Pavlina Tcherneva rightly says it is better to support labor income in a recovery rather than the financial sector.
The title of this post describes the main message of Pavlina Tcherneva’s research. This video is a “must see”.
If her message becomes part of the policy approach for the next recovery, we will see much better net social benefits for society after the next recession. (video link)
I believe that she is correct when she says it is better to support labor income in a recovery rather than the financial sector. But neither will solve our current problems.
I believe that excessive debt got us into the Great Depression in 1933 and the Great Recession in 2008. Professors Charles E Persons and Irving Fisher both published work laying the blame for the Great Depression on excessive debt. Unfortunately Fisher had been discredited because he had claimed that the stock market had reached “a permanently high plateau” just before the crash. And Persons resigned after losing an argument with the Hoover administration over how the unemployed should be counted in the 1930 census. (He had been hired as an expert to help with the census.)
Ignoring excessive debt as the problem, encourages economists to look first one place and then another for the cause and thus the appropriate solutions. Initially I predicted it would take about a decade to exhaust those other alternative solutions but I have become more pessimistic. Wishful thinking abounds.
First they fixated on the financial institutions and their problems brought on by the creation of new credit vehicles, very poor underwriting policies, and very poor credit rating policies. Those combined to give us the housing bubble, excessively indebted consumers, and a rapidly increasing number of defaults on consumer debt. The immediate solutions to the crisis were to bail out the financial institutions in one way or another beginning in 2008. They assumed that the financial institutions would then continue to lend to consumers but those institutions had had a big scare and their balance sheets still were not good enough for that.
Next they resorted to some Keynesian therapy in 2009. The idea was to cause private businesses to hire more employees to work on publicly financed projects. (Remember shovel ready?) This was doomed to be too little and over too short a period of time.
Next they tried to put more money into the hands of consumers by temporarily reducing the payroll tax by 2% in 2011 and 2012. Too little to accomplish much. (And too temporary)
Currently income inequality is being explored but that seems to be an effect rather than a cause.
None of these techniques addressed why consumers were borrowing such huge sums before the end of the housing bubble. And they all assumed that whatever had damaged the economy had ended, thus there was no continuing damage to the economy.
My own preferred solution is to end Global Free Trade since that would more quickly put Americans back to work as production was moved back to this country. And over time would raise wages. (I believe that Global Free Trade was the source of the damage to the American workers/consumers and that it is continuing.)
Failing that, we need to change our assumptions about the benefit of credit and debt. One of the operative assumptions being that any and all of us should be able to borrow even if that means that the poorest of us will have to pay very high interest rates. That assumption encourages the second which is that the borrower should decide the maximum chargeable interest rate by his not borrowing at some high rate. Thus there is no need for usury laws with low rates.
But if large numbers of us are going to have to live on stagnant wages and/or government subsidies, then borrowing and spending our future has to stop or at least be severely curtailed. We should implement nationwide usury laws with low rates and liberalize bankruptcy rules. This would improve the balance sheets of the consumers.
But this will not solve our real problem either. Eventually something will have to be done about Global Free Trade.
Your ignoring the political economy of it however. If the Financial industry feels “rejected” they can just detroy all parts of the economy as they please.
This was one of the big reasons why the government gave such favorable terms in 2008.
Labor income is just a debt reducer nowadays. It doesn’t control demand at all.
John Cummings wrote “If the Financial industry feels “rejected” they can just detroy all parts of the economy as they please.”
I wish that was our major problem. The bankers’ political friends would desperately want to escape the heat as soon as any such action began.
The groups favoring Global Free Trade are much more resistant to change. The economists, importers, and international do-gooders present quite a wall. They are ‘true believers’.