Demand Side, the Book

Chapter 2:
Three Challenges

Three Challenges and the demand side approach

There are three major challenges that confront us - the environmental collapse of the planet, global poverty, and the economic decline of the United States.  We will explore these throughout the book, but we approach them here because they ought to be the organizing influences of economics.  They are the counterpoint to the consumer society, to corporate control and materialism as the primary ethic.   - ought to be organizing influences of economics.

The Environment  

The deterioration of global ecosystems has been chronicled in a drumbeat of scientific investigations.  No longer is it possible for any but the intentionally myopic to avoid seeing the need for concerted action.  There will be no escape or substitute for addressing the causes and reversing the symptoms of global warming.  Rising sea levels, the deforestation of vast tracts, receding glaciers, stalling sea currents, disappearing phytoplankton, the pitiless march of desertification, each threaten to send the Earth spinning off its climatic axis.

Wider appreciation of the impending calamities is limited by fearful denial and purposeful ignorance.  The hesitance of many scientists to be more aggressive in advocacy has not helped, nor has a parallel disinformation campaign waged on behalf of industrial activities which poison the environmental future, but which thrive in the current market.  Public policy which condones the current laissez faire scheme or delays aggressive action is denial.

It has been argued specifically that the United States can do nothing about these problems because of the economics.  Adaptation and remediation will, it is claimed, be a burden to its industrial base.  Demand Side sees the future in a direction 180 degrees from this.  We can choose how to employ our resources, labor and capital. We do now by default, or by a corrupt process of "competing constituencies," wherein the representative bodies become marketplaces themselves and results are determined by the highest bidder.Economic life is a matter of human design.  Its institutions, incentives and relationships are issues of civilized humankind arranging its provisioning.  There is no parallel between this arrangement of human institutions and the natural laws and ecological balances that are now threatened.

The environmentally conservative and productive industries are economically of equal or greater value than those which destroy.  The development of new energy systems and the next transportation technologies could drive a vigorous economy.  Those whose profit depends on the current technology have stymied research on and deployment of alternatives on the absurd premise that society cannot afford its own survival.  It is a tactic entrenched interests have used for centuries.

A demand side economics can order costs and prices in a rational way and generate a truly productive economy.  How?  By freeing the market mechanism itself from control not by an interfering government, but by dominating corporations.

More specifically, when scientists say climate change is caused by human activity, the "human activity" is the burning of fossil fuels in an amount that creates greenhouse gases - the energy generation for industry, home heating and the animation of hundreds of millions of motor vehicles.  The last activity is the most important in the short term, because it is where "human activity" can be altered quickest and to best effect.  In the middle term, new energy sources and techniques to conserve energy use must be developed.  Long-term survival will require a new development path for nations.  We cannot afford what we already see in India, China and others - a desperate rush to development utilizing the same dirty energy technology that has pushed the planet to the brink.  China, the new industrial giant, for example, may become the world's first failed state environmentally even as it dominates economically.
 

World Poverty

Fully three billion inhabitants of our planet, half its population, subsist on less than $2 per day. [FN:  Ignacio Ramonet, "The politics of hunger," Le Monddiplomatique, November 1998.]

  The World Bank identifies 1.3 billion people living on less than $1 per day.  A billion people cannot read or write at even the most rudimentary levels.  [The State of the World's Children, 1999, UNICEF.]

The United Nations Millennium Development Goals define a program of rescue, not development.  Global health problems, which comprise several of the goals, are more properly problems of poverty, malnutrition and want.[FN:  Immigration, an issue which has aroused such fear in the United States, is a function of impoverishment of Mexico and other Latin American countries.  This is an economic and trade problem, not an issue of border security.]

At the same time, we engage in a national and regional policy of governmental competition with our trading partners.  "Competing" with our "partners" does not raise an eyebrow.  The competition is to produce the most for least, and when it infects public policy it means that huge costs are shuffled out of the market and onto the public purse.  These are the so-called "externalities" - environmental degradation and human deprivation among them.  The Commons is exploited for private gain, and necessary Public Goods go wanting.

