Dan Alpert's Two Cents

Another Summer of Discontent: The Four Factors that Explain Why What We’re Doing Isn’t Working

Here is what we know about the global economy given the experiences of the past four years:

  • There is a global insufficiency of demand relative to an immense oversupply of labor and productive capacity.
  • The imbalances between high-wage/current-account-deficit/balance-sheet-indebted nations and lower-wage, surplus nations have produced a glut of savings in the latter, relative to the opportunities offered for profitable investment of those savings in additional capacity either at home or abroad, given the absence of demand for such additional capacity.
  • The excess savings have inexorably reduced the cost of money in the developed world to the historically low levels we again achieved this week. The sole exception to this phenomenon being in the peripheral regions of the Eurozone, owing to the perverse and economically unnatural condition of their being caught in a currency union absent a fiscal union and internal credit support (a subject of many earlier posts on this blog).
  • The private sector debt overhang in the advanced deficit economies (including, for this purpose, the portion of the sovereign debts of those countries that was taken on to subsidize internal welfare systems in lieu of, or in addition to, households taking on debt directly) is preventing the recovery of internal demand. Moreover, as the great Irving Fisher wrote during the Great Depression, the very act of attempting to reduce debt has once again ignited the paradox of reduced economic activity, employment and income causing consumers to become even more debt-dependent. Quoting Fisher: “The more debtors pay, the more they owe.” We saw this materialize vividly during the second quarter as aggregate consumer debt zoomed past its bubble era highs.
  • We are enduring the unfortunate coincidence of the two foregoing phenomenon coincident with a generational (as in, once-in-a-generation) new technological plateau that appears to find an ever expanding number of labor-saving, productivity-increasing, job-obsoleting applications; and
  • The developed world has achieved population demographics that force us to confront painful intergenerational economic issues—amidst the historic levels of economic insecurity that impact younger generations as a result of the foregoing issues.

I will hereafter refer to the above as the “Four Factors”—summarized as follows: (i) exogenous oversupply relative to global demand, (ii) classic Fisher-described debt deflation, (iii) excess technological productivity relative to the availability of global labor, and (iv) inter-generational demographic challenges.

Any one of the above Four Factors has a fairly obvious (at least to those of us observers who enjoy salt water and air in the summers) set of solutions that would no doubt be both appropriate and successful if applied in the absence of the remaining three.  The challenge that is confounding all schools of economist—well, not all of them, the “austerian-liquidationists” (who summer by lakes it is said) seem not to be confounded, merely lacking in logical coherence—and the political elements who depend on economists to read the entrails of commerce and provide answers, is the need to address all Four Factors simultaneously (or, if not to address the, at least to consider the impact of each upon the others).

That challenge is not only unmet, it is sadly under-discussed in the context of the Four Factors’ impact upon one another.  It also poses a confluence of circumstances that are nearly impossible (or at least extraordinarily difficult) to model quantitatively and approach uniquely within any one of the several macro-theoretical constraints.

Putting aside what I view as theories and models discredited as the result of recent events (in part because they assume away the possibility of all, or some, of the Four Factors—to say nothing of generally assuming-away that which is inconvenient), there would seem to be a resistance even among those disciples of John Maynard Keynes, Fisher and one of my favorite practical thinkers, Hyman Minsky, to put aside their own models and start thinking out-of-the-box, as those latter three gentlemen most certainly would were they to have lived to contemplate our present situation.

In defense of many, this is hard stuff. The world has never experienced anything like this. And all of us considering what is to be done are constrained by political realities that seem stacked against any reasonable progress in considering a unified solution.  But then again, much of our political dysfunction results from a failure to inform and explain, to those in power and to the broader polity, what we are up against—a failure that extends from the economic intelligentsia’s inability to agree on what that is.

