A New Golden Age Part II: The Path to Prosperity


THE FINANCIAL CRISIS has been over for six years, and still the economy has not bounced back. Even with monetary policy maxed out and interest rates as low as they have ever been in recorded history, wage growth remains almost nonexistent, and unemployment high. Another recession seems more likely than a sustained recovery. The economic turmoil that began a decade ago when real estate prices in suburban America began to fall threatens to last longer than the Great Depression.

In Part I of this essay, I compared our current economic condition to that of your grandparents. You have cooler stuff; they had steady jobs. As consumers, we live larger than any humans in history. But as workers we have no job security, wages are stagnant, and there are few obvious paths to advancement. From 1950 to 1970, the era economic historians call “The Golden Age,” the average American’s real wages doubled. In the 40 years since then, they have barely gone up at all.

Back in the Golden Age, increases in worker productivity immediately were translated into wage gains. From Reagan/Thatcher until now, the benefits of productivity gains have gone straight into the pocket of the top one percent. This is more than unjust — it is economically inefficient. Since workers are also consumers, paying them less is a double-edged sword for corporations. On the micro-level, lower wages immediately raises profits. On a macro-level, however, it reduces demand.

The problem of the world economy today — and the only thing we lack — is demand. We have the technology, trained labor, natural resources we require. The one thing in short supply is customers. During the Golden Age, rising wages created demand. During the more recent Reagan/Thatcher era, increased debt allowed the economy to grow. Today, with wages flat and borrowing discouraged, we are unable to create demand sufficient to goose the system to its full employment potential.

Paradoxically, the most popular policy prescription remains austerity, a treatment whose efficacy was disproven last time the economy was in this bad shape. Austerity does make intuitive sense: if households and firms are tightening their belts, so should government. If I am in debt, hiring men to dig holes in my garden and then fill them would be insane. But what is true for you and me individually is not true for the economy as a whole. My workers are your customers. If I hire them, they will spend money in your store. If I fire them, your sales will decrease.

As Keynes showed us 80 years ago, cutting government spending when the economy is functioning below capacity exacerbates the problem. When the private sector is reducing its expenditures, forcing demand below its full employment level, government needs to take up the slack by spending more and taxing less. Austerity advises the exact opposite. It bleeds the patient, who actually needs a blood transfusion.

How can we return to the Golden Age? The easy answer is higher wages. During the Golden Age, wages went up and so did demand, and thus, corporate profits. During the Golden Age, productivity improvements were almost instantaneously transmitted into wage hikes. Supply grew and so, organically, did demand. Perhaps if we raised wages and so increased labor’s share of national income, we could increase demand, reduce inequality, and return to the economic stability our grandparents enjoyed.

Easier said than done. The problem is that today, technology is a job killer. During the Golden Age, corporations were hungry for workers, happy to train them, prepared to mollycoddle them in order to keep them loyal. No more. Today the supply of labor is greater than demand for it. Labor participation in the workforce keeps falling. This isn’t because workers are getting lazier. It is because technological improvements allow employers to make more stuff with fewer workers. Sadly, higher wages would exacerbate the problem. If workers cost more, firms have even more reason to invest in technology that would make that worker redundant.

It seems bleak, that we should become resigned to an almost feudal world, where the rich pass on their privilege and the rest of us are serfs, but this ignores a fundamental truth. Materially, we are richer than any humans in history. It is not just you and me in the developed West. Even slum dwellers in Mumbai and Rio de Janeiro own goods and enjoy services beyond their wildest childhood dreams. In many ways, poor people today eat better, dress better, live better than even kings did a few centuries ago.

Capitalism and technology have largely solved the problem of supply. Ever since the industrial revolution, the economy’s productive capacity continues to accelerate — lack of demand is the only thing holding us back. Our task then is to create demand in a world currently able to supply more than people are willing to buy.

Let’s remember how we got out of this mess last time. US unemployment was almost 20 percent in 1938. By 1944, it was barely one percent. World War II doubled US GDP in just four years. Everybody knows the war ended the Depression, but it is important to remember: it wasn’t the slaughter of innocents or the destruction of cities that brought prosperity, it was government spending. In 1938, the United States had the productive capacity to provide for its people. All government deficit spending did was manufacture the demand the economy craved.

