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Beyond Stagnation

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In an influential speech at an International Monetary Fund event last November, Larry Summers, former economic adviser to both Bill Clinton and Barack Obama, laid out a decidedly pessimistic view of the U.S. economy. It was bad enough, Summers said, that four years into the recovery from the Great Recession the economy was operating about 10 percent below its full potential, and the share of the population that was employed had barely increased since 2009. But to make matters worse, he observed, the economy had been underperforming even before the crisis. In the mid-2000s, years before the downturn, economic growth was sluggish, output was already below its potential, and the employment rate was well short of its 2000 peak. Summers noted that after the mild recession of 2001, even the enormous twin bubbles in housing and the stock market had not succeeded in generating enough demand in the economy to create a boom: capacity utilization “wasn’t under any great pressure,” unemployment wasn’t “remarkably low,” and inflation was “entirely quiescent.” Summers speculated that the economy may have entered a long-term phase of “secular stagnation” some time ago.

Paul Krugman, who hasn’t always seen eye-to-eye with Summers on macroeconomic policy, called Summers’s speech “a very radical manifesto.” Summers, a chief architect of the failed economic model that we live with today, was essentially saying that we can no longer count on the economy to grow rapidly enough to create jobs at the pace necessary to absorb our growing labor force. Secular stagnation necessitates rethinking much of standard macroeconomics, which is premised on the idea that the economy will grow under its own steam, with only the occasional need for government intervention, typically to raise interest rates when the economy “overheats” and to lower interest rates when unemployment suddenly spikes. Summers’s view implies the need for an active government role in stimulating the economy even when we are not in a recession.

Summers’s speech raises two big questions. The first is, what is the cause of this stagnation? For decades, progressive economists have argued that in a capitalist economy the distribution of income has an impact on the demand side of the economy. During this time, many policies have undermined the bargaining power of workers and redistributed income to the wealthy, especially the very wealthy. Unions were attacked, the real value of the minimum wage was not increased, macroeconomic policy shifted away from a concern with full employment toward containing inflation, the free movement of capital across borders was promoted, finance and industry were deregulated, and government services were privatized. As a result of these policies, an unprecedented gap opened up between productivity growth and pay increases. After 1979, for large swaths of workers, inflation-adjusted wage growth slowed, stagnated, and even turned negative. The share of American workers with health insurance fell sharply, and traditional guaranteed pensions were replaced by less generous, much riskier 401(k)-style retirement plans.

Once workers were squeezed, the economy was not able to generate the demand that would sustain growth in consumption and investment, yielding what Summers recognized as stagnation. (In his IMF talk, Summers did not offer any explanation at all for stagnation. In the debate that followed, he did suggest several possible theories, including a nod to the progressive reasoning that “[c]onsumption may be lower due to a sharp increase in the share of income held by the very wealthy and the rising share of income accruing to capital.”)

The second big question posed by secular stagnation is, what should we do about it? Summers dismisses “supply-side” solutions, such as tax reform, improving workforce skills, and promoting innovation, as “very unlikely to do much over the next five to ten years.” He also rejects the policy approach that the United States has followed since the recovery got underway, which has been to keep interest rates as low as possible indefinitely, as ultimately unsustainable. For Summers this “virtually insures the emergence of substantial financial bubbles and dangerous buildups in leverage,” returning us to exactly where we were in the run-up to the Great Recession. Instead, Summers sensibly calls for more government spending, with a special emphasis on infrastructure.

This special section seeks to provide a fuller, progressive answer to the question of how we should respond to stagnation. One common theme of the essays that follow is that “recovery” from the economic crisis is not enough. We need to do more than just recreate the conditions that led to the crash. These articles are pieces, far from complete, of an alternative economic strategy. Each of the authors looks with care at some of our most urgent problems and proposes ideas that would shift the balance of power back toward workers and address the problems of stagnation that bedevil the American economy.

Dean Baker and Jared Bernstein point out that workers’ bargaining power depends crucially on the unemployment rate. When unemployment is high, workers are easily replaced and must take whatever wages, benefits, and working conditions are offered. When full employment exists, workers have power to demand, and receive, more. Baker and Bernstein describe a menu of ideas to move us toward full employment.

The best fiscal and monetary policy can be undone by a financial system that appears to have been designed for booms and busts. Jennifer Taub takes a dim view of most of the reform efforts taken since 2008. She proposes to break up banks that are “too big to fail” and recommends an alternative agenda in which the financial sector works for the rest of the economy, rather than the other way around.

Alan Aja, Daniel Bustillo, William Darity, Jr., and Darrick Hamilton vigorously dispute the idea that economic problems confronting blacks reflect “self-sabotaging attitudes and behaviors.” They call for “targeted universalism”—universal programs like “baby bonds” (government accounts created at birth that would help young adults fund education, a down payment, or a small business) and a federal job guarantee—that seek to address problems suffered disproportionately by minorities.

Congress stands as a major obstacle to progressive policy. Amy Hanauer argues that there are significant but frequently overlooked progressive economic policies—relating to employment standards, waste removal and recycling, conservation, housing, and education—being implemented by states and cities. These efforts, while important in their own right, can also serve as a “blueprint for federal action.”

Heather Boushey’s ambitious essay advocates building a political coalition around work-family policies such as paid family and medical leave, universal child care and elder care, and an overhaul of labor law to guarantee both flexible work hours and predictable work schedules. Boushey draws on the experience of the New Deal and the Great Society, which delivered relief to workers and the poor while creating a political coalition that protected these gains. In her view, these institutions need updating to meet the needs of families where women are almost as likely to be in paid work as men.

Mark Levinson is the chief economist at the Service Employees International Union and the book editor at Dissent. 

John Schmitt is a senior economist at the Center for Economic and Policy Research.

This essay originally appeared in Dissent.

CounterPunch Magazine

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