A short and (I hope) easy-to-understand primer about the economic "overproduction crisis" -- what it is, how it happens, why we are in one now, and why we're not doing enough to get out of it.
The basic economic problem we (the whole world, but largely the industrialized nations and ESPECIALLY the United States) have now, is called an "overproduction crisis". It happens when an economy produces more than its consumers can buy. Note: this is NOT the same as "produces more things than people NEED" -- in capitalism, producers produce things for the money, not because people need them. If people can't buy food, no food is produced, whether people are still starving or not. So the name "overproduction" is a misnomer -- it's not that more things are being produced than people neede, it's that people can't BUY the things being produced. It should be called a "demand crunch".
The basic problem is illustrated by a story (perhaps apocryphal) that is told about UAW President Walter Reuther. Henry Ford was one day taking Reuther on a tour of a new automated Ford project that replaced all the workers with mechanical robots, who busily assembled cars on the line. As he proudly walked along, Ford remarked to Reuther, "Well, Walter, how are you going to get these robots to go out on strike?" And Reuther shot back, "Well, Henry, how are YOU going to get these robots to buy Fords?"
The past 30 years of American "supply-side economics" has meant that producers can produce far more than people have the purchasing power to buy. In the US, gross national product has gone up over 150% in the past 30 years, but real wages (adjusted for inflation) have gone DOWN in that same time. Profits skyrocketed (in the US, there has been a massive shift of wealth upwards, with the super-rich getting ever more rich at a rate not seen since the First Guilded Age). In the terms of our story above, this means that Ford company got cheaper and cheaper robots and made more and more profits -- but that none of the robots could afford to buy Fords. And if Ford can't SELL Fords, then it doesn't MAKE Fords. The whole economy crashes to a halt.
For the past several years, the "demand crunch" has been avoided by a simple expedient -- loosened credit allowed people to buy more things WITHOUT having money (and of course for most of those people, it was borrowing against the value of their house which provided that credit, since their house is the only thing of value that they have). So even as wages went down, credit went up. People were able to buy more and more things even if they didn't have the money for it, and the "demand crunch" was postponed for a time.
Alas, sooner or later the credit bubble HAS to burst. It did. It just so happened that it was a fall in home values, leading to a collapse of home-value-based credit, that started the avalanche -- but if it not been that, it would inevitably have been something else. Bubbles simply cannot continue indefinitely. So credit collapsed, purchasing power fell to the floor, and -- since capitalism only produces things if people can pay for them -- when people could no longer borrow to continue their spending, the entire economy ground to a halt.
It was especially a blow to the financial markets, since they, alone of all industries, don't actually sell anything -- they live entirely on speculation, and are able to build up huge fortunes based on . . well . . . nothing at all. Their bubble was the biggest, and they fell the hardest.
There is only one way to fix the demand crunch -- make sure people have more money to spend. Not just more CREDIT -- that will only make things worse, since people already can't afford the credit they have now. Fixing banks so they can make more loans won't help --- people already can't pay back the loans they already got. We've tapped the "credit" bucket dry. It can no longer increase demand. What we need is more REAL WEALTH to go to the people who buy things. That means money. Wages. Income. Unless the people who actually buy things have more real wealth to do it with, the demand crunch will continue, the depression will get worse, and everything will grind to a halt.
The LAST time this happened, in the 30's, the wealth that pulled us out came from wages created by war industries, as we geared up for the Second World War. Let's hope we are not reduced to a similar expedient this time.
There is only one route open to us. We have had 30 years of supply-side economics. What we MUST have now is DEMAND-side economics. And the Federal government is the ONLY entity around with the resources to do what needs to be done. There is no other way.
Obama is taking some steps towards demand-side economics. Which is precisely why the "stimulus packages" have all been attempts by the Federal government to enable as many people as possible to spend more, whether it's by sending free checks to everyone, whether it is by creating more jobs so there is more income for people to spend, whether it is by making it easier to form unions and thus raise wages (and spending ability), whether it is cutting taxes on working people so they get more money per paycheck, or whether it is by the government itself spending more money on infrastructure or whatever and therefore putting more money (which can then be spent by the people receiving it) flowing into the system ("priming the pump", is what FDR called it).
That is why the Repug yelling and screaming that the stimulus bills are "just spending bills" is so hysterically funny. Yes, they are spending bills. No shit. That's what a stimulus bill MUST be. When there's not enough demand to keep the economy going, the ONLY way to increase demand is to increase spending. The Repugs are still fighting the last war. They are utterly unaware (or uncaring) that the whole economic world has changed beneath their feet.
Alas, Obama (and every other Western leader) also seems unwilling to do the full extent of what must be done. His plans to end the financial crisis depend heavily on trusting the very same people and institutions who got us into the mess in the first place, and assuming that they will be willing to undo everything they have done in the past 30 years and instead move in the entirely opposite direction. They're not. They need to be replaced with people and institutions who will. Obama's goal is still "reform" -- he is still hoping that if he just helps existing institutions to weather through this storm, that things well get better and everything will go back to normal. It won't. Obama is still counting on Wall Street to get us out of the mess (with Federal help) that they got us into. They can't. The only thing that will get us out of the demand crunch is a MASSIVE shift of wealth from rich to poor, reversing the effects of the last 30 years of "free market economics".
The Repugs, of course, would rather die than do that. So they will die.
The Democrats, alas, don't really want to do it either. That's why Obama's actions have been to prop up AIG and the others, rather than just seizing them, taking them over, acknolwedging that WE OWN THEM NOW, and using them to do what must be done. Obama is still trying very hard to not upset anyone (that is of course his nature -- he is by inclination a consensus-builder rather than a fighter). Alas, it is an impossible task. The rich will never, ever, agree voluntarily to give up their wealth. Given the choice between saving their money and saving the economy, they will choose their money every time. So they must be forced to do it involuntarily, whether they like it or not. If not, nothing will ever get better for anyone.
What is needed is not simply "change", but EXTREME change. Dare say, RADICAL change.
It was what FDR did during the First Great Depression. And it is what we must do in the Second Great Depression.
Alas, I don't think that either Obama or the Democrats are really ready to do that yet. I don't think they will until circumstances FORCE them to.