It is kind of embarrassing for the Economics Scientists, politicians and central-bankers that a. they have stated that the 2007/2008 Financial Crisis came totally unexpected (meaning: they mean they had not seen it coming, or did not listen to the warnings of, for instance, prof. Carlota Perez) and b. what they did to get their economies out of RECESSION did not have a real effect. All they could think of is reach back to old (1980’s reaganista) NeoLiberal remedies, austerity and cutting social spending. Recently, that is 10 (TEN) years after the Crash, some indicators are back up to pre-2008 levels. Untrue since wages are still low despite new rising earnings in business. That is pathetic. And what makes it worse, some governments announced plans to continue with making the middle classes poorer and the rich even more shamelessly rich with Tax breaks (UK. USA) and tax exemptions for transnational companies (NL). Wonderful but will that result in more innovation, new jobs created and more value created. No.
A group of “Complexity Science” specialists, led by prof. Yaneer Bar-Yam, President of the New England Complex Systems Institute (NECSI), has completed an important and broad analysis of the US Economy as a complex eco system; and published a red hot paper about this work:
- ‘About the Paper’ and figures are at: http://necsi.edu/research/economics/econuniversal
The pdf of the full paper is ===> http://necsi.edu/research/economics/econunivers.pdf
The abstract is as follows:
We consider the relationship between economic activity and intervention, including monetary and fiscal policy, using a universal monetary and response dynamics framework. Central bank policies are designed for economic growth without excess inflation. However, unemployment, investment, consumption, and inflation are interlinked. Understanding dynamics is crucial to assessing the effects of policy, especially in the aftermath of the recent financial crisis. Here we lay out a program of research into monetary and economic dynamics and preliminary steps toward its execution. We use general principles of response theory to derive specific implications for policy. We find that the current approach, which considers the overall supply of money to the economy, is insufficient to effectively regulate economic growth. While it can achieve some degree of control, optimizing growth also requires a fiscal policy balancing monetary injection between two dominant loop flows, the consumption and wages loop, and investment and returns loop. The balance arises from a composite of government tax, entitlement, subsidy policies, corporate policies, as well as monetary policy. We further show that empirical evidence is consistent with a transition in 1980 between two regimes—from an oversupply to the consumption and wages loop, to an oversupply of the investment and returns loop. The imbalance is manifest in savings and borrowing by consumers and investors, and in inflation. The latter followed an increasing trend until 1980, and a decreasing one since then, resulting in a zero interest rate largely unrelated to the financial crisis. Three recessions and the financial crisis are part of this dynamic. Optimizing growth now requires shifting the balance. Our analysis supports advocates of greater income and / or government support for the poor who use a larger fraction of income for consumption. This promotes investment due to the growth in expenditures. Otherwise, investment has limited opportunities to gain returns above inflation so capital remains uninvested, and does not contribute to the growth of economic activity.
Wealth redistribution, not tax cuts, key to economic growth
CAMBRIDGE (October 17, 2017) — President Trump’s new tax plan will follow the familiar script of reducing taxes for the rich in the name of job creation. Not only will these trickle-down policies not work—they’ll make the problem worse. A new report by a team of complexity scientists demonstrates an alternative: increase wages to create more investment opportunities for the wealthy, thus creating new jobs and a stronger economy.
In the ten years since the financial crisis, despite massive economic interventions and zero interest rates, unemployment rates have only now returned to pre-crisis levels. Poverty and debt continue to be widespread, and economic growth struggles to reach 3 percent.
The new complexity science analysis describes the flows of money through the economy, not just the overall activity. It shows that there are two cycles of activity that have to be balanced against each other. The first is that workers earn salaries and consume goods and services. The second is that the wealthy invest in production and receive returns on their investment. The two loops have to be in the right balance in order for growth to happen. If there is more money in the worker loop, there aren’t enough products for them to purchase. If there is more money in the investment loop, consumers don’t have enough money to buy products so investment doesn’t happen.
The paper shows that before 1980 there was too much money in the worker/consumer loop. That money was chasing too few products, giving rise to dangerously increasing inflation. After 1980, likely because of the Reaganomics tax changes, the balance tilted the other way. There was too much money in the investor loop and the result was a series of recessions. The Federal Reserve repeatedly intervened by lowering interest rates to compensate workers’ low wages with increased borrowing, in order to increase consumption.
The research shows that the way the government is regulating the economy is like driving a car with only the accelerator and without using the steering wheel. Steering means keeping the balance between the two loops in the right proportion. While Federal Reserve interventions have helped overcome the recessions, today we are up against the guard rail and need to rebalance the economy by shifting money back to the labor/consumer loop.
Since 1980 consumers have accumulated trillions of dollars of debt, and the wealthy have accumulated trillions of dollars of savings that is not invested because there is nothing to invest in that will give returns. This is the result of government policy reducing taxes for the wealthy in the name of increasing economic activity. No matter how much money investors have, these so-called “job creators” do not create jobs when consumers don’t have money to buy products. Increased economic activity requires both investment and purchase power to pay for the things the investment will produce.
The research shows that Reaganomics had the right idea at the time, but there is need today for a new, bold policy change in the opposite direction. The economy will grow if the flow is shifted toward workers/consumers and away from wealthy investors. The work cautions, however, that this has to be done in the right amount. Reaganomics moved things too far toward the wealthy, so shifting the flow in the other direction has to be done in the right measure.
The results suggest that current approaches to correcting economic problems by reducing government spending (austerity), while decreasing taxes for the wealthy to promote investment, are misguided. They may have been good policies in 1980 but they are long outdated today. It turns out that economic inequality is not just a social justice problem, but actually an economic problem. Fixing economic inequality will have dramatic benefits for economic growth.
FIG 1: Schematic model of monetary flow representing the wages and consumption loop and capital and return loop (red). Transfers from or to banks (savings and loans) and government (taxes, transfers, subsidies and other economic activities) are also indicated (black).
FIG 10: Plot of consumption versus investment between 1960 and 2015. The straight lines represent the dynamics of the economy if the ratio of consumption to investment were fixed. Recessions occurred in years marked by red dots.
So instead of blindly keep bumping into the guard rail we should design a government steering wheel that balances at least the TWO mentioned loops. The American professor indicates in his podcast interview that this new analysis of the US Economy is only a first step in an urgent process to redefine the US policy to create wealth in discussion with specialists, policy makers and the public. And then create concensus for actions to make a real turn for the better like was done in 1980.
And in EUROPE we should start the same process of more broad evaluation and rethinking policy instead of staying stuck in outdated measures or fruitless quarrels between leftist Keynsians and neolib rightwing back-pedallers.
Let us look forward and design together ways to improve prosperity worldwide.
(update Oct 24 2017)
From the analysis of the NECSI paper I suggest that our NL government does at least the following measures:
- Get the mortgage debts of households annulled.
- Invest in digging the physical layers (trenches and pipes) of all Fiber-to-the-Building connections = Future proof FttX Digital Infrastructure. This will boost SME and Farm connectivity.
- Get the Middle Class people interconnected and cooperating so they can get educated, active and creative again, so they can regain upward mobility.
Jaap van Till. TheConnectivist