The Great Recession, as with the Great Depression, is proving to be a structural crisis, which only a Euro-Keynesian programme of public investment can tackle.
There are good reasons to think that the more developed countries are going through a long structural crisis. In this sense, the various financial crises—of the ‘new economy’ in the early 2000s and of property and derivatives in 2007-08—should be seen as cathartic moments in which far deeper problems, exacerbated by deregulation of financial markets, explode.
The graph clearly illustrates why we need a theory of ‘extended crisis’.
Domenico Delli Gatti and colleagues have developed a promising parallel between the onsets of the Great Depression (1929) and the Great Recession (2007). They suggest persistent structural problems arise when a large and distinctive sector suffers a major fall—in output prices, wages and employment—due to increasing technical productivity. In the context of saturated demand, this affects the whole economy, because of barriers to labour mobility: if the transition of workers from the declining sector to new sectors is slow (because of the different skills required), there may be a decrease in aggregate demand, due to lower wages paid by the economic system overall. Even new sectors may then have difficulty developing, due to lack of demand.
This could have happened in the transition from agriculture to manufacturing in the early 20th century (hence, the financial crisis of 1929) and from manufacturing to services in recent decades.
As a consequence, expansionary Keynesian policies may be appropriate—for the short run in sustaining aggregate demand and for the long run if they are oriented to facilitate the migration of workers. For instance, public investment in education is crucial. Public demand can also be very important in directly supporting the new services which should develop today. Indeed, Keynesian expansive policies played a key role in the final transition from agriculture to manufacturing.
Winners and losers
With colleagues, I have shown that not only is the speed of the transition important; so also is its quality: knowledge-intensive services (KIS) pay high wages, while less-knowledge-intensive services (LKIS) pay low wages. This explains why some economies which have endured a minor financial crisis are still in crisis (Italy, Greece), while others perform better (US, UK): the former are experiencing a transition towards LKIS, the latter towards KIS.
Germany is meanwhile maintaining high-tech manufacturing—paying high wages without exposure to competition from developed countries. At least for now.
A problem arises: in Europe, the countries which most require a shock of public investment are those with the highest public debt. We need more Europe: a eurozone budget and revenues, and a unique common public debt. In the euro area as a whole the government gross debt would be around 85 per cent of gross domestic product; there would be room to fund public investment in depressed regions, including with deficit spending.
The advance of the robots
Data from the International Federation of Robotics show that robotisation has advanced further in manufacturing than in services. This has played a role in increasing labour productivity in manufacturing and in the consequent expulsion of workers. On the other hand, the same data indicate that the advance of the robots is now faster in services. What could happen if robotisation were to affect services to the same degree as manufacturing, with the associated expulsion of workers? To what ‘sectors’ could the next transition be made?
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Technology and robots are a threat if not directed. But they are an opportunity if appropriately oriented through public policies. Probably, there will be less labour and so a need for job redistribution (everyone works but works less). Alternatively, this labour-reduction dynamic could be useful in addressing the issue of ageing and the declining share of the working-age population.
More generally, there may be a need to boost new sectors and/or create ‘new markets’ through public investment. It is possible to think of sectors useful for the common good even if not immediately profitable for private investments: health research, biodiversity, climate change, hydrogeological instability, earthquake-proofing, spatial research and so on.
Bear in mind that in many advanced countries private investment is low, despite low interest rates—capitalists don’t know where to invest (or they invest only to reduce costs). Along with financial deregulation, this could lead, once more, to financial speculation and bubbles …