The Demand Problem

In a post last week, Why Economics Failed, Paul Krugman again summarized the financial crisis in the simplest terms possible. What we have had since the crisis began is essentially a demand problem. Not a problem of deficits, or too much government intervention or any of the other absurd claims made by the right. We have a demand problem. And the answer to a demand problem is to, well, increase demand. But how can we do this?

The most obvious and effective way to do so is to spend government money that stimulates economic activity. This includes investment in growth industries, expansion of jobs programs and other ways to actually get money in the hands of people who will spend it. Too often we are told that the super rich are the architects of our economy and we must cow tow to their interests. But that is what got us in the problem in the first place. We need more people working, at better wages and with some confidence that the future will be better than the present. If those three conditions are met, the economy will start to grow.

Now the complaint against this essentially “Neo-Keynesian” approach is that it demands higher deficits and will lead to inflation. But there are two problems with that argument: 1. If more people are working and making more money, tax receipts actually go up and the deficit will decline in the medium to long term and 2. Inflation is only bad if it outpaces wage increases (thus the union tendency to push for COLA (cost of living) pegged wages).

The next obvious question is, who is hurt by this approach? The answer is the same as to the question of who will pay for the stimulus. And that is the 1 to 10 percent of income earners who are currently snatching far too many of the benefits of our economic activity with almost none of its concurrent risks. When they go too far, which is made easier by lack of government regulation, they are bailed out. When they go just far enough to make incredible profits, they are taxed at lower and lower rates. And they benefit from low inflation, high unemployment and lower real wages while the rest of the country suffers.

And so the obvious answer to our current economic malaise is essentially the answer that has been around for as long as advanced capitalism has existed – redistribution of wealth and income from the rich to everyone else. That was the arrangement settled upon in the wake of the Great Depression and World War II and it led to the Golden Era of economic growth. Why don’t we return to those policies that benefited everyone (including the top earners, though to a lesser degree than the post-80s conservative revolution has)? Because the one percent have too much power to let that happen again and there is no alternative out there that they fear.

Maybe it’s time for everyone else to demand change, eh?