Where is the recovery?

Submitted by Matthew on 9 February, 2011 - 12:14

There are two competing economic narratives in the American economics and business press explaining why, with recovery of the stock market and the purported increase in corporate profits, the economy is failing to produce job-generating expansion.

The Keynesians — for lack of a better description — worry that the anemic government stimulus package is an insufficient offset to the overall decline in private sector spending. Consequently, they argue, the economy is poised on the precipice of a deflationary spiral. Businesses are therefore hesitant to add to productive capacity or use more of their existing capacity for fear that additional output will bring a lower rate of return in the context of declining prices.

This eventuality is less feared by conservative monetarists, who look to the “wealth” effect of declining prices as a stimulus to renewed spending. As prices decline, the purchasing power of the dollar would increasingly make it less useful to hold idle balances. But this scenario, conservatives would argue, is currently beside the point. The downward fragility of the near zero rate of inflation is an artifice of government manipulated statistics that conservatives have — correctly, in my view — little faith in, but which Keynesians such as Paul Krugman or J K Galbraith built their case for public sector expansion on.

Greenspan

It has evidently disappeared down the memory hole that, under arch conservative Alan Greenspan, the government long ago departed from the fixed-basket of goods approach in measuring changes in living costs.

The Fed chairman, after substituting other means of low-balling increases in the cost of living ultimately embraced what he labeled the “core” inflation rate, which conveniently eliminated energy and food prices from official calculations. Obviously, this was and remains politically useful in cutting cost of living adjustments to public pensions and Social Security.

On the other hand, to admit to an underlying positive presence of inflation, even if the rate has diminished, would be to undercut the immediacy of the Keynesian argument. A modest rate of inflation, even in the absence of additional government induced demand, should provide a sufficient incentive to expand production, insofar as price increases can be expected to outstrip that of money wages. And since this is manifestly the case, the question remains: why haven’t increased profits led to economic recovery?

Conservatives have a ready answer. They argue that corporations have, in effect, staged — though they would be loathe to admit it frankly — an investment strike and are, in their opinion, fully justified in doing so. In their view, corporations fear the “inevitability” of tax hikes directly or indirectly arising from the need to address budget deficits, comply with cap and trade antipollution measures or fulfill new health care mandates.

The increased public sector spending that liberals call for is therefore a nonstarter. It would exacerbate all the underlying problems that currently threaten future profitability. Corporations will, as it now stands — or so it is argued — only invest in those rare sectors that promise an abnormally high compensatory pretax profit rate. Clearly such “exceptional” opportunities cannot be expected to be the engine of a broad general recovery. Unless — and this is the right-wing game changer — the tax structures can be dramatically overhauled to reduce the overhead costs of government, coaxing businesses to renew investment with secured prospects for higher post-tax profit rates.

Debt

The sovereign debt crisis that Greece, Ireland, Iceland, Latvia and others are facing has its American counterpart in the fiscal crisis of state and local governments. Many — such as California — have economies as large as these nation states themselves.

American states cannot by law run deficits. So, either the federal government can run ample deficits and share its revenues with the states — and, in the process, modestly increase the rate of inflation, thereby gradually diminishing the real burden of government debt — or the state economies will eventually implode dragging the overall economy into a deflationary abyss. It is here that the Keynesians would seem to have the upper hand.

But capitalism, unlike socialism, is not a system of demand induced production, even if it is ideologically sold as if it were. It is a system in which markets expand in the course of capital accumulation.

Capitalists are interested in selling their commodities at an adequate profit, not merely at whatever prices are needed to clear the market. As such, capital accumulation is intimately tied to profitability.

A state-led “recovery” as foreseen by the Keynesians can only create, at best, a pseudo prosperity as far as the ruling class is concerned, because the state would have effectively committed itself to appropriate sufficient resources needed to bolster demand and do so regardless of its effect on net profitability.

The business class and its ideologues argue that they can still diffuse the American state debt time bomb from a receding public sector through robust accumulation. But they can only do so if a “proper” business climate is quickly restored. This extortion means nothing less than a civilizational step down. But it is a cost that the American political system seems poised to surrender to.

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