What is very clear from
this analysis is that there are really only three sustainable solutions to the
global crisis in demand. Either the world has to embark on a surge in
productive investment, or we need to reduce the income share of the state and
of the rich, or we must accept that unemployment will stay high for many more
years.
The first is possible, but
with so much excess manufacturing capacity and excess infrastructure in many
parts of the world, and with significant debt constraints, we need to be very
careful about how we do this. Certainly countries like the United States, India
and Brazil
lack infrastructure, but they do so largely because of political constraints,
and it is unreasonable to assume that any of these countries will soon embark
on an infrastructure-building boom.
Even if they do, the amount
of excess savings is likely to be huge, and without a significant
redistribution of income to the middle classes and the poor, it is hard to see
how we can avoid high global unemployment for many more years. Because trade
war is the form in which countries assign global unemployment, I would expect
trade relations to continue to be very difficult over the next few years, as
countries with high unemployment and low savings intervene in trade, thus forcing
the savings back into countries with excess savings.
So what are the policy
implications? Clearly Europe, the US,
China, Japan, and the
rest of the world must take steps to reduce income inequality. Just as clearly
countries like China and Germany must take steps to force up the household
income share of GDP (in fact polices aimed at doing this are at the heart of
the Third Plenum reform proposals in China). Because it will be almost
impossible to do these quickly, as a stopgap countries with productive
investment opportunities must seize the initiative in a global New Deal to keep
demand high as the structural distortions that force up the global savings rate
are worked out.
But redistributing income
downwards is easier said than done in a globalized world, especially one in
which countries are competing to drive down wages. The first major economy to
attempt to redistribute income will certainly see a surge in consumption, but
this surge in consumption will not necessarily result in a commensurate surge
in employment and growth. Much of this increased consumption will simply bleed
abroad, and with it the increase in employment.
Less global trade, in other
words, will create both the domestic traction and the domestic incentives to
redistribute income. In a globalized world, it is much safer to “beggar down”
the global economy than to raise domestic demand, and so I expect that there
will continue to be downward pressure on international trade.
Until we understand this do
not expect the global crisis to end anytime soon, except perhaps temporarily
with a new surge in credit-fueled consumption in the US (which will cause the
trade deficit to worsen) and more wasted investment in China (which, because it
is financed with cheap debt, which comes at the expense of the household
sector, may simply increase investment at the expense of consumption). These
will only make the underlying imbalances worse. To do better we must revive the
old underconsumption debate and learn again how policy distortions can force up
the savings rate to dangerous levels, and we may have temporarily to reverse
the course of globalization.
I will again quote Mariner
Eccles, from his 1933 testimony to Congress, in which he was himself quoting
with approval an unidentified economist, probably William Trufant Foster. In
his testimony he said:
It is utterly
impossible, as this country has demonstrated again and again, for the rich to
save as much as they have been trying to save, and save anything that is worth
saving. They can save idle factories and useless railroad coaches; they can
save empty office buildings and closed banks; they can save paper evidences of
foreign loans; but as a class they cannot save anything that is worth saving,
above and beyond the amount that is made profitable by the increase of consumer
buying.
It is for the interests
of the well-to-do – to protect them from the results of their own folly – that
we should take from them a sufficient amount of their surplus to enable
consumers to consume and business to operate at a profit. This is not “soaking
the rich”; it is saving the rich. Incidentally, it is the only way to assure
them the serenity and security which they do not have at the present moment.
(…)
Inevitably some one will
discover that Keynes and Krugman said many of these things, in which case the
essay is the work of the devil and innocent young people should not be allowed
to read it, or that it agrees with things that Laffer and Friedman have said,
in which case ditto. In fact an awful lot of economists in the past 200 years
and on every part of the political spectrum have agreed with some or all of
this model, mainly because it is just basic economics. There should be no guilt
by association here, please.
This article originally appeared in China Financial Markets.
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