Our Economic Paradox Continues

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Tyler Cowen says there are three ways that declines in consumer demand can make itself felt, but I’m just going to focus on the first two:

  1. A general decline in spending.
  2. A disproportionate and permanent demand decline for the more income- and wealth-elastic goods, a category which includes many consumer durables and also luxury goods.

The first, he says, can be addressed via stimulus. The second can’t. For what it’s worth, this is a distinction that’s been eating at me for a long time too. One of the things that was clear after the housing bust and the financial collapse of 2008 was that Americans were simply consuming too much. Relative to the rest of the world consumption needed to go down, but in the short term this would be so economically disastrous that we couldn’t allow it to happen right away. The Wall Street bailout and the stimulus bill really were necessary.

But our current account deficit, after shrinking a bit in 2009, has started to grow again, and in the long term we can’t keep this up. International trade and money flows have to start balancing out eventually, and that means less consumption from the U.S. and more from countries like China.

This has been the contradiction at the heart of fiscal and monetary policy for the past two year. Do we damn the torpedoes and stimulate now, simultaneously swearing on a stack of Bibles that we’ll restrain ourselves after we’ve gotten back on our feet? Or should we gulp hard, work through the pain all at once, and get our economy back on a sustainable track now? Back in 2008, I remember concluding that the trend level of consumption in the U.S. needed to drop 5-10% at some point, and obviously that hasn’t happened yet. What’s more, even if we wanted to make it happen we’re constrained by the policies of export-oriented economies like China’s, which have to take the other side of the deal and increase their consumption considerably. That hasn’t happened either.

So I still don’t know how this all ends. Trying to adjust to a big drop in the trend level of consumption seems suicidal at the moment, and for that reason further stimulus seems like a good idea. But even while acknowledging that, I still wonder when and how we’re going to get ourselves back to a sustainable level of economic activity. I don’t think the answers are any easier today than they were two years ago.

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SIX TRUTHS

Reclaiming power from those who abuse it often starts with telling the truth. And in "This Is How Authoritarians Get Defeated," MoJo's Monika Bauerlein unpacks six truths to remember during the homestretch of an election where democracy, truth, and decency are on the line.

Truth #1: The chaos is the point.

Truth #2: Team Reality is bigger than it seems.

Truth #3: Facebook owns this.

Truth #4: When we go to work, we're in the fight.

Truth #5: It's about minority rule.

Truth #6: The only thing that can save us is…us.

Please take a moment to see how all these truths add up, because what happens in the weeks and months ahead will reverberate for at least a generation and we better be prepared.

And if you think journalism like Mother Jones'—that calls it like it is, that will never acquiesce to power, that looks where others don't—can help guide us through this historic, high-stakes moment, and you're able to right now, please help us reach our $350,000 goal by October 31 with a donation today. It's all hands on deck for democracy.

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