The New America Foundation has published what I believe will go down as one of the most important papers published about our current economic problems.
They argue that the current Great Recession is not an ordinary business cycle downturn. It is actually more similar to the Great Depression than has been thought. And, it has been coming for the past twenty years or so. The basic issue is that we live in a finite world, but a world which really had been divided into two parts - the haves and have-nots, developed and undeveloped nations. Over the past 20 or so years many countries, especially China, have been moving from the undeveloped to the developing state, while the developed world has been becoming more efficient, particularly with regard to productivity. From the report:
In consequence, the world economy now is beset by excess supplies of labor, capital, and productive capacity relative to global demand. This not only profoundly dims the prospects for business investment and greater net exports in the developed world — the only other two drivers of recovery when debt-deflation slackens domestic consumer demand. It also puts the entire global economy at risk, owing to the central role that the U.S. economy still is relied on to play as the world’s consumer and borrower of last resort.
The global economy has brought about more competitive labor forces with the result that power has shifted away from labor and towards capital. The result: "stagnant wages in the United States, but also in levels of income and wealth inequality not seen since the immediate pre-Great-Depression1920s".
The report analyzes the attempts made to turn the economy around and concludes that those tried have either gone as far as they can go or have not worked. They are especially dismissive of the fiscal austerity road.
They propose that we proceed in three areas if we are to defeat this severe economic illness:
First, as Pillar 1, a substantial five-to-seven year public investment program that repairs the nation’s crumbling public infrastructure and, in so doing, (a) puts people back to work and (b) lays the foundation for a more efficient and cost-effective national economy. We also emphasize the substantial element of “self-financing” that such a program would enjoy, by virtue of (a) massive currently idle and hence low-priced capacity, (b) significant multiplier effects and (c) historically low government-borrowing costs.
Second, as Pillar 2, a debt restructuring program that is truly national in scope, addressing the (intimately related) banking and real estate sectors in particular – by far the most hard-hit by the recent bubble and bust and hence by far the heaviest drags on recovery now. We note that the worst debt-overhangs and attendant debt-deflations in history6 always have followed on combined real estate and financial asset price bubbles like that we have just experienced. Accordingly, we put forward comprehensive debt-restructuring proposals that we believe will unclog the real estate and financial arteries and restore healthy circulation – with neither overly high nor overly low blood pressure – to our financial and real estate markets as well as to the economy at large.
Third, as Pillar 3, global reforms that can begin the process of restoring balance to the world economy and can facilitate the process of debt de-levering in Europe and the United States. Key over the next five to seven years will be growth of domestic demand in China and other emerging market economies to (a) offset diminished demand in the developed world as it retrenches and trims back its debt overhang, and (b) correct the current imbalance in global supply relative to global demand. Also key will be the establishment of an emergency global demand-stabilization fund to recycle foreign exchange reserves, now held by surplus nations, in a manner that boosts employment in deficit nations. Over the longer term, we note, reforms to the IMF, World Bank Group, and other institutions are apt to prove necessary in order to lend a degree of automaticity to currency adjustments, surplus-recycling, and global liquidity-provision.
The report is fairly complex. For a summary, read Joe Nocera's column.
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