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.