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Title: Talking Economic Blues Author: Ron Tabor Date: February 17, 2018 Language: en Topics: United States of America, Economy, The Utopian, economics, financial crisis Source: Retrieved on 11th August 2021 from http://utopianmag.com/archives/tag-The%20Utopian%20Vol.%2017.2%20-%202018/perspectives-on-the-u-s-economy/ Notes: Published in The Utopian Vol. 17.2.
The recent volatility in the US stock market and in financial markets
abroad has raised the question of the health of the US and global
economies. As is their wont, a slew of economists and financial
professionals have reassured us that economic “fundamentals are sound.”
And yes, according to a variety of measures, the US economy appears to
be very healthy, while the international economy, for the first time in
some years, is expanding. Official unemployment in the United States is
at a record low of 4.1%. (It was only a few years ago that 5%
unemployment was considered “full employment.”) Consumer spending is
robust. Inflation is modest (although there are signs that it is
increasing, which was the likely cause of the plunge in stock prices).
Corporate earnings are strong. And the stock market, even after the
recent sell-offs, is at or near historic highs.
Yet, somehow, we are not quite reassured. It’s hard to dismiss the drop
in the stock indices as a mere “correction,” let alone a “salutary” one.
In addition, some may remember that in the run-up to the Great Recession
of 2008–09, then-President George W. Bush also insisted that the
“fundamentals are sound,” while during the prelude to the collapse of
the dot.com bubble and recession of 2000, after the longest economic
expansion in the post-World War II period, we were told that things
couldn’t be better.
A closer look at the current US economy reveals some troubling
questions. While official unemployment is way down, the labor
participation rate – that is, the percentage of the potential workforce
that is either working or looking for work – is also at a record low:
62.7%.This means that whatever the government may say, real unemployment
is much, much higher than the official statistics indicate. To put this
more graphically, in various parts of the country — among them,
Appalachia and other rural areas, parts of the Rust Belt, and the inner
cities outside the Rust Belt – a great many people are without jobs,
without hope of finding one (either unwilling or unable to move to where
the jobs are or lacking the skills to do them), and very likely to be
addicted to opioids and/or other mind-altering substances. And this is
not to mention those who are struggling to make ends meet on one, two,
or even three poor-paying, part-time jobs. At the same time, several
sectors of industry are complaining about a shortage of semi-skilled and
skilled workers. Beyond all this, the growth in labor productivity has
been worrisomely slow, the rate of business investment has been tepid,
and the “wealth-gap” between the rich and everybody else is continuing
to grow. Finally, it’s worth noting that while consumers are currently
spending at robust levels, the savings rate is extremely low. In other
words, people are spending everything they earn (and even borrowing to
finance their purchases) and are not putting any money away for a rainy
day. If/when the currently optimistic economic picture starts to get
cloudy, let alone becomes downright dark, people are likely to curtail
their spending very rapidly.
Despite the economists’ confident prognostications, the reality is that
nobody really knows what causes the ups and downs in the economy (the
so-called “business cycle”), let alone is able to predict precisely when
economic upturns and downturns will occur. There are a myriad of
competing theories out there, none of which has ever been empirically
confirmed, while detailed analyses of economic crises over the years
(even over the centuries) reveal that no two business cycles have ever
been the same.
In fact, at the highest, most abstract level of economic theory, the
business cycle is not supposed to happen at all. In this realm, the
fundamental assumption is that when markets are free, that is, operate
without monopolies, oligopolies, and other obstructions, they are fully
transparent — that is, at any given time, prices give complete and
accurate information about economic conditions — and all participants in
the market – businesspeople big and small, workers, consumers, bankers,
investors, etc. – act on the basis of full and accurate knowledge and in
a rational manner. In such a situation, the market and the economy as a
whole will always be in “equilibrium,” and no such thing as a “business
cycle” will ever occur. The absurdity of this conception, as well as its
complete irrelevance to the real world, should be obvious (except to
those whose minds have been completely addled by political ideologies
and mind-numbing abstractions). Most obviously, markets are not always
free, people do not always act on the basis of complete knowledge of
market conditions, and they do not (duh!!!) always act rationally.
