Where’s the Recovery?

On the Opinion page in yesterday’s Wall Street Journal, the title, “The Reasons Behind the Obama Non-Recovery” (p. A13) caught our eye.  The argument by a Harvard professor of economics was that because recovery from all past depressions/recessions has always been relatively rapid, President Obama is responsible for a slow recovery because he increased non-productive government spending that made the rich richer, instead of figuring out ways to make business more profitable to make the rich richer.

Nothing in the article even approached the real reason that the economy hasn’t recovered from the euphemistically named “Great Recession.”  The fact is that there have been profound changes in the global economy that have made it nearly impossible in conventional terms to “recover” from an economic downturn using the same-old-same-old — two in particular.

Simón Bolívar, the Great Liberator

One, there’s the problem of the boom and bust cycle itself.  This is a fairly recent development on the world scene.  Most authorities agree that it began with the Panic of 1825.  This was caused by the new republics of Central and South America not having tax bases sufficient to support the governments, so they financed by emitting bills of credit, essentially mortgaging future tax collections before they knew that they could even collect taxes.

Not surprisingly, when the government debt went into default, there was a global (or at least European and American) financial panic.  The value of stocks tumbled.  All the experts were baffled.  Previously, except for things like the Mississippi Scheme or the South Sea Bubble, financial panics had been the result of war or natural disaster.

The experts decided it was the unregulated issuance of government debt in the form of bills of credit that caused the problem.  Just keep government debt in bounds, and everything would be all right.

Unfortunately, it was the issuance of government debt itself that was the problem, not how little or how much.  When a government issues debt, it creates demand for production that already has claims against it.  Consequently prices rise (inflation), and supply and demand go out of whack.  Things are either booming or busting.

Two, there is the problem of advancing technology and the displacement of labor from production.  As technology advances, more people are forced out of jobs.  They have no income, and consumer demand (which drives the economy) drops, causing a slowdown.

These are not the 'droids you own.

If the people who lost their jobs owned the machines that replaced them and took their income, all would be well — but they don’t.  Instead, to make up for lost income government issues more debt to stimulate demand so that jobs are created artificially, or the government issues more debt to give to people directly to stimulate demand so that jobs are created artificially, or the government redistributes existing wealth. . . which usually doesn’t stimulate demand or create jobs because the existing wealth already exists, and there is no net increase in demand, merely a shift from one group to another.

In the twenty-first century, technology is advancing at such a rapid rate that there is no way to create enough new jobs to make up for those that are lost: the productiveness of the new capital instruments is so great that creating jobs actually reduces “productivity” by adding more labor hours into the equation, essentially featherbedding.  The added labor doesn’t actually add anything, not even an increase in production.  It just adds more labor hours into the calculation to drive the numbers down.

Obviously, the answer is not to keep on adding more and more labor hours to increase productivity.  Rather, the answer is to turn more people into capital owners so that consumption can keep up with production.

One plan for this is the Capital Homestead Act, which anyone interested in bringing an end not only to this “Non-Recovery,” but future downturns should take a look at.

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