Post-Keynesian Observations

Understanding the Macroeconomy

New Book from John Weeks!

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My colleague John Weeks has just published a very relevant book laying bare the logical and practical problems with economic policies informed by mainstream economics. Please find a description below:

Economics of the 1%: How mainstream economics serves the rich, obscures reality and distorts policy ($19.99)
John F. Weeks
http://www.anthempress.com/economics-of-the-1-percent

Today’s ‘doctrine of choice’ assures adults that they are competent to make serious personal decisions about healthcare, education and retirement plans. At the same time, most people are convinced that they are so ignorant of economics that they are not capable of holding an informed opinion, and that economic issues must be left to experts. The so-called experts of the mainstream economics profession claim to have profound, inaccessible knowledge; in fact they understand little and obscure almost everything.
Understanding the economy is not simple, but it is no more complicated than understanding the political system sufficiently to cast a vote. In straightforward language, John F. Weeks exposes the myths of mainstream economics and explains why current economic policies fail to serve the vast majority of people in the United States, Europe and elsewhere. He demonstrates that austerity policies have little theoretical basis and achieve nothing but inequality and misery. He goes on to explain how the current deficit and debt ‘crises’ in the United States and Europe are ideologically manufactured, unnecessary and simple to overcome. Drawing on examples from around the world, this book provides a bold alternative to the economics of the 1%. Their failure to serve the interests of the many results from their devoted service to the few.

Written by rommeldak

April 7, 2014 at 6:17 am

Posted in Uncategorized

Piece by Me on Forbes.com

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Decided to try to get a bit more publicity for Post Keynesian ideas!

Forbes.com

Nothing I haven’t said here before. It was very lucky in that they were willing to accept a 2400-word article. Even with that, however, the issue is complex and it bothers me that I couldn’t cover everything. Having said that, the majority of questions I have received so far were already answered in the article!

Written by rommeldak

March 18, 2011 at 8:41 pm

Posted in Uncategorized

Why It’s Logically Impossible for Social Security to Go Bankrupt

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The belief that Social Security may not be there when we retire is one that comes up on a pretty regular basis and the program itself is currently a potential target for cost cutting in an effort to balance the budget (something that is totally unnecessary, but that’s a separate issue addressed in other posts). However, those who think that it could go bankrupt simply do not understand how it works. It’s a logical impossibility and the confusion comes from trying to think of it from a micro (individual) rather than a macro (economy-wide) perspective. Social Security, indeed, retirement in general, is all about productivity.

To understand how this works, imagine the following. Let’s say there has been some sort of M. Night Shyamalan “Happening,” and everyone in the world has been killed but the following individuals (recycled from my debt and deficit example):

Adam
Betsy
Charlie
Danielle
Eva
Fred
George
Hannah
Isaac
John.

Further say that we have set about erecting a society in the post-Happening world, including an economy. We all have various jobs growing food, making clothes, et cetera, and in our primitive stage of development each person makes roughly enough for one person to live. Call the latter a “bundle o’ goods,” such that ten people produce ten bundles o’ goods, allowing ten people to survive.

How many people can retire in this situation? Obviously, zero. If one did, then the remaining nine would be producing only nine bundles o’ goods, which they would presumably keep for themselves. The one retiree would starve.

What if Adam, during an expedition to find canned food at the local Kroger’s, discovered that a Brink’s truck had been in the middle of unloading precisely when the Happening occurred? Can he now retire on the cash he found lying about? Of course not, because as soon as one person quits working, we are down to nine bundles o’ goods. The ultimate limiting factor is productivity, not money. The latter is absolutely irrelevant if we can’t make enough stuff (and it is almost trivial if we can).

Moving from M. Night to the real world, is our productivity sufficient? Right now, it obviously is or we couldn’t do what we are doing (granted we are in the midst of >9% unemployment–so take just four years ago, when it was 4.4%). As for the future, even if productivity rose as slowly as its slowest rate since WWII, we should still have no problem allowing the baby boomers to retire AND having enough goods and services for them and ourselves (at an even higher standard of living). Productivity, barring a natural disaster of some sort, is not an issue, so that bullet is dodged. And, to be honest, it’s the only real economic bullet. The rest is just politics.

Now let’s start raising productivity in the post-Happening world and see what happens once you allow for retirees. Let’s make the math easy and suddenly allow each person to make two bundles o’ goods per year. Now we have some real options. At one extreme, we could have everyone could keep working and just enjoy twice as much stuff. At the other, five of the survivors could retire and those still working would share half of what they produce, leaving them all at the same standard of living as before. In between, we can actually have retirees AND more output/person. This last option is basically what we do in the real world. Nice!

