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"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

is stagnation the new normal? « Previous | |Next »
October 31, 2012

The current fetish in Canberra about the budget surplus is an expression of austerity now being “in fashion”. Governments respond to the revenue shortfalls of the global economic crisis through deficit reduction plans whilst economists blame it on the profligate spending of countries with social democratic governments.

The economists say that deficit spending is inflationary, and in any case will not help in the long run as budget deficits raise interest rates, “crowding out” business and household spending. They talk about as inflexible labor markets and “sticky prices”.

PinnIUSeconomy.jpg Ingram Pinn

This is the pre-Keynesian stance of the economics profession on display. The politicians reason from the analogy between the individual household and society as a whole assuming that what holds for the individual household holds also for all households together. Maxing out the credit card is bad.

Hence the need for belt-tightening. For these economists the bursting of the financial bubble and the subsequent crisis represented events that were not supposed to happen. For them ---e., their conventional macroeconomic wisdom---the economy was now free of major crisis tendencies, due to the advent of new, improved monetary policies.

There has been a shift in focus from financial crisis of 2007 to economic stagnation in the global economy; to a sense that there will be a prolonged period of stagnation, what Paul Krugman called a Third Depression (the first two being the Long Depression following the Panic of 1873 and the Great Depression of the 1930s).

The defining characteristic of such depressions was not negative economic growth, as in the trough of the business cycle, but rather protracted slow growth once economic recovery had commenced. In such a long, drawn-out recovery “episodes of improvement were never enough to undo the damage of the initial slump, and were followed by relapses.” It is a long period of anemic growth.

The logic of neoclassical economics is that rapid growth was natural under capitalism, except when outside forces, such as the state or trade unions, interfered with the smooth operation of the market. The economic reality is that global economic growth since the 1970s has been driven b;

(1) the much greater role of government spending and government deficits;
(2) the enormous growth of consumer debt, including residential mortgage debt, especially during the 1970s; a
(3) the ballooning of the financial sector of the economy with its explosion of all kinds of speculation, old and new.

A new financially driven capitalism centered in Wall Street had emerged. That financialization style of growth crashed spectacularly in 2007.

The situation now is one of financial instability and a deep economic malaise (stagnation), which has set in during the current period of financial deleveraging and the declining hegemony of the US. The hope is that China can carry the world economy on its back, and so keep the developed nations in America and Europe from what appears to be a generation of stagnation and intense political struggles over austerity politics. The big hope is that China could provide capitalism with a few decades of adequate growth and buy time for the Us and Europe to sort themselves out.

China---the new perpetual growth machine--- will act to counterbalance the tendency toward stagnation at the global level. We are now in the realm of economic illusions.

| Posted by Gary Sauer-Thompson at 9:31 AM | | Comments (17)
Comments

Comments

prof.bill mitchell,formerly of newcastle university and now at darwin university,dubunks all this neocon economic bullshit that we are constantly fed when he says that any sovereign nation that issues it's own currency can run a deficit indefinitely and over time this will correct because of the automatic stabilisers ie.increased tax revenue from a growing economy.the analogy of a household budget is wrong and misleading but it serves the rhetoric of the neocons.he advocates a jobs guarantee as a means to equity and to grow the economy.sadly our so called progressive government has sipped on the neocon cool aid and relentlessly pursue holy grail (surplus)
http://bilbo.economicoutlook.net/blog/

"financialization style of growth"

The long-run financialization of the economy refers to the shift of the center of gravity of economic activity increasingly from production (and production-related services) to speculative finance.

Economic stagnation and financial crisis are now seen as feeding into one another. Europe is the example.

In Australia China's economic growth is seen as the solution to global stagnation.

China's two largest export markets (the US and Europe) are in serious trouble and can no longer be counted on as reliable, sustainable sources of external demand.

Chinese economy, with its whole low-wage accumulation model needs to move away from an economy that is dangerously over-reliant on investment and exports.

Such a fundamental rebalancing—on the gigantic scale required—will be difficult to achieve quickly.

The extent to which the ideology of capitalism has become entrenched in our society is apparent when stability can be called 'stagnation' and condemned as a thoroughly Bad Thing. There is no obvious merit in endless growth except that we are told The System is based upon it. If growth stalls, it's a crisis. If growth promises to slow down indefinitely, it's a great calamity.

Nowhere is the inherent lunacy of the finance capitalist system more obvious than in the discussion of house prices. Instead of falling prices being a good thing because they help ordinary people buy an essential good, they are gloomily held up as evidence of crisis. Why? Because people can't borrow as much against their homes and that will depress economic activity. Debt is the fuel of the finance capitalist economy and it only works if it has more and more of it.

