posted July 27, 2014
On the Causes of Investment Decline in the US Economy (A Reply to Hartmann-Wolff Interview)

Is the chronically stagnant US economic recovery since 2009 (predicted in my 2010 book, ‘Epic Recession: Prelude to Global Depression’), the result of insufficient income growth for most households—that is then necessary to stimulate consumption demand that, in turn would result in real investment that would create jobs? Or has the escalation of financial asset prices since 2009—itself the consequence of $10-$15 trillion of Fed and central bank liquidity injections— resulted in lower real investment in the US and thus the failure of job and income growth?

To restate more simply: does the lack of wage and income growth determine real asset investment; or are the expanding opportunities for more profitable financial asset speculative profits globally driving the decline of US real asset investment (and thus jobs, wages, and income growth)?

Which is the more primary causal relationship? If one believes lack of income is the primary cause of declining real investment today in the USA, then the solution is simply to raise wages and income of households that typically spend by whatever means—tax cuts, subsidies, etc. The problem is simply an insufficient level of income.

But what if, alternatively, it is not income that determines real investment, but rather the addiction of investors to financial asset speculation and investing that is the main determinant of slowing real asset investment?

If the latter is primary, then simply raising wages and incomes alone will not necessarily ensure real investment returning to historical levels in the US economy. That is, the determinants of real asset investment lay just not with inadequate income growth in the US, but with the expanding and more profitable financial investment opportunities in a 21st century finance capital world in which investors are increasingly addicted to financial asset speculation forms of investment.

This is a critical distinction that mainstream economists fail to understand (and some ‘left’ economists only partly understand). It is important because merely boosting wages and incomes of median and below households will not, by itself, generate sustained real investment and recovery in the US economy. That’s a Krugman-Reich-Stiglitz notion. It is also a classical ‘underconsumptionist’ argument that those who follow Marx should know Marx himself rejected unequivocally.

Sustained recovery requires direct investment, not just a rise in consumption income that hopefully might convince capitalists to again reinvest in the US (or not convince). So the problem is not merely a lack of income growth to stimulate investment. US capitalists are investing–just not in real asset investment and not in the US. They are investing in emerging markets, and even more so in financial asset markets globally (which are now more numerous, liquid, and available than ever before due to the creation of an unregulated global shadow banking system). That’s where the Fed’s $15 trillion money injection is going (some of which is also just being hoarded on balance sheets, of course).

The more fundamental problem is that finance capital has changed. Raising incomes of workers and middle class Americans will help recovery somewhat, but not all that much. It will not result in sustained economic recovery any longer. It is therefore not the main solution to the long term economic stagnation that the US has been experiencing since 2009. Capitalist profit opportunities are simply greater offshore in EMs, and in financial asset markets, than they are from making goods and services in the US, even if US workers were able to buy those real goods and services if they had more income.

Neither mainstream liberal economists, nor even many US Marxist economists, understand the differences, or the important mutual causal relationships between financial asset investment and real asset investment, which is key to understanding today’s long run global economic stagnation trends in the US, Europe, and Japan ‘heartland’ of the global capitalist economy.

To argue simply for wage and income growth as the solution to a chronic stagnant US economic recovery—as Krugman and colleagues do for example—is to assume that capitalist enterprise will redirect itself from more lucrative profit opportunities from financial speculation and in offshore markets, back to less profitable real production of goods and services in the US. They won’t to any significant extent, since rates of return in the latter are significantly less than in the former.

The only real solution to a sustained US recovery is for massive public government investment, that then subsequently creates income. Investment precedes income creation, it does not necessarily follow it any longer in a world of 2st century global finance capital. Just calling for income growth (via minimum wage hikes, more low pay contingent job creation, tax cuts, or whatever) will not necessarily result in a rise in US-based investment if Capitalists continue to shift to more profitable financial speculation offshore; public investment on a major scale must therefore occur prior to income growth in order to generate a sustained recovery.

Krugman and his neo-Keynesian colleagues don’t understand this essential error in their analysis. They simply believe all forms of consumer demand stimulation are the same. Only the aggregate amount matters. (which, by the way, Keynes himself did not maintain, so they aren’t even really Keynesians at all).

Neo-Marxists should beware of this idea that ‘simply raising wages and incomes is the solution to economic recovery’. They should understand that the financial bubbles being created again around the world are not a consequence of declining real asset investment but are a cause of it. They should beware of slipping into an argument of promoting dead-end underconsumptionism in its many variant forms.

In today’s world of 21st Century Global Finance Capital, don’t expect capitalists to invest in real production and thus jobs and income in the US economy as they did decades ago. They are too busy making greater profits offshore and in financial asset speculation, leveraging the trillions of dollars of free money and credit created for them by the Federal Reserve. If real investment in the US economy is ever to return, it will have to come via major public investment initiatives. And if not, expect chronic real economic stagnation to continue, as has been the case since 2010.

Dr. Jack Rasmus
Green Shadow Cabinet Federal Reserve Chair
July 26, 2014

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