The last war and the next…
One of the most damning criticisms that can be leveled at generals is to offer the observation that they were well prepared for the last war. It is a criticism that could be applied to those who seek answers to this crisis using the New Deal as their model, as well.
The template for popular response to this crisis has inevitably focused on the official actions of the Roosevelt administration during the Great Depression, and the intellectual underpinning of that action in the economics of Lord John Maynard Keynes. The Great Depression, however, is not a model for addressing the current crisis for at least the following reasons:
- The Great Depression took place when “globalization” consisted, more or less, of trade between independent national economies. What little formal integration (globalization) existed took the form of colonial predation of less developed regions of the planet and the carving of these areas into spheres of economic interests among the industrial powers.
- For the most part, of course, these industrial powers were already on the road to losing their independence. Competition within the narrow confines of then-existing economic relations had drawn them into conflict once – in the Great War – and would lead them into war again. Essentially, the colonial powers – the big industrial nations – were trying to turn each other into colonies as well. The conflict was not just military; still less was it an ideological one between fascism and democracy as is often portrayed. National leaders thought it possible that the problem of national economies outgrowing the narrow confines of their home territories could be resolved by the victor turning their neighbors into markets for their expansion.
- The war precipitated events that converted these ruined national economies into a single global economy under the hegemony of a single power: The United States.
Flash forward to where we are today, and you can see how different things are in the aftermath of World War II: The American Dollar Empire is based on significantly different assumptions than the inter-war period. Rather than turning other nations into a market for its exports, the United States turned other nations into export platforms (in the words of the economist Peter Dorman) and itself into the essential market for goods produced elsewhere. The idea that a nation needs a trade surplus to pursue its domestic policy goals, as Paul Krugman argues, has proven not only wrong, but so incredibly outdated that his Nobel Prize for Economics is a testament to the role economists played in the great debacle through which we now suffer – an albatross, which should be hung around their necks to remind them of their crime.
Until this crisis exploded, the only nation with unfettered latitude to pursue an independent fiscal and monetary policy was precisely the nation with the largest and most persistent fiscal and trade deficits. Indeed, every other nation pursuing such independent domestic policy based on fiscal deficits and trade surpluses found its domestic policy driven by external forces that impose great costs on it – became a pawn of its market of last resort, the United States.
The Wile E. Coyote moment
The result, as Krugman explains, is that economists were surprised to find that the United States dollar was immune to the sort of speculative attacks that had forced Britain and many other nations to devalue their currencies in the past. Krugman observes:
By 2006, huge U.S. current account deficits suggested that the dollar would have to fall eventually, and the fact that U.S. real interest rates weren’t significantly higher than rates in other major economies suggested that markets weren’t taking that fact into account. So there was reason to expect a Wile E. Coyote moment – a moment of sudden realization – leading to a sudden dollar fall. But U.S. external debt, although large, is overwhelmingly dollar-denominated. So America didn’t seem vulnerable to a third-generation currency crisis. No worries, then, right?
What Krugman shows is that, in contrast to every other nation in the world market, the United States exports deficit had to grow. And this means that debt in one form or another – consumer debt, mortgage debt, public debt – was under constant pressure to expand as well. In the crazy through-the-looking-glass world of the American Empire – where every economic law must take the form of its opposite – balanced budgets, individual saving, thrift, sobriety, hard work are vices to be condemned. The rewards must go to extravagance, waste, public fiscal negligence, and the drunken sailor syndrome – even the much despised middle class – who had long ago lost their identity as proletarians – finally submitted to the logic of Empire and began to imagine its raised ranches were investments and its egg monies capital for speculation.
The party was in full swing; the punchbowl was bottomless; and the bartender, Ben Bernanke, was in some side room trying to coax Lloyd Blankfein out of his panties in preparation for a special cocktail of Washington’s liquidity enemas.
Meanwhile, in the back of the house, the punchbowl was constantly refilled by an endless torrent of goods produced by newly created industrial capacity in the low wage industrial parks of American capital and the tens of millions of dispossessed peasants streaming into the cities of the planet’s least developed countries. While economists proved wrong that the American dollar must be devalued by this inflow of cheap substitutes to American labor, they were nevertheless correct that the result of this devaluation – the collapse of American wages – was the point of the exercise.
The bubble economy
From the 1980s on, even as the American bubble expanded, industrial capacity was being replaced by imports, spurred on by the relentless evangelists of free trade, neoliberal dogmas, agreements, and deregulation; wages stagnated and fell. There was not so much the sucking sound of jobs disappearing into Mexican maquiladoras, as there was the odd hush of the Great Moderation – the growing silence as domestic factories shut down operations.
Although the American dollar could not be devalued, America’s industrial base could, and was.
From 1990 on, recessions began to take on an oddly different shape in contrast to the earlier post-war period. The recognizable short, sharp vee shaped recession, associated with the cycle of intervention by the Federal Reserve to choke off inflationary pressures, acquired a shallow bowl-like shape – lasting much longer than familiar recessions before 1990.
