The Rut We Can’t Get Out Of

[Scuba]

http://www.nytimes.com/2013/10/01/opinion/the-rut-we-cant-get-out-of.html?_r=0

We are in an age of global oversupply: an oversupply of global labor (hence high underemployment); an oversupply of global productive capacity (hence ultra-low inflation); and an oversupply of global capital (hence low interest rates). This explains why, around the middle of each of the past three years, activity petered out after predictions earlier in the year that the economy would finally achieve escape velocity.

The jobs created have been mainly low wage and part time. Growth in domestic manufacturing is still slow, and business spending has fallen, though corporations are flush with profits. Debt-saddled households continue to see real incomes deteriorate (even with very low inflation). Sales of new homes have suddenly reversed course. Rents are falling in several markets where home prices have recently increased. Even the seemingly unflappable stock market has been seesawing because of the uncertain economic signals.

Why do we seem unable to get out of this rut? In short, our policy makers are still fighting the last war. We are no longer faced with a world in which supply-side economic remedies — easy money, reduced taxation, fiscal belt-tightening and deregulation — can spur new capacity and the creation of well-paying private sector jobs.

...

Can we get out of this mess? We can, but we need a fresh playbook. Developed nations need to put the huge surplus of underemployed workers back to work by any means, including big public sector investments to improve infrastructure and competitiveness. We need a new economic multilateralism with the developing world, to encourage them to rebalance their economics away from savings and toward consumption, while we in the West must curb our addiction to credit and consumption (and in doing so reverse the trends of income and wealth polarization).

[Laelth]

1. Hear, hear!

When the private sector can not produce enough jobs, the public sector should step in and fill the gap. There are plenty of public projects that need doing.

The problem, of course, is that our oligarchs love the cheap labor created by a labor surplus, so they resist allowing the government to do anything about this. How to convince our oligarchs that we're all better off when we all have money to spend is the issue of the day.

That's what needs to be done.

-Laelth

[Brigid]

4. Isn't there a saggy bridge in WI that needs to be fixed?

And more than a few others that are "structurally deficient?" And that's just for starters.

[Jackpine Radical]

2. In short, we need to humanize the world economy--

make sure the starving and destitute have enough, while rejecting consumerism for its own sake and allowing the workers to share more equitably in the products of their labor. Let people have good incomes and let them have more leisure time as an alternative to pushing them to produce ever more needless stuff.

I guess it all comes down to changing our value systems, and in particular, curbing greed.

[Xyzse]

3. This is missing one thing for me.

Huge reason we are in this rut is because of our tax system and the way the rich.
Particularly those making above 8 figures and corporations don't pay their fair share in taxes.

Next part is that, that money is not circulating around the broader economy. It gets siphoned off, and it is mostly horded, and a lot of the time it is just used to buy out their competition, while also moving their operations outside of the US. That just takes away even more jobs.

Otherwise, yeah, make sure that they do everything to create jobs, even if it is public sector work.

[lottopol]

5. Since 1969 there has been a tremendous shift in the tax burdens away from the rich and onto the midd

. In free-market capitalism, capital generates income for the owners of the capital which in turn is used to create additional capital. This is very good. Sometimes, it can be actually too good. As capital continues to accumulate, its owners find it more and more difficult to deploy it efficiently. The business sector generally must interact with the household sector by selling goods and services or lending to them. When capital accumulates too rapidly, the productive capacity of the business sector can outpace the ability of the household sector to absorb the increasing production.

The capitalists, or if you prefer, job creators use their increasing wealth and income to reinvest, thus increasing the productive capacity of the business they own. They also lend their accumulated wealth to other businesses as well as other entities after they have exhausted opportunities within the business they own. As they seek to deploy ever more capital, excess factories, housing and shopping centers are built and more and more dubious loans are made. This is overinvestment. As one banker described the events leading up to 2008 - First the banks lent all they could to those who could pay them back and then they started to lend to those could not pay them back. As cash poured into banks in ever increasing amounts, caution was thrown to the wind. For a while consumers can use credit to buy more goods and services than their incomes can sustain. Ultimately, the overinvestment results in a financial crisis that causes unemployment, reductions in factory utilization and bankruptcies all of which reduce the value of investments.

If the economy was suffering from accumulated chronic underinvestment, shifting income from the non-rich to the rich would make sense. Underinvestment would mean there was a shortage of shopping centers, hotels, housing and factories were operating at 100% of capacity but still not able to produce as many cars and other goods as people needed. It might not seem fair, but the quickest way to build up capital is to take income away from the middle class who have a high propensity to consume and give to the rich who have a propensity to save (and invest). Except for periods in the 1950s and 1960s and possibly the 1990s when tax rates on the rich just happened to be high enough to prevent overinvestment, the economy has generally suffered from periodic overinvestment cycles.
It is not just a coincidence that tax cuts for the rich have preceded both the 1929 and 2007 depressions. The Revenue acts of 1926 and 1928 worked exactly as the Republican Congresses that pushed them through promised. The dramatic reductions in taxes on the upper income brackets and estates of the wealthy did indeed result in increased savings and investment. However, overinvestment (by 1929 there were over 600 automobile manufacturing companies in the USA) caused the depression that made the rich, and most everyone else, ultimately much poorer.

Since 1969 there has been a tremendous shift in the tax burdens away from the rich and onto the middle class. Corporate income tax receipts, whose incidence falls entirely on the owners of corporations, were 4% of GDP then and are now less than 1%. During that same period, payroll tax rates as percent of GDP have increased dramatically. The overinvestment problem caused by the reduction in taxes on the wealthy is exacerbated by the increased tax burden on the middle class. While overinvestment creates more factories, housing and shopping centers; higher payroll taxes reduces the purchasing power of middle-class consumers.

In an interview about the proposed "Buffett Rule", T.J. Rogers the CEO of Cypress Semiconductor Corporation (CY) inadvertently illustrated the potential perils of overinvestment for an economy. Warren Buffett the CEO of Berkshire Hathaway Inc. (BRK.A) (BRK.B) had proposed the "Buffett Rule" which would impose a minimum tax of 30% on incomes above one million dollars. Rogers explained to Larry Kudlow on CNBC's Kudlow Report on May 16, 2012, why he opposed the Buffett Rule. Rogers said that he spends less than 1% of his income on his living expenses and invests the other 99% in creating new businesses and increasing the productive capacity of the businesses he already owns. If he had to pay taxes pursuant to the Buffett Rule he would not be able to invest as much. Clearly, someone who invests 99% of their income will see his wealth grow exponentially as long as his investments are at all productive. It would not take too many members of the top 1% investing 99% of their income before they would be unable to deploy their capital productively. This would be a classic example of capital accumulating faster than consumers' incomes. Consumers would not be able to buy all the goods and services produced by the over investment...."
http://seekingalpha.com/article/1543642