For example, New Keynesian macroeconomists, as well as some of their post-Keynesian and Hicksian cousins (yes, I am including Paul Krugman in this category, much as he is to be admired for his outspokenness) have posited that gargantuan additional amounts of monetary expansion will succeed in overcoming the debt deflation. If debt deflation were all we were dealing with—it very well might.  It would even take a good shot—albeit a painful one—at addressing the intergenerational imbalances in the advanced economies by making sure that aging savers (who would otherwise prefer to “clip bond coupons”) become desperate to make expansionary investments amidst Japanese-style bond yields and panicked fears of inflation.

Yet we now have enough of a post-crisis track record to see that efforts to induce inflation, and efforts to target and forcibly obtain high rates of nominal GDP growth (the hope of all who seek to induce debt-devaluing, and investment-inducing inflation/financial repression—see Christina and David Romer, Kenneth Rogoff, and his collaborator, Carmen Reinhart) are not working.

We are at the zero lower bound of short term interest rates.  Long term rates are certainly being manipulated by central banks—but the mass of excess capital floating about with no sensible investment alternatives given the excesses of supply relative to demand, would keep them low anyway.  The reason the Japanese experience is applicable to the rest of the developed world is not because of their inescapable recession/deflation—it is because it was the first advanced economy to experience a massive private sector debt overhang contemporaneously with a substantial excess of savings relative to opportunities for domestic investment when the “Asian Tiger” economies began to challenge Japan’s manufacturing and export hegemony. Then, as now, savings sought the security of hard currency government debt and reasonable equivalents (excluding, in the present iteration, debt of troubled Eurozone countries without control over their own currency) when there was no reason to finance additional capacity.   

In addition to historically low interest rates and a banking/credit system choking on un-lent, and foolish-to-lend, liquidity, we have the subsidizing effect of low interest rates on banks and corporations (and, to a far more limited extent because of the decrepitude of household balance sheets, consumers). We even have, as a result of the household debt crisis and the underwater mortgage crisis, 6.5 million households that are delinquent or in default on their mortgage and essentially living “rent free”—a most insidious form of subsidy.

There is so much cash floating around in the capital markets that money supply long ago ceased to be the metric targeted by the Federal Open Markets Committee of the U.S. Federal Reserve Bank—it is now all about interest rates and I would dare say that with 10 year and 30 year U.S. treasury bonds, at below 1.5% and 2.5% respectively, if nominal GDP can’t be made to grow, and inflation to ignite under present circumstances there must be something else going on! Something bigger, even, than the classic liquidity trap in which we are very much caught.

I believe that the so-called “doves” at the Fed realize this as well.  Markets may trade on the expectation of further monetary intervention, but the intervene-ors are beginning to conclude that further easing is likely not to be productive—and, worse yet, possibly counterproductive. And with no small irony, this is not because of the typical fears of their inflation-hawk colleagues.  Rather it is because we haven’t been able to produce much inflation at all, apart from bouts of commodity inflation that correspond with periods of massive easing and each time only succeed in quashing economic activity at the margin, as consumers cannot keep up.

Wages, unfortunately, refuse to track the rise in those prices that are influenced by more liquidity, lower interest rates, and short-lived fears of inflation-that-is-not-to-be.  And, yes, that is because there is too little aggregate demand for labor relative to a global surplus thereof.

Critics of this view are many.  Some, like Krugman, readily acknowledge that wages are stuck at rigid nominal levels—refusing to grow, but also refusing to fall in the absence of demand. And the truth is that employees aren’t given to offering to work for less and employers seldom cut wages—preferring instead to cut workers—so wage rates are, in fact, quite sticky.  As I sat down to write this essay, I noted a blog post by Professor Krugman precisely on this point, written within hours of my putting my own thoughts down. In it, Krugman asserts that falling wages would precipitate “destructive deflation” and maintains that while wage cuts could theoretically be thought of as expansionary (because such cuts would notionally increase the demand for workers, thus creating jobs and increasing demand) they would exacerbate the debt problem, as households earning less would have a more difficult time deleveraging and between that, and the downward price adjustments that would need to follow wages, we’d be off on the road to Tokyo before long.