“Neo-classical” economists have modified this view in some ways but have
retained its essence. Thus, the “monetarists,” such as Milton Friedman
and other members of the “University of Chicago School” of economic
theorists, insist that economic crises and the business cycle as a whole
are purely monetary phenomena, caused by there being either too much or
too little money in circulation. In their view, if the central banking
authorities – in the US, the Federal Reserve Board – were to ensure a
slow and steady increase in the supply of money, economic growth would
occur smoothly and uninterruptedly, and no crises would occur. One of
the fallacies of this view is that, in the real world, the central
bankers do not at all times have accurate knowledge either of the amount
of money in circulation or of its “velocity” (how fast it changes
hands). With the massive expansion and intricate elaboration of the
credit/financial markets that are characteristic of the modern
capitalist economy, no such knowledge is possible. Beyond this, the
conception is completely tautological. When an economic crisis does
occur, this is deemed to be because the monetary authorities did not
perform their task competently. (It’s like the New Age belief that you
can do whatever you want as long as you truly believe you can. Thus,
when you jump out of a window and, instead of flying, break your neck,
this is because you didn’t really believe you could fly.)
To their credit, the Keynesians recognize that economic cycles and
crises are endemic to the system, but their view of the cause of such
crises – that as people become wealthier as the economy expands, they
tend to spend proportionally less of their incomes – is too vague to be
of much use in explaining, let alone predicting, the economic cycle
(although it has led them to understand that when crises do occur, the
government needs to act quickly to stimulate “effective demand”).
Marxists also understand that economic crises are a fundamental
characteristic of capitalism, but Marx himself never developed a unified
and consistent theory of the business cycle, and to this day, there is
no more agreement among Marxists than among mainstream economists on
what actually causes such cycles and their concomitant crises. The
simplest and most basic of these explanations is that the capitalist
economy, because it results from the spontaneous and disconnected
activities of large numbers of people (that is, is unplanned), is
intrinsically characterized by what Marx called the “anarchy of
production.” Over the course of a given economic cycle, the different
sectors of the economy do not develop at precisely the same rate. The
result is the build-up of “disproportionalities,” which sooner or later
cause the economy to crash. To put this in more modern terms, the
equilibrium among the various facets of the economy that is necessary to
sustain the economy’s smooth and continuous expansion is a fragile one;
it is easily disrupted and cannot be sustained indefinitely. Over time
and in various ways, the economy gets further and further removed from
this optimum. Eventually, this causes the economy to abruptly slow down
(“crash”) and enter into a recession or worse.
As an aside, it is worth noting that some economists who have studied
the business cycle in detail, such as Joseph Schumpeter, claimed to have
discerned as many as four distinct cycles or “waves”, ranging from 3–4
to 50+ years, whose complex interactions lie behind and explain the
oscillations of the economy.
Of these, the cycle/wave I believe is most relevant today is the one
that appears to occur over roughly eight-to-ten years. (This was the
focus of Marx’s theorizing.) The expansions (and the recessions that
followed them) of the 1960s, 1980s, 1990s, and 2000s reveal such a cycle
fairly clearly, whatever its precise causes. Each expansion was
characterized by an explosion of credit, which financed the
over-development of certain economic sectors relative to the others.
Eventually, in each case, the credit bubble burst and the economy
entered a recession.
If this pattern holds, we can reasonably expect a downturn to occur
within the next year or so. As I see it, the main “disproportionalities”
that have come to characterize the current economic upturn are three:
(1) the massive increase in stock prices, with “price-earnings ratios”
(one measure of the relative values of stocks) at close to historic
highs; (2) the more recent burst in consumer spending, in part motivated
by the run-up in stock prices and the euphoria this has created,
financed to a great degree by borrowing; (3) the bottleneck in the labor
market (millions of people not working combined with shortages of
qualified workers), which may soon lead to a spike in wages in key
sectors of the economy. (Some or all of these, along with a significant
increase in interest rates as the Federal Reserve acts to contain
inflation, may well be the triggers that cause the next downturn.)
Precisely how long the current expansion will continue and when the next
recession will begin is anyone’s guess. The expansion is already the
second longest of any since World War II. Since it was, for a variety of
reasons, very slow to pick up momentum, it may well continue for some
time. However, given the short-term “disproportionalities” mentioned
above and the more fundamental “structural” problems of the economy
(among them, the failure of our educational system to prepare the poorer
layers of the working class to find work in the contemporary economy,
the wide and increasing gap between the 20% at the top of our society
and everybody else, and the decay of the country’s infrastructure), I
don’t see how a recession can be avoided in the relatively near future.
By way of conclusion, let me say that, in my view, integrally involved
in attempting to analyze economic fluctuations is the question of human
psychology, including our tendencies to think linearly, to run with the
herd, to value economic losses at a higher level than gains, and to
panic when things don’t go as we expect them to. This accounts, to a
great degree, for the ultimately unpredictable nature of economic
developments.