The Real Cause of "Secular Stagnation": Extreme Inequality

Much has been made of the concept of "secular stagnation", namely, that the current and future long-term potential for economic growth has slowed dramatically compared with the not-too-distant past.  Larry Summers defines it as "a prolonged period in which satisfactory growth can only be acheived by unsustainable financial conditions".  And at least since the Great Recession, the data do indeed seem to bear this out.  Most notably, for decades now the American economy has been requiring lower and lower interest rates to get the same effect in terms of boosting aggregate demand, the sine qua non of economic growth.  One can even argue that, relatively speaking, the United States will have had a whopping "lost two decades" of growth from 2000-2020.

But why is this happening, exactly?  Some blame demographic changes, particularly population aging, as one of the causes.  But while this theory may be at least partially true, it only seems to explain, at most, one-third of the trend of secular stagnation.  Others blame the decline in EROEI (Energy Returned on Energy Invested) as cheap and easy fossil fuels are increasingly less readily available than in the past, as well as the planetary limits to growth.  That is indeed true in the very long run at least, and all the more reason to end our inane and insane addiction to growth for the sake of growth, the ideology of the cancer cell which eventually kills its host, by the way.

But in the relatively near term at least, the biggest elephant in the room by far in terms of the causes of secular stagnation would be the extreme level of economic inequality in this country that is now back at Gilded Age levels.  Or should we say, at banana republic levels these days.  The top 1% controls roughly 40% of the nation's wealth, the top 20% controls roughly 90%, and the bottom 80% is left to fight over crumbs.  Wages have lagged behind the cost of living for decades despite exponential increases in technological progress and resulting increases in labor productivity.   The oligarchs at the top took nearly all of the gains.  And the rest of us simply cannot afford to keep spending enough to keep the economy going without digging ourselves deeper and deeper in debt.  Eventually, something has to give, since there is not enough aggregate demand, and increasing debt clearly cannot be sustained forever.

Thus, a more accurate definition of "secular stagnation", would be, in the words of the Economic Policy Institute, "a chronic shortage of aggregate demand constraining economic growth".  They really hit the nail right on the head here.  After all, one person's spending is another person's income, by definition, and any business without enough customers will clearly not stay in business for long.

Which, by the way, was also one of the causes of the Great Depression and the long period of secular stagnation that followed until WWII.  The Roaring Twenties also had similarly extreme inequality as well, along with a wildly unregulated financial system.  And we also had a trade war from 1930-1934, which further deepened the Depression.  The only real difference now (aside from the levels of debt today) is the Feral Reserve's monetary policy, but even that will run out of ammo very fast (as interest rates are already low) unless their methods are truly overhauled to accomodate today's realities.

But what about in the long run?  Well, the Keynesian punch line to that is, "in the long run, we are all dead".  Seriously, though, an inequality-induced chronic shortage of aggregate demand not only reduces actual economic growth in the short run, but also reduces potential growth well in the future as well.  That is because less demand today leads to less business investment tomorrow, degrading the economy's productive capacity over time and thus leading to significantly less growth in the long run as well as the short run, creating a vicious cycle and downward spiral.  Hoarding such ludicrous amounts of wealth at the top of the pyramid clearly has serious consequences for the economy and society, and with much larger effect sizes than originally thought.

Thus, policies designed to tackle economic inequality would be beneficial in this regard.  In addition to more progressive taxation of both individuals and corporations (like it was before Reagan) and/or the Universal Exchange Tax and/or Georgist taxation on natural resources, that would also include things like Universal Basic Income (UBI) as well.  And nationalizing the Feral Reserve to make it a truly public national bank that creates money interest-free would be even better still, since usury (interest) and debt-based currency are essentially the biggest weapons of the oligarchy.  Problem solved.

At the very least, in the meantime, we need to raise the minimum wage to $15/hour to give the lowest-paid workers a boost, which will also have a positive spillover higher up the wage scale.  Also, macroeconomic policy (both fiscal and monetary) should seriously prioritize very low unemployment over very low inflation, since tight labor markets have long been known to give workers much more bargaining power relative to employers. And labor unions also need to be revitalized as well.  Yesterday.

So what are we waiting for?

