Saturday, January 15, 2011

Business Political Power: The Present Weak Economic Recovery

Ben Bernanke recently declared that the present recovery may take another four years, and this estimate is generally shared. It is commonly assumed that the causes of this situation are ineluctable economic forces. In fact, however, there is no economic necessity whatever for this situation.

There is a simple proof of this fact: Following Pearl Harbor, it did not take the United States "four years" to convert to a war economy that wiped out unemployment; this was done in a matter of a few months.

Where market forces predominate, initiative is located in households, and firms respond to consumer demand; if households are not spending normally, for whatever reason, private firms sit and wait. The time necessary for a full recovery, then, can depend on the extent to which initiative is transferred from households to government.

We may now identify some of the limits of the actions of the Obama adminstration, which, like any government, has operated under various constraints:

(l) In view of the visible weakness of the recovery, the stimulus package was not "ineffective" but too small. When Secretary of Treasury Timothy Geithner was asked about this recently, he explained that the administration did not know what the exact effects would be of a stimulus package of a given size; that if the administration had requested a larger package Congress would have debated it for a long time; that it was therefore decided to request a smaller package that could get Congressional approval promptly; and that the issue could then be "revisited" later. This means that a constraint lay in a group of more conservative Democrats in Congress.

(2) The Democratic Party under President Obama has not fully offset the effects of the recession on the tax revenues of state and local governments. Their "budget balancing" efforts have continued to disrupt public and social services and to undercut the stimulus measures that have been taken at the federal level. I discuss this issue in detail in this post.

(3) There are a wide range of investments in infrastructure to which the Democratic Party under President Obama is committed but which go far beyond what the Obama adminstration has done. These include thousands of bridges that need repair or replacement; port facilities that lag far behind current standards in many other countries, which negatively affects the competiveness of the U.S. economy; modernization of long distance transmission lines within the electric power grid; and development of high-speed passenger rail lines. From the point of view of job creation, such construction projects have the advantage that they involve many opportunities for unskilled labor.

(4) There are "green" branches of the economy the Obama adminstration wants to promote, but there are potential investments in these branches that go beyond what has been done. Where the constraint is capital, this can be provided by tax concessions. But where the constraint is risk, government could acquire controlling equity positions in such firms and then order expansions in production such firms would not otherwise undertake, or undertake so soon.

(5) By extension, there is an ultimate weapon against any weak economy, based on the fact that government can take risks private firms are unwilling or unable to take: Government could acquire controlling equity positions in a large number of major firms, spread geographically across the nation, and then order their managements, on pain of their replacement, to expand production, and thus hiring, to meet the demand for their outputs that would exist if households were spending normally. Such simultaneous investments would cause fear of being laid off to evaporate and accelerate transition to high levels of employment. The government could then, as one option, sell its shares back to private investors. Since stock prices would have risen, the government would have a good prospect, as in the case of the government's equity stake in General Motors, not only of recouping its investments, but of receiving a substantial profit. Such profit could be accurately described as a return to risk-taking. But it would be risk-taking by society as a collectivity through the instrumentality of government.

In a nation where fear and distrust of government is a powerful tendency, what, then, of beliefs within the American population itself? Large parts of the American population believe that - by a populist misconception - the collapse of large financial institutions would be "just Wall Street" and would pose no systemic danger to "Main Street"; that deficits in the budget of the national government - by false analogy with "households" (which, in fact, often spend out of borrowed funds) - are evil in the abstract, without regard to the business cycle; that the current size of the federal debt poses some immediate crisis, which it does not; and that governmental ownership in firms is evil in the abstract, regardless of the practical consequences.

The conservative business community, through the Republican Party, then perpetually operates on the fulcrum of such beliefs with misleading and massive propaganda, and has been brilliantly successful in making curse words out of "bail-outs," "deficits," and "debt."

The real causes of the present weak recovery thus lie in the political system. They are beliefs that pervade large sectors of the ordinary American population itself, and massive promotion of such beliefs by a great business oligarchy.

Much of that business oligarchy, in the United States, is animated by a fixed aim of discrediting use of government for popular well-being.

The best interests of ordinary Americans would be strategically advanced by getting rid of that oligarchy -- through gradual adoption of a decentralized market socialism for large firms, with taxing away of great personal wealth.

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