Wednesday, April 6, 2011

Bill Mitchell: "It's Time To Get Angry"

Prof. Bill Mitchell is one of the original developers of MMT and the author of billy blog, one of the premier MMT resources on the Internet. In It Is Time To Get Angry, Bill traces the origins of the present crisis to the dominant neoliberal economic theory and economic policy based on it.

It is often recounted how Henry Ford cleverly realized that if he was to sell his cars, he would have to pay his workers a wage sufficient to afford them. This is the basis of a how an economy works. Income must be sufficient to purchase output, taking into account funds diverted to savings that won't be consumed in the present period.

This implies that demand leads supply in the sense that demand sends a signal to invest. Insufficient demand to purchase potential output results in economic underperformance and rising unemployment.

Bill explains how the seeds of the crisis were sown based on this:

"In the past, real wages grew in line with productivity, ensuring that firms could realize their expected profits via sales. With real wages lagging well behind productivity growth, a new way had to be found to keep workers consuming.

"Here a link between the real economy and the financial sector emerged. The deregulation push not only affected the real economy (wages, conditions etc). The neo-liberals lobbied hard to ensure that policy makers also reduced their oversight of the financial sector. The myth of self-regulation leading to efficiency and optimal outcomes for all was generalised.

To keep consumption growing at the same time as the power elites were “stealing” more and more real output via the redistribution mechanism noted above [productivity gains not being passed on], the financial sector became more sophisticated (which in this context doesn’t connote good or better) and we observed the rise of “financial engineering,” which pushed ever increasing debt onto the household sector.

"It was such a lurk. Capitalists found that they could sustain sales and receive an additional bonus in the form of interest payments – while also suppressing real wage growth. Households, enticed by lower interest rates and the relentless marketing strategies of the financial sector, embarked on a credit binge.

"The increasing share of real output (income) pocketed by capital became the gambling chips for a rapidly expanding and deregulated financial sector. Governments claimed this would create wealth for all. And for a while, nominal wealth did grow—though its distribution did not become fairer. However, greed got the better of the bankers, as they pushed increasingly riskier debt onto people who were clearly susceptible to default. This was the origin of the sub-prime housing crisis of 2007–08."

Why is it time to get angry? Even though this theory was discredited by the crisis, it has arisen from the dead and is still dominating the policy debate. What does it take to kill a zombie. A depression?

7 comments:

Red Rock said...

It is indisputable that wages have not kept pace with gains in productivity. This is due to both outsourcing and automation. There is nothing illegal or immoral about it. If a business can't compete, they're gone so they have little choice.

In addition, the other side of the equation is questionable. In my eyes at least, nobody forced individuals to go into debt. Despite the ease of getting loans and all the commercials promoting them, where is individual responsibility in the equation?

Increasing productivity tends to lower prices, which is good, but it also works against employment, so it's a negative in that sense. It's a legitimate conundrum, but 'getting angry' about it is not the solution.

Matt Franko said...

Yeah but Rock, when it blew up on the FIRE sector (and this was a problem THEY caused in the first place), they got free money and regulatory forbearance.... what did the public borrowers get who were just buying a house to live in????

Resp,

mike norman said...

Affluent people don't have high levels of debt to income simply because they have sufficient INCOME to supppor their consumption.

Of course people were forced to get into debt. That's what happens when your income doesn't rise in real terms. People sustain consumption with debt in that case.

SPECIFIC POLICIES caused incomes of wage earners to decline. It was not about automation. Germany and Japan are both highly modern, automated economies, but incomes in those countries did not fair as badly as here in teh U.S.

mike norman said...

Red Rock

It's also a very weak argument to say that the only way a business can survive is by cutting the wages of its workers. That's ridiculous. Wall Street is a model of how that is not true. Earnings keep going up, up and up. (Although Wall Street's "product" is not good for the country, unfortunately. Like a drug dealer's product.)

What you are missing is that higher income is recycled back into the economy in the form of higher consumption and investment. It's a circular flow.

When you cut income to "compete," it becomes a race to the bottom and we know where the bottom is...zero.

On the other hand when you raise incomes the upside is unlimited.

mike norman said...

It's too late to get angry. The plutocrats are already in control and they control it all: policy, law enforcement, everything. We cannot break out of this.

Chewitup said...

It might be time to rebuild a few guillotines. May find those plutocrats suddenly behaving better.

Red Rock said...

Mike,

I don't think you can compare Wall Street employment to Main Street employment. First off, trading income can be made regardless of what way the economy is moving and many employees get a cut of trading profits. Secondly, for M&A advice, there's almost a quasi monopoly. A Fortune 500 company is not going to shop on the basis of price for an investment banker. The same can be said of premier athletes. They cannot be outsourced or automated.