How to Prepare for the Next Big Crash (Part Deux)

As we have noted before, things are really not looking good for the global economy this year.  Whether we actually experience another financial crisis on the order of 2008 or even 1929 (or worse) is a matter of debate, but the time to prepare for such a scenario is yesterday.  At the very least, another recession is inevitable at this point by 2019 at the very latest, since no economic expansion has lasted much more than eight years straight in this country (with the notable exception of 1991-2001 that lasted exactly ten years).  Granted, the expansion from July 2009 to the present mostly benefited the rich, and until around 2014 practically entirely benefited the rich, but it was still technically an expansion of the economy even if the growth was largely uneconomic in practice.  And expansions can only go on so long before a contraction (i.e. recession or depression) inevitably occurs--it's just a fundamental truth of the business cycle.

One thing is for sure--things are very different this time around at least in terms of monetary policy.  At least in 2008, interest rates were well above-zero, and could be cut to stimulate the economy (or, more accurately, stop or slow down the hemorrhaging).  When that proved to be futile, then the Feral Reserve and many of the world's other major central banks resorted to "quantitative easing" (i.e. creating money out of thin air and giving it to the banks directly).  In late 2014, the USA tapered off and ended its QE policy, and in December 2015 ended its zero interest-rate policy by raising the Fed Funds Rate to 0.25-0.50%.  Since then, the FERAL Reserve has raised rates five more times, most recently on March 21, 2018 to 1.50-1.75%, and many more hikes are on their way.  And combined with Trump's new trade war against China, that may have been enough to finally lance the massive bubble--make that the festering BOIL--that the stock market has been in for years now.  And since they now have a little bit of room to cut it--if they don't wait too long to do so--they probably seriously think that they can somehow engineer a soft landing if (and that's a VERY big "if") that is even possible at this point.  But not much room, really.

But many of the central banks of the world are still starting from zero or close to zero--and some banks including the European Central Bank and the Bank of Japan have even resorted to negative interest rates (!) by 2016.  That means they are effectively charging depositors for the "privilege" of depositing money, and effectively paying borrowers to borrow money, which basically turns the world of finance upside-down.  Such negative rate territory is uncharted waters, since until a few years ago no country has ever dared to do such a thing.  And there is currently no evidence to suggest that such a move will be beneficial in the long run, and may in fact turn out to do more harm than good overall.

So monetary policy basically needs a new set of tools and a new game plan to deal with the next crisis, whenever it occurs.  The Feral Reserve and the other central banks of the world are basically still using an outdated playbook.  In the near-term, two things need to change yesterday.  First of all, they need to abandon interest-rate targets altogether for the time being, and instead focus on targeting the growth of the overall economy.  Like Paul Volcker did in 1979-1982, but done in reverse since the "inflation dragon" is not the problem this time (unless the Trump tariffs really begin to bite). Secondly, implement Quantitiative Easing for We the People in general (as opposed to the banks, which only benefits the ultra-rich) by injecting newly-created money into everyone's bank accounts.  Granted, the latter measure would probably require an Act of Congress to allow it to occur legally, but as the Feral Reserve was just two years ago seriously debating the legality of negative interest rates, I'm sure they could find some sort of a loophole to allow it in an emergency such as a massive financial crisis.  And of course fiscal stimulus would likely be necessary as well, in additional to much needed reforms to regulate Wall Street and the big banks (a law that rhymes with "brass seagull" comes to mind, as well as a financial transactions tax and better regulation of the shadow banking system), but those two changes to monetary policy would go a long way towards preventing the next recession/crisis from turning into another 2008 or 1929 or even worse.  And the silly idea of negative interest rates really needs to be abandoned as well.

More fundamentally, of course, we need to nationalize the FERAL Reserve to make it a truly public national bank that creates money interest-free, and take the power back from the big banks.  Ellen Brown has written books about that very subject.  In the meantime, though, the aforementioned recommendations would still work in the near term.

But let's be brutally honest here.  What we are really witnessing these days is the slow and painful death of a woefully obsolete system, one that has been kept on life support for many years now.  And eventually we will have to pull the plug on it, sooner or later.  It's just a matter of time.

