Institutional Failure

On last month’s dismal jobs numbers, Felix Salmon agrees with Brad DeLong that we’re seeing a “massive failure of our economic institutions”:

The green line, here, should not be able to simply go up and to the right indefinitely. While market failures clearly happen all the time, things are really bad when they persist for this long. And what you’re looking at, here, is a market failure, as Brad DeLong explains: what we’re seeing, he says, is nothing less than “a massive failure of our economic institutions”.

The first reason betrays a lack of trust that governments can and will do the job that they learned how to do in the Great Depression: keep the flow of spending stable so that big depressions with long-lasting, double-digit unemployment do not recur. The second reveals the financial industry’s failure adequately to mobilize society’s risk-bearing capacity for the service of enterprise.

Basically, we have low bond yields because the Fed has failed to do its job, and persuade the markets that it is capable of engineering a healthy economy over the long run. And we have high stock yields because the market has failed to do its job, which is to treat high corporate earnings as a fantastic opportunity to invest in the economy and build something even greater in the future.Just look at the amount of money which is flowing straight to corporations’ bottom lines, and not being put to good, productive work. Corporate profits now account for significantly more than 10% of GDP: that’s never happened before.

Salmon’s proposed solution is massive stimulus, and he thinks the 2012 election should be “a referendum between two visions of America,” with a left-liberal Obama advocating stimulus to heal the economy and Romney advocating a solution purely based in the private section.  But, he laments:

Sadly, the lines won’t be drawn nearly that cleanly: Obama is bizarrely reluctant to talk about anything which rhymes with “stimulus”. As a result, the current dysfunction — and horribly weak jobs market — is likely to persist for far too long.

But this isn’t so mysterious.  I don’t have opinion poll numbers, but the idea of “stimulus” may not be so popular among moderate or undecided voters Obama’s looking to pick up in the election, and that might contribute to his reluctance to talk about it, let alone engage in stimulus.  Not to mention that the president’s big-money donors probably aren’t such big fans of stimulus, either.  Obama himself may well think that stimulus isn’t the best or most appropriate measure at this point, especially with his more hawkish turn on the budget over the past couple years.  All of that serves to collapse much of the distinction between Obama and Romney on how to deal with the crisis.  Unless something surprising happens, we aren’t going to see the referendum Salmon is looking for in November, and the economic crisis is going to continue.

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  • Msienk  On June 3, 2012 at 7:28 pm

    To put it another way, not all crises look the same. Back in 2008-9, the fact that we were in a crisis was obvious, and it resulted in unprecedented levels of enormous coordinated actions between Treasury and the Fed. Now, however, when we look at the crisis-level spreads in the first chart, we don’t think “crisis” any more — and the sense of urgency that everybody felt in 2008-9 is long gone. How many more dreadful jobs reports do we need before it returns?

    I think I find this bit particularly striking. I wont pretend to have stayed entirely on top of economic developments month to month but I certainly had caught the general feeling of positive movement. But here I take pause, real change comes slowly, nothing is ever simple

    • aaronbek  On June 6, 2012 at 9:40 am

      It’s strange, too; like you say, what will it take for people to see this as a crisis the way they recognized a crisis back in 2007/8? That inevitable but invisible line will be crossed eventually, but we can only hope it’ll be sooner and not later. THanks for your comment!

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