The Sluggish Economy

Kevin Drum, whose blog on Mother Jones is my favorite, has the following 3 posts up today:

• Economy Doing Ever So Slightly Better Than We Thought
  "Nobody should mistake this for anything meaningful... GDP growth for the first half of the year now clocks in at about 2.1 percent instead of 1.9 percent, but that's pretty anemic either way."
• Stock Buybacks Are a Symptom, Not a Disease
• Mitch McConnell Doesn't Get to Decide if Republicans Will Threaten Another Government Shutdown

There's a common theme here which is that the economy is crappy, and our dysfunctional government (Republican obstructionism) isn't going to do anything constructive to improve the situation.

The reason for the crappy economy is fairly simple and is described well in the following paper by Thomas Palley: The theory of global imbalances: mainstream economics vs. structural Keynesianism.  Basically, the wave of globalization since 1980 has resulted in chronic and massive U.S. trade deficits.  The move of manufacturing jobs to China and other developing economies has undermined wages in the U.S., resulting in stagnant incomes and purchasing power.  (This was offset for a time by increasing consumer credit, but that disappeared with the housing bubble in 2008.)

As the U.S. consumer market is the driving force for growth in China and other developing economies, stagnant U.S. consumption is rebounding into slower growth in developing economies and intensified competition, including currency devaluation.  Corporate profits have been up in spite of the stagnating consumption, but this cannot go on.  Profits are now being used to buy back stocks (at high prices), since increased physical investment is not needed.  Also, higher profits, as compared to wages, lead to stagnation as profits tend to be reinvested rather than spent.

So the global economy is deflating, with profits and stock prices set to crater, and the Republicans are completely off the reservation.