But that view ignores other realities.  Yes, nominal wages are downwardly rigid and, yes, reduced nominal wages would result in reduced nominal prices before too long.  And reduced rents, both real and economic, ultimately reduce asset values that are reflective of the nominal wages and prices. It is hard to argue in the alternative. 

Yet it is, as I see it, similarly hard to argue that further monetary expansion will succeed when wages cannot be forced to rise. It is even harder to argue that wages will rise when we are at the zero lower bound of short term interest rates and long term interest rates imply a near-negative rate of future inflation. And it is—in my judgment at least—impossible to argue that wages will rise now that we have been through multiple rounds of unprecedented monetary intervention, with the only result being that we have stabilized the developed economies a few yards short of descending into full-fledged depression.

And it is particularly difficult to ignore that, measured in terms of headline CPI for Q2 2012, for what it’s worth statistically (not much unless it continues)—we actually experienced price deflation (March CPI = 229.018, June CPI = 228.618, subject to revision).  .

Without going too far into a discussion of the emerging economies, the disinflationary patterns we are seeing in China as growth slows, is particularly alarming.  We badly need an overheated Chinese economy to inflate in order to partially offset the supply/wage imbalances and induce cross border currency revaluation to the detriment of the U.S. dollar. Today, the dollar is flying way too high, having risen in recent days to a two year high. Too high to be helpful (indeed, it will soon be the opposite) in addressing trade and current account balances.

If all we were experiencing was a debt deflation, the easing by the Fed, ECB, BOE and BOJ would have actually accomplished something. If that were the case, than central banks would have the ability to force growth in nominal GDP. But, as demonstrated via consideration of the Four Factors, such is not the case. Not even close.

Note that I am not saying that the presence of a global supply glut knocks into the gutter all economic theory that says such a thing can never occur. Markets and economies do of course tend towards Walrasian equilibrium. But I am saying that the magnitude of present imbalances, especially if not properly addressed, would take quite some time to rebalance.

As an analogy, consider that we have, since the Renaissance, generally understood that the earth always turns daily on its axis from west to east. A giant meteor slamming into its surface might alter that rotation with the result that its restoration would take considerable time, during which costs to the residents of the planet would undoubtedly be severe.  In the case of global macroeconomics, it was no meteor that hit us. We were hit by a ton of BRICs.

Irving Fisher taught that to prevent a deepening slump amidst a debt deflation we must stabilize economies and then go all-out to reflate them. The monetary authorities in the developed world have engaged in massive coordinated action to stabilize their financial systems and economies to prevent depression (at least so far). But they have not succeeded in being able to reflate the advanced economies—and will not be able to do so through a singular reliance on the blunt instrument of further monetary easing. Fisher would certainly have seen this.

We must move from stabilize and reflate, to stabilize and recalibrate:

  • It is time for creditors throughout the developed world to finally take the write downs that have long been coming their way in connection with the trillions of dollars of truly un-payable household and sovereign debts that resulted from the credit bubble of the 2000s.  Yes, this will pressure lenders and, yes, they will need to be recapitalized to the detriment of their existing stakeholders.  But there is presently no shortage of capital seeking reasonable risk-adjusted returns, and I have every confidence that it will flow eagerly into the financial sector—if only the balance sheets of our institutions were honestly reckoned by having the currently unrecoverable carrying value of assets written down to that which can be recovered today from borrowers and/or underlying collateral.
  • As I have been saying and writing about for years, we must accept the reality of what the credit markets are telling the planet’s most creditworthy governments, particularly that of the U.S.  The message is “please, here, take our money…take it cheaply and keep it safe…we have no fear of lost purchasing power, the trend is not inflationary…now take it (and use it to fix your  economy).” And that is what we must do. We must take as much 30-year money at these depression level interest rates as we need to re-employ our underemployed workers directly, on public infrastructure projects that return benefits to the economy more than sufficient to repay the sums borrowed when the time comes.  The private sector will not hire until it sees a recovery in demand—so the only agent for re-employment of workers and regeneration of demand may, for an extended time until the imbalances at least decline somewhat, be our governments.  It is long past time to pack away austerity agendas.
  • And yes, we must address and manage the process of nominal price, wage and asset value declines. The advanced economies are experiencing the effects of a supply glut, a debt overhang, massive technology-induced productivity (soon to transfer to the emerging economies, worsening the glut), and aging populations. These are all disinflationary factors. And the aggregate effect of their contemporaneous existence is deflationary—full stop. Yet in relying on monetary intervention alone we are fighting the battle to control the pace of deflation (forget about reflation) with one hand tied behind our back.Instead of targeting growth in nominal GDP, which I am proclaiming here to be a futile endeavor, we must target renewed global competitiveness and, at the very least, growth in real GDP. That means both allowing our price and wage structures to align themselves with global supply and demand and, more importantly, feeding and nurturing investment in those areas of the private sector that can employ large numbers of people at market clearing wage rates. Especially in those sectors that are more readily protected by geography from global competition.

