Map of life expectancy at birth from Global Education Project.

Monday, March 16, 2009

Depressed . . .

Repressed, oppressed, suppressed and compressed. After contemplating why many people, particularly of the starboardside variety, cannot seem to grok the basic concept of what a recession or a depression is, and how to get out of it, I have come to the following conclusion.

If you just assume that the market is "self-correcting" and that it "efficiently allocates resources," and then you look around and you see that there are factories sitting idle, fields unplanted, and workers unemployed, it seems obvious to you that the market could not be responsible for this, and something or somebody must be getting in the way and stopping it from doing what it does naturally. I mean, why don't those factory owners just start up the factories and hire the workers and start making stuff and selling it like they were before? What's stopping them? It's gotta be those onerous taxes and government borrowing crowding out private investment and burdensome regulation blah blah blah. Cut spending, cut taxes, get the government off the backs of the people, and we'll all be back in business and getting rich again.

Why is this wrong?

It's wrong because it is circular. The market does not do what you think it does. The market is not a natural phenomenon, it is a human social construction, cobbled together painfully and largely accidentally over many centuries. When it has been obvious that in one way or another it wasn't doing what people in power wanted it to do, they took steps to modify it -- whether to your benefit or mine, or not, all depends. It does not, as many economists assume just because, well, because they assume it, have an "equilibrium" state either. It is a chaotic system that goes through periods of pseudo-equilibrium in which change is generally slow, other periods of more rapid change, and occasional catastrophic changes which leave it in a new pseudo-stable state called a depression.

Here is what happened, in a nutshell. Due to an asset bubble (one of the rapid change states alluded to above) people spent a whole lot of money and businesses invested a whole lot to sell stuff to them. Commodities with fairly inelastic supply -- like petroleum and food -- became disproportionately expensive. Then the bubble popped and people everywhere felt a whole lot poorer and/or they couldn't borrow any more money, so they stopped spending. Factories closed, workers were laid off, the price of commodities collapsed curtailing investments in their production or extraction, meaning more workers were laid off. As people lost their jobs, they spent even less and more factories closed, along with the restaurants that fed the workers and so on, and now those people were out of work and they spent less and so on and so forth.

People who still had money weren't inclined to invest it because there was nobody to sell stuff to. Factories sit idle, not because they would have to pay workers comp and social security and unemployment taxes if they hired people, but because they wouldn't be able to sell the products those people made. They wouldn't even accept the workers as volunteers, because they would still have to pay for raw materials and electricity and what not, and they'd end up with a lot of stuff sitting in a warehouse that they couldn't sell.

So there is only one way out of this, unless we're willing to wait a long, long time. We're in a liquidity trap. Money is there, but it just sits there. Factories and workers are all there, but they just sit there too. Think of an internal combustion engine. You've got gasoline, you've got pistons and cylinders and ignition, but it doesn't spontaneously start running. You need a starter motor, which can draw current from a battery and get the whole thing moving.

There is only one such starter motor available in all the world. The government. The government has to spend money. It could cut taxes to zero and it wouldn't do any good. It could cut interest rates to zero and it wouldn't help. Instead, we have to turn the crank. Buy stuff, hire people, get the machine going again. That's called Keynesianism. And it isn't just true. It's completely fucking obvious.

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