words to mean “price”, that is whatever the seller wants, rather than “price discovery” which suggests a bargaining between buyer and seller and that both parties have roughly equal power in the negotiations.

      But I could be wrong (haha).

      1. washunate

        That’s interesting. This is getting out of my depths a bit, but I thought that’s what was meant when we talk about price – the mechanism by which buyers and sellers discover a price at which they would make a transaction (including the range of potential prices at which no transaction takes place, which is what happens most of the time; buyers want a cheaper price than sellers will take, so nothing happens). Roughly equal bargaining power is definitional. If one party has market power over the other, then what you have, by definition, is a failure of that market. The unwillingness of establishment economics to address basic market failures in our system is one of the tells they are tools of power, not honest intellectuals.

        But anyway, I find it interesting how the ratchet effect works on these things. Instead of allowing prices of privately owned assets to rise and fall over time, most leftists/liberals of the past couple decades have wholeheartedly embraced this notion that asset owners get to enjoy the fruits of rising prices yet should be protected by the government from experiencing losses on falling prices.

        So we get these polemics, essentially, arguing that spending more money would solve problems without any acknowledgement that maybe we should try and understand why prices got so high in the first place or guidance on criteria for how public money should be spent.

  10. Goyo Marquez

    Seems a little odd that there is no mention of Milton Friedman’s monetarist explanation of the Great Depression. Especially odd since it seems to mirror the MMT theory for explaining the Great Recession.

  11. VietnamVet

    As an interested participant; it appears that human emotions and ego are pretty much in play. If Japan is good predictor, there will be no shut down of the financial industry for a week while government auditors scourer the digital records writing off the bad debt that is not earning any money. No one will go to jail for the bad loans.

    The Middle East is extremely strange with Russia intervening in Syria and then a partial withdrawal; plus over 4000 American troops are back in Iraq. But, there is no war between Russia and Turkey unlike the 13 times before in last 1000 years. This indicates that World War III is not a solution to wiping off the bad debt because it would take the Northern Hemisphere and the global aristocracy with it. The write off cannot be done from the top down. The basic fact remains that the debt that cannot be paid will not be. Eliminating the bad debt has to be forced from the bottom up. The 2016 election appears to be the first salvo that will try turn the world upside down.

  12. WanderingMind

    Two economists whom I have not seen referred to here or elsewhere are Gardner Means and Fred Lee. In the thirties and later, Means pointed out that the modern economy does not function the way classical economists pictured it.

    Instead, significant segments of the modern economy are dominated by oligopoly. A few large firms, often vertically integrated, are capable of fixing price over a long period of time and compete for market share instead of on price.

    This is done in order to protect the large capital investment which they have made in plant and equipment, maintain the enterprise as a going concern and to keep out new entrants. He termed this administered pricing.

    The classical model of the economy is like an ebay auction with no reserve. The stuff is going to sell at some price. I.e. the market clears.

    The modern economy is like “buy it now” on ebay. There are a fixed number of units for sale at a set price and, if they don’t all sell at the offer price, they just sit there. I.e. the market doesn’t clear. If they all sell out, then more are added at the same price.

    If a failure to clear persists long enough, then there is a cutback in production, which means either fewer hours or outright layoffs. Prices might decline over some period, but not the way they would if the market were truly competitive.

    If there is a greater demand for the particular good at the offered price, instead of raising the price, production is scaled up, meaning more hours worked and more hiring.

    To me, this points up yet another weakness in the reliance on “price discovery” to handle economic problems. There is no true price discovery when prices are fixed, either by outright collusion or “follow the leader” type behavior.

  13. Fiver

    Surely it needs to be asked whether or not ‘stimulus x’ is intended to ‘fix’ The Economy, or supposed to support It until the assumed next cycle begins? Isn’t the problem that the wealthy, and especially the financial sector, have appropriated so much potential spending power there no longer can be self-sustaining growth, and stimulus becomes standard absent a new revolution in technological capabilities? So the nature of the stimulus is critical.

  14. H. Alexander Ivey

    To me, this post is NOT new economic thinking – the reason for the source website, I would think – it is just the same wrong-headed thinking by mainstream economists for well over a hundred years now.

    A close reading of the posting, the authors’ slant or bias, and the authors they cite (and their work) leads to the conclusion that an economy grows or dies by supply. This theory that ‘supply’ controls or drives an economy is simply wrong, and has been strongly stated as such by outside (dare I say “exegesis”?) economists, not the least by Keynes himself. The economy is controlled or driven by demand. Plain and simple. And if the demand does not come from labour (the working and middle classes), then it must come from the government “demanding” things. There is simply not enough of the 1%ers, now or in the 1930s, to create enough demand to grow any economy.

  15. Keith

    So much time is spent on studying the Great Recession and not enough time is spent on studying the cause.

    Just imagine if Ben Bernanke had studied the cause of the Great Recession instead.

    An under-regulated Wall Street leads to Wall Street crashes.

    Let’s re-instate the 1930s legislation.

    2008 crash and Great Recession (part 2) averted.

    1. Keith

      After some further study Bernanke would have come to the inevitable conclusion:

      Bankers are short term clever but long term stupid.

      They do not think through the long term consequences of their actions.

      So, complex financial instruments are bound to be a disaster in the long run.

      Let’s give them some benefit of the doubt.

      After the collapse of Long Term Capital Management in 1998.

      Make all complex financial instruments illegal.

      2008 crash greatly reduced in magnitude.

      James Rickards in Currency Wars gives some figures for the loss magnification of complex financial instruments/derivatives in 2008.

      Losses from sub-prime – less than $300 billion
      With derivative amplification – over $6 trillion

      Crash magnitude reduced by a factor of 20.

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