Persistent Global Demand Shortfall: Some History
In June 1939, Marriner Eccles, the Chairman of the Board of Governors of the Federal Reserve System, gave a speech to a group of alumni of the Harvard Business School. It was titled, “How are We to Put the Idle Men, Money, and Machines to Work?”. Basically, Eccles was asking: the unemployment rate is over 15%. It’s been around that level - and at times much higher - for nearly a decade. What should policymakers do about it?
Eccles knows his audience. He talks through the answers that many business owners would give to his question: the usual suspects of taxes, regulations, and unfair governmental competition. But his speech does a wonderful job of explaining why these factors just don’t seem to be large enough to explain the magnitude of the problem.
Eccles was no ivory tower academic - before coming to Washington, he had been a Utah businessman and banker. But his ultimate conclusion would have been no surprise to John Maynard Keynes: the US had too little demand and needed to take steps to cure that problem. Eccles describes a number of ways to do so, including cutting back taxes on consumption, shifting after-tax income to the poor, and providing subsidies to investment.
Much of the world experienced a significant global demand shortfall throughout the 1930s. Fiscal policy and monetary policy choices certainly helped ameliorate this shortfall. (One of the coolest papers that I saw last year was this one - it makes a great case that the miraculous boom of Franklin Roosevelt’s first year in office was caused by an increase in inflation expectations.) Unfortunately, even with these supportive interventions and even over the course of a decade, the world was left with a significant amount of resource underutilization.
It is true that if we fast forward to 1950, the demand shortfall had been largely cured. Unfortunately, I suspect that the destruction associated with World War II was an important part of the “solution”. During the course of that War, over 50 million people were killed, and many others were injured severely. Much of the physical capital of Asia and Europe had been destroyed. The world didn’t put Eccles’ “idle men and machines” to work - it destroyed them instead.
To be clear: I see little risk of policymakers going down the calamitous path of global war again. But the experience of the 1930s and 1940s is unfortunately suggestive of how the economic pressures of a global demand shortfall can give rise to highly adverse geo-political outcomes. .
How do we solve the current global demand shortfall? My own surmise is that, to solve a global problem, we will need a globally coordinated solution of some kind. But I am sure that we can make little progress without more policymakers who are willing to identify the problem and discuss possible solutions - that is, more policymakers like Marriner Eccles.
Update: There is a companion theory post.
N. Kocherlakota
Rochester, NY, January 8, 2016
Follow me on Twitter @kocherlakota009. Please address media enquiries and non-academic speaking requests to Monique Patenaude (monique.patenaude@rochester.edu and 585-276-3693).