Unemployment: The bizarre prescription of L. Randall Wray
In 2005, L. Randall Wray published a working paper critical of Alan Greenspan, and, by extension, of the Moron’s economic policy. The criticism can be just as easily extended to the present policies of the Messiah, and, indeed, has been advanced by Wray – and, with some modification, by Krugman, Galbraith and Delong. Since the argument forms the core of the liberal and progressive economists’ flawed response to the current crisis, we thought it reasonable to subject it to some analysis here.
According to Wray, insufficient government deficit spending “…has generally been too low to allow for adequate growth of both the labor force and labor productivity.”
This is because, since both the supply of labor as well as the productivity of that labor are variables that are highly responsive to deficit spending, when Washington’s economic policy prevents the running of large enough deficits, it also limits the creation of new jobs and productivity growth.
Slow economic growth undercuts the incentive to invest to improve productivity, and when insufficient government deficit spending reduces investment incentives, low productivity growth produces the kinds of growth that generates even more low productivity growth.
By not running even larger deficits than Washington already does, Wray believes successive administrations have been causing both slow jobs creation and hurting productivity.
Wray’s argument is simple, even if ultimately flawed and useless: Since the overall growth rate of an economy is merely the mathematical result of an increase in the number of people employed and the increase in the productivity of the labor of those people,
“Given a growth rate, there is a tradeoff between employment growth and productivity growth: if the US grows at only 3% and if our employment rate grows at 2% it is mathematically impossible for productivity to grow at anything other than 1%.”
Chronic slow jobs growth results from leakages in the economy – “the portion of income received but not consumed.”
These leakages happen, when:
- people hoard a portion of their income rather than investing or consuming it;
- when governments run a surplus from its tax revenues; and,
- when the country as a whole imports more than it exports.
Wray says overall the total income of a country must be spent or invested to avoid chronic underperformance. Thus, if a country imports more than it exports, then either private individuals must spend or invest more than their income, or, government must run a deficit to offset the leakage caused by the imports, or both. However this is resolved, the overall balance sheet in the economy must equal zero.
Over the past two decades, in the US economy, these leakages have taken these forms
- The private sector usually runs a surplus— it saves or accumulates net financial wealth of about 2-3% of GDP
- The foreign sector runs a current account deficit of about 6% of GDP.
- The US government sector runs a budget deficit of around 5%
Since the total of the current account deficit plus private savings are equal to 8-9 percent of GDP, Washington should have been running a deficit closer to 8 or 9 percent of GDP, not its actual deficit of about 5 percent.
Washington wasn’t accumulating debt nearly fast enough to prevent the economy from stagnating.
Worse, it was not even spending enough to prevent the private sector from becoming increasingly mired in debt. And, when the Clinton administration congratulated itself for producing a federal surplus, things really went off the rails:
“[S]ince 1997 the private sector has been in deficit every year but one, and that deficit climbed to more than 5.6% of GDP at the peak of the boom. This actually drove the federal budget into surplus of about 2.5% of GDP (the overall government balance reached 1.65% in the beginning of 2000) and the current account deficit to about 4% of GDP. At that time nearly everyone thought the Clinton budget surplus was a great achievement, never realizing that by identity it meant that the private sector had to spend more than its income, so that rather than accumulating financial wealth it was running up net debt.”
Wray offers this conclusion, which can probably be applied to the Messiah’s deficit-phobic approach today:
“[T]he only way to sustain a combined domestic private sector and foreign sector leakage of 8% of GDP is for the overall government to run a deficit of that size. Since state and local governments have to balance their budgets, and on average actually run surpluses, it is up to the federal government to run these deficits … We are left with the conclusion that if the US household sector is to improve its balance sheet and increase its saving, the federal budget must be biased toward larger deficits.”
Bullshit! We call bullshit!
We call Wray’s prescription bizarre because, even in its most simple form, as a household budgeting problem, it fails the bullshit test: To an American family that finds itself simultaneously saving so much, and adding so much debt to its People’s Bank of China credit card, that it is unable to pay its grocery bill, Wray suggests they borrow even more money, with their rich uncle as a co-signer this time, to cover the shortfall.
This criticism, of course, has been made by any number of people, and Wray probably would counter with the argument that the American economy is not, and cannot be likened to, a household budget. It is far more complex and works in ways that are somewhat counter-intuitive.
Having taken such pains to simplify exactly how the economy works – to reduce it to three sectors of economic activity (domestic private, government and exports) – and so conceal its actual complexity, Wray might now claim that it is, in reality, so complex that such simplification is misleading.
It’s one of those On-the-one-hand-and-on-the-other-hand kind of doohickeys that economists do so well.
But, as we stated, this was only the initial bullshit test of Wray’s prescription, so let us turn now to de-simplifying his model of the economy to find the actual hot creamy core of his steaming pile of bullshit.