A Banana Republic

Editors note: Paul Heise PhD. is Emeritus Professor of Economics at Lebanon Valley College. He also writes a column for the Lebanon Daily News. This is his first appearance in CS2.


All the economic indicators are pointing to a double dip recession, really the second stage of a depression. Our economy is in real trouble and our politicians and economic elite are treating the situation as though it were an opportunity to score political points. They are showing all the responsibility of the ruling oligarchs of a banana republic. With the same potential for an economy-destroying outcome that you would expect.

Our Depression.

This is serious. The unemployment rate is at 10% or 20%, depending on how you measure it. The IMF World Economic Outlook projections have just lowered the expected US growth for 2011 from an anemic 1.5% to a dismal 1.1%. A lot more people are going to suffer. A lot of people are subsisting on food stamps now. That’s the only reason there are not soup kitchens and bread lines all over the place.

Let’s be clear. This is a depression. It is not a recession. A recession is something that the Federal Reserve causes and can be cleared up with monetary policy as part of the normal business cycle. A depression is different; it is a failure of aggregate demand. Only a vigorous fiscal  or incomes policy can do the job.

Over the last 40 years wages have been stagnant. Workers finally got to the point where they could not borrow any more and could not meet the payments on the bubble value of their homes. The Federal Reserve took extraordinary action and saved the financial system. To what purpose, is a good question. The Fed spent trillions shoring up rich criminal bankers. They did not bail out the poor, underwater and foreclosed homeowners. Housing prices in some areas are still falling and thousands of homes sit empty.

The last two depressions were the Long Depression of the 1870s and the Great Depression of the 1930s. Both lasted for 10 years and ended only when something extraordinary happened to the economy. We should not have to wait that long.

The political response to the depression has been pathetic. The Republicans are advocating the very policies that almost destroyed our financial system at the beginning of the century. It is an ideology that will not entertain reality. The perfect market hypothesis, so beloved during the first decade of this millennium, proved to be a destructive delusion. Markets do not automatically lead to equilibrium. Nor do they lead to productive or distributional efficiency.

Yet the Republican debaters continue to argue that deregulation of virtually all markets is desirable. The attacks on the Environmental Protection Agency in the face of        crushing scientific evidence of deadly and costly pollutants are scary. The evidence for global warming is way beyond doubt but not to the committed ideologues. Global warming, climate change or whatever you want to call it, should be among the largest of government expenditures for research and survival.

The macro economic policies that slash wages and weaken unions, that cut government spending on education and green technology, that maintain a humongous wasteful military undermine the productive sector of the economy. These policies do not create jobs, they destroy jobs.

President Obama gave direction of the economy over to the very men who had deregulated and destroyed it. In his campaign, we will surely see all of the hopey-changey things he promised us the first time. The financial and corporate sectors already knows that what he says does not apply to them. .

We suffer from banana republic politics. A banana republic is a corporate-run, compliant state with a dysfunctional political system based on a destructive income inequality, a wasteful and inappropriate military and a disdain for the law. That is our response to this depression. But it doesn’t have to be that way.

The emerging markets of the world are growing and it isn’t just India and China with their 7-9% rates of growth. The emerging economies are projected to grow at 6.4%        next year. Latin America and the Caribbean will be growing at 4%, the Middle East and North Africa at 3.6% and sub-Saharan Africa at almost 6%.

Yet we have the technology and products, the know-how and skills to produce what they want and can now afford. If we get our act together and spend the money on research and education, on plant and equipment on a realistic appreciation of the technology of the future, we can score big in exports to them.

The more we advocate or implement government-cutting, budget-balancing, government-hating, war-mongering policies, the less we will have to export and the more we are embracing the banana Republic model. All we have to do is make sure we stick with those perverse remedies: undermine aggregate demand by slashing wages and weakening unions, cut government spending particularly on green technology and education, maintain a humongous military and run away from any shared political vision.

If we bow down in front of crazy ideologies like creationism and reject the common sense of modern science, we will deserve what we get.

Then, in 30 years, we will be to China what Mexico now is to us.

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