The conventionally wise yatter on about when economic recovery will let the Fed raise interest rates and how the politicians will find the grand bargain. As though any of that really mattered.
In fact, as the NY Times told us yesterday, the search for a grand bargain is all show.
Republicans oppose further tax increases on the rich, as Democrats demand, so Democrats will not support major changes to Medicare and Social Security, as Republicans insist. But the dirty secret — a phrase used independently, and privately, by people in both parties — is that neither side wants to take the actions it demands of the other to achieve a breakthrough.
Not that this is bad since the grand bargain is supposed to solve a government budget problem far in the future, while ensuring nothing is done to provide the fiscal stimulus we urgently need to invigorate the economy.
In the meantime both Larry Summers, in a speech at an IMF conference, and Paul Krugman, in his NY Times column and also his blog, have raised a real issue that should have our attention: will there really be a recovery from our current economic slump?
But what if the world we’ve been living in for the past five years is the new normal? What if depression-like conditions are on track to persist, not for another year or two, but for decades?
You might imagine that speculations along these lines are the province of a radical fringe. And they are indeed radical; but fringe, not so much. A number of economists have been flirting with such thoughts for a while. And now they’ve moved into the mainstream. In fact, the case for “secular stagnation” — a persistent state in which a depressed economy is the norm, with episodes of full employment few and far between — was made forcefully recently at the most ultrarespectable of venues, the I.M.F.’s big annual research conference. And the person making that case was none other than Larry Summers. And if Mr. Summers is right, everything respectable people have been saying about economic policy is wrong, and will keep being wrong for a long time.
Frankly I don’t have enough grasp of economics to understand the basis for these fears, but it rings a bell with me because of something I had noticed. It’s generally agreed that our recession followed a bubble driven by excessive consumer debt, especially in housing. Yet that time period was not one of economic boom, although unemployment was low. That raises the question of how we can recover to full employment without the demand supplied by excessive consumer debt.
And that suggests to me that a critical element in our economy is inadequate purchasing power among consumers. The reason: the incredible shift of purchasing power from the middle class to the wealthy in recent decades. Ignorant as I am, I was relieved to find that Nobel Luareate Joseph Stiglitz agrees:
. . . . . our middle class is too weak to support the consumer spending that has historically driven our economic growth. While the top 1 percent of income earners took home 93 percent of the growth in incomes in 2010, the households in the middle — who are most likely to spend their incomes rather than save them and who are, in a sense, the true job creators — have lower household incomes, adjusted for inflation, than they did in 1996. The growth in the decade before the crisis was unsustainable — it was reliant on the bottom 80 percent consuming about 110 percent of their income.
This is the biggest problem facing our country – except for global warming. But don’t expect to hear much about it from the talking heads in Washington.