September 29, 2013


Book Review: 'The Age of Oversupply' by Daniel Alpert  (ANDY KESSLER, 9/25/13, WSJ)

Over the last two decades, some 3 billion people have been added to the global economy, more than half of them from China, India and the former Soviet Union. And rather than buy iPhones or Kate Spade handbags, these new workers have generally chosen to put their earnings into savings accounts, causing a glut of capital. China's reserves were $250 billion in 2000, $2 trillion in 2008 and are probably more than $3 trillion today. Add to this the $5 trillion in money printing/quantitative easing by the Fed, the European Central Bank, the Bank of England and the Bank of Japan, and it's easy to see that the world is swimming in cheap credit. But is this a good thing or a bad thing?

Certainly it's good if you're a worker in Shenzhen, China. Or buying a 40-inch TV for $268 at Wal-Mart. But these same shifts in capital have caused dislocations to industries and labor. Since the financial crisis five years ago, economic growth in advanced economies has been lame and unemployment has been stubbornly high. In the past, growth usually came roaring back as new technology was introduced and workers adapted to the alterations in job markets. It has become fashionable, as it often does, to suggest "it's different this time."

Maybe it is, maybe we have entered a new era based on too many workers and too much money. In "The Age of Oversupply," Wall Street banker Daniel Alpert writes that an "unprecedented global explosion of cheap labor and cheap money" has become "a central obstacle to restarting growth." As I read the first half of his book, which diagnoses the problem, I found myself agreeing with most of the factors he identifies as causes for this oversupply: globalization, lower trade barriers, too much debt, sticky wages, sticky prices.  [...]

In my mind, calls for a managed economy are often cries of desperation from those who can't trust pricing and markets to do their thing. Increased living standards are all about productivity--using what is in oversupply to do more. But Mr. Alpert worries that "productivity is, after all, similar to cholesterol--there is good productivity" (technological advances) "and bad productivity" (workers are paid less). At the end of the day, Mr. Alpert's big idea is to "juice up demand with public spending," rather than to let markets reallocate resources and provide more of what is scarce....

Man, they're right on the edge there.  But to arrive at the central fact of the modern economy you have to ask what exactly is it that is scarce?  

The answer is that, since productivity increases have been liberated from domestic labor inputs, a process which is only in its infancy and which will accelerate in coming decades, what is going to become increasingly scarce is work, but, more importantly from a public policy viewpoint, remuneration for work.  The dilemma that confronts us is that we have an economy and a culture premised on such remuneration as the basis for redistributing wealth.  

There are then three possibilities we can choose from going forward: 

(1) The First Way: We could simply accept the ever more radical wealth disparities that completely free markets would produce.  Except, of course, that this is a democracy and the majority won't long tolerate such results for very long.

(2) Or, the Second Way, we could move back towards a managed economy, the goal of which would be to  preserve jobs and the old redistribution system.  Except, of course, that the cost of this would be to radically decrease wealth and to retard economic growth.  However fondly we may wish for full-employment, as a way of avoiding making some jarring public policy choices, we aren't going to institute the USSR's economic system.

(3) Finally, a Third Way, we could embrace the dynamics of the modern (neoliberal) economy that Thatcher and Reagan bequeathed us and make increasing productivity and creating ever more wealth our central goals, even though this means accepting the declining need for labor, and we could replace the job as the sole basis for redistribution of the ever larger pie. This will be done with instrumentalities like O'Neill accounts, HSAs, personalized and heritable Social Security, housing grants, National Service, etc. and will occasion the adoption of taxation on consumption rather than on income.  

For all the agita that the transition is causing, and will cause, it's obvious which of the three we're going to choose.  Indeed, the politics of the Anglosphere and Scandinavia over the past couple decades boils down to nothing more than choosing the party that is currently most identified with choice number 3.  

We still await the politicians and parties capable of fully articulating the third program, but their caution is understandable given what a departure this future represents from both parties past ideologies.

Posted by at September 29, 2013 7:31 AM

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