How to Prepare for the Next Big Crash

As we have noted in the previous article, the risk of the next big economic crash continues to loom larger than ever before, and it is most likely too late to actually prevent it from occurring entirely.  That's not to say that there aren't things that should be done to prepare for it to make it less catastrophic, though.  Back in 2014, the TSAP had predicted that a crash would occur within a few short years, and we had written an article then discussing how to prevent it before it occurs or at least take the edge off of it, while ending the previous economic "stagpression" for good.  We also reiterated such ideas in 2016 as well, the year for which the insightful Thom Hartmann predicted the epic crash that was his book's namesake.  (Being off by two years or so is still fairly accurate in our book.)  And we should note that these things would indeed help take the edge off of the next looming financial crisis as well.

Two things come to mind right away:  1) a Universal Basic Income Guarantee for all, an idea that is LONG overdue, and 2) Quantitiative Easing for We the People in general (as opposed to the banks, which only benefits the ultra-rich) by injecting newly-created money directly into everyone's bank accounts and/or via debit card.  Additionally, we need to better regulate the Wall Street casino so such a crisis could never, EVER happen again, and also JAIL the banksters who caused the crisis (instead of bailing them out) like Iceland did.  A complete debt jubilee would be even better still (in general, but especially for student loans), but even the things we just mentioned are a fairly tall order for a government who is bought and paid for by the banksters/oligarchs.  While other things need to be done as well in the long run, such as critical investments in infrastructure and education, the aforementioned measures would go a long way towards fixing our soon-to-be-ailing economy.

Those are the things that should be done at the government level, of course.  At the individual level, there is really not much one can do except get OUT of the stock market while you still can, and take at least most of your money OUT of the big banks (before the "bail-ins" begin) and put it into smaller banks, credit unions, or even under your mattress.  Or even in a big, brown bag inside a zoo (what a thing to do!)

The Crash of 2018?

Despite the fairly rosy economic reports, the next financial crisis, recession, or perhaps even depression is most likely already baked into the cake at this point.  It is not a matter of if, but WHEN, and just how bad it will be.   In fact, we are overdue for one.  And the beginning of the slump will be one of those things that will only be noticed in hindsight, as was the case last time ten years ago.  And this one may very well make 2008 or even 1929 look like a walk in the park.

The positive economic numbers mask a rather dismal underlying reality just beneath the surface:  wages lagging behind the true cost of living, and (not coincidentally) unsustainable record-high levels of consumer debt.  This time the debt increase is not primarily mortgages (though there is plenty of that too) but is now mostly student loans, along with that perennial, decades-old papering-over-declining-wages tool: credit cards.  In fact both are a result of a problem decades in the making:  reverse Robin Hood economics has robbed from the poor, gave to the rich, and torpedoed the middle class as the real economy has been systematically hollowed out since Reagan.  And the debt has become a way to artifically and temporarily sustain ever-increasing consumer spending (and thus economic growth) despite stagnant or declining wages for the bottom 80% of Americans--and eventually even that becomes insufficient, and the house of cards collapses.  That is the powder keg, just waiting for a spark to set it off.  And practically any sort of "black swan" event could serve as the spark at this point.  Here be dragons.

The stock market is a bubble.  Scratch that, it is a big, festering BOIL just waiting to be lanced.  The recent "correction" in early February is a warning, followed by a return to "normal" before the Big One happens sooner or later.  If Trump goes through with his plan to start a trade war, that will likely trigger the crash, as will any further increases in FERAL Reserve interest rates.  But it looks like a crash is coming, one way or another.   So don't say we didn't warn you.

We Need A Carbon Tax-and-Dividend, Yesterday

We at the TSAP have long been pushing for a carbon tax-and-dividend (aka fee-and-dividend, feebate, fee with rebate, revenue-neutral tax, or Alaska Permanent Fund) since we first heard about the idea.  Steve Stoft, James Hansen, Elon Musk, and even some very unlikely supporters like the recently ousted Secretary of State and former ExxonMobil CEO Rex "Ruthor" Tillerson are known to support it to one degree or another.  And the list is growing.