I am convinced that if our economic policy had more closely acknowledged and addressed the challenges posed by the Four Factors, we would have made far more progress over the past five years. Let’s not waste the next five years ignoring the reality thereof.



40 Responses to “Another Summer of Discontent: The Four Factors that Explain Why What We’re Doing Isn’t Working”

Eva WebsterJuly 24th, 2012 at 4:24 pm

How does one target 'renewed global competitiveness'? Competitiveness, by definition, takes at least two and if you take it onto a global level it doesn't make sense at all…am I missing something?

EngineerJuly 24th, 2012 at 5:23 pm

I agree with the analysis of the author, something extremely rare. He brings fresh air to the public discussion. Thanks!
Until next time,

EngineerJuly 24th, 2012 at 5:28 pm

Daniel, some food for thought. I have sent open letters to the FOMC and personally to B. Bernanke. From my perspective as an engineer/economist I find that the models used in economic analysis lack a critical aspect, they don't consider the possibility of oscillatory behaviors, something that is the critical point of analysis and control in plant management (where thousands of feedback/control loops exist). And they ignore this, despite the fact that the most complex plant is ridiculously simple by comparison to the world economy. Quantitative easing is very similar to increasing the gain of those loops. Thinking that you can do unlimited QE (Krugman) and that your plant (financial system) will still remain stable is criminally incompetent from my perspective.

Until next time,

WilburJuly 24th, 2012 at 6:58 pm

The worlds current economic situation is an extension of personal economics. If you have a rich bloke who lends money to a poor bloke who’s trying to keep up with the Jones and claims he has the capacity to pay but in reality he doesn’t because his job has just been replaced by a computer, you have a problem. The rich bloke loses because he’s not going to get his money back and the poor bloke is stuffed because his credit rating is shot and he can’t get a job. What it will take is time. Time for the rich bloke to re-earn his lost money and time for the poor bloke to retrain so he can use a computer. We’re in for years of restructuring before we get out of this one.

CurtJuly 24th, 2012 at 7:26 pm

In the US to start, lower taxes on poor workers and raise taxes on wealthy in a revenue neutral way. The wealthy can't invest their extra funds and the poor will spend creating demand.

curtJuly 24th, 2012 at 7:41 pm

In US for long run, stop thinking that CEO's are smart and efficient. They don't stay up nights sweating how to make their companies efficient. They think about how to keep their lives simple while maintaining their job. If you want to figure out how to make a more efficient production line at home that is hard, if you want to find cheap labor overseas that is easy. The problem is that after exporting essentially the whole company overseas you may lose control of your market. But by then you will be long retired (they hope).

But for now don't try to change how corporations work. Just change the pay scale of the employees by changing the tax structure. Increase tax on CEOS (lower wage) lower tax on low level salaries (increase wage). We essentially did so in the opposite direction before.

lucad10July 24th, 2012 at 10:15 pm

Great essay Dan!!!

