Long-Term Economic Cycles

Here’s a blog post I wrote last summer (with the only caveats that I had no blog and thus no where to post).  Enjoy…

George Friedman, in one of my favorite books entitled “The Next 100 Years: A Forecast for the 21st Century” intrigued me by noting a historic pattern he had observed: Every 50 years, the US goes through a major economic/political cycle. For example, during the Great Depression, public policy turned towards stimulating consumption of the lower and middle classes. To correct inadequate demand while taxing the upper classes to contain investment and excess supply. This coincided with a shift in political power towards the urban working class. However, by the 1970s,
There was excess demand in the economy, and supply was being constrained as years of high taxes and overregulation resulted in inadequate investment and a depleted capital stock, lowering productivity and supply increases. This crisis instigated the next cyclical shift in the early 1980s (50 years after the 1930s cycle began), in which taxes and regulations were cut to boost supply, and political power shifted to the suburbs and away from the urban areas.

In my view, while I agree with Friedman that this shift resulted in a new surge in productivity and efficiency, supply again outstripped demand and sowed the seeds for the Great Recession.
As surplus capital accumulated, much of it was used to sustain the borrowing of the lower and middle classes, temporarily sustaining their consumption (as income growth was inadequate for them). Eventually, the bubble popped, and now demand is severely inadequate relative to supply. According to Friedman’s theory, sometime in the 2030s the US will experience another shift. What will this shift be, though? For although this past cycle seems to have undoubtedly favored capital over labor and supply over demand, it did not completely neglect demand; rather, it sought to prop up demand unsustainably. This calls into question current US economic policies. Right now, the US is undertaking an extremely expansionary monetary policy
and a contractionary fiscal policy. Many Keynesian economists want both to be expansionary. However, will higher government spending and, especially, lower interest rates really help to create sustainable demand in the US economy? The latter is meant to encourage borrowing, consumption (and theoretically investment). However, it was heavy borrowing that got the middle and lower classes into the conundrum they, and the entire economy, face today. Household debt is beginning to increase again after years of deleveraging, a deleveraging that, while significant, still left household balance sheets far from repair. Meanwhile, higher government spending could temporarily help prop up demand, but by putting upward pressure on debt to gdp ratios, it seems unsustainable and a risky endeavor to rely on for economic recovery. As for the neoliberal solution of contracting both monetary policy and fiscal policy, such actions will almost surely depress demand even further (at least temporarily).

I believe ultimately that this crisis is a function of diverging productivity levels for different groups of the population. Higher skilled workers have an inherent financial advantage in our increasingly globalized economy; further compounding their advantage was their lack of supply relative to demand, increasing their price. Meanwhile, an oversupply of less skilled workers (who inherently have less of a financial advantage to begin with due to lower productivity) constrained their price. This has resulted in widespread inequality. Our failure as a nation to convert these less skilled workers to higher skilled workers has resulted in insufficient income to support demand.


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