All economic activity is meant to satisfy today’s consumption or what is expected to be tomorrow’s consumption. Incomes determine consumption. Incomes lead consumption, in other words, up or down. The two are never equal whether incomes are rising or declining. Incomes will rise faster than consumption on the way up, and will decline faster than consumption on the way down.
For the past 30 years we’ve had stagnant or declining incomes for most Americans. So far this century we’ve had absolute declines in incomes for the majority of Americans. We have an ongoing, and apparently accelerating, deflation in incomes. If this income deflation continues, at some not too distant point the income liquidation will force liquidation on the owners of capital. This is the well understood sequence of events in a deflationary spiral. Such spirals always create severe, lengthy Depressions. Debt is liquidated by default, rather than being paid off the proper way, because incomes have declined too far for debt repayment.
The underlying income deflation of the past 30 years was papered over by easy central bank monetary policies. Interest rates were kept artificially low for an extended time and these low rates encouraged private sector borrowing on consumables and housing but not on productive investments. This period ended with the collapse in 2007 of the housing and financial sectors–not just in the US but across the North Atlantic economies in general.
If the central bank policies were easy leading up to the collapse, what followed was unprecedented, particularly in the US. Federal Reserve Chairman Ben Bernanke, an economist who studied the Great Depression of the 1930s, pumped trillions of dollars into relieving bank balance sheets of shaky mortgages and other debt in a successful effort to avoid a complete banking meltdown. Presidents George W. Bush and Barack Obama, along with Congress, passed $800 plus billion stimulus bills, extended Bush era tax cuts and under Obama twice passed additional payroll tax cuts in addition to 17 business tax cuts. From both the fiscal and the monetary fronts leadership came out with guns blazing, in other words.
All of this activity had two effects. One was that the banking system did not go into full cardiac arrest and a re-run of the Great Depression was avoided. All the tax cutting on the fiscal side countered somewhat the previous 30 years of income loss by simply leaving more money in people’s pockets, even though their incomes were declining.
But almost four years later, unemployment is high (in the US it is reliably estimated that 14% of working age men and women are effectively unemployed) and incomes are still declining. The largest portion of houshold debt, that tied up in home and credit card debt, stubbornly refuses to decline much if at all. The nation’s economy still hovers perilously close to entering a debt deflation spiral despite all these efforts.
So what to do? The ‘magneto’ refuses to fire in a way that would create a more rapid recovery of economic activity. Jobs are being produced but at rates that will take a decade or more to put the unemployed back to work. What’s missing?
What’s missing is real income growth that can only be acquired by putting people back to work in jobs that pay so-called living wages and benefits. What’s missing are three words: “You are hired.”
The problem here is that the private economy cannot profitably hire the millions of people that need to be hired. They are ‘profit constrained.’ Private corporations exist to make profits. No profit, no hiring.
There’s only one agent in the economy that can hire without regard to profit/loss bookeeping. That’s the Federal government. Building public works, whether it’s bridges and roads, or urban mass transit, or sewer lines, or energy and data infrastructures, do not book profits in private sector metrics. But economist know such works do help future businesses book profits. In fact history clearly shows that national economies cannot grow without a steady dose of these public investments.
This is the mis-firing magneto. Instead of pumping trillions of dollars into so-called financial ‘liquidity’ the Federal government should be hiring literally millions of workers rebuilding, modernizing and expanding public infrastructures that will be critical to future economic success. By doing this the income decline can not only be stopped, but reversed.
Real incomes will rise, as will consumption that will follow. Incomes will rise faster than consumption because some of the income gains will go towards paying down debt (the right way, not by default) and even towards private investment. Government revenue will increase as will overall private economic activity, spurred in part by the increase in consumption. Unemployment insurance and other safety net spending created by economic contraction, will disappear as incomes and economic activity increase. Income tax cuts can safely be reversed too, because their economic stimulus is no longer needed in a healthy economy where the income ‘magneto’ is firing properly. Central bank easing can relax, thus allowing interest rates to rise which helps savers. All the positive effects of a healthy economy go into action when incomes rise across a broad section of the nation’s population.
The only impediment to this course of action is politics. The President and Congress need to understand why this Federal government action is necessary. Waiting for the private economy to hire millions of the unemployed is a fools choice. All the tax cuts and all the stimulus cannot make private corporations hire when such hiring is not profitable. And it will always not be profitable until incomes rise. And that takes jobs.
So let’s have a national “you are hired” program.