« The financial crash and macro-economic policy - why the US and Europe have budget crises and China does not | Main | More than three years without full economic recovery in the developed economies the latest GDP figures in context »

11 August 2011


Feed You can follow this conversation by subscribing to the comment feed for this post.

John Ross


No a shortage of demand from labour, in any economic system, need not necessarily cause a crisis. Demand from labour for consumption can be replaced by demand for investment and there will be no overall shortfall of demand. Not noting this is the basic error of 'underconsumptionism'.


John, thanks for the analysis.
However the comment dedicated to "Cristiano" encapsulates the real source of the crisis , basically a crisis which Marxist would call a "sub consumption" moment . Basically, the accumulation of debt ( which is also an asset for the counterpart whether private or public ) responded to the inherent contradiction of the expectation for an ever rising profits in an economy sustained by mass consumer ( which is also the labor ....) . Therefore, the crisis will not end as long as the current imbalance between Capital and Labor shares persist.

John Ross

The primary reason that there has been no increase in median incomes in the US for several decades is due to the redistribution of US GDP away from wages and to profits. This reflected an inability of US employees to force rises in median wages compared to the ability of US employers to raise profits. This is therefore why US economic growth was not reflected in an increase in wages and salaries.
As median incomes were not increasing a rise increase in consumption could not be achieved by means of increases in wages and salaries. However a situation in which US consumption did not rise would have led to considerable political discontent. The share of consumption in US GDP was instead increased through facilitating the US population building up debt, particularly in the form of mortgages – a number of US economists, for example Dean Baker in The United States Since 1980 analysed this very thoroughly.
This mortgage debt, not sustained by income increases, then led to inability to repay the loans – i.e. to the sub-prime mortgage crisis which ignited the international financial crisis. However the sub-prime mortgage crisis was just the weakest link in the entire overextended debt chain.
The debt crisis in the US was consequently not due to individual ‘mistakes’ but was inherent in the course of US economic policy from the 1980s onwards.

Cristiano Carlutti

Brilliant post, John, I reposted it through through Twitter as we need some clear voices in this confusion.
I would like to add one point to the private debt creation. As you said, it was created mostly in order to sustain living standards; however, what's the reason why the economy was struggling to maintain living standards? Was it due only to consumerism or also to a decrease of income of the population? I think it was both, and that the latter was generated by a salary pressure (I'm not blaming Globalization, but international competition helped keep them low) and fake inflation rates. I mean, how can you peg salary increases to "core inflation" rates which do not include food and energy which are among the unavoidable expenses for most of the population? This has been an hidden tax on the weakest segment of the population. All of that compressed salaries even further in my opinion, thus pushing for the creaion of debt. I'd be glad to know our opinion on this.

Michael Roberts

Excellent post John. Investment is key and as long as the private sector is forced to pay down debt, it will not invest sufficiently for employment-creating growth even if profitability has risen. That makes the 'socialisation of investment' decisive. However, that poses a new contradiction - between the state and the private sector as the state wiil seriously encroach on the profits and size of the private sector. This poses a political confrontation that could be just as big in China as in "the West".

The comments to this entry are closed.

My Photo

John Ross

  • Is Senior Fellow at Chongyang Institute for Financial Studies, Renmin University of China

Follow on Twitter

Twitter Updates

    follow me on Twitter


    Your email address:

    Powered by FeedBlitz

    Blog powered by Typepad