Tuesday, July 29, 2014

Jack Rasmus — On the Causes of Investment Decline in the US Economy

Sustained recovery requires direct investment, not just a rise in consumption income that hopefully might convince capitalists to again reinvest in the US (or not convince). So the problem is not merely a lack of income growth to stimulate investment. US capitalists are investing–just not in real asset investment and not in the US. They are investing in emerging markets, and even more so in financial asset markets globally (which are now more numerous, liquid, and available than ever before due to the creation of an unregulated global shadow banking system).… 
The more fundamental problem is that finance capital has changed. Raising incomes of workers and middle class Americans will help somewhat, but not all that much. It will not result in sustained economic recovery any longer. It is therefore not the main solution to the long term economic stagnation that the US has been experiencing since 2009. Capitalist profit opportunities are simply greater offshore in EMs, and in financial asset markets, than they are from making goods and services in the US, even if US workers were able to buy those real goods and services if they had more income.…

To argue simply for wage and income growth as the solution to a chronic stagnant US economic recovery—as Krugman and colleagues do for example—is to assume that capitalist enterprise will redirect itself from more lucrative profit opportunities from financial speculation and in offshore markets, back to less profitable real production of goods and services in the US. They won’t to any significant extent, since rates of return in the latter are significantly less than in the former.
The only real solution to a sustained US recovery is for massive public government investment, that then subsequently creates income. Investment precedes income creation, it does not necessarily follow it any longer in a world of 21sts century global finance capital. Just calling for income growth (via minimum wage hikes, more contingent job creation, tax cuts, or whatever) will not necessarily result in US-based investment if Capitalists continue to shift to more profitable financial speculation offshore; public investment must therefore occur prior to income growth in order to generate a sustained recovery.… 
In today’s world of 21st Century Global Finance Capital, don’t expect capitalists to invest in real production and thus jobs and income in the US economy as they did decades ago. They are too busy making greater profits offshore and in financial asset speculation, leveraging the trillions of dollars of free money and credit created for them by the Federal Reserve. If real investment in the US economy is ever to return, it will have to come via major public investment initiatives. And if not, expect chronic economic stagnation to continue, as has been the case since 2010.
On the Causes of Investment Decline in the US Economy — A Reply to Thom Hartmann’s Interview of Richard Wolff
Jack Rasmus


Ralph Musgrave said...

“The only real solution to a sustained US recovery is for massive public government investment, that then subsequently creates income. Investment precedes income creation…”

Complete bollox. Printing fiat and distributing it via tax cuts and/or raising non-investment government spending would increase demand and hence incomes.

Tom Hickey said...

I don't think he is arguing against that, Ralph. He is saying that it would not fix the fundamental problem with investment, which is going into either EMs or being saved through financial investment rather than actual investment in the economy.

However, I don't see how increasing public investment is going to cure that problem either.

Seems to me to be a fundamental flaw in contemporary capitalism.

Anonymous said...

Isn't this in part another trickle down argument? That we need rich people to create opportunities for us? And if they won't do it, we need a paternalistic government to do so? Increase our incomes enough for us to find and create opportunities for ourselves.

Not that there isn't a lot for governments to do. But the idea that ordinary people cannot create good work is false. Just look at tribal societies. Left to themselves, people are creators.

Adam1 said...

"Capitalist profit opportunities are simply greater offshore in EMs, and in financial asset markets, than they are from making goods and services in the US, even if US workers were able to buy those real goods and services if they had more income.…"

The only problem with this statement isn't IF workers had more income but really nobody wants to give developed nation workers more income! This is pure Kalecki... Capitalist/Financiers would rather suffer lower long term wealth than losses of social status/power with rising bargaining powers of workers... wasn't that the 1960's and 1970s'??!!! The elite wont go back there if they can avoid it.

Ryan Harris said...
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Jack Rasmus said...

