Wednesday, December 14, 2011

A Contrary Explanation of The Depression and The Great Recession

Joe Stiglitz offers a new interpretation of the Great Depression and argues that there are parallels to the Great Recession. He also argues that only massive investment by government in the services economy can get us out of our mess.

The Great Depression was not due to the failure of the Fed to increase the money supply. Milton Friedman made this argument and it has been accepted by many economists. Stiglitz argues that the economy was undergoing a transition from an agricultural economy. Productivity had enabled farmers to produce more product with fewer workers. That created an oversupply of product and an oversupply of labor. Prices of food and the wages of farm workers fell. Since farm labor was 20% of the labor force, the demand for manufactured products also fell. This added fuel to the fire that was only quenched by the military build up that stimulated manufacturing and facilitated the transition from agriculture to an industrial economy.

Today we are losing manufacturing jobs to productivity and to globalization. We must make the transition to a services economy. Finance and healthcare are already bloated, we need to make investments in education which is suffering layoffs due to declining tax revenues. We also need to invest in infrastructure that has suffered from low investment, and which will help us make the transition. With interest rates at all-time lows, the only thing preventing government from making the transition is politics.

No comments:

Post a Comment