Post WW 2
Post WW 2 US Competitive Adjustments
U.S. Economic Normality
Profits vs. Labor
#1 Rising Income
WW 2 generated savings, pent-up demand and few foreign few competitors
generated 25 years of high
profits higher wages and cooperative unions.
New Normal #2 Oil Embargos and Competition
Began Wage Stagnation
Japan's competitive manufacturing sector
accelerated causing stagnate Rust Belt wages and employment. Why? Japan
got lucky when gas efficient small green cars required change and U.S.
manufacturing responded by protected profits with less quality improving
capital investment. Unions protected current workers by accepting
two-tier wage system minimizing new worker wages. Feeling
pressure Japan built modern U.S. plants.
How the U.S. Squandered Its Steel Superiority and
The End of the International Liberal Order?
1hr: 28 min
New Normal #3 Financial Instability from
1980's U.S. and England Returned to Conservative Lax Business Regulation
because increased regulation and increased welfare provisions had upset many voters.
Think Great Society and lax derivative regulation.
1980's Major Investments Banks Went Public
creating a need to balance client needs with equity needs.
Think expansion of financial industry's share of GDP.
1980's Accounting Standards Declined
as accountancy firms struggled to balance commitments to audit
standards with the desire to grow their consultancy business.
off-balance-sheet items and
Arthur Anderson Scandal.
Home Equity Loans
Increased Current Consumption and Lowered Savings as they replaced
equity building home improvement loans.
Think many not prepared for retirement.
1983 Reverse Mortgages Approved for FHA loans.
Think less retirement savings.
1999 Gramm–Leach–Bliley Act Increased Systemic Financial Risk
once limited by the Glass-Steagall Great Depression Act. Initiated by
Republicans it was signed by President Clinton.
Think financial industry expansion. See
Five Bad Bush/Clinton Policies
2004 Uptick Short Rule of 1938 rescinded. Think
stock market gambling.
2006 FASB requirement that housing assets be mark-to-market decreased
financial system collateral.
Action resulted from a 1991 Government Accountability Office investigation
of the $160,000,000,000
and loan bailout.
Think moral hazard.
Financial Crisis to
Great Recession to Recovery
1. 2007-8 Financial Crisis was tamed by the Federal Reserve.
2. 2008-9 Recession was tamed by monetary and fiscal policy.
3. European financial instability and world-wide austerity slowed economic recovery
and income growth
for all but the very, very, very wealthy. Think top 1/10th of one-percent.
Great Recession Recovery Has Varied Around the World
Understanding Balance Sheet Recessions
infrequent, severe, and long-lasting. Understanding them is necessary when
judging society's efforts to manage The Great Recession. It is like understanding a doctor's attempt
to relieve a headache requires knowing the level of difficulty. Was it a
Migraine Headache? A balance sheet is
caused by high levels of private sector
debt. Assets must equal liabilities plus
equity. If assets values like housing collateral fall below their
associated debt, equity must make up the difference or insolvency results
and debt must be repaid. Think 1837, 1873, 1890 & 1929 See
Most Severe US Recessions.
Was Our Great Recession a Balance
Paul Krugman feels the
financial crisis ..."was one manifestation of a
broader problem... associated with a "balance sheet recession."
Economist Richard Koo wrote Japan's 1990- ?
"Great Recession "was a "balance
What Led To The
1. Free Market Capitalism Lowered Regulation.
Innovative Expanded Investment Banking.
3. Global Trade Imbalances
Easy Money Bubbles
Great Recession Stages
The Shifts and the Shocks by Martin Wolf
1. A more complex unstable financial/credits system
resulted in extreme optimism in
good times and panic in bad times. Think derivatives, securitization,
credit default swaps all
managed by hedge funds.
2. Savings glut created
emerging countries lowered borrowing and increased trade surpluses
the 1997 Asian Debt Crisis
made their foreign dollar dominate debt unsustainable. They expanded trade and kept personal consumption below economic growth. Less consumption and borrowing plus a trade
surplus increased Dollar, Euro, and Yen
China and Russia.
3. Aggregate demand stagnated
as trade surplus countries didn't spend. Germany's 2005 economic
renewal was saved and Japan's private sector saved much more after
their 1990's credit bubble exploded. Adding to the demand shortage
were companies who maintained profit by decreasing capital investment
spending despite historically low interest rates. Globalization and technology also
helped them maintain profit as wage increases were limited to most valuable employees.
