- 14 Sep 2017 08:40
#14843465
Consider the overall shape of the global western economies:
* Persistent underemployment, gig employment, part time employment, low wage employment, etc., for a growing number of workers.
* Increasing number of bubble/crashes, spaced more frequently.
* Post-crash, a panicky monetary stimulus to forestall deflationary spiral.
* Persistent disinflation despite the above. CB's consistently undershoot inflation targets.
* Labor's share of productivity growth declining to record lows. Declining real wages for those under the median income. Stagnant wages for those near the median. Real wage growth for the upper middle class, and astounding gains for the rich.
* Persistent long-term manufacturing overcapacity, despite shutting down thousands of factories over the decades.
* QE inflates asset prices, benefiting the wealthy. QE, in all other respects, is deflationary.
At first glance, these may appear to be random or unrelated phenomena. They are not. They, in fact, are part of a cohesive whole.
We have worked ourselves, partly by design and partly by historical circumstances, into a demand-constrained trap - a trap that is devilishly difficult to escape from. The OP's question of consumption becomes the limiting factor for the economy as a whole.
It goes something like this: As wages decline, workers have less money for consumption. Given fewer numbers of buyers with less disposable income, there is less demand for goods and services. Those that do have money set aside a large portion of their wealth, so that less of it enters the economy. Thus the size of the overall economies slows its growth or shrinks. Companies adapt by downsizing, outsourcing, and investing in automation; this, in turn intensifies the decline in labor share. In effect, a positive feedback loop intensifying all these existing problems. Some companies adapt by niche marketing to upper incomes. A good example is Harley-Davidson; this firm nearly died marketing utility bikes to the average consumer. They only survived by transforming into a high-end niche manufacturer.
There are two ways out of this trap. The first is a deflationary spiral leading to depression. This could occur through a simple CB mismanagement of the post crash environment. It could also occur as successive bubbles lead to hyper-financialization of the economy (Minsky). In this scenario, ponzi objects begin to overwhelm the real economy, leading to more financial instability - another positive feedback loop. The tendency is acceleration of the bubble/crash cycle leading to a non-recoverable crash (depression).
The depression scenario is not ideal. Once deflationary psychology sets in it will last a generation (as we learned from the Great Depression). Businesses become hyper conservative. They don't want to hire or expand or take risks. Consumers either have no money, or become deathly afraid of spending. Cash hoarding becomes common. Deflationary psychology is another positive feedback loop, contributing to the length and depth of the depression.
There is another option. Government can create money ex nihilo by purchasing goods in the private sector or spending 'helicopter money' via expansion of direct payments. Some combination of basic income and job guarantee would get spendable money to those who spend it the fastest (that is, the demand-constrained workers). The only limit to this process is inflation, which wouldn't occur until companies are 1) competing for labor, and 2) excess capacity is wrung out. After 30 years of neoliberal austerity, this can't be achieved overnight. The biggest problem with this option is cognitive: getting people to understand that deficits are not a bogeyman and government spending is necessary.
The most likely outcome, I believe, is that governments will muck it up and stick with monetary stimulus. After this fails, they will reluctantly try fiscal stimulus. Unfortunately, political pressures will cause it to be too little, too late. If this is the case, I expect a long and deep depression, and an acceleration of radical politics on the left and the right.
(Note the above analysis ignores external factors that could change everything radically, such as environmental degradation, energy scarcity, war, etc.)
The old world is dying, and the new world struggles to be born: now is the time of monsters. -Antonio Gramsci