Nations should cooperate for the common good.  The corporations are those who should compete.  Instead, as Stiglitz points out, the world's most powerful nation seeks to dominate the weaker  and often for the benefit of major corporate interests.  By way of the World Bank and International Monetary Fund (IMF) radical market-driven economic schemes and suffocating budget requirements are prescribed for developing economies.  These are strictures we in the U.S., even as conservative as we have become, would never approach in practice and were never seriously considered when economic crisis visited our shores.  As we will see, instead of factories and exportable commodities and debt, these nations could be building roads, schools, infrastructure, utilities and reinforcing their basic agrarian economies.  They could be building a future not dependent on Western consumerism, but collaborative in a broad prosperity   "Globalism" too often means plantationism, more miserable than serfdom because workers do not have the rights even of soil.

The economic decline of the United States

We wrote in the first edition of Demand Side Economics:

"The United States is in advanced stages of losing its manufacturing base.  It clings to doomed technologies.  Its infrastructure is aging and decrepit.  Both government and citizens subsist on debt and borrowing.  While the U.S. remains the richest nation, the free market ideology that directs federal policy comes with a curiously contradictory price tag in the form of enormous public borrowing by the Free Marketeers who direct fiscal policy.  This borrowing and the resulting debt is then cited as proof of the regrettable profligacy of government.

We have doubled our mortgage debt within the past six years.   Our aging population enters retirement with its Social Security made fragile by decades of borrowing to float general government operations.  The free market advocates who advocate low taxes and high deficits have hidden from us as much as possible the financial facts.  Borrowing does not reduce taxes, only postpones them to be paid back with interest.

Much of our debt is held by foreign central banks or individuals.  They have financed our homes and durable goods.  They will not be satisfied with payment in currency.  Money is simply the medium of exchange.  They will want goods and services.  What will we give them?  Where is the industrial plant or development plan to repay our debts?

Health care demands a sixth of our output, twice the proportion of other industrial nations.  War demands people, treasure and effort that cannot be used to address our other problems.

Huge borrowing also bids up the value of the dollar.  American-made products priced in expensive dollars must then compete with the manufactures of other countries.   Standard economic theory has no explanation for trade deficits of hundreds of billions per year for decades.  The inflated dollar and the trade deficit are inextricably linked, and result from the use of the dollar as reserve currency.  The implications for with the implications of instability and potentially excruciating correction are enormous if it should return to its role as simply a medium of exchange.  Will the Federal Reserve, the central bank of the US, allow the dollar to collapse?  Or will it pursue in futility the strength of the currency at the expense of a collapse in the economy?

Meanwhile workers and productive industry absorb the costs.  Median incomes have stagnated since 1980, and wages have actually declined in real terms.  Health care, energy, housing and education have consumed more of the family's budget.  And this richest nation also boasts the greatest disparity between its rich and poor.

There is a way for the US to become a productive power again and for its government and citizens to operate in the black.  The country can again trade goods and services in balance, rather than support itself on delusion and borrowing.  That way will certainly not be found by running behind the Corporate Oligarchy and hoping for crumbs.  The technologies and consumption patterns will not be the same in a rational world, but will provide for a fully engaged workforce and rising global economy that can convert the daunting challenges into opportunities. The United States, or its Corporate Oligarchy, may not dominate others economically, politically, or militarily, but we can be more prosperous, more secure, and allow our planet to survive as home for us all."

These facts have changed but little as of this writing.  What has changed is the public exposure to these facts.  The struggle between the entrenched interests in finance, manufacturing, health care and energy and the aggressive pursuit of a new, vibrant economy continues.  

The economic decline of the United States is now evident beyond contradiction.  Later we will address the damage control issues around housing and the debt and insist on measures to ensure that costs and benefits are allocated rationally by the market.  We will look directly at the opportunities to build an economy, produce employment, and give ourselves a path to economic prosperity, environmental stability, and global responsibility.

Demand Side Solutions

First of all, it is necessary to employ Demand Side concepts.  These are cited and developed throughout the book.  They are not startling new ideas to economics, although to many of the economists of the past generation they may seem revolutionary.  Demand Side concepts are planted in the fundamentals, experience and practice of the discipline since Keynes.