State and local governments, especially those with underfunded pension systems, also cut
4. Increased current account deficits by wealthy nations balanced world trade.
Higher demand for
was made possible by massive central bank supported
loans. The FED's historic monetary expansion was made possible by
continued low inflation caused by expanded Flat World competition
and low oil prices. Innovative financing and lax financial regulation also fostered
expanded financial asset demand.
Think excess OPEC savings
financed the 1970's
Latin American Debt Crisis leading to Savings and Loan Crisis.
5. Real Estate and Stock bubbles came as
expected from low long-term real interest rates. New home buyers borrowed surplus savings and
investors devoured growing unique debt securities created by an expanding
finance industry promising insured difficult to understand
almost guaranteed financial instruments.
Leverage rose dramatically. Fraud, near fraud
and data manipulation exploded. See
Brief History of Financial Bubbles.
6. Poor Crisis Management by politicians as
their economic advisors believed market capitalism would prevent
serious recessions. The
Great Moderation solidified this view. Possibility of new financial
instrument contagion were not understood. When panic started,
political, intellectual and bureaucratic leaders resisted quick action in areas
that required cooperation. A
US depression was avoided by FED, Treasury and Congressional efforts
that were slowed by austerity. Iceland, Ireland, Greece, Spain and
Portugal experienced economic depression.
The Great Recession.
Part 2 Financial Bailout, Economic Recovery, Poverty Stuck at 15%, Income Stagnates
and Wellbeing Grows 12/18/15
Financial Bailouts, Economic Recovery,
Poverty Stuck at 15%, Profit vs. Labor, Wellbeing Grows, Asian Competition
New Normal # 5
Poverty Stuck at 15%
Some believe the 15.5% poverty rate should
be lowered. After "...correcting the
2013 poverty rate for noncash food and housing
benefits, refundable tax
credits, and the upward bias in
the CPI-U ..."the rate drops from 14.5% to
War on Poverty-Was It Lost
Others believe it should be raised as
it doesn't account for geographic and demographics differences.
Poverty Rates How Flawed Measure Drives Policy
Data 2 Think many use true but not
necessarily appropriate data to foster their POLITICAL beliefs.
Example: With our obesity problem how could anyone have believed that many went to bed hungry during the
Great Recession. Calculation ignored food stamps and subsidized
New Normal # 6
Beating Labor Twenty-first century war expenditures helped profit recover after a
bubble recession, then crash with The Great Recession and then
new heights. US Companies have competed very well in a flat world using
technology, outsourcing to Asia, Mexico...and by keeping wage
Source Total compensation has done better although Obama Care gave companies an opportunity to again lower compensation.
Think Rust Belt then NAFTA and soon TPP?
New Normal #7
Wellbeing Increased Continually
1. Society's continued stability has resulted in tremendous economic growth
the key determinate of well-being.
Public safety net,
adjusted poverty rate have all improved
dramatically since the
Gilded Age. Think
economic continued economic distress in
Russia, Europe, Japan and China.
2) Scientific achievements have continuously added to citizen well-being.
Think cured diseases, smart phones, streaming audio-video, Gillette Stadium ...
Health Problems Solved.
3) Personal Income increased continuously if not always rapidly
because nature and nurture improved the personal characteristics
needed to enhance wellbeing.
Think Russia, China, and
Europe's really slow recovery from the Great Recession. Source
Is The Country In Trouble,
Will Stagnate Income Hurt Our Children and
Decades Ranked By Problems.
Capitalism 11:10 video is an interesting Marxian view i.e.
Return to page 1 Send thoughts to
New Normal # 8 Asian
1. The Good
Cold War to 1980
AD > AS
Full Employment Goal =
Inflation, Debtors Paradise
equates AD with AS.
2. The Bad
Neoliberal Economic Reset 1980-2008
AS > AD
Business Responded to Inflation
Deflation. a Creditors Paradise
3. The Ugly
Reactions to Neoliberalism
Pickett's R > G
Back to Equilibrium with Increased Income Inequality
Central Government Strong
Central Bank Weak
Wages Got All-Time High
Capital Got All-Time Low
Real Debt Decreases
Globalized Labor Markets
Labor Got All-Time Low
Capital Got All-Time High
Lack of Bank Regulation
Short-Term Reserves Were in
When Dollar Were Required
Academic Economist Ignored Economic Effects of Financial
Top and Bottom
Creating Middle Income Envy