Is the Economic Rulebook failing us?

One of the questions I’ve always wanted to try to find an answer to is: Is there a level of economic growth at which our happiness (as in a general state of wellbeing) will start to decline?

That this is going to very difficult has never put me off; I believe it can be done, I just don’t know how yet, mainly because it’s going to take time to come up with reliable definitions that we can then attempt to measure. The subjective nature of happiness is only the start of the difficulties.

What has spurred my return to this question is the contrasting approaches to the latest global recession, and how none of them seem to be working. The spending approach of the US seems to be working marginally better than the austerity of Europe, but I fear the associated cost of this, huge deficits and unheard of levels of govt debt, compounded by monetary policy gone mad, are pushing the world economy toward a point of no return. By this I don’t mean apocalypse, just a painful re-set that in retrospect might not be such a bad thing. Things will not, and cannot, continue as they are.

Painting the picture with a very broad brush, this is what we have: unprecedented levels of economic activity, with most of the influence centred in the financial, not the productive, sector of the economy. Technological gains that have pushed output up, but with employment lagging behind, this coupled with downward pressure on wages since the 1980s has created a huge gap between what the economy is capable of producing (and is being pressured to produce by an out of control financial sector) and what people are capable of consuming. This results in consumption pressure, from direct means such as promoting easy credit and media-led lifestyle choices, to indirect ones such as built in redundancies and unnecessary packaging. This creates the credit bubbles that, when they burst, result in recessions. We then get slapped on the wrist for our poor choices, but are still encouraged to pay our debts and somehow find the money to keep the whole show on the road, while those who put the air in the bubble not only start again, but have the audacity to grade us on how we dance to their tune (the ratings agencies, fow whom I have a question: Once you’ve downgraded every country in the world, what then?).

I want to have a quick look at the US Federal Reserve, because the state of their finances is perhaps the best indicator of how things have changed in the last 30 years. In 1985 the balance sheet of the US Fed was just over 200 billion dollars. Holdings of US govt bonds accounted for about 80% of the assets, with notes in circulation making up abount 80% of the liabilities. In 2012, the balance sheet is over 2 trillion dollars, up tenfold since the 80s. This in itself is not the worry – you would expect your money supply to grow as your population does, and as the economy grows. But let’s look at the components: on the asset side, govt bonds are now about a third, with mortgage backed securities (including the crap that kick-started the economic collapse of 2008) another third. On the liabilities side, notes in circulation is down to about half, with the other half being the deposits held by commercial banks.

So what does this mean? Well the US Fed is buying up all the bad debt from banks, and also about 75% of the govt bonds being issued. They don’t exchange actual money for this, they increase the reserve deposit amount for that particular bank (whether it be a commercial bank or the US Treasury). It’s just an accounting entry. That bank can then proceed to lend out a multiple of it’s reserve deposit, the mechanism I described in this post. The purchase of govt bonds basically sets the interest rate; inflating the demand for the securities (by buying them up) increases the price, decreasing the yield, which is effectively the interest rate.

So currently we see interest rates near zero – this has always been the monetarist approach to stimulating an economy. But it’s not working. The US economy is recovering, but very sluggishly; and this with goverment spending at unprecedented levels (what’s it now – 16 trillion in debt?) and monetary policy reduced to buying your own products to make the demand seem high. This suggests to me that this time it might have gone too far. I mean it’s ok to buy up all the rubbish that’s already exploded in our faces once, and even to buy up your own securities and have a government in huge debt, as long as the rest of the world maintains its confidence in you. But you can’t keep it up forever, and when this one blows, that will be it.

Perhaps it’s about time we stopped using the word “recession” and started to recognise that unemployment is no longer a result of bad macroeconomic policies foisted upon us by our ideological rivals (as neither ideological approach is working). Instead, we need to see it as a sign that the economic system as a whole has let us down, that consumers just can’t keep pace with the level of output, and no amount of easy credit is going to make a bad situation look different – we’re starting to see it for what it is. Unemployment should be our signal that bigger is not better any more.