Please allow me to propose you to include within "global imbalances"
factors also:

1) increase in inequality in western world (both US and EU)
2) lack of a real free x-rate floating regime after 10 years in WTO for China
(as we discussed in your previous post)
3) Eurozone wrong design due to lack of fiscal union
4) lack of financial regulation in order to get under control over the counter derivatives

I suppose that addressing those factors, a pure political decision, may allow economies to restart towards a global "win win" development, economics discipline to regain trust and hopefully a Walrasian equilibrium.

On the other hand QE actions should support growth restoring as a short term tactict.

MarkJuly 25th, 2012 at 12:25 am

I would summarize your conclusion as "liquidate, liquidate, liquidate" and then any sovereign that has a decent credit rating should borrow as much of the resulting 'panic' capital as they can and invest in projects that generate a return above the cost of capital. The only problem is that no one trusts governments to invest well (least of all the US), and Japan certainly didn't help the case.

Turning that capital over to the citizens in the form of tax breaks might be politically easier, but would it result in enough growth soon enough to offset a rising fear of deficits?

TomJuly 25th, 2012 at 1:20 am

I'm confused by the derogatory comments about "austerian-liquidationists" who "lack coherence" followed by the recommendation for "creditors … to finally take the write downs that have long been coming their way".

Aren't write-downs the very essence of so-called liquidationism? Aren't you being a bit incoherent yourself?

I agree write-downs are necessary. The world needs cheaper assets, and it will get them, however long it takes to overcome all the political resistance.

berry leeJuly 25th, 2012 at 2:07 am

Hpefully the bottoming of the housing market will slowly but surely put more people to work building energy efficient homes at budget prices. Other BASIC industries that require more people should be stimulated also!!

AllenJuly 25th, 2012 at 1:28 pm

Dear Engineer,
I think you should read again what Krugman has been saying for the past four years. Krugman does not believe that you can do unlimited quantitative easing, what he says is that quantitative easing should be accompanied by expansionary fiscal policy. Separately, neither of the two really works, they must go together. This is what Cristina Romer has proved in an excellent article titled "Lessons from the Grear Depression". What unlimited quantitative easing can only achieve on itself is to put a stop to the debt-deflation spiral. Even if interest rates are cero, it is does help and must be done, as both Romer and Krugman discuss following what Irving Fisher argued in his famous 1933 paper on the "Debt-deflation theory". On the other hand, it is fairly easy to understand why Krugman, and also Romer and the FED, argues for more quantitative easing: because it is the only thing that the government can really do amidst a Congress that blocks all initiatives related to fiscal policy. Instead of doing nothing, at least try to keep under control the deflation spiral

tspareJuly 25th, 2012 at 2:56 pm

Thank you for the good write up. I wish the article focused a bit more on point (iii) regarding excess technological productivity vs human capital. As far as I can see, in the past the technology that accompanied industrializationn actually increased the productivity of human capital (assembly lines compared to family farming). Now, the technology tend to replace human capital completely or actually lowers the human skill set and thereby the productive value of human capital (for example, Fedex using computer to enhance their package delivery and therefore requiring less human intervention and skill). So how do you justify human capital investment (education, health etc) when technology investment offers far greater short term return compared to human labor investment. How do elected official offer proof in order to convince people that human capital investment will pay off and therefore goverment are profitably investing the money borrowed.

GuestJuly 25th, 2012 at 3:21 pm

"allowing our price and wage structures to align themselves with global supply and demand"

Who's going to tell that to all the government and corporate bureaucrats, unionized public sector workers with their million-dollar pensions, the educational establishment (including universities, which could be downsized by half), and all the other underproducing and overpaid sectors of the workforce?

There are a lot of overpaid people out there; cutting their salaries back to economically realistic levels would cause demand to crater; on the other hand letting things run on means long term economic sclerosis and ever-expanding public debt.

AllenJuly 25th, 2012 at 4:04 pm

I disagree with what you think is the author's conclusion. He is not saying "liquidate", in the sense "let the debt deflation spiral continue and liquidate everything" (conclusion that would have horrorized Irving Fisher). On the contrary, he is advocating for stimulus policy not exclusivley focused on expansiory monetary policy.

