Why We Are Moving Toward a Recessionary Era

Double-dip watch: Retail sales in May took their biggest nose-dive in eight months, according to today’s report from the Commerce Department. Remember: Consumers account for 70 percent of the nation’s economic activity.

American Corporations are sitting on huge piles of cash but they’re not investing, and they’re creating only a measly number of new jobs. And they won’t invest and create jobs until they know there are customers out there to buy what they sell.

For three decades, starting in the late 1970s, the biggest economic problem America faced on an ongoing basis was inflation. Demand always seemed to be on the verge of outrunning the productive capacity of the nation. The Fed had to be ready to raise interest rates to stop the party, as it did on several occasions.

During this era of inflation economics, it appeared that John Maynard Keynes – and his Depression-era concern about chronically inadequate demand — was dead. So-called “supply siders” told policy makers that if they cut taxes on corporations and the wealthy, they’d unleash a torrent of investment and innovation – thereby increasing the productive capacity of the nation. The benefits would trickle down to everyone else.

But the pendulum may now be swinging back to the earlier era in which demand always seems on the verge of trailing the nation’s productive capacity. The biggest ongoing threats are chronic recession or even deflation, because consumers don’t have enough money to what the economy is capable of selling at full or near-full employment. Despite gains in productivity, little has trickled down to America’s middle class.

robert_reich.jpgJohn Maynard Keynes is being exhumed because his Depression-era worry about inadequate demand is once again the nation’s central economic problem.

Keynes prescribed two remedies – both of which are now necessary: Government spending to “prime the pump” and get businesses to invest and hire once again. And, as Keynes wrote, “measures for the redistribution of incomes in a way likely to raise the propensity to consume.” Translated: Instead of big tax cuts for corporations and the rich, tax cuts and income supplements for the middle class.

Robert Reich

This article first appeared on Robert Reich’s Blog. Republished with permission

Published by the LA Progressive on June 14, 2010
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About Robert Reich

Robert B. Reich is Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written eleven books, including The Work of Nations, which has been translated into 22 languages; the best-sellers The Future of Success and Locked in the Cabinet, and his most recent book, Supercapitalism. His articles have appeared in the New Yorker, Atlantic Monthly, New York Times, Washington Post, and Wall Street Journal. Mr. Reich is co-founding editor of The American Prospect magazine.

Reich has been a member of the faculties of Harvard’s John F. Kennedy School of Government and of Brandeis University. He received his B.A. from Dartmouth College, his M.A. from Oxford University, where he was a Rhodes Scholar, and his J.D. from Yale Law School.