Demandside Economics with Alan Harvey

By some miracle of chance I happened across Alan Harvey and the demandside blog and podcast. As you shall see below he rails against what he calls, "the primitive orthodoxy" of market fundamentalism and "the P.T. Barnum of economics, Milton Friedman" that are most responsible for our current state of affairs. His blog, www.demandsideblog.blogspot.com, is a great resource and a shame that his and the demandside perspective have not been more readily deployed or understood as clearly our current situation necessitates. Here you go.....

The recovery has been accepted by acclamation, but the vote only counts at the National Bureau of Economic Research, and they won't be announcing it until after the fact. Otherwise it depends on economic data, not popular opinion. Demand Side still sees us bouncing along the bottom. The business cycle is broken without investment, and there is only a government stimulus program substituting for investment. The bottom may be higher than in the previous Depression by virtue of the automatic and discretionary stabilizers, but it is still a bottom. The bad news is they went about fixing things in the first Depression, and we haven't fixed anything this time around. In particular, we have not dealt with insolvent banks or the mountain of privately held debt.

For a perspective on that, we turn to Nouriel Roubini, now operating from an undisclosed location at Roubini dot com. He was among the first to see the housing bubble and probably the very first to step out and peg the looming meltdown of the financial sector. It used to be you could get quite a bit of Roubini. Now -- at least for non-paying clients -- not so much.

Here, the first and last paragraphs from a Project Syndicate post by Roubini, entitled.

States of Risk

Nouriel Roubini
Project Syndicate
March 15, 2010

"The Great Recession of 2008-2009 was triggered by excessive debt accumulation and leverage on the part of households, financial institutions, and even the corporate sector in many advanced economies. While there is much talk about de-leveraging as the crisis wanes, the reality is that private-sector debt ratios have stabilized at very high levels."

...

"Unsustainable private-debt problems must be resolved by defaults, debt reductions, and conversion of debt into equity. If, instead, private debts are excessively socialized, the advanced economies will face a grim future: serious sustainability problems with their public, private, and foreign debt, together with crippled prospects for economic growth."

This is the big point. The problem with demand is it is crushed by debt in the private sector. Many of these are bad debts. To be good, they need to be written down. That is, the lender has to realize risk has two directions. Absent this, there is no recovery.

In between these two paragraphs, however, Roubini digresses.

"Thus, the recent problems faced by Greece are only the tip of a sovereign-debt iceberg in many advanced economies (and a smaller number of emerging markets). Bond-market vigilantes already have taken aim at Greece, Spain, Portugal, the United Kingdom, Ireland, and Iceland, pushing government bond yields higher. Eventually they may take aim at other countries – even Japan and the United States – where fiscal policy is on an unsustainable path."

"In most advanced economies, aging populations – a serious problem in Europe and Japan –exacerbate the problem of fiscal sustainability, as falling population levels increase the burden of unfunded public-sector liabilities, particularly social-security and health-care systems. Low or negative population growth also implies lower potential economic growth and therefore worse debt-to-GDP dynamics and increasingly grave doubts about the sustainability of public-sector debt."

"The dilemma is that, whereas fiscal consolidation is necessary to prevent an unsustainable increase in the spread on sovereign bonds, the short-run effects of raising taxes and cutting government spending tend to be contractionary. This, too, complicates the public-debt dynamics and impedes the restoration of public-debt sustainability. Indeed, this was the trap faced by Argentina in 1998-2001, when needed fiscal contraction exacerbated recession and eventually led to default."

"In countries like the euro-zone members, a loss of external competitiveness, caused by tight monetary policy and a strong currency, erosion of long-term comparative advantage relative to emerging markets, and wage growth in excess of productivity growth, impose further constraints on the resumption of growth. If growth does not recover, the fiscal problems will worsen while making it more politically difficult to enact the painful reforms needed to restore competitiveness."

Bond market vigilantes are doing nobody any good, not even themselves, except those who win. These are the casino traders. They are the masters of the states. As soon as they are brought to heel, everyone will get back to work.

Side note: the unfunded liabilities of Social Security do not exist in any meaningful way. Again, it is the low performance of the economies, which have been run into the ground by the belief that more consumer goods and greater pollution are the route to prosperity, that is the problem. Reorient economies to bring them into the production of productive goods and the problems disappear.

"... If growth does not recover ..." Where will growth come from? Investment. Where will investment come from? Not producing more or different types of toothpaste, or even autos and computers, because the demand is being crushed by debt burdens (and plenty of capacity stands idle). The engines of private investment are blown. China is willing to create all the industrial capacity the world needs so as to make jobs at $2 per hour. Where, then, is the growth? It is in the things we need that have been shoved aside for the great free market boom: infrastructure, climate change technology, education, and so on.

"A vicious circle of public-finance deficits, current-account gaps, worsening external-debt dynamics, and stagnating growth can then set in. Eventually, this can lead to default on euro-zone members’ public and foreign debt, as well as exit from the monetary union by fragile economies unable to adjust and reform fast enough."

Investment, investment, investment. It does not need to be deficit financed. Taxing the wealthy, financial transactions, pollution and greenhouse gases. These bads are being touted as necessary. With investment in public goods and reductions in private debt, the consumer economy can recover, though not to its previous dominance. Yes, there will be inflation, perhaps disconcerting spikes of inflation, but we should hope to get there. The example of Japan is an example of a low-tax, low-social safety net country. The example of Argentina is an example of doing exactly what Roubini advocates here, following the Washington Consensus. Avoid Argentina. Avoid Japan.