But how do we accomplish that? It’s easy in the post-Happening economy since we all know each other and can just agree to do it. In reality, it’s more complex. Note that there are two things we need to make sure of:

1. Workers don’t simply consume all bundles o’ goods themselves;

2. Retirees get the bundles o’ goods not consumed by workers.

Note that the entire economy cannot “save,” incidentally. This is one of the places where people get micro and macro mixed up. While you can take your $1000 pay check and put $200 in the bank for later, the US doesn’t earn a salary and can’t do that. It produces goods and services (or bundles o’ goods). I suppose it would be possible on some extremely limited basis, but in general we can’t produce 10 TVs in 2011 and put 2 aside for 2030–hell, they probably wouldn’t even work any more. Or build 50 houses, but “save” 5 for later. Or 100 haircuts, but put 20 on the shelf. For all intents and purposes, all goods and services produced today are consumed today, period. The United States of American can’t save.

So, if the ten people make twenty bundles o’ goods, all twenty must be consumed today. We can’t save them. What can be saved, however, is the revenue from producing the bundles, and if workers do that then they can’t buy all the bundles–which is what we are after according to point 1 above. Meanwhile, if the retirees have cash left over from back when they worked, they can use it to buy the bundles the workers didn’t consume–point 2.

Notice that this isn’t going to be neat and tidy since the amount workers choose to save is not necessarily equal to the amount retirees spend from their pension funds. In particular, retirees may find themselves able to buy more or less than they had expected compared to 20-30 years ago when they started saving. This can create some real problems, particularly if the pension had been held in financial assets whose value had collapsed (like, for example, you had the bad luck of retiring in November of 1929!). We then end up with the capacity to support the retirees–because, remember, this is always a function of productivity and we still have 20 bundles o’ goods–but they don’t have the income to buy the output. Ironically, even if the workers still only want to consume half the bundles, it doesn’t matter and retirees are screwed. And what would actually happen is that the macroeconomy would contract since retirees demand for goods and services dropped off. We would see workers becoming unemployed and bundles o’ goods production falling. Not good, and no underlying productivity reason for it.

This is one of the reasons we have Social Security, so this sort of scenario can be avoided. People can argue that they know better than the government how to invest their money, but:

1) no, they don’t–there have been many studies on how consistently even professional investors can beat the market, and the answer is they can’t;

2) in the event of a market collapse, everyone is screwed and we will have to deal with it as we aren’t going to leave the retirees to starve (particularly as it wasn’t their fault);

3) most importantly, it’s not being invested, anyway, it’s being handed over directly to retirees!!!

Social Security is not an investment fund. It is not now and it never was, and I hope it’s becoming clear why that’s true. What would be the point of taking tax dollars from today’s workers and “investing” them? The goal is to lower worker income sufficiently to make sure they can’t buy all the bundles, while transferring income to retirees so they can buy the remainder. And therefore the Social Security tax you pay today is going directly to your parents.

The effect of this (in that it reduces the consumption of current workers and raises that of retirees) is no different from what would happen if it were voluntary, except that it avoids the “oh my God, the stock market crashed and I have no retirement money left!” scenario. And this was, not surprisingly, a real issue back when Social Security was invented (and obviously remains so today). The transformation of American society also played a big role. In the days when agriculture dominated, aged members of the family lived on the farm with their children and grandchildren (and great grandchildren). This represented an informal and widespread social security system. However, as America industrialized, it wasn’t always as convenient or even possible to have grandma and grandpa move into the apartment in Brooklyn with the rest of the family. And so, the elderly became a poverty-stricken segment of society (particularly once the Depression hit). Social Security was intended to solve that by re-instituting an institution that had already existed, but in a formal way and without requiring that your parents move in with you once they get older. Funny, but when I explain it that way in class, I notice that students are very quickly strong supporters of the idea!

To reiterate, what Social Security does is take money from workers today to prevent them from buying as much as giving it to retirees so they can have the remainder. Of course, workers get to play that game, too, once they hit retirement age. And this is no different from a private system, except that it sets guaranteed levels. A financial-market crisis can’t wipe out your savings. And remember, so long as we have the productivity, we can afford it. It’s a question of how many bundles o’ goods we can make, not how much money we have.