The sheer mindless idiocy of a system which can only function if everyone obsesses about getting endlessly richer ought to be self-evident. Sadly, most people have been convinced by decades of propaganda that The Economy is a kind of force of nature, like the weather, and you defy its laws at your peril. The post talks about fashion but it is more than that - it is evidence-free dogma and politicians seem incapable of calling it for what it is.

The complex system of global supply chains that has made China the world’s factory has also made China increasingly dependent on foreign capital and foreign markets. These markets, in turn, are vulnerable to any disruption in the Chinese economy.

The big problem, if not the root cause of instability in China, is the low and declining share of GDP devoted to household consumption. All the calls for rebalancing the economy boil down to the need for a massive increase in the share of consumption in the economy.

How is this going to happen when the low consumption levels are fundamental to the low wage export orientated growth model? Increasing the wages of Chinese workers would increase consumption as a share of GDP. But that would drive the large foreign-owned assembly plants --eg., Apple---to countries with lower wages.

Apple makes all the money not the Chinese workers.

Allow me to second most strongly the recommendation by nobby at comment #1 to read the work of Bill Mitchell if one wishes to get a far more credible economic analysis than the rancid pap peddled by mainstream media and its so-called 'expert' 'economists'.

Unlike them Bill Mitchell actually uses facts and evidence and goes to reality itself [rather than mere ideology as the MSM does] to illustrate his analysis.

fred,
what is so frustrating is that the left is totally seduced by this stuff.if an old uneducated codger like me can get the basics of mmt then anyone can.i think that mmt could provide the basis for a renewal of the left if only there was someone with vision.with the austerity policies provoking movements like occupy to spring up around the world,the time is surely right.sadly it looks like the chance will be missed and the extreme right exploit this to the hilt.

http://neweconomicperspectives.org/2012/10/pete-peterson-has-won.html

Just to show that Oz ia not the only place where neo-whoever-ism is rife and Bill Mitchell is not the only sane voice out there whispering in the gale.

Bill Mitchell makes some good points in his Fiscal austerity violates basic economic efficiency requirements post at Billy Blog:

Fiscal austerity is wreaking havoc on economies because it undermines the very thing that allows economic growth to proceed – aggregate spending. It intentionally does that despite all the conservative rhetoric that non-government spending growth will more than offset the cuts in net public spending.

He then shows why there are severe limits to the neo-classical concept of efficiency:
Fiscal austerity is creating massive inefficiency both in a contemporary setting (that is now) but also for the future. When health care systems crumble a nation’s claim to advanced status is untenable.
When significant proportions of the future workforce are deliberately denied the opportunity to acquire the essential skills and experience that drive high productivity the nation faces a bleak future.

His conclusion is that the orthodox approach to efficiency (neo-classical economics) allows all the ideological indisposition towards government involvement in the economy to be discreetly hidden.

"the orthodox approach to efficiency (neo-classical economics) allows all the ideological indisposition towards government involvement in the economy to be discreetly hidden."

The ideology is "market fundamentalism”, the neo-liberal view that a self-regulating market would deliver sustained prosperity for all. This leads to a hostility to fiscal intervention by the government.

nobby
Couldn't agree more.
The contradictions by the rabid right are amusing, or would be if the human consequences aren't so dire.
Recently Crikey was showing a Romney ad which complained that "Obama's defence cuts will cost umpteen thousand jobs in Virginia" [or similar]. So the Right does understand the value and function of govt stimulus [it creates jobs and prosperity], their opposition is mainly, even entirely, on ideological grounds only and bugger the people.
We have the media, bank 'experts', Hockey et al repeating the same crap here in a cool and cynical exercise of public deception.

nobby says: "what is so frustrating is that the left is totally seduced by this stuff."

economics is hard

"economics is hard"

Well, we do know that austerity makes recessions worse and can increase rather than shrink budget deficits. Even the IMF knows that.

Time for some praise for Gary [and Bill and a few other blog sites around the place inc Ken L's sadly missed Road to ...].
Without these sites the opportunity for people like us to be aware that we are not alone would be diminished, the ability to get info and ideas that question the status quo would be close to non-existent as the MSM is a force of darkness not light. There are a few 'mainstream' voices that occasionally border on sanity and reality, Peter Martin/Ross Gittins stray that way every now and then but generally the public is treated like mushrooms in an echo chamber.
Ta Gary - generally, not just this topic.