In The Age of Oversupply (Penguin Group, 2013), Daniel Alpert makes a compelling case that the United States and the world are stuck in a serious crisis of insufficient demand for the foreseeable future. According to Alpert, the result is likely to be a prolonged period of slow growth and high unemployment barring coordinated international efforts to counter the problem.
Before giving the outline of Alpert's argument, let me get out my baseball bat to beat home a simple point. Standard economic theory does not believe in a world in which demand is a problem except possibly for short periods of time during recessions. This means that we don't have to worry about having enough demand because the market will automatically adjust to keep the economy at the full employment level of output. If there is unemployment, then interest rates will fall enough to induce the additional investment, consumption, or net exports (slightly longer story) needed to bring the economy back to full employment.
The people who might look unemployed in normal times are actually people who have opted for leisure rather than working at the wages that their skills will command. If we want these people to work then the answer is to improve their skills so that they will be able to earn a high enough wage to make work worthwhile.
In this world, most types of government spending are simply a drag on the economy. While the spending may employ people and generate demand, this is really just pulling workers and resources away from other sectors. The classic story is that the additional government spending will push up interest rates reducing private consumption, investment, and net exports. It does not on net increase demand.
This story has been the essence of macroeconomics in the United States for the last 60 years. Read it again if it is not clear: we don't have to worry about demand. The economy generates enough demand to sustain full employment. Both liberal and conservative economists accepted this view of the economy.
The Age of Oversupply is 180 degrees in the opposite direction. The fundamental story is that the United States and the whole industrial world are being overwhelmed by the effective entry of billions of workers into the world economy as a result of the collapse of the Soviet Union and the market oriented reforms in China, India and elsewhere in the developing world. This has created a worldwide glut of labor, with the cheap labor in the developing world displacing huge numbers of workers in the United States and other wealthy countries.
The housing bubbles of the last decade created enough demand to temporarily fill the gap, but these bubbles burst and left us worse off than ever. Alpert's remedy for this situation is a massive stimulus focused on rebuilding and improving infrastructure, improving the skills and education of our workforce, and reducing greenhouse gas emissions.
This is all good stuff in my book, but I would raise a couple of not so small complaints and one big one. Alpert is focused on the government spending route to restoring full employment which is great, but this is not the only possible route. Why not try to have all cylinders firing?
The dollar fell sharply in the years 2002-2007, reversing the run-up in the period immediately following the East Asian financial crisis. This cut our non-oil trade deficit by more than 50 percent. Why not look to go further in this direction? China has easily absorbed this reduction in its trade surplus, as have most other developing countries. We can help to boost employment and output with a further decline in the dollar.
After all, in the textbook economics capital is supposed to flow from rich countries to poor countries, where it can draw a better return. That means countries like the United States should have trade surpluses not trade deficits. Anything that moves us towards a surplus or smaller deficit will boost employment and growth.
The second complaint is that we should be actively looking to reduce work time. The United States is a huge outlier as a country in which workers have no guarantee of paid vacation, family leave or even sick days. As a result, we work on average 20-25 percent more hours a year than do workers in Europe.
If we have excess supply, as Alpert claims, why not look to whittle back supply by getting people to enjoy more time off. The great secret of Germany's 5.3 percent unemployment rate is not its growth, which has been no better than ours, but rather its use of work sharing and other mechanisms that encouraged employers to shorten hours rather than lay people off. This is a great environmentally and family friendly way to tackle a problem of oversupply. (Under general circumstances, more leisure will mean less pollution.)
But the big complaint is that Alpert, like Krugman, like DeLong, like the rest of us, has not come up with the magic language that will explain the simple problem of oversupply to a policy audience that refuses to learn. The public debate on economic policy is still dominated by people who think it's a good thing that we have been shrinking the deficit. The reality that the fruits of their frugality is slower growth and fewer jobs has not sunk in.
Unfortunately, I don't think The Age of Oversupply will be able to turn the debate. I would be happy to lend Alpert my baseball bat.
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