At present, we do have money in a fund that we use to supplement the tax dollars we take from workers, but that doesn’t mean the workers are getting to keep more because there are still only twenty bundles o’ goods. The difference is that instead of taxing the income away directly, we give retirees enough money from the fund to bid bundles o’ goods away from workers. But I think you can see how that it’s really irrelevant. If that money ran out entirely, all we have to do is raise taxes to the point that gave us the same effective outcome in terms of bundles o’ goods transferred from workers to retirees. People would, of course, complain, but that’s because they ain’t smart like you! They wouldn’t realize that the outcome is identical and that it doesn’t matter how we finance Social Security. So long as we have the requisite productivity, we could create new money or tax to put ourselves in the position we want and only our own stupidity could stop us. America doesn’t need to save for Social Security because America can’t save anyway.

Written by rommeldak

February 21, 2011 at 10:11 pm

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Economic Disaster Looming (and it’s my birthday)

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Today is my 50th birthday (meaning I was born on the day JFK was inaugurated). It’s been very nice so far, with lots ad lots of kind wishes from friends and relatives, and I was really looking forward to enjoying myself today. Then I read this:

House GOP Lists $2.5 Trillion in Spending Cuts

The first sentence reads, “Moving aggressively to make good on election promises to slash the federal budget, the House GOP today unveiled an eye-popping plan to eliminate $2.5 trillion in spending over the next 10 years.” Absolutely terrifying. I haven’t felt this depressed and hopeless since Sept 11.

If anything close to this really happens, we can say goodbye to economic recovery any time in the foreseeable future. I’d go into details as to why that is true, but a) that’s the subject of the previous two posts (plus several before that) and b) it’s my birthday. Suffice it to say that the people in charge in our country fundamentally misunderstand how the economy actually works. They are more interested, anyway, in name-calling and political one-upmanship.

Written by rommeldak

January 20, 2011 at 1:48 pm

Posted in Uncategorized

Debt and Deficit in a Nutshell: The Video!

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My friend, Tschäff Reisberg, made a flash video of my blog post on the debt and the deficit and posted it to You Tube:

http://www.youtube.com/watch?v=Ei_B5MTJofI

Thanks, Tschäff! Very nicely done!

Written by rommeldak

November 14, 2010 at 11:33 am

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World’s Simplest Explanation of the Debt and the Deficit

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(and why cutting spending right now would be an unmitigated disaster)

There may be no single economic concept that is more poorly understood by the lay public and most politicians (both varieties) than the federal government’s budget. I suspect that some of that is willful ignorance with an ulterior motive, but the vast majority is simply and solely because it has never been explained to them. They assume it’s like their personal or business budget. It’s not. It’s fundamentally different and lessons drawn from one cannot necessarily be applied to the other. I’ll try to make this as short as possible but, dammit, it’s sort of complicated! You can’t truly understand it, however, without this background–and you need to understand it.

UNDERLYING ECONOMIC PROBLEM

First off, you’ll need a basic understanding of the operation of the macroeconomy as a whole. Think of it this way. Say that there are eleven people in our economy playing the following roles:

1. Adam: worker
2. Betsy: worker
3. Charlie: worker
4. Danielle: worker
5. Eva: worker
6. Fred: worker
7. George: worker
8. Hannah: worker
9. Isaac: worker
10. John: worker
11. Kate: entrepreneur

There is no government and no foreign sector. Kate is the only potential employer in this world, and she has a factory that makes all the goods and services that everyone else demands. Kate’s factory can produce sufficient output for all ten workers (for simplicity I’ll ignore the fact that Kate needs to consume, too), but by employing only eight of them. Kate is not a charity–she has a family to feed, as well–so she won’t hire all ten just to be nice. She only needs Adam through Hannah to make goods and services for Adam through John, and therefore that’s all she’ll hire. But wait, that’s not quite right, is it? Because if Isaac and John don’t have job (recall that Kate is the only employer), then there is no point is making goods they can’t afford to purchase. Hence, Kate doesn’t even hire eight people. For sake of argument, let’s say that rolling back production to seven people creates an equilibrium in which Kate can hire Adam through George and they only create output for Adam through George.

Now we have the following:

1. Adam: working for Kate
2. Betsy: working for Kate
3. Charlie: working for Kate
4. Danielle: working for Kate
5. Eva: working for Kate
6. Fred: working for Kate
7. George: working for Kate
8. Hannah: unemployed
9. Isaac: unemployed
10. John: unemployed
11. Kate: earning profits associated with sales to seven workers

In the smallest nutshell possible, this is how the macroeconomy works. It is absolutely vital to understand this in thinking about the federal (though not state and local–they DO operate like your personal budget) government budgets.