The Federal Reserve actions changed as well: Instead of precipitating a recession to wring inflation out of the economy, it was now concerned with fighting this new type of recession – forcing down the interest rates it controls sooner and holding them at these very low levels much longer than before. The labor market, during and after recessions, changed as well: Unemployment was stubborn, employment levels stayed well below their pre-recession peaks for months after the recession was over. Jobs became harder to find, and the jobs that were found paid much lower wages.
Professor Sims makes his stand at the Maginot Line
The American Dollar Empire rushed headlong into the meltdown driven, not by the debt of its citizens, but by their lack of sufficient debt – not by their waste, profligacy, dissoluteness, avarice, and greed, but because even they could no longer exceed previous limits on such indulgences. The survival of the empire rests now on such an explosion of waste, fraud, and abuse – such corruption, such licentiousness and such absolute dissipation – as can be realistically expected of only one person on the planet: your congressperson.
Thus we find this gem of economic reasoning by a colleague of Paul Krugman at Princeton University, Christopher A. Sims:
[Good fiscal policy] would recognize the need to affect expectations of future inflation. In particular, in models with nominal rigidities the objective of policy is to lift expected values of future inflation. It would recognize that monetary and fiscal policies that affect future inflation are intertwined. In an environment where fiscal pressures are perceived to have potential effects on inflation, the implications of a given monetary policy expressed in terms of interest rates depend on assumptions about fiscal policy. In this kind of crisis situation, therefore, inflation reports or other policy announcements should be joint, with mutually consistent statements being made by fiscal and monetary authorities.
Fiscal policy is important also because it can, if described properly, remedy the problem that announcements of commitments to future monetary policy actions may not be credible if there is no corresponding current policy action. Major fiscal policy interventions, accompanied by a discussion of their implications for inflation and for future monetary policy, might have a better chance at being believed.
Stripped of its academic gibberish, Professor Sims is suggesting that you be led to believe that Washington is willing to run such staggeringly large deficits as to convince you that not only will the economy recover, but also that wages and prices will go ballistic. And, moreover, Washington will need to keep spending these massive sums until that actually happens. Finally, Washington must convince you that nothing will be done either in the interim, or even after the economy recovers, to pay off this ungodly accumulation of the national debt – it will all just be inflated away!
Professor Sims is a good example of a general who intends to fight the last war; he will go down in history with the French generals who commanded troops along the Maginot Line in 1940.
The New Normal
It is likely that, in any case, New Deal 2.0, as it is being touted, will not be adopted by Washington in this crisis. The more likely game plan is to bleed you slowly – offer just enough support in the form of unemployment compensation and other government services to ease you into what has come to be known as The New Normal. Your wages will be allowed to fall, and, if possible, rising unemployment will be managed against a backdrop of fears, deliberately spread, that the nation faces bankruptcy should timely assistance of too great a scale be offered to you.
In the meantime, the economic logic of the empire will be quietly reinforced: Industrial capacity and those services which can be out-sourced will continue to shift from the U.S. to the low wage industrial parks of China and other nations; public employee unions will be broken; and, what jobs do remain will be marked by low wages and scant benefits.
The regime described here is the end of work realized in the worst possible form: An economic environment where the labor market never comes close to recovering from the job losses of the last cycle before it begins shedding jobs anew in the next cycle; where the pretense of job creation becomes the rallying point for dangerous new assaults on labor, social and environmental protections; and, where necessary services provided by government are sacrificed for requirements of the national security state and debt service.
This is the most likely alternative to reducing hours of work that the Washington-wall Street Axis will seek to implement. The steady erosion of your economic circumstances, as the deliberate campaign to paralyze self-government continues; as your unions fall to the corruption and incompetence of its leadership; and, as progressives – the faithful lapdogs of the Democratic Party – offer you the outmoded theories of some dead economist who once compared you to the nutritional value of the mud at the bottom of a pond.
There is no guarantee, however, that they will have as much control over events as they believe. The Federal Reserve has exhausted traditional monetary policy tools and is pushing policy into areas never before breeched. Washington provided an unprecedented second stimulus – the largest in history – and watched as unemployment rose to levels beyond even their worst case scenario. The two stimulus packages having been swallowed up in the collapse of employment – and, the largest unemployed population ever to have exhausted their standard benefits – Congress is considering a third package! An increasing number of states are struggling with falling revenue and deficits. Several nations in Europe are, even now, tottering on the brink of catastrophic debt deflation, and, China is struggling with a massive bubble in real estate and excess capacity. This list could be extended well beyond these examples.
Events unfolded quickly and with astonishing breadth and depth in this crisis, and no one can predict how they still might evolve in the near future. However, it is not likely to resemble anything like the Great Depression.
The struggle will likely be over the terms and conditions of the end of work.