Wednesday, January 13, 2016

Why Has It Taken So Long?

The latest Federal Reserve press releases—firstly, the minutes of last FOMC meeting, and also its reduced projections of expected inflation—tell us the Fed is still in austerity mode, due to a fear of non-existent inflation.  And it is that unjustified fear that puts the brake on growth, since even the fear that the Fed will tighten credit conditions via its control of short term interest rates affects business investment.

The just released FOMC minutes reveals there was hardly a consensus in raising the Fed Funds rate to 0.5 percent from 0.25 percent.  Why?  Because many of the Fed Governors don’t believe inflation will rise at all this year from the present 1.3 percent annual Personal Consumption Expenditure index rate it favors.
This is while Nobelist Joseph Stiglitz has been decrying the lack of concern over the slow recovery from the Great Recession; lest we forget has grown more slowly than during the Great Depression.  And the Fed hasn’t been as proactive as I could be.
But what can duplicate the conditions that led to President Roosevelt and the New Deal programs (which were created by a woman, Labor Secretary Francis Perkins, by the way) that gave enough benefits to workers and trade unions so they could ultimately negotiate for a living wage and working conditions?
“In early 2010, I warned in my book Freefall, which describes the events leading up to the Great Recession, that without the appropriate responses, the world risked sliding into what I called a Great Malaise,” said Stiglitz. “Unfortunately, I was right: We didn’t do what was needed, and we have ended up precisely where I feared we would.”
            We needed another New Deal, in other words, but there was neither a Roosevelt with the experience and political savvy to push through the job creation programs of the 1930s, nor such a loss of faith in capitalism that prevailed then.  Let’s not forget that Herbert Hoover lost his job precisely because private industry ran for the exits, refusing to create jobs, so government job programs such as the CCC, and WPA employed those millions left jobless and became the bulwark that saved the US economy during that time.
Now we sadly have history repeating itself.  “The economics of this inertia is easy to understand,” continues Stiglitz, “and there are readily available remedies. The world faces a deficiency of aggregate demand, brought on by a combination of growing inequality and a mindless wave of fiscal austerity. Those at the top spend far less than those at the bottom, so that as money moves up, demand goes down. And countries like Germany that consistently maintain external surpluses are contributing significantly to the key problem of insufficient global demand.”
            History has repeated itself in several ways.  Income inequality was this high in 1929, as well as a stock market bubble.  A six-year drought in the Midwest created the Dust Bowl, and made millions homeless.  And credit was too easy then as well and consumers overspent, believing that stock values would never fall. 
John Steinbeck described those times the best in A Primer on the '30s' by John Steinbeck, 1960, pgs. 17-31: “I remember the Nineteen Thirties, the terrible, troubled, triumphant, surging Thirties. ... I remember '29 very well ... the drugged and happy faces of people who built paper fortunes on stocks they couldn't possibly have paid for. ... In our little town bank presidents and track workers rushed to pay phones to call brokers. Everyone was a broker, more or less. At lunch hour, store clerks and stenographers munched sandwiches while they watched stock boards and calculated their pyramiding fortunes. Their eyes had the look you see around a roulette wheel ...”
Why is it important that we remember those times?  Why is it so important to learn from history, you say?  Because the Great Depression led to WWII in direct ways.  Hitler rose out of a Germany shamed by its failed economy, and so chose dictatorship.
[I]n the Thirties when Hitler was successful,” continued Steinbeck, “when Mussolini made the trains run on time, a spate of would-be Czars began to rise. Gerald L.K. Smith, Father Coughlin, Huey Long, Townsend - each one with plans to use the unrest and confusion and hatred as the material for personal power.”
And today we have blatantly racist Republican presidential candidates like Donald Trump and Senator Ted Cruz doing the same. 
Professor Stiglitz says we know what to do: “…some of the world’s most important problems will require government investment. Such outlays are needed in infrastructure, education, technology, the environment, and facilitating the structural transformations that are needed in every corner of the earth.
Therefore, “The obstacles the global economy faces are not rooted in economics, but in politics and ideology. The private sector created the inequality and environmental degradation with which we must now reckon. Markets won’t be able to solve these and other critical problems that they have created, or restore prosperity, on their own. Active government policies are needed.”
There is a price we pay for ignoring the lessons of history, in other words. 

Harlan Green © 2016

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