Will the U.S. economy see an upturn later this year?

The economy is now more than a year and a half into what is becoming its deepest and most prolonged recession in half a century. Output has fallen steeply the last year, with two recent quarters registering a sharp contraction averaging 6 per cent of GDP at an annual rate. Measured per person, even if the decline were to be halted today, the income of the average American will have dropped well over 7 per cent compared to the level enjoyed only a few years ago.

The Administration now points to some signs of recovery. Unemployment reports have recorded smaller monthly losses in jobs, some financial institutions have reversed their unsustainable losses and generated huge profits, some banks have begun to re-pay bailout loans and eliminate toxic assets from their balance sheets, fears of a sudden jump in interest rates and inflation or a precipitous drop in the dollar have receded, and there are signs economic activity may be stabilizing in some parts of the country. The sense of a "free fall" of the economy that pervaded the past year has been replaced by a hope that a revival may be on the horizon.

In some superficial sense, it may be true that conditions have improved. Statistically, the GDP includes government spending, and the massive but unsustainable deficits now being accumulated into huge increases in the national debt no doubt have had some positive effect on the economy. This effect may well intensify in the months ahead. Some increase in consumer spending and a rundown of inventories may also encourage businesses to increase their current production somewhat in response. The negative growth of the past year may well be replaced by some minor uptick reflecting improvements in a few sectors of the economy.

It is not unusual for there to be a positive quarter in the middle of a recession, especially when measured in terms of the aggregate volume of activity rather than in output per person. However, measures of overall GDP mask what is going on underneath this total, where industrial production, unemployment, capacity utilization, tax receipts, and other indicators of economic health continue to deteriorate. Moreover, average incomes can continue to decline noticeably even when the economy appears to be on the mend.

Nowhere is this clearer than in the job market, where the economy-wide unemployment rate of 9½ per cent hides rising distress in the lives of workers. More and more firms have been asking employees to work part-time, the work-week is being cut in the private and public sectors, and the average length of unemployment is rising. Even when a recovery begins, employers will first restore longer working hours to their present employees before they hire more workers. When an upturn begins, it will be a long, slow, painful and jobless recovery.

Adding to the dim prospects for a strong recovery and boost in job creation are the proposed higher business and energy taxes. Massively raising taxes on the economy in the best of times can be expected to lower its performance and discourage employment. Raising taxes in the middle of a recession, as the Administration is now advocating, can only be regarded as lunacy which will postpone any recovery.

The United States remains in the grip of a major downturn rooted in mammoth economic, financial, and trade imbalances that have taken years to become entrenched and will take years to overcome. The Administration is doing nothing to deal with these fundamental problems; indeed, its policies are only making them worse. Until these problems are addressed, the foundations for sustained and rapid growth cannot be restored. For this reason, if there is an upturn later this year, it will be weak and halting and temporary and by no means an indication the recession is over and we are on our way to recovery.

Lenin on the best way to destroy Capitalism

“Hundreds of thousands of rouble notes are being issued daily by our treasury. This is done, not in order to fill the coffers of the State with practically worthless paper, but with the deliberate intention of destroying the value of money as a means of payment. There is no justification for the existence of money in the Bolshevik state, where the necessities of life shall be paid for by work alone. Experience has taught us it is impossible to root out the evils of capitalism merely by confiscation and expropriation, for however ruthlessly such measures may be applied, astute speculators and obstinate survivors of the capitalist classes will always manage to evade them and continue to corrupt the life of the community.

The simplest way to exterminate the very spirit of capitalism is therefore to flood the country with notes of a high face-value without financial guarantees of any sort. Already even a hundred-rouble note is almost valueless in Russia. Soon even the simplest peasant will realise that it is only a scrap of paper, not worth more than the rags from which it is manufactured. Men will cease to covet and hoard it so soon as they discover it will not buy anything, and the great illusion of the value and power of money, on which the capitalist state is based will have been definitely destroyed. This is the real reason why our presses are printing rouble bills day and night, without rest.”

Quote attributed to Vladimir Ulianoff Lenin (1870-1924) during an interview with a London newspaper and subsequently referred to in the New York Times (~1919). This quote is notable because it is the basis of comments made by John Maynard Keynes in Chapter 6 of his Economic Consequences of the Peace (1919), where Keynes says:

“Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose.”

“Lenin” was the alias of the Marxist revolutionary Vladimir Ulianoff (also spelled Ulyanov), the Communist politician, principal leader of Russia’s October Revolution of 1917, and first head of the Soviet Union.

In the midst of the national catastrophe that overwhelmed Russia in 1917 the Bolsheviks had been able to grasp power and begin to destroy the existing economic and political order in preparation of introducing a socialist society. Among the steps they took were the nationalization of the banks, confiscation of private bank accounts, assumption of control over factories, seizure of the properties of the Church, repudiation of foreign debts, and takeover of land by peasants. Needless to say, these actions in the economic area were complemented by the arrest of leaders of opposition parties and even members of the Menshevik faction of the Congress of Soviets of Workers’ and Soldiers’ Deputies, as the revolutionaries called themselves at the time.

Lenin’s determination to destroy the private economy and the general political chaos he promoted resulted in the Russian Civil War (1917-1923) and a period of upheaval and terror associated with what was called “War Communism” (1918-1921), a strict socialist economic policy of nationalization, state monopolies, obligatory labor, and rationing, confiscation and distribution of commodities in a centralized way, with severe penalties imposed on those who do not comply.

