Wednesday, December 22, 2010

The Great Depression and the Great Recession

"As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth - not of existing wealth, but of wealth as it is currently produced - to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-1930 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped."

This is a quote from Marriner Eccles who was the Fed Chairman 1934-1948. We have a similar problem today. There is not enough buying power in our economy to purchase the potential output of a fully employed economy. The lack of purchasing power is related to the distribution of wages. Middle class incomes have not kept up with increases in productivity and much of our consumption contributes to the purchasing power of offshored labor. Asset bubbles in real estate provided a short term solution to the problem by encouraging households to borrow against the rising values of their homes, and by refinancing their mortgages at lower rates, and taking cash out without increasing their monthly payments. Unless the Fed is successful in reflating housing values its hard to see where the demand will come from to restore full employment. Our large corporations have the capacity to invest in new production but they don't see where the demand will come from either. Many are drawing down their retained earnings by repurchasing their own stock. Some are even borrowing at very low rates to fund stock repurchases. This improves earnings per share, and may increase stock prices faster than capital investments in an uncertain economy.

While the US and European economies have been hard hit by the financial crisis and its aftermath, globalization has led to the development of a growing middle class in many Asian countries. They provide an attractive market opportunity for our multinational corporations, but much of what they might purchase will be exported from the offshore facilities of the multinationals. Growth in international markets may offset stagnant revenues in the US market but that will lead to greater capital investments outside the US. There are no easy answers to these problems and most of the potential solutions would require an enlightened Congress.

No comments:

Post a Comment