This passage by Steve Waldman gets at the fundamental issue in recessions (and in the arguments about the stimulus package), something that the byzantine complexity of structured finance tends to conceal. This recession is not the product of some specific financial misstep or one bad class of investment so much as it is the inevitable consequence of having too much money looking for too few investment opportunities.
Ultimately, a financial system has to find productive projects for the private parties to invest in. The government can invest directly, can delegate investment to the best and the brightest, can saturate the public’s demand for money until private parties try to find other means of storing wealth. But it’s what real human beings do with real resources that ultimately matters. Our financial system didn’t fail because it was overlevered. It failed because it was uncreative: It could not conjure up worthwhile things to do with the capital it was asked to invest, and instead of owning up to that, it pretended that poor projects were good. Financial markets are ultimately information systems. The only way out of this is to discover worthwhile things to do, or more importantly, to develop better means of generating a diverse menu of worthwhile things to do going forward. Right now, the government is being asked to do what the semi-private financial system could not: generate a positive real return on trillions of dollars of undifferentiated future claims.
He is following up on an idea that investment banker/blogger Cassandra outlined in this post: After listing a bunch of dubious investment ideas that had been launched in the bubble period, Cassandra writes, “maybe credit crunch is wrong description. Maybe it’s actually a useful productive idea crunch. Maybe, we are—for the moment—overbuilt, over-satiated, over-consumed, and just full-up. And that is before we ask anyone for credit.”
This is similar to the Marxist idea of overaccumulation. Basically, workers are squeezed out of the production process by capital investment in technology. With fewer workers, you can’t extract value (no profits), since all value ultimately comes from human labor making something socially useful. “Productive projects,” in Waldman’s terminology, are a matter of putting workers to work on projects the world is capable of using. And, to oversimplify radically, Wall Street used financial chicanery to evade the problem of actually being productive, which allowed more capital to flow to capitalists rather than the workers who would have to be paid at some point.
Another way to look at this: Capitalism has no incentive to develop socially useful ends. The category of the socially useful, though not given by human nature and immutable, is not automatically elastic either; it needs to be fostered. (The growth of this category is the flowering of the species to its full potential.) Marx contends that capitalism, basically, fails to foster the socially useful—that is, the pursuit of surplus value prevents resources from being devoted to developing and reproducing human capabilities so that more things can be considered socially useful. (This may be part of the answer to why don’t Chinese workers consume more—at the site of the most intense capitalist exploitation of labor, the capacity to consume is stunted both by inadequate wages and inadequate cultural capital.) The point of the stimulus package, when you abstract away from the numbers and the “shovel-ready” projects and so on, is to invest in developing the category of the socially useful directly, rather in the indirect and haphazard way private investment deals with it. But will the state will necessarily be any better at finding “productive projects” than private investors? Won’t most of the money end up in pork projects and boondoggles like this? Megan McArdle argues stimulus spending should be able to pass some test of economic efficacy.
It is not enough to argue that the projects are worthy, as, say, covering the healthcare over people aged 55. To go in the stimulus package, it should provide stimulus—that is, either spur real economic growth directly, or at least convince people that it will, improving their animal spirits. Programs that do not meet these criteria should not be part of the stimulus package. There are better ways to assist the unemployed than to build a bridge we don’t need. If a project won’t “pay” for itself, then it should be justified on its own terms, not packaged into a stimulus so that politicians don’t have to explain their choices to the American people.
But what is this test? Often we rely on sheer profitability to determine worthiness, but these investments are to a degree, by definition, non-capitalistic—these are programs private investment wouldn’t touch, and if you view that as a sign that they are inherently wasteful, all stimulus packages will be anathema to you. It seems like an investment in ideology.
David Leonhardt’s long NYT Magazine article “The Big Fix” looks at this question as well. He argues that our consuming habits in recent decades constituted an “investment-deficit disorder” that left the forces of innovation crippled. Thus the government must step in with infrastructure investments.
Governments have a unique role to play in making investments for two main reasons. Some activities, like mass transportation and pollution reduction, have societal benefits but not necessarily financial ones, and the private sector simply won’t undertake them. And while many other kinds of investments do bring big financial returns, only a fraction of those returns go to the original investor. This makes the private sector reluctant to jump in. As a result, economists say that the private sector tends to spend less on research and investment than is economically ideal.
Historically, the government has stepped into the void. It helped create new industries with its investments. Economic growth has many causes, including demographics and some forces that economists admit they don’t understand. But government investment seems to have one of the best track records of lifting growth. In the 1950s and ’60s, the G.I. Bill created a generation of college graduates, while the Interstate System of highways made the entire economy more productive. Later, the Defense Department developed the Internet, which spawned AOL, Google and the rest. The late ’90s Internet boom was the only sustained period in the last 35 years when the economy grew at 4 percent a year. It was also the only time in the past 35 years when the incomes of the poor and the middle class rose at a healthy pace. Growth doesn’t ensure rising living standards for everyone, but it sure helps.
Growth is another way of saying “expansion of the production of social utility”—people have more meaningful projects to work on and more fulfillment as a result. GDP, however, doesn’t necessarily measure that kind of growth; it can’t been massaged through financial manipulation, the creation of what David Harvey calls “fictitious capital.” As Leonhardt points out, recent “growth” has been illusory: “Richard Freeman, a Harvard economist, argues that our bubble economy had something in common with the old Soviet economy. The Soviet Union’s growth was artificially raised by massive industrial output that ended up having little use. Ours was artificially raised by mortgage-backed securities, collateralized debt obligations and even the occasional Ponzi scheme.” The fiscal stimulus could be directed at real growth to compensate for the capital destruction going on with the unmasking of the fictitious capital Wall Street had been creating.
The policy prescription that follows from this seems clear to me. The government should spend on those worthy but noncapitalistic projects that expand human potential and create public goods, and they should not spend on projects whose only purpose is to prop up asset values for those fat cats who hold vast amounts of fictitious capital. In other words, build transit systems and pay teachers better; don’t bail out banks. Of course, chances are we will do the opposite.