Aside from the primary (and urgent!) reason for it-- mitigation of climate cataclysm--there is also another pressing reason for it:  simple justice.  The distributional impacts of a straight carbon tax (without any rebates) would be highly regressive, hitting poor people the hardest, and studies show that simply having the carbon tax replace other taxes would also be quite regressive as well.  And ignoring that fact would be a major intersectionality fail, to put it mildly.  But refunding 100% of the revenue to everyone in equal amounts would effectively make the tax quite progressive in practice.  And even better, it can also double as a Universal Basic Income (UBI) Guarantee for all, or at least a viable gateway to such a thing.  Once it becomes normal for every citizen to receive even a small amount money unconditionally with no exceptions, then the Overton window of political acceptability would have shifted enough to make it possible to simply increase the amount and/or finance a larger UBI through other revenue sources as well.  After all, if everyone's on the dole, then no one's really on the dole.  And if everyone's a rentier, then no one's really a rentier.  Thus, the idea transcends the left-right political spectrum and becomes an idea that even hardcore libertarians and right-wing populists/producerists can support, not just the left.

What better time than now?

Our Position on Tariffs and Trade

With Donald Trump essentially starting a trade war with his latest import tariffs (25% on steel, 10% on aluminum), the TSAP must clarify our often ambiguous position on tariffs and trade.  Unlike both corporate political parties, we have always rejected the so-called "free trade" scam as the neoliberals typically define it (we aren't called the True Spirit of America Party for nothing, you know), but have nonetheless gone back and forth over the years on the question of just how protectionist we ought to be.

We believe that protectionism is indeed a razor-sharp, double-edged sword, and can backfire if done excessively or improperly, but if done wisely and properly (unlike Trump's bass-ackwards version) it can work well.  No one really wins a trade war, so trade policy must be based on more than beggar-thy-neighbor policies.  Thom Hartmann wrote an excellent article on how properly implemented tariffs can, in conjuction with subsidies and other important measures, contribute to the goal of protecting vital American industries and the jobs that go with them.

While we are not against tariffs, protective or otherwise, any tariffs should be carefully targeted to those essential goods and countries for which we have a significant trade deficit today.  Unlike Trump's rash and hamhanded version of protectionism that is prone to backfiring, tariffs should not be applied to raw materials that American industry uses to make finished goods, nor should they apply indiscriminately to unnecessarily include our allies as well.  They should apply primarily to situations where workers in other countries are grossly underpaid to make the good in question and/or environmental standards are more lax than ours.  And they should never be done in isolation, but rather other measures should be done along with it, such as subsidies for crucial domestic industries, "Buy American" clauses in government stimulus packages, and even more importantly, closing the ludicrous loopholes in the corporate tax code that encourage outsourcing and offshoring of American jobs.  The latter tactic is the basis for Bernie Sanders' Outsourcing Prevention Act, which would also end or claw back subsidies for American corporations that send jobs overseas.  Note that Bernie was not against tariffs, and even advocated for some level of protective tariffs in 2016 before Trump cribbed his idea, bastardized it, and successfully stole his thunder as a result.

Alternatively, or in addition to the above, the TSAP also supports the Buffett Plan.  In 2003, the legendary Warren Buffett came up with a simple and very clever idea to close America's yawning trade gap by issuing tradeable Import Certificates (IC) to American exporters equal to the dollar value of exports.  And anyone holding these tradeable certificates would be allowed to import the same dollar amount of these certificates, thus being a similar idea to cap-and-trade.  The inevitable result would be trade balance, as every dollar worth of imports would have to be offset by a dollar worth of exports.  While the downside is that prices will inevitably go up somewhat as a result, the upside is that jobs will return to America and workers' wages would also go up as well, so the net effect would be beneficial overall.  And if tariffs still exist and/or ICs are auctioned by the government, the revenue could be directly refunded to the people to further help offset the price hikes for any affected goods and services.

But make no mistake.  Our nation's once-great manufacturing base has been hollowed out for decades, and much of it is currently rotting and rusting thanks to the neoliberal "free trade" scam brought to us by Reagan (and Thatcher in the UK) and embraced by both corporate parties ever since.  We ignore it at our own peril.  And the left would do well to abandon this highly corrosive ideology yesterday.