Depressing Debt Dogma Distills Deflation Dilemma

As the less-than-adequate federal stimulus funds recede from view, we are left with a sinking realization that this recession is depressingly persistent.  Gains on the employment front have reversed.  A fifth of the population is either unemployed or under employed, so demand for goods and services is lacking.  Without demand, companies aren’t hiring.  With the private sector in the doldrums even with short-term interest rates at zero, all that’s left to get things moving again is a bit of government spending.  But that is not likely to happen because the gut reaction to bad times – cut spending, pull in the reins – is being touted as the solution for governments as well as the private sector.

The Libertarian – Independent – Tea Party reaction is, as usual, that all government intervention is bad; let the free markets work on their own.  This essentially do-nothing stance fits well with the reality that congress is stymied by 41 votes in a senate that also want nothing to happen.  With Democratic leadership tepid, we are a rudderless ship.

Today there is a glut of stuff with no one to buy it.  We’ve got houses to supply demand for a full year, we’ve got big box stores full of cheap consumer goods, and car lots full of new autos.  What do you do when you’ve got stuff, but no buyers?  Drop the price and lay off workers!  Not surprisingly, the inflation rate is now less than 1% and heading downward.  The cash you save today will be worth as much or more tomorrow – so there is no hurry to go out and buy anything; it’s better to wait for the price to fall.

So how does this all end?  Eventually things wear out,  become obsolete or used up, and the replacement rate of stuff is enough to sustain the level of employment.  Prices stop falling.  Then employers have a choice to make.  They can add workers or buy a bit of new software or automation so that they can produce more goods.  In this day and age, workers come last, so when the cycle completes, companies will make more stuff with even fewer workers.  Making more stuff with fewer workers seems like a good idea as long as there are people to buy the stuff.  But remember, the problem is we have too much stuff – not enough buyers.  The end result of this economic cycle just increases the stuff-to-worker ratio.  Those with jobs have access to even cheaper goods.  That’s progress!

Fewer and fewer people are needed to actually DO anything anymore.  Unemployment and under employment remain a chronic problem.  Without official jobs, people figure out something else to do.  From mowing lawns and painting houses for cash, to growing pot, to hard crime and prison – there are things that you can do if you can’t find work.  Over 3% of the adult work force is currently locked up, on parole, or on probation in the criminal justice system.  In some parts of the country, the illegal drug trade is a significant fraction of the local economy.  Protracted high levels of unemployment stoke the “alternative” economy.  When states can’t find tax dollars to fund schools, stay-at-home moms become cash and barter day-care providers.   When the parks departments cut back on groundskeepers, we find more cash-only landscapers and handymen doing what they must to get by.  Gardens and backyard chickens become more than just a hobby.  Bicycles replace cars for short trips.  People are not buying as much food or fuel, so prices remain depressed and there is no need to add workers.  The downward cycle continues…

The prevailing mood presently is to just let the economy run on its own without intervention.  We are at the mercy of the strong pro-cyclic feedbacks inherent in the economy, the same feedbacks that used to fuel large boom and bust cycles before the establishment of the Fed in 1913.  Right now the pro-cyclic fundamentals are still pointing downward.

Periods of intense protracted economic turmoil often end badly.  One can argue that natural trend GDP growth is significantly flattening.  Expectations of growth can’t keep up with reality, so with every bubble deflation, we find ourselves on a slightly lower growth track.  This certainly fits the picture for the aftermath of the 70’s oil shocks.  Comparing the 30 years prior to 1980 to the 30 years since, real growth has gone from about 4% to 3%.  With the present turmoil far exceeding the  recessions in the early 80’s, it easy to imaging that we lose another 1% to 1.5% of GDP growth – for good.  That would put GDP growth barely above the rate of population growth and would signal the end of prosperity growth in this country.  With very low average GDP growth, we would find ourselves in recession about half the time – that’s just by definition, since if average growth is near zero, the wiggles are going down about as often as they are going up.

So we muddle along without direction, gradually shedding our cultural heritage and creeping to a new dark age.