Bruce Greenwald on Structural Problems in the Economy and Unemployment
The conventional wisdom is that World War II ended the Depression. Is that correct?
The reason why World War II got us out of the Depression, and the reason that Argentina suffered because it didnt participate, is that it is actually industrial policy that gets everybody off the farms.
That policy also accumulates purchasing power, so that when people are in the cities, there is demand for appliances and cars. They have moved and they are now part of the productive economy. So the demand is sustainable.
One of the great concerns at the end of WWII was that everyone thought we were going to go back to the Great Depression. In Argentina, of course, that happened. In the US and everyplace else, everyone was surprised and relieved. But the reason is that youve gotten everyone off the farms and into the cities. It was through both the war industries and in the army.
How does this relate to todays problems?
The comparable thing that is going on today is that manufacturing is dying, and it is dying for exactly the same reason, which is productivity growth is 5% to 6% a year and demand growth is 2% to 3% a year.
Thats why Japan has had such a difficult long-term problem. They are manufacturing-driven, and they think of themselves as a resource-poor country, where their imports of food, energy, and raw materials are absolutely essential. They want a huge margin of safety of exports over imports. The only way you can do that is by manufacturing. Thats harder and harder to do as manufacturers die. So theyve basically done a little bit of what was done in the Depression, which is that youve got to employ these people. And many countries, like Japan, try to do it through exports.
China has decided to grow, and they cant grow based on domestic demand, so they have to do it through international demand, and thats of course demand from manufacturing. They have exactly the same problem as Japan. They have a command economy, and they have sort of kept their workers busy, but they are heading for big trouble. Manufacturing employment hasnt grown for three years in China, and thats a huge problem for them, despite the fact that, like Japan, they are manipulating their currency, which is just a modern version of protectionism. And theyre generating exports.
Japan and China are in the same situation. Germany is too; they have powerful unions and powerful firms, and basically those who they are undermining because they have fixed the Euro exchange rate are the other European countries. Overall, the Euro should go to $2.50. But there is no way they will let that happen, because they would go from surplus to deficit, and all their manufacturing jobs would be gone.
Then youve got Korea, Thailand, Indonesia, and Malaysia, all of whom used to run deficits. The problem was that they had to borrow in foreign currencies to finance those deficits. Everyone got nervous about the deficits. Their currencies collapsed. The burden of debt destroyed the manufacturing countries predominantly. But they went from deficit to surplus because their imports collapsed and their exports took off. Theyre never going to run deficits again, and you see it in the data. Theyve been there and dont like it and theyre not going to do it. Brazil, which had the same experience, is pretty much in the same place.
So youve got these enormous trade surpluses as a result of countries trying to sustain in various ways their manufacturing bases, partly because they have people marooned there. But also, like with agriculture, they think they cant have a successful economy if nobody makes anything.
You go into a Japanese factory, by the way, and nobody makes anything. There are more people on the loading dock, which is a service function, than there are actually in the factory. Thats why they are a hopeless enterprise.
Which countries are in a position to play a leadership role in solving the crisis?
There is one iron rule that must hold, which is that the sum of all the surpluses and the deficits across all countries has to be zero.
Somebody has to eat the surpluses. It used to be Malaysia, Korea, Indonesia, and Thailand, and they paid the price and went from deficit to surplus, but somebody still has to eat their surpluses. So ultimately it goes to the country who can accommodate that, because it can borrow in its own currency. When the dollar falls, we dont suffer the way the Koreans did, with unserviceable debt. The US is the deficit country of last resort.
The Asian countries are running protectionism just differently by manipulating their own currencies. They dont do tariffs, and thats why the dollar hasnt been able to fall.
The problem from the perspective of the US is that if we are importing 9% more of our GDP than we are exporting, it is very difficult to sustain full employment. You basically have to have a zero saving rate or a bubble in the internet or housing. But you have to have some substitute demand.
Is there a sustainable source for that demand?
There is a phenomenon that helps this take place, and its really what generated the financial crisis. If the US buys $900 billion more than we sell overseas, the surplus countries accumulate that $900 billion. That number is growing every year. They have to get rid of that money, and the only way they can get rid of that is to go from surplus to deficit, and that would destroy their economic growth.
The US controls how surplus countries deploy dollars in the US. They are not going to be able to buy US equities we showed them that in Chevron and they are going to have to buy US fixed income. That drove down long Treasury rates, and Alan Greenspan had nothing to do with it. They got tired of the low yields, and they looked for other fixed income. They are poor, uninformed investors, and we sold them a lot of bad mortgage-backed investments. Interest rates got to be really low in the US, and there was a housing and consumer lending bubble, and savings rates went to zero. And thats what sustained growth in the US, which sustained demand, which sustained all the manufacturing industries.
