Deconstructing Fed Vice Chair’s Grim Economic Forecast

PERI Co-Director Gerald Epstein discusses how Fed Vice Chair Stanley Fischer has ignored real solutions to improve the economy, like increasing wages.


JESSICA DESVARIEUX, TRNN PRODUCER: Welcome to The Real News Network. I’m Jessica Desvarieux in Baltimore. And welcome to this edition of The Epstein Report.

Now joining us from Amherst, Massachusetts, is Gerry Epstein. Gerry is the co-director of the Political Economy Research Institute and a professor of economics at UMass Amherst.

Thanks for joining us, Gerry.


DESVARIEUX: So, Gerry, this week we had the Fed vice chair Stanley Fischer come out saying that he is disappointed with the global recovery. What specifically is he talking about?

EPSTEIN: Yes. Well, he’s not the only one who’s disappointed with the recovery. I think we’re all disappointed, and especially people who’ve lost their jobs and lost their houses are very disappointed. He, Stanley Fischer, was talking about whether this is a short-run problem due to the lack of full recovery from this great crisis that we had starting in 2007 or whether this really reflects a longer-term trend in the U.S. economy and the global economy more generally, whether we have gotten permanently on a slower growth path. And this issue about stagnation, whether it’s a longer-term trend or it’s just due to a slower recovery from the crisis, is a big debate in the economics profession right now, and it’s not just this time around, but it’s been—we’ve seen echoes of this in previous large crises. We had a similar debate during the Great Depression of the 1930s.

DESVARIEUX: Okay. And he also said that it remained uncertain whether lower productivity growth and lower labor force participation rates are now a permanent feature. Can you break down for us what exactly he means by that?

EPSTEIN: Yes. So this debate is based—the way he’s talking about this debate, it’s really based on a very mainstream, very conservative economic model, which says the following. It says long-term economic growth depends on a number of purely technical factors. Now, this is different than the way many of us here at PERI and elsewhere think about this, as being a result of a combination of historical, institutional, and political factors. So Stanley Fischer and the mainstream of economics profession say it’s just technological factors, and this depends, economic growth in the long-term depends on population growth. The faster population growth, the greater the growth of the labor force, so the more economic growth you potentially have. Number two, it depends on productivity growth, that is, the growth of output that each employee can produce; so the higher productivity growth, the faster economic growth can go. And the third factor is of innovation, economic innovation, technological change, new techniques, and so forth.

Now, what he’s leaving out in these three factors are factors such as the distribution of income and wealth and the level of aggregate demand in the economy, as emphasized by John Maynard Keynes. So you can have a lot of growth in technology, you can have a lot of growth in population, but if you don’t have demand, nobody’s going to buy the products that these factories are producing. And if income distribution is tilted way towards the rich who don’t consume very much, you’re not going to have much demand.

DESVARIEUX: So, essentially, Gerry, if I’m understanding you correctly, it’s wages. I mean, they’re not addressing the idea that people need to earn more in order for there to be more demand in the market.

EPSTEIN: That’s exactly right. So what Stanley Fischer and all these economists often leave out is the fact that we are stuck in this trap, which is both a short-run and a long-run trap, largely due to two factors. One is the incredible maldistribution of income, where the top 0.01 percent is getting all of the gains from the economic recovery and has a higher share of the economic wealth since the 1920s and wages are so low. So workers can’t afford to consume. They have to cut back because of the debt that they undertook in the run-up to the great crisis. And as a result of this, there’s not much demand for consumption. Another factor that’s leading to this is the moving abroad of multinational corporations, the refusal to pay taxes. As a result, we have this huge push for austerity, so the government isn’t spending very much. And so that’s not improving demand. So if you look at it this way, you get to the point of view that’s completely the opposite of what Stanley Fischer was arguing. What Stanley Fischer was saying: look, if it’s a long-run technical problem, there’s really not much to do about it; w might as well fold up our tents and go home. But if you look at it as a result of austerity by the government, of movement abroad by multinational corporation, refusal to raise wages and pay taxes, then you see what really we need is much more policy by the unions, by the government to raise wages, infrastructure investment, increased demand to get the economy going. And as I said, this is a long debate going back, say, to the 1930s. That’s precisely what John Maynard Keynes said. He says, look, in the 1930s we’re going to have this secular stagnation unless the government comes in, builds infrastructure, much more public investment, unless we raise wages, unless we completely restructure the casino financial system. This is what we need to do. And Stanley Fischer isn’t about to propose these kinds of more radical structural changes.

DESVARIEUX: But with Stanley Fischer’s sort of grim assessment of the global recovery, it makes you wonder how corporations are doing. How are profits?

EPSTEIN: Yeah. One of the really ironic points about all this is that the corporations keep crying, don’t raise our taxes; in fact, you should lower our taxes, or we’re going to change our nationality to the Swiss or go to Ireland like Walgreens was threatening to do. But the fact of the matter is corporate profits are still at pretty much an all-time high, yet the corporations themselves are not investing in job-creating activities here in the United States. They’re continuing to engage in financial speculation, to park all their cash abroad so they don’t have to pay taxes on it. So as long as corporations are refusing to invest, are refusing to create jobs here in the United States, then that’s an additional reason, on top of what I was saying, as to why we need to have the government step in.

Now, we don’t need government to step in and just do anything. As my colleagues here at PERI, Bob Pollin and his associates, have been arguing for years now, what we need is government investment that’s going to address the real issues that we have, so, for example, making the transition to a greener economy to deal with climate change. So we’re at this crucial period where we do need a transition out of this stagnation that we’re in, but we don’t need the kind of analysis that Stanley Fischer is offering to us.

DESVARIEUX: Alright. Gerry Epstein, always a pleasure having you on.

EPSTEIN: Thank you very much.

DESVARIEUX: And thank you for joining us on The Real News Network.