Forget monetary policy, re-examine the cause of the great depression. The revolution in agriculture that threw out millions of work. We must face and manage a shift in the ‘real’ economy from agriculture to industry and service or risk a tragedy.
It has now been about five years since the bursting of the housing bubble, and four years since the onset of the recession. Unemployment has been the order of the day even before the recession, with so many workers losing their jobs. Almost half of those who are unemployed have been unemployed long-term. Wages are falling – The real income of a typical house-hold is now below the level it was in 1997.
We knew the crisis was serious back in 2008, and we thought we knew who the ‘bad guys’ were – the nation’s big banks, which through cynical lending and reckless spending has brought the stock market to the brink of ruin.
The past two presidential administrations justified a bailout on the grounds that only if the banks merges while having a fixed capital base and were handed money without conditions/limits – could give an economy recovery. Of late even the monetary policy such as the production of large values of money in a single note so as to by-pass spending much of the national fund in the production of new notes.
Many, especially in the financial sector, argued that strong, resolute, and generous action to save not just the banks but the bankers, their shareholders, and their creditors would return the economy to where it had been before the crisis. In the meantime, a short-time stimulus, moderate in size, would suffice to tide the economy over until the banks could be restored to health.
Finally, banks got their bail-outs, some of the money went to bonuses. Little of it went to lending. And the economy didn’t really recover – output is barely greater than it was before the crisis, and the job situation is bleak.
Diagnosis of our condition and prescription for solution is incorrect.
First, it was wrong to think that the bankers would mend their ways – that they would start lending, if only they were treated nicely enough.
Even when we fully repair the banking sector, we’ll still be in deep trouble – because we were already in deep trouble. That seeming golden age of 2007 was far from a paradise. Companies in the info-tech field were at the leading edge of a revolution. Our living standard of under a dollar was sustained only by risings debt – debt so large that our savings rate had dropped to near zero. And zero doesn’t really tell the story - Because the rich have been able to save a significant percentage of their income, putting them in the positive column. An average rate of close to zero means that everyone else must be in the negative column.
The problem today is the so-called ‘real’ economy. It’s a problem rooted in the kind of jobs we have, the kind we need, and the kind we’re losing, and rooted as well in the kind of workers we want and the kind we don’t know what to do with. The real economy has been in transition for decade and these transition dislocations have never been squarely faced.
Joseph E. Stighitz and Bruce Greenwald have been engaged in research on an alternative theory of the depression – and an alternative analysis of what is ailing the economy today.
They concluded that the under-lying cause was a structural change in the real economy. The widespread decline in agricultural prices and incomes, caused by what is ordinarily a ‘good thing’ – Over Productivity.
Agriculture had been a victim of its own success. Jobs and livelihood on the farms were being destroyed, because of accelerating productivity, output was increasing faster than demand and prices fell sharply, and then came the black crude oil business, which led to the total decay of the agricultural sector.
The cities weren’t spared – far from it. As rural incomes fell, farmers had less and less money to buy goods produced in factories. Manufacturers would have to lay-off workers which further diminish demand for agricultural produce, driving down prices even more.
Before long, this vicious cycle affected the entire national economy.
Not until government spending soared in preparation for global war that America started emerging from the current depression. It is important to grasp this simple truth. It was government spending, not any correction of monetary policy or any revival of the banking system – that brought the recovery.
The long-run prospects for the economy would of course have been even better if more of the money had been spent on investments in education, technology, and infrastructure rather than munitions, but even so, the strong public spending more than offset the weaknesses in private spending.
Government spending unintentionally solved the economy’s underlying problem; it completed a necessary structural transformation moving America and especially the south, decisively from Agriculture to Manufacturing.
Moving forward now they are moving from manufacturing to a service economy in America, but here in Nigeria, we are moving from Agriculture to Manufacturing and partly a service economy.
Anyone who believes that monetary policy is going to resuscitate the economy will be sorely disappointed. The idea is a distraction and a dangerous one.
What we need to do instead is embark on a massive investment program that will increase our productivity for years to come and will also increase employment now.
This public investment and the resultant restoration in G.D.P increase the returns to private investment. Public investment could be directed at improving the quality of life and real productivity – unlike the private sector investment in financial innovations, which turned out to be more akin to financial weapons of mass destruction.
Can we actually bring ourselves to do this, in the absence of mobilization for global war? Maybe not, the good news is that we have under-invested in infrastructure, technology, and education for decades, so the return on additional investment is high, while cost is unprecedented low.
Government stimulus designed is only going to work if we don’t preserve the old economy but to squash it, focus and create a new one. We have to transition out of manufacturing and into services that people want – into productive activities that increase living standards, not those that create risks and inequality.
To that end, there are many high return investments we can make. Education is a crucial one – a highly educated population is a fundamental driver of economic growth. Support is needed for basic research for without it, nothing will fuel a new spurt of innovation.
Finally, our decaying infrastructure, from roads and railroads to levees and power plants, is a prime target for profitable investment.
The second conclusion is this; if we expect to maintain any semblance of ‘normality’ we must fix the financial sector.
As noted, the implosion of the financial sector may not have been the underlying cause of our current crisis – but it has made it worse, and it’s an obstacle to long-term recovery. Small and Medium size companies especially new ones, are disproportionately the source of job creation in any economy and they had been especially hard-hit.
What’s needed is to get banks out of the dangerous business of speculation and back into the boring business of lending, but we have not fixed the financial system. Rather we poured money into the banks without restrictions, without conditions and without a vision of the kind of banking system we want and need. We have; in a phrase confused ends with means.
A banking system is supposed to serve society, not the other way around.
That we should tolerate such a confusion of ends and means says something deeply disturbing about where our economy and our society have been heading.
The society are getting to understand what has happen. Protesters around country, galvanized by Occupy Nigeria movement already are in the know
God bless You
God bless Nigeria
God bless Africa.