(Interesting analysis. – promoted by lowkell)
Conventional economic wisdom is that the reason why we do not have economic growth is that we do not have enough private (non-governmental) investment. Under this “conventional wisdom”, we need to encourage “job creators” by reducing taxes on them, not by encouraging consumption. A brief digression here — those seeking to reduce taxes on job creators ought to want to reduce payroll taxes on the employers, not on the employees (as Obama has done).
The “conventional wisdom”, combined with electoral realities driven by this conventional wisdom, has led everyone from Tea Party Republicans to Bill Clinton (much as I admire Bill Clinton, he’s wrong on this one) to embrace the idea that the cure for our economic ills is to extend the Bush tax cuts to encourage private investment.
The problem, as economic historian James Livingston discusses in his new book Against Thrift, is that it is based on a flawed assumption. The reality is that the United States has not had net private investment since 1919. For the last 90+ years, our economic growth has been driven by government investment and private consumption enabled by income redistribution programs like Social Security.
Citing such diverse economic thinkers as Karl Marx, John Maynard Keynes, Milton Friedman, Alan Greenspan and Ben Bernanke, Livingston notes that the problem of the last century has been surplus capital, not a lack of capital. Greenspan, among others, has noted that since the Bush tax cuts — supposedly needed to stimulate investment — industry has re-invested less than its retained earnings. If that money isn’t being re-invested in the business, where is it going? Into housing bubbles, or into investment in Collateralized Debt Obligations and Credit Default Swaps, and other things that the investors didn’t even understand.
There is historical precedent for this. Citing Friedman and Keynes, Livingston notes that the real estate and stock market bubble that helped trigger (or at least extend) the Great Depression was caused by surplus capital that capitalists didn’t want to reinvest in their manufacturing companies because they knew that the demand for their products was not great enough to require reinvestment. Efficiencies in modern manufacturing facilities had made each worker so much more productive that if they built new plants and hired new workers, they would quickly make more of their product than they could possibly sell. So they invested in real estate, or stock, driving up their values beyond reality. And when the bubble burst — as all bubbles do — the resulting economic contraction was worse than it needed to do be.
Every bubble can be attributed to surplus capital — too much capital chasing too few good investments. The dot.com bubble of the 1990’s is another example — with billions and trillions of dollars in IRA’s trying to find good places to invest, investors were bidding up companies to share prices of hundreds of dollars each, when some of the companies didn’t even have a business plan that could possibly lead to making a profit.
So why are we so determined to encourage investment, when what we really need to do is to stimulate consumption (so that business owners will know that they can sell their goods)?
Part of the problem, Livingston notes, is that we have this Protestant work ethic that tells us that consumption is bad and investment is good, so as a moral matter, we should condemn consumption and encourage investment.
But if we insist on making economic decisions based on this morality rather than reality, we condemn ourselves to failure.
In essence, Livingston argues, we are engaging in faith-based policymaking, not reality-based policymaking.
And the worst part is that the Democrats have bought the logic and the rhetoric, and have given up on trying to argue the contrary position.
Livingston’s book is, to me, somewhat annoying — I wish that he documented the economic history more thoroughly, because he just quotes Friedman, Greenspan, et al. almost in passing rather than making a big deal of it. And I frankly just kind of skimmed past his discussion of how we should come to embrace “consumer culture.” You can catch more of his argument at his website, in a piece that he wrote for Salon.com or in an interview on NPR’s Marketplace.
But what interests me at this point is how we can get Democrats to understand the basic economic reality that this focus on increasing retained earnings of corporations and the 1% is harmful to our economic growth prospects. It has become an article of faith — meaning that there is no evidence to back it up — among virtually every Democrat to the right of Bernie Sanders that we need to encourage private investment. How can we get Democrats to listen to Milton Friedman instead of Bill Clinton?
Right now, the only candidate pushing back against this “conventional wisdom” is Elizabeth Warren.
As long as our political/economic debate is based on the wrong factual premise, we will stay mired in economic stagnation.
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