This basic information is familiar to liberals, who spent much of this period being suspicious that capital was somehow sucking up all the gains. But then came the stock market crash:

But if the gains from Internet Decade productivity growth didn’t go to labor and didn’t go to capital, then where did they go? His thesis is that it largely didn’t exist at all. The extra money went into increased costs of health care (while wages have been flat, “total compensation” has gone up because employer-side health insurance premiums are higher) but health care isn’t actually dramatically better than it was ten years ago. Mandel doesn’t put it this way, but you can understand the situation as real, but modest, productivity gains being essentially offset by the decreasing productivity of the health care sector. Instead of really growing, we’ve just been borrowing from foreigners who were willing to invest on the theory that America was going to produce awesome innovations in the IT and biotech sectors that never really panned out:

Instead of the national balance sheet, you can look at the household balance sheet:

The good news, such as it is, about this interpretation of the crisis is that it implies that some fairly large proportion of the ongoing contraction is actually the vanishing of prosperity that to some extent was an illusion all along.

To be honest, I don’t know how plausible this really is. I’ve been alive for the past two years. It certainly looked at the time as if we were, first, facing a relatively minor recession. New housing starts were way down, due to housing having been overbuilt. This was leading to unemployment. At the same time, the dollar was falling and making US exports more competitive which was leading to a (gross) decrease in unemployment. The recession basically reflected the friction involved in this need for a shift in the real economy. But then it turned out that the same oversupply of housing that was leading to the collapse of the building trades as a source of employment was also going to cause a financial crisis. And then only after management of the financial crisis went wrong did the real economy start to get really bad.

I don’t really know what follows from this. But Germany and Japan have spent the past 60 years playing a very passive role on the world stage in order to avoid ruffling feathers. But I think it might be better for the rest of us if they started thinking of themselves as forgiven and thinking about what kind of leadership role they can play in this situation.

Kevin Drum raises the specter of the trade deficit:

Maybe we really can’t worry too much about this at the moment. But the trade deficit bubble is going to pop eventually just like the dotcom bubble and the housing bubble. We at least ought to be thinking about this a little bit.

This goes back to the fraught issue of global savings imbalances. For reasons that I don’t think people understand very well, we not only have a number of high-savings perpetual-surplus countries in the developed world (Japan, Germany, etc.) but we have the odd specter of persistent trade surpluses among developing countries like China. The way this is “supposed” to work is that Chinese people, being poor but growing rapidly, consume more than they produce. The current accounts balance out because savers in rich countries should be investing money in China — building up China’s capital stock and so forth. Investments in capital-poor developing countries “should” offer a high rate of return for developed world savers, and the injection of foreign capital should speed China’s growth. And for “China” you can substitute “Mexico” or “India” or what have you. The world, however, doesn’t actually work like that. Instead, China has been running persistent surpluses. And so have various energy-rich developing countries. So money keeps getting plowed into various US investments. But the US isn’t a poor, developing, capital-poor country. And so a lot of the investment in the United States seems to be going into speculative bubbles — first dot-com stocks, then MBS. Now people are buying up no-interest treasury bonds.

Paul Krugman wrote the other day about how to achieve rebalancing:

That’s where things get complicated: a lower US trade deficit means lower surpluses and/or higher deficits elsewhere. Who’s the counterpart to our adjustment? OK, the Middle East, which no longer has its oil windfall. But China is having its own slowdown, as is Japan.

In other words, trying to figure out where we go from here is a sort of global jigsaw puzzle — and I haven’t managed to solve it yet.

So, yeah, he wrote about it but he didn’t have the answer. Brad DeLong offers this:

If it weren’t for the fact that the furshlugginer dollar refuses to fall in value, the answer would be obvious: we will have a boom in import-competing manufacturing (and exports). But then the rest of the world has a long-run problem: if we decide to no longer be the world’s importer of last resort, than what serves as a locomotive to keep it near full employment?

But if the dollar doesn’t fall, then we have a long-run problem. The only answer I can think of is for the U.S. to then become the world’s largest private-equity fund: they lend us their money, and we then invest the money back in their economies–in industries and companies that then have a very high demand for U.S. high-tech goods and for U.S. services exports.

I’ve heard some economists argue that we’re pursuing some kind of misguided strong dollar policy that’s responsible for our currency’s refusal to devalue, but I don’t actually see what policy that might be. We appear to be doing everything you would do to shake investor confidence in U.S. public finances and spark a decline in our currency.

Maybe the answer to these difficult questions is lurking inside CAP’s global new deal report. I’ll need to read it.