Economic crises are brewing in a number of countries like Brazil, India, Indonesia, Iran, South Africa, Turkey, and Ukraine. They are all having trouble maintaining reasonable price levels on imports. Natural gas in Ukraine, for example, is one issue that has been pressing their civil society past its tipping-point. Because much of the private investment in these countries is denominated in foreign currency, devaluation doesn’t serve to unwind those investments and developing countries get both ends of a bad dynamic: a withdrawal of investment causes both local economic stagnation and wage-lagging inflation. For normal people it’s no different than deflation: their wages fall relative to the prices they pay for everything.
In developed countries like the U.S. the only difference is that the lack of foreign denomination of our debt means a lack of inflation. In the U.S., especially, we benefit from external devaluation along with some internal devaluation through falling wages. This has made it possible for our central bank to keep the U.S. out of deflation and even get the economy to grow, if slowly.
As a casual follower of economic news and history, these are familiar stories to me. This story is what is often called secular stagnation, where the story is of inadequate demand due to idle capacity and inadequate financing. This is something that people like Paul Krugman identify as a Keynesian picture. The Keynesian story is backed up pretty well by the data as well as showing plausible cause-and-effect, but where public fiscal policy is unavailable to Keynesian policymakers, the Keynesian view has no other avenue of operation. For a real Keynesian recovery to happen we must wait for political winds to change.
The story of secular stagnation crops up in other guises too, usually as an Austrian story that the problem is supply, or the wrong kind of supply. It’s the meeting of opposing ideologies in the identity function of economic flows. Unfortunately, because the Austrian view has been used from its beginning as a justification for the high-handed and greedy rent-seeking of dynasties of rich bastards, the supply-side loop of secular stagnation hasn’t been developed in a useful direction. Instead the economic prescription of Austrians is to allow the whole thing to collapse and let the economy reform itself, phoenix-like, from the ashes of famine and war. Reformation is to be a global Galt’s Gulch, a fantasy as obnoxious and stupid as global Bolshevism.
Because it’s stupid, Austrian pundits usually leave out that last step. If you bring up that last step, especially the specific instance of the capital flight from Germany in the early 30s and the subsequent tight-money policy, disinflation and resulting catastrophe and rise of radical right-wing reactionary shitnockers, the put-upon wailing of the Austrians lifts the roof. The fact that they invoke Kristalnacht or other fashionable Nazi projections is simply a kind of rhetorical condom, the plutocratic version of “IN B4 THOT.”
So what is missing in the supply side loop of the secular stagnation story? How can the little bits of the productive private economy help to bootstrap the economy as a whole? How can that bootstrapping serve the need to maintain public services and rebuild public infrastructure?
In essence, what is wrong with the private sector is that economic growth now relies on bubbles and large-scale financial sector rent-seeking. Typical Austrian stories invoke regulation and taxation as the problem. The tax issue doesn’t match up with data at all so it can be discarded immediately. That leaves regulation, but Austrians never mention the kind of regulations that create patent monopolies. It’s not in the interests of the Kochs or every other transnational corporation on the planet to draw attention to Hayek’s dislike of patent monopolies. As far as other regulations go, Nixon created the EPA in the 1970s (which matches the beginning of the slowdown) but the Republican party has been dismantling both regulation and enforcement of environmental regulations since the early 90s. This, along with data from other countries, doesn’t match the productivity data at all. Meanwhile, the entire planet has internationalized the patent system and widened and strengthened patent protections ever since. From the early 1970s to now, patent protections and patent monopolies have grown to regulate markets around the entire world.
Data-wise, the only real blip in the decline of productivity growth has occurred: 1. in completely new fields (computing and the Internet) before the IP foundations are snapped up and developed; 2. in nations that have begun at a very low baseline (Indonesia, China, India) while delaying as long as possible their legal integration with international rights enforcement regimes. The delay between the early 1970s and the arrival of intractable stagnation can be accounted for in the entry of women and minorities into the productivity picture into the 80s, the use of private debt to finance growth since then, followed by the maxing out of financing possibilities around the world. Countries where IP (and markets in general) are controlled by a small number of very powerful rent-seekers (Japan) hit the wall first. One could say that the cyberpunk fantasies of the 1980s have come true. The only difference is that the megacorps aren’t all Japan-branded and they are not yet inserting paramilitary fire teams into each others’ corporate campuses.
The fit with the data is fraught with confounding variables, but the beginning and end points are both traveling in the same direction. This is also the only Austrian-derived supply-side story that makes any real sense; real effects happen when technological developments are held back and market heavyweights face little or no competition. And because this story points toward a major economic problem with exclusive patent rights, you’ll never hear this story from the lips of pundits on the right, and because Hayek wrote about it and it seems kind of anarchic and new-agey you’ll rarely hear it from “respectable” voices on the left. The tyranny of exclusive IP rights won’t become obvious and won’t be dismantled until the entire planet has spent decades in the same mud of stagnation.