Output is determined by effective demand.  The multiplier validates deficit spending and works best with public investment (public works); less well with tax cuts.  Public Goods have real economic and financial benefits that commonly surpass those of private goods, often by factors of two, three, four, or more.  And so on.

But adding another layer of economic policy will do little good alone.  It is also necessary to cleanse the market of its Supply Side bias.  This does not mean excessive regulation of the market participants, but does mean a structuring of the markets and an insistence that the market transaction include all costs, and not advantage the seller in information, nor the private sector by subsidizing demand manipulation.

[bullets?]

The market needs to be transparent and understandable.  The exchange between buyer and seller is the only opportunity for accountability in the private market.  That is, the products being sold need to be well-defined and homogenous.  The buyers' disadvantage with regard to information about products needs to be offset by a public oversight function that ensures safety and freedom from fraud. Costs not included in the purchase price and shunted aside under the rubric "externalities" for other, unnamed actors to deal with, are effectively the proof of market inefficiency.  Markets can be well described in  terms of products and warantees...

Third, it is necessary to take producers of consumer goods off steroids by eliminating the subsidy to demand manipulation.  Advertising, promotion, bribery, lobbying and all such activities that are not directly connected to producing the good or service need not be subsidized.  The manipulation of demand is currently deductible from taxes as costs of doing business.  This does not mean new regulation.  It simply ends the tax deductions that are back door subsidies.

Fourth, it is necessary to offer the developing world an alternative path to development, to invest in their economies not plantations, to remove the unfair and crippling burden of debt from their backs and to reform trade to protect and enhance agrarian economies.

Addressing the challenges in the context of Corporate Oligarchy.  It is essential to recognize the true structure of our economy and the dynamics of a Corporate Oligarchy that is the major obstacle and must be a major player in any solution.  It is unrealistic to expect corporations to become docile or go away and submit their dominant positions meekly.  Politically they are very powerful and have influence in every political forum, and pull with Main Street through their work force.  On the other hand, in terms of popularity, corporations are not favorites of citizens.  According to polling, most Americans believe corporations have inordinate power.

Where corporate and public interest are directly in opposition, the way forward will of necessity be confrontational.  It is no longer affordable to condone a development path determined by whichever market force dominates.   In the context of the realities of the new millennium, however, the dominant companies can be invited and enabled to reinvent themselves.  New energy sources, reformed transportation systems, low-chemical models for food production, and so on, are Public Goods which the Corporate Oligarchy has eschewed for inability to develop and maintain and control the markets.  In some cases, government should guarantee markets - i.e., price and quantity - so corporations can shift from exploitation of their current power to a targeted industrial development and a partnership with the public sector.  In other cases, for the public goods, it is the government itself which will be the buyer.  The government contract is a clear, reliable description of cash flow that can be expected by a corporation.  As Minsky points out, this is exactly and all that is needed to lever private investment in capital.  And it is no longer in prospect for the "consumer economy."

This is a practical way forward, completely in line with substantial and stable profits.  This must become clear to the corporate princes as well as to the rest of us.  But it is a change from the consumer economy.  In a public goods recovery, there is no less consumption (in fact, considering their nature, there is more), it is the nature of the goods that changes.  Rather than private goods --  consumer goods of all types, from baubles to food and clothing to housing and cars --  it is public goods which are emphasized -- education, public health, infrastructure, climate stability,  public security, and so on.

It is a cruel myth that economic activity is orchestrated by natural laws and revolves in a manner to which governmental policy always amounts to interference, a reduction in efficiency, a distortion.  Economic affairs have evolved to favor the powerful in every society.  When the people are powerful, as in a free democracy, they are favored and the economy does well.  When not, financial rewards cant to the dominant institution or group and economies sputter or stall as social tensions rise.

It is, then, not populations that must bow to the natural laws of an economic galaxy.  Instead the institutions, rules and incentives of the economic galaxy must be ordered to benefit populations.  In our real and present case this may allow the pursuits needed for survival of society.