Put in the front of your mind a fundamental fact about the above situation: we have the physical capacity to produce output for Hannah, Isaac, and John, but because we can do so relatively easily (i.e., without their help), they have to go without. Not only is this a really crappy deal for Hannah, Isaac, and John, but Adam through George are probably somehow supporting them (officially or unofficially) and Kate would love to be earning the extra profits associated with sales to those three. EVERYONE is made worse off by this situation. The underlying problem is that as productivity increases, so it becomes more and more difficult for the profit motive alone to generate full employment in a macroeconomy.

But note how incredibly easy this is to solve in a way that raises everyone’s welfare:

1. Adam: working for Kate
2. Betsy: working for Kate
3. Charlie: working for Kate
4. Danielle: working for Kate
5. Eva: working for Kate
6. Fred: working for Kate
7. George: working for Kate
8. Hannah: working for Kate
9. Isaac: soldier (government job)
10. John: police officer (government job)
11. Kate: earning profits associated with sales to ten workers

Let’s create a government sector and have them make Isaac a soldier and John a police officer. They are each paid a salary sufficient to buy what Kate is selling, and this leads Kate to hire Hannah (since she now needs to produce more output) and everyone is happy: Adam through George don’t have to support three unemployed people, Hannah, Isaac, and John can now share in the output that could already be produced for them, and Kate earns higher profits. In addition, not only did Adam through George have to give up absolutely nothing in terms of what they had been buying from Kate, but they how have protection from domestic and international aggression. EVERYONE is better off.

This is the essential role of the federal government in a mature capitalist economy. Without the government supplementing demand, the system breaks down and despite our ability to produce goods and services for everyone, we don’t. There will also be cyclical highs and lows (we are experiencing the latter at the moment, in case you had not noticed!), but in general we face the problems outlined above and this is something the private sector cannot solve on its own.

FINANCING GOVERNMENT SPENDING

Whence comes the money the government uses to pay Isaac and John?

Option 1: Taxes

They could tax those originally working (Adam through George), but then that means they won’t be able to buy the same volume of Kate’s products as they were before. There is no logical reason that Adam through George should have to settle for less, so that’s not a good idea. All we would be doing is changing who had the income generated in the macroeconomy (i.e., taking it from Adam through George and giving it to Isaac and John–recall that Hannah’s salary is created by private sector sales to Isaac and John). We need MORE income, not a redistribution. Again, there is zero reason why Adam through George need give anything up.

Option 2: Borrowing

The government could borrow money from those originally working (Adam through George) and use that to pay Isaac and John (Hannah gets paid from private-sector profits arising from sales of Kate’s products to Isaac and John). This assumes that Adam through George are earning enough to both buy from Kate and save some money, but if so, then this might be a useful thing to do. It would probably give Adam through George a relatively low rate of return, but a very safe investment. In fact, when they first introduced US government t-bills (during WWI), they were TOO popular!

However, our goal is not to give Adam through George an attractive means of saving, but to create jobs for Isaac and John (directly) and Hannah (indirectly). In addition, there is absolutely no reason to expect that the volume the government could borrow would equal what they need to pay the salaries of Isaac and John. It depends entirely on how much savings currently exist. Furthermore, people are least likely to be willing to tie up savings in such instruments precisely when we would be most in need of selling them: during recessions. And they would have less income to save, too. Furthermore, we don’t want people to become fixated on the idea that if the government borrowed, this means they have to pay it all back. Of course, each individual debt must be honored, but a) it need never be reduced to zero and b) so long as the debt is owed in dollars (as it is) then we can never go bankrupt. In fact, one of my colleagues actually has a page where he has promised $100 million to pay down the debt if anyone can prove that the US can go bankrupt:

http://moslereconomics.com/2010/10/22/press-release-3/

That’s a safe bet for him. It can’t happen.

Option 3: Printing Money

But, frankly, the most obvious and straightforward thing to do is this: print the money to pay their salaries. People typically react to this with shock, crying out, “But that will cause inflation!” No it doesn’t (for a more in-depth treatment, read my posts on inflation below).

The short story on inflation is this: printing more money can be inflation if no more goods and services are produced (but even then it doesn’t have to–see below). But remember that the whole point of raising the money supply here is to raise the volume of goods and services produced. We pay Isaac and John enough to make the production of goods from Kate’s factory profitable to her (and so that she hires Hannah, too). Hence, the level of output rises just as much as the volume of the money supply, and there is no inflation. Contrast that with the situation in a small, developing nation. Perhaps our productive capacity is such that we simply can’t produce enough for all ten workers, only Adam through George. In that case, giving jobs to Isaac and John just causes inflation–more money, but no more goods than before. That’s not the case in the US, however.

