FLIRTING WITH ECONOMIC DEPRESSION

The Nation's National Affairs Correspondent, William Greider writes about looming deflation:

Basically, what's under way is a brutal unwinding of the delusional optimism that reigned during the 1990s--excesses like the hyperinflation in financial assets and the swollen ambitions that led investors and companies to wildly overvalue their prospects for future returns. The stock-market bubble was the most obvious expression of excess, but not the most serious dimension. In an era of Internet fantasies and collective self-delusion, business sectors (and their financiers) overinvested on a grand scale and generally used borrowed money to do so. That is, they built too many factories, shopping centers and office buildings--creating more productive capacity than the marketplace could possibly absorb. Consumers indulged in their own version of wishful thinking, borrowing heavily to keep on buying, hoping the "good times" would last long enough to bail them out.

And

That's why there is so little new investment. What company is foolish enough to build new plants when so many existing ones are shuttered? And who would lend them the capital? If consumers run out of capacity to borrow more or can no longer refinance home mortgages, the collapse of aggregate demand will become far worse.

And

If this negative cycle worsens to extremes, only the federal government can interrupt it and push the economy in a positive direction. The basic task, as John Maynard Keynes explained in the thirties, is to get the money moving again. The government does this by borrowing idle wealth from the private sector and spending it or distributing it to taxpayers who will--thus putting the money to economic uses and stimulating business activity. Federal deficits, in other words, are an essential element in the solution--very large deficits if you intend to jump-start a $10.7 trillion economy. Yes, borrow-and-spend therapy increases the national debt, but the renewal of economic growth will handle that. (The alternative--doing nothing--means allowing events to take their own course toward destruction and multiplying failures. "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate," Andrew Mellon advised Herbert Hoover after the 1929 crash. "It will purge the rottenness out of the system.")

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If Milton Friedman is the Darth Vader of economists, then John Maynard Keynes is the Obi-Wan Kenobi. His was the advice used by FDR in formulating the “New Deal” programs designed to lift America out of the Great Depression in the 1930s; for many years Keynes’ theories dominated the field of economics: in the 40s, 50s, and 60s, the free, industrialized world enjoyed slow, stable growth.

That all started to change in the 1970s, as the Vietnam War, Arab oil embargos, and other factors combined to create the perplexing “stagflation” (inflation coupled with economic recession, an unprecedented situation) plaguing America, and, therefore, the rest of the free world. Economists did not clearly see the roots of the problem, and, like the lemmings they are, turned away from Keynes. This created the opportunity of a lifetime for the slick-talking economic sophist, Friedman. The Nobel Prize winning huckster had recently managed to subject Chile to neo-liberal reform—under Pinochet’s bloody rule, everything seemed to be doing well (alas for Friedman, Chile’s economy eventually got to be so bad that Pinochet had to use some old fashioned Keynesian economics to rescue the country—of course, that wasn’t really reported on in the US; Reagan was just too damned popular). Milton Friedman’s wacky philosophy was just the thing the disillusioned Keynesians were looking for. The flock of sheepconomists…um…I mean the field of economics once again followed their old shepherd, now in the garb of neo-liberalism, the tenets of laissez faire.

Today, Keynesianism is very unpopular as economic theory because it flies in the face of free market fundamentalism: inherent in Keynes’ views is the notion of market interference; that is to say, government should seek to regulate and stabilize the boom and bust cycle of the economy.

The so called “neo-liberal” point of view advanced by Friedman, of course, states that government should stay the hell out of the economy, that government should only provide a military, roads, and defend against monopoly, the less money cycled through the government, the better: business, left alone, will thrive. For over two decades now, neo-liberalism has provided the philosophical justification for Washington’s overly business-friendly climate. Dangerous deregulation of industry, banking and finance, and the service sector are the fruit of this shift in economic theory—“deregulation will stimulate business and create jobs.” Neo-liberalism has also justified billions of dollars of corporate welfare and tax cuts for the rich—again, the cry of “more jobs” is always heard. Neo-liberalism has all but destroyed labor as a force in the American economy.

Of course, neo-liberalism, or “Reaganomics” as I quaintly prefer to call it, is a total failure in the US, just as it was eventually in Chile.

It now appears that stimulating business itself, or supply-side economics, a sort of sub-theory advanced by Friedman, can create, in fact, some short-term economic gains. That’s pretty easy to believe: give companies money and, ideally, they will expand, which, ideally, creates more jobs, and, therefore, more demand, which, ideally, stimulates business further. Wall Street, of course, loves this because finance is so narrowly focused on quarterly earnings—government investment in the business sector taking the form of tax breaks, corporate welfare, and money saving deregulation just keeps on coming in; this drives up stock values. Business is always, in the short term, looking better.

Unfortunately, the long term has now caught up with us.

Keynes theorized decades ago what is now heresy, that capitalism, left alone, is unsustainable. The problem is overproduction and misuse of assets. Greed and high expectation of profits cause capital to flow in ever more risky directions. Even Alan Greenspan, chairman of the Federal Reserve Board, was cautioning against the “irrational exuberance” of investors on Wall Street during the late 1990s. Money, left to it’s own devices, often becomes pretty stupid. For example, Noam Chomsky has pointed out that, before Richard Nixon abandoned the Bretton Woods system of global banking and finance, “about 90% of capital in international exchanges was for investment and trade, 10% for speculation. By 1990, those figures had reversed, and a 1993 estimate is that only 5% is related to ‘real economic transactions.’” That means that most of the world’s money supply isn’t even being used to produce anything or create jobs: gamblers control 95% of the world’s wealth and they’ve been on a betting spree for over twenty years—the casino is about to close, and it's time to turn in the chips.

Keynes believed that a big part of the solution to the economic downturns caused by capitalism's inherent tendency toward self-destruction was to stimulate consumer demand. Alas, American consumer demand isn't in such great shape these days. These long years of pro-business, pro-greed, anti-labor, anti-regulation rhetoric have slowly resulted in an overall degrading of consumers' ability to continue purchasing. The credit industry has managed to artificially extend consumer demand, but that cannot last. In other words, the hopes created by the short term economic gains of neo-liberal reforms have always been false: neo-liberal reforms, in the long run, bleed rank and file Americans dry; without masses of able consumers to create economic demand, the economy must collapse, as it is doing slowly now.

Neo-liberalism is like cocaine. It feels good for a time, but after a while, you’re willing to sell you own mother just to get a few more lines. Once you do, you quickly snort it all up. Feeling like shit when it’s gone, desperately craving more, you look for somebody else’s mother to sell.

Things are going to get much worse before they get better. America is snowblind, and, for now, cannot even conceive of of such antiquated notions as "stimulating demand," or "public works;" it defies the “conventional wisdom.” Economic pain will have to become so intense that our rich leaders feel threatened—by the time that happens, everybody I know will be hurting.

I hope I’m wrong, but I’m pretty much afraid that I’m right. I know the awful truth: wealth cannot be trusted to police itself; left alone, it always turns cannibalistic and eats the nation. We’re in the stew pot right now, waiting for the water to boil...

...what we need is the lost-to-history Jedi economist, Master Keynes, coming to the rescue, battling the dark side economists, in an economic light saber duel with Milton Friedman, Dark Lord of the Sith...

...just indulge me, here...

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