Michael Roberts, in a wonderful article republished in Left Voice, describes the current economy as clearly and as accurately as anybody. There is almost nothing he says that I disagree with. It's what he doesn't say that raises issues.
Weirdly, I'm actually more pessimistic about the economy than he is. Usually it's Marxists who predict capitalism's imminent demise--but now I'm in the strange position of seeing more problems than he.
His description of the current economy is spot-on. I'll condense Mr. Roberts' argument to bullet points.
- "US economic activity is still some 20-25% below where it was this time last year."
- "Overall, the US economy has shrunk by about 4-5% in 2020. That is the largest contraction since the early 1930s – or 90 years ago!"
- "All the evidence suggests that there has been permanent ‘scarring’ to the economy in employment, investment and incomes."
- "Instead, there is what I have called a ‘reverse square root’ recovery where output falls but then does not recover to the same trajectory of economic growth that was there before. That output is lost forever, as the forecast for the US from Oxford Economics below shows."
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Mr. Roberts then describes the government response to this situation. I don't disagree with him, but I'd like to put it in a different context.
There are two components to the so-called "stimulus," which for shorthand I'll refer to (imprecisely) as fiscal stimulus and monetary stimulus. Fiscal stimulus refers to payments made by the government directly to households and businesses. The money comes from government borrowing. That would include the CARES package, the $1200 checks we all got a few months ago, and the $600 checks we got a couple weeks ago. This is actual money put into the real economy, and should by all rights be inflationary.
Monetary stimulus, meanwhile, are actions taken by the Fed, most notably quantitative easing (QE), also misleadingly known as "printing money."
Jeffrey Snider (paywalled) describes the Fed as operating a warehouse, and as long as money stays within the warehouse, there is little effect on the real economy outside. The Fed prints money inside the warehouse, but unless the cash escapes into the wider economy, it doesn't really do anything. QE means the Fed is buying T-bills (and other assets) from banks (and now corporations). These assets are considered cash equivalents, i.e., nearly as good as money, and they are removed from the economy and sucked into the Fed's vaults inside the warehouse. Meanwhile, freshly-printed money is simply moved from one side of the warehouse to the other side--it never leaves!
The result--since cash equivalent assets are sucked into the warehouse and no cash is let out--is QE is disinflationary! Indeed, in the long history of quantitative easing, no inflation has ever ensued.
Essentially, in terms of inflation, QE undoes what the fiscal stimulus is supposed to accomplish--namely to create inflation. While QE removes assets, fiscal stimulus injects cash--and there is no net inflation. But there is now more cash and there isn't very much to buy with it (restaurants aren't open; planes aren't flying), so it goes back into assets. Mr. Roberts describes it this way.
Indeed, what has happened to all these credit injections is that they have been used by banks and big businesses to speculate in the stock and bond markets rather than to pay wages, preserve jobs or raise investment. After the initial panic of the pandemic in March, the US stock market has gone on an unparalleled binge.
It is now at all-time highs and, relative to earnings and productive assets, is at extreme levels. Yet with more Fed support to come, financial markets may well go rolling on up for a while longer. So all monetary policy has done is to keep businesses on life support, while boosting the wealth of the very rich.
I'd take slight issue with the last phrase. It's not just the "very rich" who have benefited (though they certainly have), but it's anybody able to invest in assets. That includes the upper middle class--perhaps the top 10-15% of the population. People with 401Ks, owners of real estate, buyers of fancy collectables, and even bitcoin hoarders have benefited. Investable assets have all gone up.
It's a gigantic merry-go-round, spinning faster and faster, that nobody wants to be riding. If the Fed stops QE we'll end up with hyperinflation, which would be much worse than the problems we've got. And if they stop fiscal stimulus, the result will be bottomless deflation which, given the huge global debt overhang would rapidly lead to the biggest credit crunch the world has ever seen. So we're stuck.
Put aside the merry-go-round--which is just forestalling disaster. What really is the big problem that starts the merry-go-round spinning to begin with?
The big problem is deflation--the secular cost of everything is going down. The world is getting cheaper. That sounds wonderful--life on $2/day is sweet. But there are winners and losers in a deflationary world. The big losers are people in debt, since deflation causes real interest rates to go up. That's why we need all the fiscal stimulus--to make sure people can make their mortgage payments. It's hard to live on $2/day when the rent is $1500/month.