Theres a weird stability to this, because the Chinese cant do anything about it. If they try to get rid of their dollars, they can buy Euros. But then the Europeans have the choice of letting the Euro go to $3.00 or buying the dollars themselves. And then they go back and buy the Yuan, and then the Chinese have the choice of letting the Yuan go up and undermining their exports.
The problem comes with consumer demand in the US. Basically the saving rate went to zero. In the US, the top 20% of people have 40% of the income and save about 15% of their income. A lot of that is pension plans and paying off principal on mortgages, so its automatic savings. If you take 15% of 40% you have a savings rate of 6%. This means that the bottom 80% is earning about 60% of the income and is spending 110% of their income. That is not sustainable. So, finally when housing prices collapse and the defaults in consumer finance occur, that whole system falls apart.
So we are left with unsustainable consumer demand in the US and an imbalance in global trade. What is the solution?
Youll notice that we basically fixed the banks, but the underlying imbalances are in no way fixed. Those who suffered the worst, in international terms, are the Japanese and the other big manufacturers. So what youve got is this fundamental economic imbalance that hasnt gone away, which is going to mean slow growth.
We can resolve this by just directing tariffs. But Obama plays nice with others, and hes not going to do that, which would harm the rest of the world. We cant try to control our currency, because if we sell dollars we would drive the price of the dollar down, and Japan and China would just buy them and sell Yen or Yuan, and theres no percentage gain in doing that.
So the actual way we could relieve the pressure is to have the IMF just print money and give it to Korea and the other countries so that they could buy Chinese and the other exporting countries goods without having to incur foreign debt. That is the Stiglitz plan and thats the plan that the Chinese are talking about.
At the same time, youd like to tax the surplus countries to force them to adjust. Thats a short-term solution. The long-term solution is you have to get people out of manufacturing and governments have to cooperate in this effort and get them into industries like health care. Cutting health care is not a good idea at this point. They have to work in education, housing, and financial services. But if all those industries are under attack globally, you are not going to get the jobs that you need to replace the manufacturing jobs.
There is this huge structural problem taking place. The governments can offset it to some extent. I think what you are going to see in the US is what you saw in Japan for years, which is stagnant demand. We will grow a little bit, imports will flood in, purchasing power will go out of the US economy, and we will stop growing, and then the government will do something and the dollar will fall a little. All these things will happen sequentially, but ultimately you are going to have slow growth.
What does this mean for unemployment?
The next phenomenon that people are not aware of explicitly but ought to be is that productivity growth doesnt come from innovation. It comes from people taking tried-and-true methods and actually applying them better. The reason I say tried-and-true methods is because, if you look at the most productive firms in an industry, they typically have costs that are a half to a third of the industry average. Its the same technology that everyone else has available to them. Theres a huge opportunity for productivity and cost cutting.
Imagine that youve got basically 1% or 0% GDP growth and productivity growth of 2% to 3% per year. Employment is going to be decreasing by 2% to 3% per year. That means unemployment is going from 10%, where it is now, to 12% to 14%. I dont think theres a natural stopping place for that much below 15%.
Thats the potential unemployment picture you are looking at. You are already seeing the political strains that is causing, which are that companies are going to make a lot of money, because they will drastically cut costs and their revenues are going to be constant. The stock market is going to go up. It happens every reporting season; they all exceed expectations. The unemployment situation is going to be a disaster.
Weve seen this in Europe, and basically what it means is that people under 30 cant get jobs unless they are from the absolute elite universities. Thats the sort of forecast you have to think about, and its very hard to do that based on short-term movements in consumption. The savings rate has got go to somewhere above 4%, and its not there yet. It was up to 3.8%, and then went down to approximately 2.9% because of cash for clunkers and people buying furniture for their houses.
Other that then Stiglitz plan, is there any other solution?
This is the problem for the Republicans, even though they are going to win because its going to be such a disaster for Obama. The Democrats are not going to improve things unless they get lucky. The services people have to buy are lots of health care, custodial services for old people, college education and graduate education, and housing. They are big lumpy expenditures, and the government has to help finance them. So, in the meantime, while you are making this transition out of manufacturing and you are getting these institutions and the private methods of payment in place, the government is going to have to borrow a lot of money and do a lot of support. Thats going to be the hardest, because nobody has faced up to that.
We are actually in pretty good shape, because we dont have much of a manufacturing employment base left. To give you an example, we have more professional athletes and referees, including tennis pros and golf pros, than we have extractive workers, which include coal miners and oil platform workers. We have approximately 200,000 professional athletes and 180,000 extractive workers. Its just unbelievable whats happened to productivity in these areas.
You have a long-term solution, which is to do the transition, which the War did for us to end the Depression of the 1930s, which it never did in Argentina. Then you need a short-term way to relieve the pressure and generate the demand, and thats basically the Stiglitz plan, which is described in the last chapter of my book.