AllenJuly 25th, 2012 at 4:16 pm

Write-downs are not liquidations. The author is talking of liquidation in the sense Fisher talks about liquidation. Every dollar of unpaid debt when there is deflation becomes a dollar more expensive. It costs more because prices fall and the income to pay debts is lower. The natural way out of this situation (that is, without intervention) is a prolonged period of universal bankruptcy, in which debts are liquidated completely and deflation reaches a minimum: bankruptcies, unemployment and increased poverty. That is liquidation: liquidation of assets and debt.

R. CoutinhoJuly 25th, 2012 at 4:57 pm

You are confusing the situation unnecessarily. Technology is almost always "labor saving". That is the point of having it. When, in UK, the government ceased to give in to the demands of the stockings guild, the market took off for stockings. Some two thousand or so workers were replaced by seven hundred thousand workers (and lots more stockings, of course). The "problem" being faced early on was that the two thousand highly-skilled workers were out of jobs–high-paying jobs at that.

Over time, technology has led to increased production and increased distribution of the materials (in other words, computers get faster and less expensive, as an example). This frees up more workers to use their time doing other things. Few households have a full-time staff of maids, cooks, gardeners, etc. The electric and gas stoves (along with microwave ovens), washing machines, dishwashers, powered lawn mowers, etc. have rendered such human-intensive activities to be much less labor-intensive. One gardener can now do the job of many people from one hundred fifty years ago. That does not mean that all those who would otherwise have been gardeners are now unemployed. Far from it! Those people eventually began settling into other occupations. A prime example would be how few people are now engaged in farming.

The difficulty is finding a solution to the time necessary for the recalibration. While businesses become more and more profitable due to cutting back payrolls and employment of technological devices that greatly increase the work-per-person output, those who are no longer employed are yet to be assimilated into positions that, presumably, their counterparts will be filling in the future.

R. CoutinhoJuly 25th, 2012 at 5:01 pm

Our economy is not experiencing its death throes due to teachers and fire fighters being over-paid or having overly-generous pensions. Ask yourself: is one man's work, whatever he may be doing, worth the same as 20,000 school teachers? If not, then it is not the school teachers who are breaking the back of the economy.

spiderJuly 25th, 2012 at 5:47 pm

What if both the Luddites and the Malthusians were right? What if the environment is so highly stressed that it cannot support additional "development" (this would be reflected in commodity, land, food, and energy prices) while what work exists can be done by ever fewer people?

tspareJuly 25th, 2012 at 7:46 pm

I don't disagree at all. I was just pointing out that the time and capital required for human capital recalibration is difficult for government to justify compared to return on investment in technology. This is even worse for private corporations that need to show even faster return on investment. In my readings about WWII, the industry had no choice but to employ and train whoever they can find out of necessity. This allowed a diverse group of people to learn manufacturing skills. However that driver does not exist today so I am not sure how we can get out of this hole.

Jim HarrisonJuly 26th, 2012 at 4:47 pm

Capital (= maybe 10,000 seriously wealthy people) is perfectly content with the destruction of capital (= plant and personnel) in the United States because a higher rate of profit is available where labor is cheaper. The current depression is actually good for the people who count, which is why effective measures aren't being taken in the U.S. or Europe. Economists always seem to think that everything is a technical problem., but the current impasse is essentially political. Of course it is not necessarily obvious what the best course of action would be if the aim really were to benefit the majority of human beings, just as it isn't obvious that the masters of the universe have figured out the most efficient way to maximize their own advantage. The crucial questions, though, are not about ways and means but about how the gross imbalance of power between the emerging world wide oligarchy and the rest of us can be addressed.

TomJuly 27th, 2012 at 2:52 am

Write-downs generally do involve some kind of liquidation. Creditors rarely simply forgive debts. They seize the collateral, liquidate it, and then write down their loss. Avoiding write-downs usually means evergreening non-performing loans, or holding the collateral while marking it at face value.

