The Second Great Depression poses a real dilemma for liberal mainstream economists. They want to attack conservative mainstream (aka austerity) measures and, at the same time, to fix capitalism. In other words, they want at all costs to avoid the alternative: to point in the direction of a world beyond capitalism.
Paul Krugman’s approach is to argue that we’re all in this together, not in the manner of a household but in an Irving Fisher debt-deflation kind of way:
an economy is not like an indebted family. Our debt is mostly money we owe to each other; even more important, our income mostly comes from selling things to each other. Your spending is my income, and my spending is your income.
So what happens if everyone simultaneously slashes spending in an attempt to pay down debt? The answer is that everyone’s income falls — my income falls because you’re spending less, and your income falls because I’m spending less. And, as our incomes plunge, our debt problem gets worse, not better.
The moral of Krugman’s story is that, when the private sector is busy paying down its debts, the public sector needs to engage in deficit-spending until the economy has recovered.
Joseph Stiglitz also wants us to understand we’re all in this together, but in a somewhat different manner. His focus is on growing inequality—”a few mega-yachts surrounded by masses of people in dugout canoes, or clinging to flotsam”—and the tendency of unequal capitalism toward underconsumption.
The relationship is straightforward and ironclad: as more money becomes concentrated at the top, aggregate demand goes into a decline. Unless something else happens by way of intervention, total demand in the economy will be less than what the economy is capable of supplying—and that means that there will be growing unemployment, which will dampen demand even further. In the 1990s that “something else” was the tech bubble. In the first decade of the 21st century, it was the housing bubble. Today, the only recourse, amid deep recession, is government spending—which is exactly what those at the top are now hoping to curb.
Once again (as with Adam Davidson), the focus is on what Stiglitz considers to be the rent-seeking behavior of those on top.
The word “rent” was originally used, and still is, to describe what someone received for the use of a piece of his land—it’s the return obtained by virtue of ownership, and not because of anything one actually does or produces. This stands in contrast to “wages,” for example, which connotes compensation for the labor that workers provide. The term “rent” was eventually extended to include monopoly profits—the income that one receives simply from the control of a monopoly. In time, the meaning was expanded still further to include the returns on other kinds of ownership claims. If the government gave a company the exclusive right to import a certain amount of a certain good, such as sugar, then the extra return was called a “quota rent.” The acquisition of rights to mine or drill produces a form of rent. So does preferential tax treatment for special interests. In a broad sense, “rent seeking” defines many of the ways by which our current political process helps the rich at the expense of everyone else, including transfers and subsidies from the government, laws that make the marketplace less competitive, laws that allow C.E.O.’s to take a disproportionate share of corporate revenue (though Dodd-Frank has made matters better by requiring a non-binding shareholder vote on compensation at least once every three years), and laws that permit corporations to make profits as they degrade the environment. . .
In their simplest form, rents are nothing more than re-distributions from one part of society to the rent seekers. Much of the inequality in our economy has been the result of rent seeking, because, to a significant degree, rent seeking re-distributes money from those at the bottom to those at the top.
The moral of Stiglitz’s story is that the top of the pyramid is shaky without a firm base. In other words, the fate of the 1 percent is tied to the (mis)fortunes of the rest and the only way out is, as with Krugman, government spending.
There is a kernel of truth in the accounts of both Krugman and Stiglitz. Capitalism is an interconnected economy in which the spending of some becomes the income for others, and for decades now capitalism has created a massive redistribution of income and wealth from the majority at the bottom to a tiny minority at the top.
However, what neither Krugman nor Stiglitz wants to see is that government spending can’t possibly reverse the fortunes of those at the bottom without creating further problems for those at the top. Wealthy individuals and large corporations do want to see economic activity pick up so that they can sell more goods and services and make even more profits. But they don’t want anyone to demonstrate that they’re the problem—to show that private capitalism is incapable of generating sufficient jobs and pay for those at the bottom, or to impose further regulations on their activities—and that a different set of economic arrangements would render them superfluous.
So, yes, it’s all well and good to recognize that capitalists and workers are all in this together. But, we need to add a caveat: albeit in a quite different manner.
Here’s a link to Robert Kuttner’s piece on Joseph Stiglitz and Paul Krugman who, in his view, are “astonishingly prescient, widely read, and largely ignored by those in power.”