On the Global Economic Mess

While it is grabbing fewer headlines, the global economy remains in the dumps (even by the low standards of growth of the post-1973 era), and I suspect it will do so for quite a while. The problem seems to be a structural one, simply that an economy fueled by easy lending and focused on speculation can't run very well or very far for very long. Unfortunately, that's what we've increasingly moved toward since the 1970s.

I laid out the description in detail in an article I published here on this blog, but here's a short(er) version. The raw deal labor has been getting these last three decades (like wages falling in relative or even absolute terms) translates into weak consumption, and/or unstable, debt-fueled consumption. This means a combination of high profits (because of that gap between wages and productivity), and a discouraging environment for the productive investment that is the true basis of meaningful economic growth.

Instead, investors put their money into speculative investments (purchases of assets for resale at higher prices rather than for income). Financialization prevails, complete with a search for quick profits from the pouring of money into the buying and selling of assets rather than the making of things. As this has played out, the financial sector has ended up dominant over non-financial corporations (NFCs), themselves treated as assets to be bought and sold for quick profits.

Apart from the money absorbed by this mergers and acquisitions game (which, in its forcing companies to expend critical resources sustaining stock prices and fighting takeovers, often on credit, in a manner reminiscent of feudal princes fighting over fiefs), this encourages a "short-termist" mentality. (Just think about how often you hear the expressions "last quarter," "this quarter" and "next quarter" on CNBC.) The evidence shows that short-termism means axing things like necessary maintenance, and corporate R & D, in favor of the "smooth earnings" that get CEOs their preposterous bonuses.

This is also inimical to robust economic growth, and the distorting and disrupting effects of the speculative bubbles into which they feed do not help.

As a result of these things-weak consumption, high debt, the channeling of investment into merger and acquisition games and speculative booms and busts, and an obsession with the short-term (and a particularly narrow view of it at that), you have a long-term pattern of slow growth and periodic crisis, the current one especially sharp.

To date, little substantive action on these aspects of the global economy seems forthcoming, governments instead tending to prefer corporate welfare and band-aids in the hope that the engine can be patched up enough for yet another go, instead of addressing structural issues. (The crackdown on banking secrecy, I have to admit, strikes me as a red herring.)

What might it look like?

Well, there would be an emphasis on getting consumption up. That means, among other things, money in people's pockets. There would be moves, too, to tame the Electronic Herd. (Indeed, the "pre-release" edition of the UN's World Economic Situation and Prospects 2009 acknowledges inadequate financial regulation-and "to a significant degree . . . the dismantling of firewalls within and across financial sectors over the past two decades" as a major cause of the crisis.)

In the U.S., there would need to be action on rebuilding the U.S.'s industrial base, and the long-neglected infrastructure-and on getting health care costs under control, given their extraordinary drag on the American economy (in return for mediocre results). (The stimulus could be a start, but just that.)

There would definitely be talk about labor-friendly changes, such as an increase in the minimum wage. (Just to get back to where it was pre-Reagan administration, it would need to be bumped up past $10 an hour.)

We'd also see talk about things like repealing the Gramm-Leach-Blilely Act, which predictably contributed to the mess we're all in.

And of course, if this is all to mean very much in the long run, the phrase "green economy" would have to be much more than an empty slogan, since we're long past the point where we could keep growing the economy by increasing global throughput. (After all, the energy to support all this consumption has to come from somewhere, and failing to stave off the already advancing climatic catastrophe would wreck the economy in ways we dare not imagine-from savaging crop yields and fisheries, to inundating vast tracts of prime real estate.)

Politically, however, all this seems unlikely. I hope that isn't the case, but so far there have been little basis for optimism besides wishful thinking.

In the end, we'll just have to see.