Remember that Fisher was writing in the era of the gold standard, and the rapid deflation of the depression he witnessed was mainly the result of bank deposits being withdrawn and converted into gold, depleting banks of reserves and rapidly destroying broad money. Our situation is more comparable to Japan in the 90s.

John YardJuly 27th, 2012 at 4:43 am

One of the best summations of the problem I have read.. In the US, we seem to
think we can restore the status quo ante given enough time. Nothing has been done concerning global imbalances, and nothing has been done about the slow decline in real wages of the working class and middle class in the developed world.

Hmmm...July 29th, 2012 at 10:48 am

Much of what has been said is spot on, although we think we are in the worst of worlds, who knows what would have eventuated in the cliff of 2008 (China spent nearly 40% of GDP at the time to produce 10% growth). So this is where we are at if stabilized just before a depression. Global overcapacity is severe, was severe a decade ago. But the problems are even larger than the author suggests, because there are global expectations for advancement of living standards and growth.

Globally, asset prices are severely out of sync with domestic economies and the ability of those "cheap" workers to pay ( I have stood in line buying 40 or 50 USD of groceries while the two girls behind me spent .40 US cents on the next 4 meals). As there exists great and significant overcapacity in East Asia, as China's Financial Repression mechanism has focused greater growth of capacity across broad ranges of industries (as companies used borrowed funds to build more primary capacity and speculate in any number of bubbles copper, garlic, stockmarket, housing, etc…) lessor capitalized markets struggle in the region while asset valuations explode. This in an era where MENA will seek to stabilize in growth post-revolutions, LA is being squeezed, Emerging Europe holds advancement expectations, and Africa asks itself if the long held memes popular in support of unpopular nationalistic infused dictatorships have become true regarding using Africa for its Natural Resources. Africans, as each of these others are expecting to produce, not just have a few dig their resources and send abroad.

This portends, in addition to the authors perspectives, even were Asia to navigate the 15 or 20 years to switch their models toward their own demand rather than grwoing off others demands, that there is much afoot in the global economy. that new grand bargains need be struck, new condominiums achieved.

Remember, at this time, it is not the failure of the model, despite rapidity of growth in the 2000's being so destructive that is to be considered, it is the success, and near wholesale acceptance of the franchise that needs to embolden the next step in the model.
There is no other way, the State Led model of Economic Development has much less relevance insofar as global demand conditions have an inability to satiate the needs of so many who would hope to employ it. greater maturity in these things will have to eventuate for the world to progress in stability and advancement of the global peoples interests. Income inequality dynamics will have to reverse globally and elites would be wise to sure up their positions (as perhaps Gates and Buffett would have the prescience and good mindedness to know). The net several decades will be interesting and it will require such.

barfJuly 29th, 2012 at 3:17 pm

As usual another article with little to know data but lot's of "good verbage courtesy of opinions on the good verbage people." the simple fact is the economy would be growing a solid 4 percent a year right now if it weren't for state and local governments going…in effect…bankrupt. this is not a surprise as it is the taxpayer that has been completely annihilated by Alan Greenspan and friends. how the State and local governments get out of this mess is anyone's guess. i would like to think blasting away at Wall Street wouldn't be a bad start…buy, hey…who want's politics in their politics anymore? private sector recovery is not great…but it is a recovery. Larry Kudlow has called it perfectly "GROWTH RECESSION." Make your investment/work judgements based on that (to me) highly accurate observation and i think your money will do well by you. Less "fear of investing"…but "avoidance of Facebook et al" at the same time. Investment in the USA has never been stronger. Nat gas, solar, cloud computing just for the speculative "game changer" stuff. Chemical space which is the building block for an industrial recovery is on track. Dupont, Monsanto in the Ag space–Exxon Mobil is a big one as well. A real flyer is Lyondell.…
better get that high yield while it lasts!

burghardtJuly 31st, 2012 at 3:35 am

Good points all, Daniel, but few of your proposal will take hold until the need for them is understood and supported at the grass roots.

fornelasJuly 31st, 2012 at 4:28 am

Simon Johnson has made some similar arguments, but we public and politicians too prefer white lies and inaccurate statements about the state of the economy. The current productive imbalances is what has made the recovery weak and the duration in between recessions window shorter. Technology and globalization have altered the rules of the game and old recipes no longer work.

