"Plenty of Nothing: the Current Status of the U.S. Economy"

by W. Curtiss Priest

23 February 2000 01:19 UTC

W. Curtiss Priest, Ph.D. Center for Information, Technology & Society 466 Pleasant Street Melrose, MA 02176 E-mail: BMSLIB@MIT.EDU, Voice: 781-662-4044, FAX: 781-662-6882 web: Cybertrails.Org

This document may be distributed freely

February 22, 1999

An Open Discussion with Government, Foundations, Non-profits and Grassroots Efforts

Public Issue #51:

CITS DEBT WATCH

"Plenty of Nothing: the Current Status of the U.S. Economy"

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Commentary by Dr. W. Curtiss Priest, Director:

That the stock market has not yet imploded is a tribute to the hope and optimism that rests at the core of what it means to be human.

That this characteristic of mankind creates manias, panics and crashes is well documented by Charles Kindleberger and Harry Schultze.

That both authors say this behavior occurs, regardless of any single voice to the contrary, has somewhat abated my efforts to be such a voice to the contrary.

Nonetheless, that this country has a total "debt exposure" that is greater than any time in history, is something to ponder (see table below).

This issue of the CITS DEBT WATCH picks up with Mr. Thomas Palley's insightful book: _Plenty of Nothing: The Downsizing of the American Dream and the Case for Structural Keyesianism_. (Princeton: Princeton University Press, 1998).

About a month ago I was scanning the _Journal of Economic Literature_ to find a review of this book by Robert Blecker from American University.

The review was very positive, stating, " this book ... comes as an important reminder that the current short-term, aggregate prosperity of the American economy conceals long-term trends toward rising inequality, increasing insecurity, and slower growth." (p. 1189, September, 1999)

There are two fundamental observations of Palley:

1. The Federal Reserve Board has been "co-opted" by the financial community, is comprised by the financial community, and places the reduction of inflation as a priority -- much above any other social goal -- reduced unemployment or reductions in wealth disparity

2. The balance of power has dramatically shifted from workers to the owners of capital. The result is the exploitation of workers to the extent that wages have lagged far behind productivity increases.

The second observation is similar to that of Ravi Batra in The Crash of the Millennium_ (1999) where Dr. Batra identifies the "wag lag" as the primary reason for the dramatic increase in household debt.

The explanation?

Mainstream America wished to participate in the "prosperity" of the '80s and '90s, and would go deeply into debt to accomplish this!

Batra goes further than Palley on this score. Palley, on pages 206-207 talks about the "fragile household" -- "Expansion of household debt has always been an important source of demand growth in the U.S. economy, paving the way for expansion of the mass market. However, in past decades, household borrowing was predicated on the confident presumption of rising incomes to pay it back and was therefore "demand leading." Today, with declining wages, debt is being incurred to maintain existing living standards and fill the gap in demand that would otherwise emerge. Debt has therefore changed from being "demand leading" to being "demand maintaining." Batra devotes many more tables and chapters to this issue.

Whomever, both consider this a "Recipe for Depression" (Palley, p. 202).

Palley says, "[c]hallenging the current euphoria has the appearance of raining on the parade. However, without seeking to predict when the next recession will occur, there are grounds for believing it will prove deep, to the point of potentially becoming a depression. The changes associated with the move from Main Street to Mean Street capitalism has been of sufficient magnitude, and the stabilizing structures associated with the Gold Age of 1950-70 have been so eroded, that the economy is now vulnerable to the types of seismic shock that generated the Great Depression." (p. 202)

I am struck by various accounts in the news that acknowledge that some kind of bubble is occurring, but which describes the 'thinking' behind this as 'I know there is euphoria, mania, and a bubble' _but_ 'I will get out in time.'

The next stage of this process, as described by Kindleberger, is a period where the speculator does not wish to lose his/her investment. As a result, the speculator looks at every market "setback" as a "buying opportunity" -- to the point that major setbacks will "appear" as yet a grander buying opportunity.

Thus is born the unraveling of the bubble, as innocents rush in to buy stocks that are heading for as low as 5-10 % of their highest point.

But, as I have said, it doesn't do any good to advise them of this future.

They only listen to the fact that their friends are still making money while they sit in cash. Even Sir Isaac Newton couldn't resist in the South Sea bubble. He went to cash when he (correctly) determined it was a bubble, but could not stand being left out. He went back in to lose everything. According to a recent account (the original is in Kindleberger) Newton lost $2 million (Editorial Humor, Issue 238, January 26, 2000, p. 9). (in that $2 million is a largish sum for 1720, I have inquired as to whether this is reported in actual or "real" dollars.) Regardless, we must believe that Sir Newton was quite intelligent, thoughtful, and, yet, still was seduced by the mania about him.

Structural Keynesianism

To conclude, we must give credence to Palley's overall argument for "Structural Keynesianism."

Original Keynesian thought basically suggested that the federal government should spend money when the economy is weak; conserve money when the economy is strong.

This action would be counter-cyclical -- the government would be able to reduce economic peaks and economic lulls.

Palley's position (as a labor economist with the AFL-CIO) is much stronger than this.

Having witnessed the decline in unionism, and witnessing that unionism is interpreted as a hindrance to the economy -- rather than a balancing force -- Palley calls for the federal government to restructure what Blecker calls the current "neoclassical tradition of economic thought," which Palley labels "economic naturalism."

Palley argues that there is nothing inherently "good" about just letting markets take their own course. In this position, he sets himself apart from the current era.

Even Adam Smith in the _Wealth of Nations_ did not promise that the "iron hand" of the economy would produce a perfectly working society (or economy).

And, we need only point to the need for, say, National Defense, to know that there are various activities that fall under the activity of our government to conduct and maintain.

Palley argues, and this author agrees, that the current capitalistic regime is balanced too much towards the owners of capital and against the income of those employed under it.

Indeed, Grader in _Secrets of the Temple_ understands that when an economy becomes too imbalanced -- that is -- there is too much wealth in the hands of the owners; and too little wealth in the hands of the consumers -- that this imbalance produces an implosion of the economy. There is ONLY so much consuming that households can do with debt, after which, they are sucked dry.

It is this process that brings the entire economy to a halt -- referred to as a "depression" -- until -- finally -- debts are called in as they can be; foreclosures occur as they can; and, finally, the level of debt is reduced to a level that the economy can, once again, function 'normally.'

-- Spoonfed (Spoonfed@spoondfeddd.xcom), February 23, 2000

Answers

Excellent article! Thanks!

-- no (debts@here,thank.God), February 23, 2000.