Technically, we cannot choose to simply print money to fund government spending in the US–but, de facto, we can if we use Option 2, and the Federal Reserve buys the debt (they are already the #1 single owner of federal government debt). Since they will pay with brand new dollar bills, the new spending is created with new cash. This creates new demand without draining it from somewhere else in the macroeconomy or creating the illusion of a burden on future generations (actually, the illusion might still be there, but I suspect that people are less worried about us owing the Fed money than the Chinese!).

CONCLUSIONS

I am horribly, horribly tempted to write more (in fact, I did, but I’m cutting it), but I really wanted to make this as short as possible while getting the main point across. So, I’ll stop here. My main points are these:

1) It is critical that the government generate demand in the macroeconomy if we are to reach full employment–and it doesn’t cost anyone anything for them to do so since we are starting at less-than-full capacity. If we don’t do this, then we are–I don’t know how else to say it–royally screwed. THIS is the key problem.

2) In a technical sense, we don’t need to “finance” any of the spending. In other words, it’s not necessary for us to find someone with extra cash to loan us. We can simply print it (or have the Fed buy the debt), and in fact that makes the most sense since our goal is to expand demand, not rearrange it.

3) Since the debt is issued in our own currency (Greek debt was not, incidentally), we cannot possibly go bankrupt. That concept does not make sense in this context.

A private budget is fundamentally different from the federal one. Going into debt with the former represents an attempt to purchase something we could not otherwise afford. The goal of going into debt at the federal level represents jump-starting what we could have already done in the first place if, ironically, productivity had been lower and Kate had needed all ten workers.

Unfortunately, we all have a gut feeling that debt is bad and surplus is good, but that’s because we are transferring logic from our own personal lives to the federal government. It simply doesn’t apply (it is, as Paul Samuelson once said, a myth that is useful only insofar as it imposes a cost on government officials who might have a little too much fun spending money). Furthermore, if we not only do not spend more money right now, but begin to cut back, then we are doomed to a Japan-like, decade-long period of recession. To be honest, I think that’s where we are headed. Not only do the Republicans, now in greater power than before, believe that is what we need to do, but Obama only disagrees with them in degree, not in principle. Remember how the Great Depression ended? The massive government spending from WWII. Only under such circumstances were we able to make people forget about what they think of as “fiscal responsibility” and focus instead on (inadvertently, of course) economic responsibility.

I have a funny feeling the Japanese aren’t going to save us this time.

P.S. We owe China so much money because of the trade deficit, not the budget deficit. See the discussions of the debt and deficit below.

Written by rommeldak

November 7, 2010 at 1:59 pm

Posted in Uncategorized

Nice Post by Thomas Palley on Econ Policy

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You can find the original here:

http://blogs.ft.com/economistsforum/2010/09/plan-b-for-obama-on-the-economy/#more-11616

Not sure what the first commenter on that page is talking about. This is hardly from the same school of thought that brought us the crisis.

Plan B for Obama on the economy
September 6, 2010 4:54pm
By Thomas I. Palley

TO: President Obama
FROM: Thomas I. Palley
RE: How to avoid stagnation and restore shared prosperity
DATE: Labor Day, 2010

Mr President,

With hopes of a V- or U-shaped recovery fading, there is the increasing prospect of an L-shaped future of long stagnation, or even a W-shaped future in which W stands for something worse.

The reason for this dismal outlook is economic policy is trapped by failed conventional thinking that can only deliver wage stagnation and prolonged mass unemployment.

Your administration’s current economic recovery programme has been marked by four major failings:

1. Inadequate fiscal stimulus.
2. Failure to cauterise the housing market
3. Failure to neutralise the trade deficit
4. Failure to restore the link between wage and productivity growth

If your policy team remedies these four failings our economy will quickly begin robust recovery. However, the longer you wait the greater the challenge, because recession creates new facts in the form of bankruptcies, foreclosures, destroyed credit histories, job losses and factory closures.

Suggested remedies:

1. Let the Bush administration tax cuts expire and use the savings for additional targeted stimulus

The economy needs a further demand boost to establish recovery momentum. The majority of the Bush tax cuts were an income redistribution program favoring the wealthy rather than a stimulus or growth program. That makes extending them bad policy.

