America is turning Japanese – and by that I mean it is headed for a lost decade, a period of slow growth, high unemployment, deleveraging, and debt deflation. Outright depression will only be avoided by the role of government in maintaining aggregate demand. The situation will be made much worse if and when serious austerity is implemented in the coming years, as, for example, in Japan from 1996–1997, when Ryutaro Hashimoto turned to contractionary fiscal policy, plunging the country back into outright recession (and at the time of the East Asian financial crisis too).
Some quick links below on reaction to the stimulus
(1) Caren Bohan and Laura MacInnis, “Obama unveils jobs creation package,” Independent, 9 September 2011.In particular, L. Randall Wray and Stephanie Kelton in the last link show what is really required to create full employment in America: a massive and direct jobs creation program by the government and large-scale fiscal stimulus.
(2) Paul Krugman, “Setting Their Hair on Fire,” September 8, 2011.
(3) Bill Mitchell, “It is Easy to Create Jobs,” Billyblog, September 9, 2011.
(4) Gwendolyn Mink, “About That Payroll Tax Cut,” September 9, 2011.
(5) L. Randall Wray and Stephanie Kelton, “What the Country Needs Is a New New Deal,” September 8, 2011.
It can’t be stressed enough that a Post Keynesian or MMT solution to the current woes would be far more radical than anything Obama has proposed.
Post Keynesians in particular support some very severe reorganisation of the financial sector and re-imposing effective financial regulation. Much of the burdensome private debt saturating private households in the US should be written off or re-structured.
Hello Lord Keynes,
ReplyDeleteInteresting post. What do you think about the problem of stagnant wages in the United States? My understanding is that real wages for the average American worker have been stagnant or even shrinking since the 1970s.
Ultimately, it would seem like this is the ultimate structural root of the current crisis as workers have borrowed too much to maintain a middle-class lifestyle while the very wealthy, who have received a disproportionate share of the wealth generated by growth and higher productivity, went on a speculative frenzy.
Some of the libertarian socialist schools of thought and even some Marxians have made the above point and I find it compelling.
I think that, in addition to Post-Keynesian macroeconomic strategies, at the micro level of the firm, worker ownership and management of firms is the right way to go. What do the Post-Keynesians think of things such as worker’s cooperatives?
Also, what do you think about the argument that automation and globalization reduce the effectiveness of Keynesian fiscal policy? Some writers argue that because of automation and outsourcing, traditional Keynesian stimulus will no longer produce as much work for humans or for workers within the country that is implementing the fiscal stimulus.
Sorry for the long post!
"What do you think about the problem of stagnant wages in the United States?"
ReplyDeleteThis is a very serious problem: and it is one of the reasons why people have been driven into debt over the past 30 years.
The solution is stronger trade unions and government policy to encourage rising real wages in line with productivity growth.
"Ultimately, it would seem like this is the ultimate structural root of the current crisis as workers have borrowed too much to maintain a middle-class lifestyle while the very wealthy, who have received a disproportionate share of the wealth generated by growth and higher productivity, went on a speculative frenzy."
There is a great deal of truth in this. But even the middle class and workers have been tricked into the "speculative frenzy".
"Also, what do you think about the argument that automation and globalization reduce the effectiveness of Keynesian fiscal policy?"
ReplyDeleteTo the extent that private sector jobs in manufacturing and even middle class service jobs now have been lost, yes, it reduces the ability of Keynesian fiscal policy to produce new private sector employment.
However, Post Keynesians are aware of this problem. The solution is industrial policy and trade policy. I mean, some kind of limited protectionism is probably necessary as a first step. It's madness to let your industries get shipped overseas year after year, driving up your trade deficit and creating serious unemployment. I say: beat the mercantilists in East Asia (China, Japan etc) at their own game, the game of industrial policy. The reason why Japan, South Korea, and Taiwan are industrial giants isn't free market economics: its radical state intervention.
The long-term solution is industrial policy designed to create new industries and increase the productivity of Western industries, so they can compete.
I have engaged in some rather speculative musing on this here:
http://socialdemocracy21stcentury.blogspot.com/2010/09/automation-and-robotics-future-of.html
When the private sector can't create the necessary jobs to employ people, the public sector must do it. And it's not as though there aren't plenty of socially and economically useful things that can be done by the public sector.
What do the Post-Keynesians think of things such as worker’s cooperatives?
Post Keynesians wouldn't oppose them. I think such an economy mainly composed of workers cooperatives would still require macroeconomic policies, however. Supply-side inflation needs some larger policy over and above individal firms' decisions, for example.
What exactly do we mean by real wages of the average worker?
ReplyDeleteBecause for any particular worker who is an 'average worker', if his real wages rise, then he will no longer be the average worker! It's a tautology.
Consider this: you have a normal distribution (I know, I know) of real wages and number of people earning those real wages. Let's say that in 1970, the mid-50% of real wages were between $12/hr and $15/hr. That is: $12/hr is the 25th percentile and $15/hr is the 75th percentile. Okay, now in 2000, let's shift all those real wages rightward by $5/hr. Now, we notice that $12/hr is the 20th percentile and $15/hr is the 65th percentile. If we are careless, we may look at this and assume that since a smaller percentage of people is earning $12-15/hr than 1970, then wages for the average worker have not risen at all, but have fallen. But the entire normal distribution curve has shifted rightwards. If we actually looked at the mid-50% now, it would be $17/hr to $20/hr.
This is why it is extremely problematic to compare real wages across decades. Do we look at changes in income at the same percentile, or changes in percentile at the same income level? Besides, CPI is easily comparable for successive years, but not for decades, when the basket of goods has changed entirely.
To make it even more problematic, look at this situation. In 1970, a 21-year old boy named ABC is flipping burgers at McDonalds and may be earning a real $6,000 p.a. In 2000, 51-year old ABC is earning $75,000 p.a. In 2000, another 21-year old boy, XYZ, is flipping burgers at McDonalds for $4,000 p.a. In 2030, 51-year old XYZ is earning $120,000 p.a. One may look at the fall in the burger-flipping wages and assume that someone has become poorer. Except that someone has already moved to another job. The income of the same flesh-and-blood person has actually risen. And moreover, the younger man XYZ could grow up to earn even higher incomes at 51 than ABC was at 51.
Basically, there is no easy way of determining whether people are richer or poorer than they were 30 years ago. If we were to compare the incomes of people of the same age doing the same job across two different periods, maybe. Even then, they would not be a representative sample.
"This is why it is extremely problematic to compare real wages across decades ... Besides, CPI is easily comparable for successive years, but not for decades, when the basket of goods has changed entirely."
ReplyDeleteBut, even by this reasoning, then you can compare real wages over the past 3/4/5 years: you can gauge whether they are rising in the short term.
"However, Post Keynesians are aware of this problem. The solution is industrial policy and trade policy"
ReplyDeleteAnd/or accommodation. Don't reward with public funds the capital inflows into public financial assets and don't deprive your domestic sector of financial assets because of overseas hoarding.