GerryAugust 3rd, 2012 at 10:03 pm

Given the Tea Party victory in Texas for the run for the Senate, hope is not exactly springing forth about the American electorate. The do-nothing, know-thing swing of one of our two parties casts a dark shadow over all great macro economic strategies that demand facing the brutal facts. We can hope Texas was a fluke but day-to-day events indicate otherwise.

joseph glynnAugust 7th, 2012 at 12:11 pm

No mention of the global private banking cartel who caused this mess by gambling everyone's savings, and our future on a ridiculous and unsustainable global bubble in real estate and construction for big short term gains and fat bonuses. 'Economists', the respected author included, seem far divorced from reality. Have they forgotten the proper focus of their work is 'the study of political economy'. Prescribing global solutions, which ignore political realities including my generation's slavery to the private banking interests who control the creation of credit money and it's sectoral allocation must be fun! It is well for the economics profession, paid handsomely to paper over the naked delinquency of bankers and policy makers.

Spike McLartyAugust 9th, 2012 at 2:44 pm

So if I understand correctly… after the local (i.e. zero-sum) solutions have been fought out and made the mess worse, it will persist until we see some or all of:
1. massive global destruction of capital
2. "cruel bankruptcy, unemployment, and starvation" and massive defaults on debt
3. regression in technological productivity
4. substantial reduction of retired cohort in first world.
That sounds like fun…

Mark PlantAugust 15th, 2012 at 8:03 pm

I would think some form of direct investment into smaller companies with labour base industries is required. The balance between the developed world and the developing world need to be rebalanced. At this time investment or access to investment for new or young companies is zero. It needs systems for direct investment into business the bank refer to as beyond high risk. To build new companies monies are required for highly expensive equipment (your point three type) as without this type of equipment the new business are force to use poor efficiency methods reducing profit and stop their growth (this is a secondary effect of increasing tech on new and young companies).
Without something along these lines we will see no growth and continue to be depend on the old style companies we have now, which will keep the status quo we have.
What do you think, would this be workable or is it a stupid idea?

sandraharrietteAugust 21st, 2012 at 3:41 am

At first, I had to consider what you meant at the end, concerning fighting a battle with "one hand tied behind our backs". Aligning job wages and prices with global supply and demand seems to be key to us winning that battle.

Overall, this is a lot to absorb. The philosophy is rich and deep…I have a lot to learn.

I have taken the "stabilize and recalibrate" concept deeply to heart. Out of all of this, that one phrase alone has stirred me and spurred me on to continue investigating.

Michael E PicrayOctober 20th, 2012 at 7:11 pm

First – there is NO "insufficiency of demand". There is lots of demand. BUT there is an insufficiency of capacity to ACCESS the supply! ie people can't afford to BUY!

The reason is that we are experiencing hyper-inflation. Whaaaaat? You say inflation is only running 1 or 2%? Says WHO? Oh… Mr Central Banker himself, aka Bungling Ben Bernanke (BBB) who juggles the inputs to compute inflation until he gets his "targeted" rate, then he proudly announces that inflation is LOW!!! (This also answers your question as to why QE1 – infinity is "not causing inflation." Have you tracked food prices for the last three years? How about fuel prices for the last two or three years? (Food is running between 20 and 30% inflation and gasoline prices are now about 200% above what they were in my area (mid-west) two or three years ago. No inflation? As I heard one pundit put it – "No inflation? That's correct as long as you don't have to eat or drive a car." And who would these demanders be if they had excess cash? Yep. The same folks who think that eating and driving to work are more important than buying non-essentials just to make BBB look good.

So dream on, o' ye inhabitants of fantasy land!!!

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