Demand, demand, demand.
Many years ago, I came across a video on YouTube. It was published on October 1st, 2008, the day after we realized that all the big banks had stock that was worthless. It’s a short video, that is well worth the three minutes it will take to watch it.
Here we see Dean Baker, economist for the Center for Economic Policy and Research. He explains the problem very clearly: the big banks and the economists who are supposed to manage the economy had missed the housing bubble. Baker was one of maybe 6 economists who saw the housing bubble coming and he was ringing alarm bells for years around anyone who would listen.
He has a priceless quote at the end:
“What’s going on is that they (the banks) have a gun pointed at their head, and they’re going to pull the trigger if we don’t give them 700 billion dollars, and I’m willing to live with that.”
I was blown away by the candor of Mr. Baker. No other economist that I had seen on TV, in the press, or even in the blogosphere was even remotely as candid as he was. So I started reading his works, like his blog, “Beat The Press”, and found a very interesting story.
You might recall the Asian currency crisis in 1997. During that crisis, the United States, the World Bank, and the IMF were dictating austerity to Asia. This was a painful moment for the Asian community and they did tighten their finances. And they got really good at it. But there was something else.
They all started to buy US dollars, usually in the form of securities like US Treasury Bonds. They bought our debt. This had the effect of making the dollar stronger and of creating a trade imbalance. This had the effect of making it cheaper to manufacture abroad than to build what we need here, in the United States.
As the trade deficit grew, economic demand sailed out of our country to other countries. Who is the largest foreign holder of US debt? China. The lack of demand created by the trade imbalance could not support the home prices of the housing bubble, and eventually, as we all saw, the housing bubble collapsed.
All of this was engineered by the supposed best and the brightest from American schools. American MBAs drank the cool-aid of foreign trade, shipping our jobs overseas so that they could make money. American MBAs pushed for public policy proposals that had the effect of sending economic demand overseas. And American politicians wrote laws and signed treaties that sent wood to the fire of the trade deficit.
Fast forward to today, and we see a misguided President Trump enacting tax cuts to restore demand in the economy. We see him also using tariffs to restore domestic demand, to bring the jobs home. Yet we are seeing record trade deficits under Trump. And all of their efforts to restore a balance of trade will have to chew through $1.2 Trillion in debt held by China. As long as China holds that debt, nothing much will happen with the trade deficit. Well, at least not to China. But you can rest assured that anyone who ships anything to China will suffer. Just think of the farmers in the Midwest.
As I write this, I am reminded of economist John Maynard Keynes. I didn’t study him much, but in recent days, I saw a quote of his words. Keynes said in 1930, that eventually, we’d only be working 15 hours a week due to the benefits of technology. Clearly, he was wrong. But in this interview transcript from NPR, we have the grandson of Keynes’ sister telling us why Keynes was wrong. He might have been right, but he underestimated the desire that people have to compete.
The interview goes on to say that if you’re paid $200 an hour, you want to keep working more. Look at the basketball players who get $80 million contracts, and yet, they keep playing. But none of the people in that room said a word about another possibility. Those people getting paid $200 an hour might just love their work. And there is something else they missed, not everyone who loves their job can get paid top dollar.
I’ve read a few books by Dean Baker and he paints an entirely different view of why we’re working so much. One of his books, Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer, goes into great detail about the story I told above. The basic story that Baker tells in much of his writing is that our relationship with China is not how economics works. Rich countries loan money to poor developing countries in basic economics. What we saw is that poor countries like China started buying US debt to create foreign demand for their products by making the dollar stronger.
To put this in perspective, the housing bubble, the trade deficit, the extreme inequality we see in America today, is not a result of how economics works, unless you rig the rules. The rules were rigged so that most Americans would be left behind, unable to enjoy most of the economic benefits of technological innovation. This is another reason why Keynes was wrong about the workweek.
As an example, Baker points to doctors who are protected from foreign competition by trade barriers. But auto workers are not protected by trade barriers. Autos are relatively cheap. Even auto maintenance is relatively cheap. But healthcare now takes up 18% of GDP, twice the cost of most other OECD nations. The protection provided to doctors, the patents provided to drug and medical device makers, are all forms of government intervention in the markets. Its an intervention in the markets that Republicans don’t seem to mind. And that kind of intervention keeps the rest of us working to support the health care industry. The healthcare industry is a very powerful lobby.
Notice in the debates on health care, nobody is talking about increasing the number of doctors allowed to practice in the United States. That’s protection. Notice that nobody is talking about reducing the strength and length of patents for drugs and devices. That’s also protection. That kind of protection ensures that supply will never meet demand. And this is just one example of how the economy is rigged.
The stated premise of how our economy is structured is that the almighty dollar is an incentive to keep people working. The idea is that monetary rewards will give people the incentive to work. The problem is that they have taken this so far, that people are dying because they don’t have enough money to pay for health care. Kids are starving because they don’t have enough money for food. But there is something else.
I was at a social function a few years ago. I found myself talking to a teacher about how parents complain about the teachers. But the teacher that I was talking to, he pointed out that many of his students in high school were taking remedial reading and math classes. Why? Because their parents were working 2 and 3 jobs each. They never had time to tutor their kids, to help them, to encourage them.
The subtext of how our economy is structured is to reduce participation in government. Our voting laws have made it hard for people to vote. While many other nations make election day a national holiday, most people have to work and then go vote. And if they’re lucky, they won’t have to stand in line to vote. America is one of the richest nations in the world, and supposedly, that comes from efficiency, but to see Americans stand in line for hours as they did in 2016, is not the mark of an efficient and wealthy economy.
Economics doesn’t explain what happened. Rigged rules do. Similarly, when people are working 2 and 3 jobs just to make rent and pay for the basics, they don’t have time to protest. They don’t have time to participate in get-out-the-vote campaigns. They don’t have time to phonebank for their candidate of choice or attend party functions for their political party. They don’t have time to go to the city hall and be heard.
So when we see our government doing something that we would never do, like separating kids from their parents at the border, we wonder who is in charge. When we see our government engage in unpopular wars, we wonder who is in charge. When we see our government bail out an inefficient and incompetent banking industry, we wonder who is in charge.
If we want to be in charge again, we must rewrite the rules. How do we rewrite the rules? We participate in government. We find a way to make the time to do it. In America, politics is a rich man’s game. We need to change that.
How should we change the rules? Dean Baker offers some great ideas in his articles and his books, most of which are published in hardcover and are free as PDFs. The Roosevelt Institute, headed by Nobel Prize winner in economics Joe Stiglitz, offers a comprehensive plan to put an end to trickle down economics on their “Rewrite The Rules” page. And more than 20 candidates for the Democratic nomination offer many good ideas and suggestions for how we should rewrite the rules.
The way to get there is to keep your eyes on the prize and participate in your own government. To vote, to write, to contact your representatives, to participate in rulemaking, to show up. There is no other way.