(Above I suggested a future problem might be hyperinflation. How can hyperinflation and deflation coexist at the same time? Hyperinflation is a problem with the dollar--too many of them chasing too few goods. The deflation I'm talking about is a much deeper problem, and it is that the costs of goods and services are decreasing in real terms, i.e., independent of whatever unreliable currency unit you choose to measure them with.)
The causes of deflation are much discussed. A big reason is demographics--global population growth is slowing, and in many big economies it is now shrinking. Because baby boomers are aging into retirement, the labor force is shrinking even faster than the population. The result is less demand for everything--food, oil, copper, etc., and accordingly, lower prices.
A second reason is automation--the examples are legion and are now part of everyday life. Just one to illustrate: in the old days a human cashier would ring up your groceries, and then make change for a $20 bill. Today I use the self-checkout (beep, beep, beep) and pay with a debit card (no change required). They still do have a few cashiers at Walmart for old folks who haven't caught on yet.
But we ain't seen nothing yet! Because now we're embarking on the second half of the chessboard. I first encountered that analogy in a book entitled The Second Machine Age (my review here). The analogy refers to the ancient king, proposing as a settlement for some debt, suggesting that his rival put a grain of wheat on a chessboard square. And a month later two grains of wheat on the second square, and then four on the third square, and then, on subsequent squares, 8, 16, 32, 64... By the time you get to the 32nd square, the king is due 4,294,967,296 grains of wheat--still maybe doable. But when you go beyond that, to the 33rd square and more, pretty soon his rival will owe more grains of wheat than there are stars in the universe!
Moore's Law is like that--computer power doubles roughly every 18 months. (While Moore's Law in the narrow sense seems to have reached its physical limits, progress in software and bandwidth continues the effect.) For example: college professors smugly note that Zoom meetings are no competition for the live classroom--and true enough. But 18 months from now, Zoom (or whatever replaces it) will be twice as good. And in 36 months it will be four times as good--so good, in fact, that nobody will ever want to sit in a classroom again (at least not for getting an education).
Community colleges and grad schools are already headed for extinction, replaced by Zoom and YouTube. Four-year colleges are not far behind--the notion that one has to sit in a classroom to get educated is doomed. And with that realization, everything else about colleges collapses: degree programs disintegrate, tuition plunges, campuses sit empty. Everything gets sucked up into the ether.
The ultimate software is artificial intelligence, which is advancing very rapidly. Consider another example: drug discovery. Today, a clinical trial consists of a single drug tested against a single disease. That's all the human brain can process at one time. But given enough data, AI can measure a single drug against all diseases, or for that matter all drugs and nutrients against all diseases, all overlayed on variations in the human genome. In other words, drug discovery becomes vastly more efficient--think about all the scientists who are about to get unemployed.
So here's the rub--where deflation is biting most hard. The real wages of the bottom half of our society are going down (h/t Jeff Booth--paywalled). They're competing against software, and in the end software is vastly cheaper. Software will win--it's eating the world. This is a disaster--society can't survive when half the population--professors, retail clerks, insurance agents, factory workers--are being reduced to poverty. The merry-go-round exists to forestall this cataclysmic event.
The Fed--which is neither evil nor stupid--is working all out to prevent disaster. But it's got the wrong toolbox--using tools that were invented before software was ever a thing. All it can do is spin the merry-go-round ever faster until the whole thing falls apart.
It's not the fault of the bourgeoisie--who will also eventually lose out to software. Their current increase in wealth comes from the Fed whose merry-go-round pumps money into assets. But when the spinning stops the markets will crash, and only owners of software assets (e.g., bitcoin) will come out on top.
It's not the fault of the Democrats--who are working hard to completely miss the boat, arguing about who is more woke and who deserves promotion in the English department.
It's not the fault of the Republicans--who think if we just cut the budget all our problems will be solved. Nope.
Our Marxist friends have no solution. The proletariat can't stop the march of software anymore than the bourgeoisie. Fretting over the precise nature of the "vanguard party" is a spectacular waste of time.
The only winners will (eventually) be consumers, which ultimately is all of us. We'll all be able to live comfortably on $2 per day.
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