The Bush 10 per cent bracket and marriage provisions should be retained, while everything else should be allowed to expire with the savings used to fund new temporary fiscal stimulus.

Half the funds should be directed to state and local governments to help avoid another round of job losses, this time in state and local government. The other half should fund an immediate lump sum non-taxable payment to all individuals earning less than $50,000 ($100,000 for married couples). This means 80 per cent of households will continue benefiting and the total paid to these households will actually increase.

Moreover, the lump-sum design will increase the benefit going to those at the bottom, which will further stimulate demand and also lower income inequality. This temporary stimulus should be repealed once self-sustaining recovery is underway.

2. Cauterise the housing market

The second critical measure is to cauterise the housing market. Throughout the crisis, policy has disproportionately benefited banks and corporations. It has largely failed to help households directly and has instead relied on hopes of trickle-down effects from banks, combined with expensive tax subsidies to attract new home buyers.

The failure to directly help households has been a grievous policy error. Along with banks and corporations, households have needed debt relief but this has not been forthcoming. Banks have resisted meaningful loan modifications, while many households have been unable to refinance mortgages at lower interest rates because of zero or negative home equity. Consequently, the household sector has remained distressed and trapped in a foreclosure tsunami that has traumatised the economy.

Policy must immediately put a floor under existing homeowners. The solution is to use the Federal Housing Administration to refinance Fannie Mae and Freddie Mac mortgages with low or even negative equity and then have Fannie and Freddie repay some of their federal government borrowings. The test criteria should be whether the mortgage is viable once refinanced at low rates.

Additionally, the Federal Reserve must continue with purchases of mortgage-backed securities to ensure that mortgage rates stay low until the housing market has stabilised.

Refinancing such mortgages will yield a huge boost to the distressed corner of the household sector that is currently unable to refinance. It would reduce foreclosures; boost consumer demand by lowering mortgage payments; and it is urgent because adjustable rate mortgages issued late in the bubble are still resetting upward.

The problem has always been inability to service interest costs, and the foreclosure wave could have been avoided if lower interest servicing had been made immediately available to households. Policy did this for the business sector via the TARP and various Federal Reserve rescue facilities but failed to do so for households.

3. Neutralise the trade deficit

The third critical measure is to neutralise the trade deficit. The adverse effects of the trade deficit can be understood through the metaphor of a bathtub. Fiscal and monetary stimulus is being poured into the tub but that demand is leaking out through the plughole of the trade deficit. Moreover, it is not just demand that leaks out, but also jobs and investment due to off-shoring.

The trade deficit and off-shoring are significantly attributable to China’s under-valued exchange rate, which also forces other countries to under-value their exchange rates to stay competitive. This has resulted in an over-valued dollar which makes the US economy internationally uncompetitive.

As China refuses to correct its under-valued exchange rate, it is long past time for the US to take protective action. That can be done via administrative interventions and legislation to make countries with under-valued exchange rates subject to countervailing duties.

There may be trade disruption and retaliation, but the costs of inaction and appeasement are far worse. The problem of under-valued exchange rates was visible a decade ago yet policymakers have failed to take action with devastating consequences.

The choice has always been pay now or pay more later. Inaction means working families have already paid enormously and continued inaction will compound their devastation.

4. Restore the wage – productivity growth link

Finally, policy must address the central problem of the last 30 years: the destruction of the income generating process and severing of the wage – productivity growth link.

Rebuilding that link is critical to recovery and shared prosperity, and it requires rebuilding worker bargaining power. One immediate measure is passage of the Employee Free Choice Act that will enable unions to organise on a level playing field.

A second measure is to index the minimum wage to the median wage. That will create a real wage floor and limit wage inequality because the minimum wage will automatically increase as median wages rise with productivity.

5. Do it all

It is important these measures are enacted as a comprehensive package. Implemented alone they will be far less successful.

Without tackling the trade deficit, fiscal stimulus and the benefits from cauterising the housing market will leak out of the economy. Similarly, increasing union membership and wages will result in an acceleration of job and investment off-shoring.

Fixing the trade deficit without fixing the income generation process and lightening households’ debt burden will leave the economy permanently short of demand.

Escaping the Great Recession requires jumpstarting the economy by increasing demand. Preventing the economy falling back into stagnation requires rebuilding the income and demand generating process. That is why success needs the full policy package.

Thomas Palley is a Schwartz Economic Growth Fellow at the New America Foundation

Written by rommeldak

September 6, 2010 at 2:06 pm

Posted in Uncategorized

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