Most of the comments appear confused. Let me explain further. First, recovery and growth requires investment. There's only two sources from which investment may originate: from private capital or from government. Private capital won't invest at sufficient levels any longer in the US (or OECD) economies. So government must. If anyone knows where investment may otherwise come from, I'm all ears. Now, government investment need not necessarily be deficit financed. Restructuring of the tax system is an alternative. Once again, if business capital is hoarding trillions of dollars on balance sheets, then tax the idle money capital and invest it. That can take various forms, I wont get into here. Railing against 'big government' in opposition to this, is a moral argument not an economic one. This view isn't Kalecki, by the way. Nor keynesian (in current 'hybrid Keynes-Krugman form'). Nor Marxist (which sees the financial speculation shift of recent decades as a consequence of falling profit rates for real production, instead of its more accurate opposite). Nor, of course is it 'Retro Classicalist' which dont understand the nature of inside credit and still adhere to variations of the quantity theory of money created by central banks via regulated commercial banks, both of which are no longer central to global credit creation in a world of global shadow banking with $80 trillion in investible assets. So in summary, yes, the new global financial elite and their paid-for politicians will not implement this government investment corporations idea, since it is not profitable for them. They want central bank liquidity to continue to prop up global financial asset markets, plus austerity for the rest in the interim, until this real 'trickle down' occurs via market forces. But market forces is what gave up the string of financial crises since 1966, growing wider, more frequent, and more intense. The next one is coming, this time via a bond market crash, I predict, which will make 2007-09 appear mild in comparison.

Tom Hickey said...

Public investment goes to corporations, including non-US corps, and this flows to their expenses, including outsized exec compensation, and profit. Some is recouped by taxes, but very little given present tax policy.

Some goes to ordinary wages, too, but that doesn't help everyone, and in a technological age, the bottom is left out. Public investment rather public assistance mostly helps those that need least help.

In any case the money that enters the economy from government spending goes either to corporate profits and top-tier compensation, where much of it is saved, or else taxes.

Increasing public investment is the old Keynesian pump-priming fiscal model that has been rejected in favor of monetary policy since the advent of Friedmanism, and it would just as difficult getting an "unfunded" public investment past a GOP House as it would an _unfunded" increase in the minimum wage or and increase in transfer payments because the morons think that the US government is a currency user that needs to tax or borrow for funding rather than the currency issuer of a fiat currency that can't become insolvent operationally.

Currency sovereigns like the US, UK, Japan, Canada have no operational need to either tax or borrow for a since currency sovereigns fund themselves directly through issuance. Taxes simply withdraw net financial assets from non-government to control inflation, and government securities are provided, even though not needed operationally, as "safe assets" for non-government. (Note that the EZ countries gave up currency sovereignty to the ECB in order to join the common currency union.)

I am not against public investment, especially since US infrastructure has been neglected since the Reagan administration. Of course, we should have been doing this all along instead of letting the public infrastructure just depreciate. However, there's a political reason that public investment has been so low since Reaganomics, since Democrats adopted it, too.

That tendency has increased rather than subsided in an insane drive to privatize, deregulate, cut the deficit, and expand the military. The Obama administration could not get a decent stimulus package approved, with the result that the economy has lagged since the crisis.

The sure way to get a big injection of "public investment" that would be bipartisan is to greatly increase military and intelligence spending.

Nothing is positive for the position of workers is going to happen without reducing the capital share and the compensation level at the top, and also increasing labor share of ordinary workers. Firms, the wealthy, and those with outsized compensation and tax advantages are not going to do this voluntarily. Rather, the trend is in the opposite direction, with the proliferation of dynastic wealth.

What is required is a disincentive to save at the top and also a disincentive for outsized compensation, on one hand, and on the other, a helping hand to those at an social, political and economic disadvantage. That way to this is a shift in tax policy, an increase in the minimum wage and also more public assistance at the bottom to alleviate poverty. It also calls for a permanent job guarantee to replace the current buffer stock of unemployed with a buffer stock of employed. These steps would adjust the capital-high income/ordinary labor ratio, and benefits those that are not able to participate in the economy, most of which are elderly or children.

And even this is papering over the rot. What needs to be changed in neoliberalism as the social, political and economic model dominating the US and masquerading as democracy. Then public and private investment could work as they should in developing distributed prosperity in an technological age where greater leisure for all is increasingly possible to make available.

Bob said...

Did this interview between Hartmann and Wolff occur recently? The most recent one I can find is from April, 2012.

The OP should have a link so we can gain some context. Wolff has argued on several occasions that businesses are leaving the US for more profitable ventures abroad.