A conversation over at PEF, instigated by Jim Stanford’s modeling exercise with respect to what the future holds for unemployment, prompted me to put down some of my thoughts about the future path of economic growth. On commentator suggested that the Jim’s numbers were too pessimistic based on the experience of the past two recessions. I argue the past recessions will not be a useful guide and here is why:
Three years forward and it is anyones guess what monetary policy is going to be and a strong case can be made that some form of restraint will be in the works whether in monetary or fiscal form. I don’t think the last recessions are going to be a very good guide to, or even educated guess about what, we can expect over the next three to five years. I would make the following seven conjectures.
1) There is not any post-NAFTA bounce this time around, either in terms of the optimism it generated in investors’ expectations or in the “easy” forms of continental rationalization it made possible.
2) The US is going into major deficits these will have to be paid for through some form of restraint –higher interest rates plus higher taxes and or spending cuts. So hard to see a Clintonite gilded age of surpluses along side of tax cuts. Much the same this side of the border although more muted.
3) The bubble was a financial bubble not simply confined to housing or the US. It was that bubble that generated the fantastic growth numbers that brought structural unemployment down towards, but never reaching, post WWII golden age averages. That bubble also generated the terrific commodity price boom through several linkages.
4) The bursting of the bubble undermined the faith in high degrees of leverage. It was that leverage which enabled the neoliberal consumption miracle.
5) Mainstream economists may still have faith in the “efficiency” (not in the tautological sense of the EFMH) of financial markets. But it is going to be a long time before that degree of faith is restored in investors’ eyes and even then it is hard to imagine a repeat of the heady days of 2001-2006/7 in our life-time.
6) Insofar as this is shaping up to be a generalized (international) recession, the spatial and temporal dynamics are going to be very different. It is not going to be possible to play the game of export to the hot demand zone. We are going to be trying to export our way to growth. There is a compositional fallacy involved here. This will either degenerate into a beggar-thy-neighbor game or its opposite which is not a positive sum game either. Rather, it is a cut throat competition game played-out in putatively “free” markets
7) Policy makers on both sides of the line are looking for one-off spending programs which deliver fiscal stimulus that has the following exotic properties: (a) to stimulate the economy over the short-term with no medium to long term liabilities in terms of taxes or debt i.e., which do not permanently alter the weight of the state in the economy; (b) which preserves jobs and (c) which lays the foundation for a future round of growth based on high productivity. I would like to be 7 feet tall and I wish them the best of luck in their endeavors.
Taking 1-7 together we get a recipe for the more somber form of neoliberal macroeconomic policy where the costs of adjustment are forced onto subordinate classes sans the prospect of an eventual orgy of consumption to wash the pain away.
Put less colorfully, the future looks more demand and supply constrained than the past and the current ideological policy fashion is still fascinated with last seasons dogma.
In a nut shell Jim’s numbers just might be too optimistic.