Stimulus Blues

I recently had the opportunity to take an unoffical poll of my economist colleagues a the City College of San Francisco, where I teach. One of the areas of very strong agreement was that the US dollar is the most serious risk to the US economy (there was one dissenter out of six economists). The other area of agreement was that the US needs another stimulus, on the order of $500 billion. Here, I was the lone dissenter. (Several of my colleagues didn’t feel another stimulus was politically feasible; I don’t think another stimulus is desirable economically.)

My colleagues are in good company; Paul Krugman, the 2008 Nobel prize-winner in economics has called for a second stimulus, as has Robert Reich and many others. A majority of economists were in favor of the first stimulus, though there were also some prominent dissenters. I think the views of economists tend to mesh with the conventional wisdom that the government has to do something.

The problem is that doing something is rarely a good substitute for doing the right thing.

Economics has largely scrapped the distinction between necessary and surplus value; necessary value is the portion of value that reproduces the capital and labor that went into producing a good or service, while surplus value is the additional value of the product above the cost of production. Without this key distinction, it becomes impossible to distinguish between economic activities which are productive (directly produce surplus value) and unproductive (those that do not); we’re left with only GDP numbers, without a notion of where the value flows came from.

To try to increase GDP without considering whether we’re increasing productive or unproductive economic activity is dangerous in an economy like the US, where unproductive activity has been steadily rising over the last 60 years. This rise has been financed by growing debt and capital inflows to the US economy, but as these flows slow, unproductive activity becomes less and less viable. To put it simply, the future of the US economy is in agriculture and manufacturing, not in finance, retail, or advertising. While there will always be a place for finance and other unproductive activities in the economy, it must be recalled that government is also an unproductive activity. As government spending increases, it absorbs a greater portion of the economy’s total surplus, at the very moment when that surplus is most needed to restructure, innovate, and re-invest. That is a recipe for a lingering malaise, such as what Japan experienced in the 1990s.

This is the time for government to cut back, do less and spend less, to balance the budget, and to trim taxes. In short, the government should take the advice given to a man in a small pond, thrashing about in an effort to make the muddy water clear:

Be still; it will happen best on its own.

Robert Reich: "Double the Stimulus"

I like Robert Reich. He has a wonderful style of writing, at once assertive in his rhetoric and reasonable in his tone. In a recent blog post, (3/13/09) he calls for a new stimulus of roughly equal size to the last stimulus of $787 billion.

That is interesting. The President of the European Union, Czech PM Mirek Topolanek has just made headlines by calling the stimulus the way to hell. Topolanek argues that to ramp up spending during a recession is the wrong move. He's going against the grain, and since his center-right party just lost a vote of no confidence, he probably won't have much influence. It does seem like an unusually provocative statement.

Double the stimulus or road to hell?

In Marxian terms, this recession is all about what is called 'unproductive' economic activity, meaning labor which is not designed to produce value (i.e. activities which directly transform raw materials with labor in order to produce something which meets a human need). Unproductive activity is important, yet it does not directly produce an economic surplus (that amount which is produced which is greater than the needs of the direct producer). Over the last 60 years, the US economy has dramatically increased its unproductive activity, shown nicely in Measuring the Wealth of Nations, by Anwar Shaikh and E. Ahmet Tonak.

The activities of the Federal government, though important, are unproductive in the sense that they are not intended to produce a surplus. That means that government must be funded from a portion of the total surplus produced in the US. Since the crisis facing US capitalism is a crisis of unproductive activity, it cannot be solved by increasing the amount of unproductive activity.

In the years to come, we will see a return to productive economic activity: agriculture and manufacturing will once again dominate the US economy.