August 07, 2011
Thomas Friedman tells us today that we have “win together or lose together.” That’s a really cute line.
Folks who look at the National Income and Product Accounts know that corporate profits are at a record high share of national income. And within corporate profits, the financial sector is at a record high. Given that we have 25 million people unemployed, underemployed or who have given up looking for work altogether, that doesn’t seem like much togetherness.
We could increase togetherness with a modest financial speculation tax like the 0.25 percent tax that the UK imposes on each side of stock trades. A similar tax applied to trades of stocks, bonds, options, futures, and other derivative instruments can easily raise more than $100 billion a year. That would help to bring down the deficit that so concerns Mr. Friedman and his friends.
Friedman gives his usual tirade about people in the United States overconsuming. The problem in this story is that people would not have been overconsuming if the housing bubble wealth was real. At its peak, the housing bubble created more than $8 trillion in housing equity compared to a situation where house prices had just followed their long-term trend. People consumed based on this wealth, exactly as economic theory predicted.
This would have been an entirely rational decision if they were able to keep their bubble equity, but of course they were not. The problem was not that people were being spendthrifts, the problem was that the people in charge of running the economy allowed an $8 trillion bubble to grow that had predictably disastrous consequences.
The blame here lies not with the average homeowner, who acted rationally with the information available. The blame lies with the people who managed the economy, like Alan Greenspan, Ben Bernanke, and Hank Paulson, and the people who opine on economic issues in major news outlets. If these people were competent, they would have been shooting at the bubble with everything they had before it reached such dangerous levels.
Friedman also turns to Harvard economist Ken Rogoff for suggestions for hastening the recovery. For some reason he missed one of his favorites. Rogoff suggested that the Fed deliberately run a high rate of inflation (e.g. 6 percent) for a couple of years. This would have the effect of reducing the real value of people’s debts, making it possible for them to spend more money.
It also is worth noting that the U.S. cannot return to normal levels of employment without “overspending” unless we get the trade deficit down. This can only happen if the dollar falls substantially against other currencies. Thomas Friedman should know this.
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