Karl Marx was right. So say Nouriel Roubini of “Dr. Doom” fame – one of the few economists to accurately predict the Great Recession:
Marx, among other theories, argued that capitalism had an internal contradiction that would cyclically lead to crises, and that, at minimum, would place pressure on the economic system.
Companies, Roubini said, are motivated to minimize costs, to save and stockpile cash, but this leads to less money in the hands of employees, which means they have less money to spend and flow back to companies.
In another post, he adds:
But here is a Catch 22: Firms are not hiring—and are actually shedding more jobs—as there is not enough final demand. But if firms hire less and/or fire more there are not enough jobs and labor income and thus consumption and final demand are weaker, making the double dip self-fulfilling. Worse, in the past few years, the secular worsening in the distribution of income has gotten worse since, during and after the financial crisis, income has shifted from labor to capital and from wages to profits as firms have slashed costs and jobs to survive and thrive. But what is individually rational—slash jobs to survive and profit—is in aggregate destructive of labor income and aggregate demand.
So what’s the solution then, eh? Communism? No. The government needs to step in and…well…spend money to stimulate demand…thereby stimulating the private sector to start hiring again.
Roubini added absent organic, strong GDP growth — which can increase wages and consumer spending — what’s needed is large fiscal stimulus, agreeing with another high-profile economist, Nobel Prize-winner Paul Krugman, that, in the case of the United States, the $786 billion fiscal stimulus approved by Congress in 2009 was too small to create the aggregate demand necessary to advance the U.S. economic recovery to a self-sustaining expansion.
It won’t happen though. Indeed all around the world and here in this country, the push is for austerity. Which will simply worsen the feedback loop. Human beings are stupid sometimes.