Roach & stagnation

In his recent New York Times op-ed piece, Steven Roach says:

The Bank of Japan ran an excessively accommodative monetary policy for most of the 1980s. In the United States, the Federal Reserve did the same thing beginning in the late 1990s. In both cases, loose money fueled liquidity booms that led to major bubbles.

But why is it excessively "accommodative monetary policy"?

Without this kind of monetary policy in the late 1990s, the US economy would likely have stalled in 1996 or 1997 or thereabouts. The short period of close-to-full employment at the end of the decade would not have happened. Without this kind of monetary policy, the recession in 2001 would likely have been deeper and longer, with even more negative impact on workers. It seems like the US economy cannot have half-decent growth of demand without "excessively accommodative monetary policy"!

What's the problem? To my mind, it's the way that the distribution of income and wealth have steadilyly tilted to the right (since 1980 or so), with the rich getting richer (and richer and richer...) and the rest of us facing stagnant or even falling incomes. This has led to a stagnation of mass consumption (absent expansion of credit) or what I've termed the "underconsumption undertow."

Just as a strong swimmer can beat an undertow, an economy can enjoy demand growth, roughly in step with its potential growth, despite an underconsumption undertow. (For the mathematical condition that must be met for this to happen, see my 1994 RESEARCH IN POLITICAL ECONOMY article.) This can happen due to private nonresidential fixed investment, as happened in the late 1990s. It can happen due to investment in housing and credit-based expansion of consumer spending, as has happened in the post-2001 period until recently. It can also happen due to increased luxury spending, as has happened since about 1980 or so, accelerating in recent years. With stagnant underlying consumer spending (sans credit expansion) in place, all of these props but perhaps the last (i.e., increasingly luxury spending) require what Roach calls "excessively accommodative monetary policy."

The problem is that relying on any of these props makes the economy increasingly unstable, i.e., prone to collapse. Fixed nonresidential investment is notoriously less stable than consumer spending. So is luxury spending -- since, after all, it's not really needed. Housing investment is also unstable, fluctuating more than most. And credit-based consumption spending leads to the accumulation of debt, which is hard to sustain. In a time when the Federal government's purchases (G) were shrinking as a percentage of GDP, these private-sector sources of instability become increasingly important.

(Federal G shrank relative to GDP from 1991 to the present, with an up-tick about 2001 to 2004 which did not cancel out the over-all trend. The up-tick partly reflects the increase in military spending. State & Local purchases are ignored because those governments behave more like consumers, varying purchases with tax revenues.)

So the general growth story that the US has followed as a way to deal with the underconsumption undertow has been to use "excessive monetary accommodation" to pump up bubbles, not just financial but real ones (based in spending on goods and services). This has lead to what the late Hyman Minsky called "financial fragility" -- plus real fragility. The fragility has led to recessions.

As Roach notes, the 2001 recession and the current one (if it ends up being classified using that term) both involved bubbles popping: underlying instability came to the top. He then suggests that infrastructural investment (and if the US is lucky, export growth) can fill the gap. Hopefully, it will be "green" investment. My friend Julio adds the Clintonesque point that the government could invest in "human capital" (i.e. education). That's fine, but I would add in basic research, public health, reconstruction after disasters (think New Orleans), and the like. Then, the government should not try to fund these investments out of a balanced budget but instead by using credit. After all, corporations don't run balanced capital budgets.

The increased role of government sure fits with the normal tendency of capitalism that results from what Engels calls the contradiction between socialized production and private appropriation (of profits). That is, all else constant, this contradiction drives the capitalist state to play a bigger and bigger role (at least until things have settled down, the way they did in (say) the 1950s). It socializes private losses.

But what about raising (after tax) wages, to strike a direct blow at the underconsumption undertow? In theory, this could make bubbles unnecessary to stable growth. This kind of solution seems totally forgotten. That's likely because it involves reversing the ongoing one-sided class war.
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Jim Devine