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Friday, January 16, 2015

The Way Forward


Here I explain the likely path from our current dysfunctional political-economic system to a new paradigm.  With the first 6 items below, I describe the factors that make the present system unstable.  Then I will make a brief comment on what might be possible after the next political-economic shock.
  1. Reaganomics (the" ownership society") has the prevailing political-economic paradigm for the last 33 years in the United States, and for the last 25 years globally (coinciding with the fall of Communism and the Soviet Union).  This paradigm has been characterized by freeing business from regulation and an increased pace of economic globalization.
  2. The share of income going to capital has increased (in the U.S. and other developed economies), while the share of income going to labor has decreased.  Consequently, asset prices (stocks) have appreciated faster than wages.  This has been a self-reinforcing phenomenon, as capitalists take their increased profits and reinvest them, thus boosting shares even higher.
  3. As the process described above (increasing asset prices, stagnant labor income) has continued for over 3 decades, it has become hard to find reasonably valued investment opportunities.  Assets are far overvalued in comparison to consumption.  We are now in the midst of the 3rd major stock market bubble in the last 15 years (tech bubble, housing bubble, energy bubble (?)).  Stock valuations currently are on a par with 1929, ahead of housing bubble valuations and behind only the tech bubble of the late 1990s.  
  4. Consumer prices continue their 33 year disinflationary trend.  This is the logical consequence of the phenomenon described above -- more money being spent on investment, with less being spent on consumption.
  5. Overinvestment and bubbly asset prices are corrected via dramatic price declines (as happened in 2000 and again in 2008).  There is no other likely scenario in the global economic paradigm, where capital continually moves to cheaper locations, and countries devalue their currencies to become more competitive.
  6. To change the fundamental 30+ year trend, political changes are required.  These changes are most likely to happen following one of the periodic stock market crashes, especially now that a substantial portion of middle class savings is held in the stock market. 
There are several camps as to how to get to a more stable society:
  1. Further reduce the size and power of government.  The Austrian school of economics falls in to this camp, believing that we should return to the gold standard and the laissez-faire economics of the gilded age.  
  2. The Monetarist (neo-classical) camp that believes in the preeminence of monetary policy (tinkering with interest rates) as a tool to manage the economy with a minimum of government involvement.
  3. The Keynesian camp that believes government action, including fiscal policy (taxing and spending) is needed to manage the economy.
Within the Keynesian camp, the conventional wisdom is with the NewKeynesians.  The NewKeynesians accommodated their Keynesian views with those of the pre-Keynesian neoclassical economists, whose modern day successors are the Monetarists.  In other words, the conventional wisdom is more monetarist than Keynesian.

My favored camp is the PostKeynesians, or Modern Monetary Theorists (MMT) in particular.  In a hopeful sign, MMT economist Stephanie Kelton has been appointed by Bernie Sanders, the ranking member of the Senate Budget Committee, as his new chief economist -- See Bernie Sanders opens a new front in the battle for the future of the Democratic Party.  Excerpt:
Usually, when Democrats hire economists, they hire nice, respectable Keynesians, who use mainstream economic models and often agree with conservative economists on a lot of theoretical matters while drawing different policy conclusions from them. For example, Greg Mankiw, who served as George W. Bush's top economic advisor, and Christina Romer, who served as Obama's, were both influential in developing New Keynesianism, a macroeconomic theory that emerged in the 1980s and arguably dominates the field today. What really set Romer and Mankiw apart was policy, not economic theory.

Kelton disagrees with Romer and Mankiw on economic theory. In fact, she disagrees with just about every economist Bush or Obama ever hired about economic theory. Kelton is among the most influential advocates of Modern Monetary Theory (MMT), a heterodox left-leaning movement within economics that rejects New Keynesianism and other mainstream macroeconomic theories.

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