When I said before that we’re all responsible for Neoliberalism, I meant it. There’s no global conspiracy foisting this upon us, although there are players who benefit, and they are certainly not complaining. But we’ve all bought into this philosophy that we must achieve economic growth at all costs; the management of every corporation in the world is under pressure to deliver better results than the previous year, every year. But by cutting labour costs they are ultimately cutting off the branch they are sitting on – each one just thinks it won’t happen to them.

Can we find a way of using technology to actually make our lives easier, instead of just producing more? Couldn’t we use the enormous technological gains we have made to benefit more people – imagine an approach that values employing more people each to do less work, keeping production levels constant. And making benefits for unemployed people a mainstay of any civilised economy. This can be done in such a way that incentives to work and make profits are not removed, but this approach will result in a more even distribution of the fruits of the economy’s labour – not as an end to itself, but with the ultimate goal of ensuring a market place where everything that is produced can be sold without the need to go into debt.

In my next post I’ll be looking at my proposed tax and spending regime that will be designed to encourage the type of economic responses that I believe can save capitalism from itself.

Advertisements

3 thoughts on “Is the Economic Rulebook failing us?

  1. I wasn’t aware that you were posting again.

    I am in the midst of reading “The Decline And Fall Of The Roman Empire, and your question of “happiness” brought this line from Gibbon’s work to mind:

    The ancients were destitute of many of the conveniences of life, which have been invented or improved by the progress of industry; and the plenty of glass and linen has diffused more real comforts among the modern nations of Europe, than the senators of Rome could derive from all the refinements of pompous or sensual luxury.

    My guess is that the point you are looking for is much lower than one might expect and depends on much more than economics. A cultural mindset, or worldview will probably determine if such a point even can exist for a given society, whether that mindset be endemic rose-colored ignorance, or values. Whatever the case, I am pretty sure that that point has been surpassed in the U.S., and probably the whole of Western society. I am constantly encountering wealthy, at least from a global perspective, individuals who are decidedly unhappy without economic reason.

    I took a leave of absence from my place of employment many years ago, and with my airplane mechanic’s and pilot’s license in hand, spent time flying medevac missions in a single engine airplanes from remote areas of Central America. When I departed, I left behind me a 3 bedroom 2 bath shack. When I returned, that shack had become a 3 bedroom 2 bath mansion. The only thing that had changed was my mindset.

    Here is the context to the Gibbons quote if you’re interested:

    The opulent nobles of an immense capital, who were never excited by the pursuit of military glory, and seldom engaged in the occupations of civil government, naturally resigned their leisure to the business and amusements of private life. At Rome, commerce was always held in contempt: but the senators, from the first age of the republic, increased their patrimony, and multiplied their clients, by the lucrative practice of usury; and the obsolete laws were eluded, or violated, by the mutual inclinations and interest of both parties. A considerable mass of treasure must always have existed at Rome, either in the current coin of the empire, or in the form of gold and silver plate; and there were many sideboards in the time of Pliny which contained more solid silver, than had been transported by Scipio from vanquished Carthage. The greater part of the nobles, who dissipated their fortunes in profuse luxury, found themselves poor in the midst of wealth, and idle in a constant round of dissipation. Their desires were continually gratified by the labor of a thousand hands; of the numerous train of their domestic slaves, who were actuated by the fear of punishment; and of the various professions of artificers and merchants, who were more powerfully impelled by the hopes of gain. The ancients were destitute of many of the conveniences of life, which have been invented or improved by the progress of industry; and the plenty of glass and linen has diffused more real comforts among the modern nations of Europe, than the senators of Rome could derive from all the refinements of pompous or sensual luxury.

    Gibbon, Edward (2008-07-24). The Decline and Fall of the Roman Empire (Kindle Locations 17636-17644). . Kindle Edition.

    • Well I haven’t posted in a while – I’m a bit shocked to see this last one was back in December. I really must get back to it.

      Thanks for sharing your thoughts regarding both the book you’re reading and something of your life. It’s impossible to separate economics from human nature, it’s called a social science after all. And I agree that the point (if that’s even what it is) that I’m looking for is probably quite low for many people. I’m just fascinated with the possibility of being able to measure or define it somehow.

  2. Pingback: Is employment still a useful economic indicator? | Penny Wise

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s