Some commentators such as the historian Richard Pipes argue that War Communism was an attempt to impose Communist economics on Russia, and Lenin and others expected an immediate and large increase in output and employment once their program of central commands and state control was introduced. The quote by Lenin above provides some idea of the naivety of Communists when it comes to economic affairs. Destroying the value of money and expecting that people can be somehow paid in kind on the basis of their “work” is delusional. No economy, however structured, can allocate resources and distribute goods and services without the means of exchange and unit of account we call “money”. That the Russian economy collapsed, famine killed millions and the hardships of the times multiplied under the rigors of the completely dysfunctional economic and political system introduced under Lenin is not surprising.

If Lenin’s understanding of the role of money in an economy was wanting, his appreciation of the destructive power of inflation is right on. As Keynes was well aware, although a general rise in the price level appears to be benign and associated with an equal percentage increase in the cost of all goods and services offset by an equal percentage increase in sources of income such as wages and salaries, interest and rents, in fact it can considerably distort these relationships in ways that are unpredictable. Here is how Keynes described its effects:

“By this method [inflation] they [governments] not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers’, who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.” Keynes, Economic Consequences of the Peace (Chapter 6)

What is ominous about the present state of the world economy in general and the United States in particular is the increasingly reckless way economic policy is being conducted, here and abroad. In the U.S., the Federal Reserve is buying vast quantities of newly-minted bonds and has greatly expanded the monetary base of the economy this past year. It is by no means clear it has the power to control the potential inflationary forces that could be unleashed by such actions.

Fiscal policy has been dominated by two stimulus packages -- the first of $168 billion in February of last year and a second of $787 billion in January of this year. Both of these packages (and a potential third now being raised as a possibility) have resulted in an explosion in the budget deficit, a deficit that will impose continual pressure on the Fed to follow a monetary policy accommodating to the needs of the Treasury for finance. Neither stimulus program has resulted in a significant improvement in the economy.

The monetary lesson of Lenin we should learn is the tremendous importance of money for the proper functioning of the economy and the terrible consequences that will arise if we follow policies that result in the debauchment of the currency.

Thanks to Michael White and Kurt Schuler for their article on Keynes and Lenin in the Spring 2009 issue of The Journal of Economic Perspectives and the topic of this Tdj.

The sad state of the Swedish welfare state

“Sweden still sets hearts racing across Europe. The "Swedish model" might bring up thoughts of a nubile blonde rather than a strong social state, but it is in the latter incarnation that my home country stirs the passions of left-leaning Europeans. Whatever Sweden does must be right, or so reason progressive politicians and Guardian journalists – not to mention scores of Swedes. But beyond this blue-eyed vision lurks a darker reality. …

Swedes were roused from this dream with the 1986 assassination of prime minister Olof Palme. Palme might have left behind "a country where no one was poor and no one had room for optimism" as Andrew Brown puts it, but it was Sweden's homemade financial meltdown of the 1990s that finally killed off the dream. Poverty was added to the pessimism. Savage cuts hit schools, unemployment rocketed, the krona sank – leaving the social system in a disarray from which it has not recovered. …

Take healthcare. Swedes do not enjoy free public care: it costs to see a GP. That is, if you manage to see one. Queues are long and scandals rack the system. Psychiatric care, the source of many such scandals, has a near-medieval penchant for authoritarianism with few European equivalents. People are locked up for months for not taking medicine, given no therapy, and spat out of the system into despair and destitution. The mentally ill die in wards and in outpatient isolation. And they do not even have charities to turn to because state-run healthcare is supposed to work: this is Sweden, after all.

Those who do enjoy Sweden's second-rate public services are lucky. Undocumented migrants, who lack a "personal number", are barred from day-to-day healthcare. Foreigners do not fit easily into a social system built on the postwar notion of the folkhem, or people's home, whose rightful inhabitants are the native Swedes. … This is Sweden, after all.

Even being in the system is less rewarding than it was. Unemployment benefits are falling behind those of other countries, and access to social security involves Big Brother-style controls most Europeans would abhor. … Norwegian lawyers have sued over privacy infringement, leaving the prime minister perplexed – because in Sweden, the state is there to help us.
…
Admittedly, Sweden might seem a haven of tranquillity compared with other European states. But in the hunt for a humane social model, Sweden no longer provides the blueprint. Europe's progressives will have to construct something new. But to do that, those who let their minds drift northwards for inspiration first have to wake up: the Swedish dream is over.”

Ruben Andersson, “Death of the super model”, The Guardian (29 June 2009).

http://www.guardian.co.uk/commentisfree/2009/jun/29/swedish-economy-social-state


Ruben Andersson is an anthropologist, writer and journalist based in London.

Government-run health care is more or less the same over the world in one respect: Compared to care available in the private sector, it involves longer-waits for care, rationing of procedures by bureaucratic formula, low capital investment and hence fewer and lower quality medical equipment, little to no personal attention, limited choice in physicians and care givers, and very high taxes to support what is called “free health care”.

Granted that private markets do not work well in the delivery of health care. And it is certainly true that private health delivery systems are less than perfect, especially as the relate to the quality of care available to different segments of the population. But it is even truer that public health delivery systems are sub-standard compared to the private system. Yet despite this we here in the U.S. seem determined to replace a less than perfect private system with an even more inferior government-run system.

I for one find this strange.

Thanks to Marginal Revolution for the pointer to the article.