All Cashed Up with Nowhere to Go: What Caused the Depression(s), and What to Do About It
Livingston’s explanation for both cases (in my words):
- There were oceans of money with not enough productive uses available (like, investments in physical plants and wages–things that would increase productivity and production).
- To get returns, money-holders’ only option was gambling (investments not tied or only loosely tied to production).
- Naturally, financial companies’ share of GDP and profits skyrocketed.
- Wages became a smaller part of GDP, and profits a larger part.
- Income and wealth inequality increased — more money went to, and stayed with, the wealthiest.
- The wealthy thus had oceans of money with not enough productive uses…
- At the same time, lower wages threatened to kill the golden domestic goose: consumer spending.
- In our current case, government deficit spending and loose Fed policy were gasoline on the fire. It ameliorated–temporarily — the weak consumer spending, but simultaneously exacerbated the more fundamental trends.
The responsible fiscal policy for the foreseeable future is, then, to raise taxes on the wealthy and to make net contributions to consumer expenditures out of federal deficits if necessary.
His structural analysis is, in my mind, profound. Read his pieces and you’ll see that he both adopts the facts of Friedman/Schwartz’s Great Contraction narrative, and eviscerates the self-contradictory conclusions that Friedman and Schwartz draw from those facts.
And the first half of his prescription is also dead-on, in my opinion. More below.
But the second half of prescription is far less profound. Some might argue that if we give more money to consumers then they, in their infinite collective wisdom, will find productive uses for it. Without lengthy discussion here, I’ll just say that the presumption is somewhat tarnished.
Rather than addressing the fundamentals (productive capacity), Livingston wags the dog: consumer spending. (Because consumer spending constitutes 70% of U.S. GDP–extraordinarily high, BTW, by international standards–it is the big dog. But spending is not production, which is the tail that actually does the wagging.)
If the wealthy can’t find productive places to put their money,
1. There’s obviously a problem with supply-side theory. Lack of capital was decidedly not a constraint on growth in the 20s, or the 00s (or, once government started pouring money in, in the 30s or 40s). With oceans of cash sloshing around, transfers to the wealthy (by whatever means) do not spur real productivity/production growth.
2. Policy should concentrate on moving money into productive uses.
There are two obvious productive places that pretty much everyone agrees are screaming for money right now: infrastructure, and education. The market provides few or no incentives for individuals to invest in these areas. (I’m not talking about individual spending on education, which obviously has high incentives. I’m talking about building schools, lowering student-teacher ratios, providing class materials, etc.)
So Livingston’s right: tax the wealthy–who, pace Grover Norquist, aren’t investing their money productively–and put that money into the things that we know will spur long-term productivity and production growth.
As a side-effect, this will spur consumer spending (not as quickly as cash dropped from helicopters, but still…) and create jobs (yes, sorry, a lot of them will be government jobs), which hopefully will tide us over until the payback kicks in from those long-term investments.
Does this make sense? Talk to me. And, I’d love to hear from anyone with time-series statistics on percentage of capital stock invested in productive assets. I’ve done some digging, but without success so far.