Had the United States government spent as much on schools or roads or parks or even ukulele lessons as it did on defeating the Nazis, it would have had just as positive an economic effect. War is the least economically productive human activity imaginable. Blowing stuff up is the exact opposite of investment. Government deficit spending, however, doesn’t have the atavistic thrill of battle. Since the Great Depression, we have created demand with war, with rising wages, and finally with debt. Increasing wages will only eliminate more jobs; debt ends up threatening financial stability; another world war would certainly stimulate the economy, but at an unbearable cost. There is a better way.

The first thing we need to do is recognize our pathological fear of deficits is counterproductive. When inflation is low and unemployment is high, government has two ways to stimulate the economy: monetary policy and fiscal policy. Monetary stimulus means cutting interest rates. Right now, they are close to zero so there is no room to lower them more. Thus the only tool available is fiscal: cutting taxes or increasing spending. Austerity, unfortunately, advises the exact opposite.

Larry Summers uses the term “secular stagnation” to explain our predicament. He says it is an imbalance between the private sector’s desire to save and its desire to invest that dooms us to slow growth. As households are able to satisfy their current needs more inexpensively, they can save more. And since so many of us feel insecure about the future, saving for a rainy day seems sensible. Meanwhile, technology is making capital goods, those things we need to produce consumer goods, considerably cheaper. Every year firms can make more goods and services with fewer inputs of capital, so corporations don’t need to invest nearly as much to make the same amount of product. It is this shortfall between the private sector desire to invest and its desire to save that reduces demand and causes the economy to function below its full potential.

Saving sterilizes demand. Whether you put your money in a bank or buy bonds or hide it under a mattress, unless someone uses those funds to invest or consume, that money disappears from the system. It is our proclivity to save that obviates Say’s Law. Jean-Baptiste Say, a 19th-century French economist, famously demonstrated that “general gluts” (what we now call recessions) were theoretically impossible because “supply creates its own demand.”

His insight is that we only make things in order to sell them. The very process of manufacturing a good or service puts money into workers’ and suppliers’ pockets, which they then will spend. Any individual product might not find a buyer, but the demand engendered by creating goods for sale means that some goods will be purchased, maintaining equilibrium between our total capacity to supply and our desire to consume. If we decide we don’t want butter, we can spend our money on a gun. What Say forgot is that we need not buy either butter or guns. We can save the money we earn and unless someone uses our savings to purchase capital goods, that demand is drained from the system.

Recessions are ultimately and always caused by the shortfall between our desire to save and our desire to invest. Because of inexorable technological progress, that shortfall is likely to grow. Fortunately, even though the private sector isn’t interested in investing, we do have a desperate need for public investment. Our infrastructure is crumbling, our schools no longer world class, our transportation system outdated. And since corporations are cutting research and development, the federal government should increase its support for scientific studies.

One of the most destructive legacies of Reagan and Thatcher is the easy assumption that government is incompetent and ineffective. But it wasn’t the private sector that defeated the Nazis, built the interstate highway system, put a man on the moon, or invented the internet. Mariana Mazzucato in her The Entrepreneurial State makes a very convincing argument that most innovation is ultimately funded by government. From the iPhone to solar power to nanotechnology to pharmaceuticals, government did much of the basic research before venture capitalists stepped in and took the profit.

Increased public investment in infrastructure, education, and R&D will make us stronger in the future and richer in the present. With interest rates so low, markets are begging for public sector investment. And selling government bonds also creates havens for investors looking for somewhere safe to stash their savings. It is win-win-win-win. And yet it is the exact opposite of what leaders of the Republican Party in the United States, the Tories in Great Britain, and all of Germany are currently advocating.

Increased public sector investment can soak up what Ben Bernanke calls “the global savings glut” and solve Larry Summers’s secular stagnation problem. Instead of increasing the deficit to fight a world war, this time we can escape global recession by investing in our collective future. As it did in 1940, expansive fiscal policy puts money in workers’ pockets, which they will spend, which finally gives the private sector reason to hire and invest.

Sadly, public investment, while necessary, might not be sufficient. World War II created jobs in the United States because building tanks and warplanes was a labor-intensive proposition. Since we need fewer workers to make more goods, even an expansive fiscal policy might not be enough to return us to the Golden Age. Sheffield, the ancient heart of the British steel industry, makes more steel today than it ever did. But since factories are much more efficient and need fewer workers, Sheffield’s economy remains depressed. The second step to recreating a Golden Age is enacting a Basic Income Guarantee.

In Part III of this essay, I will explain how giving every citizen a government grant of enough money to survive may well be the best way to save capitalism.


Tom Streithorst has been a union member, an entrepreneur, a war cameraman, a commercials director, a journalist.