“Demand-side” economics and the liberal denial of reality

November 26, 2011

When, after 9-11, George Bush told us to “go shopping” he in fact demonstrated a correct understanding of mainstream economics, liberal and conservative alike. As all economists know, a decline in consumer spending, confidence, and optimism, can plunge an economy into recession. This entirely uncontroversial view is one step away from its categorical version which turns out to be the foundation of liberal economics: that not only can a lack of demand cause a recession, the lack of demand—when considered in its broadest sense–is really the ONLY thing that could cause an economic recession or slow down. While this is also the foundation of conservative economics to just a slighter extent, I will conclude by reflecting on this slight, but significant, difference.

When economists talk about demand in this way, they are referring to something somewhat broader than demand in the everyday sense of the word. Demand, here, is not only a matter of the desire of consumers for new things, but also whether because of unemployment, inflation, or interest rates they are able to afford these new things. Thus a banking or currency crisis, whether it creates a tight credit market or a trade imbalance and capital flight, or just a more general crisis in consumer confidence are considered to be problems with demand.

The sensibility of linking these seemingly disparate elements together under one side of a supply and demand equation becomes apparent when we consider the cures that mainstream economists, especially liberal ones, like to administer to an ailing economy. Though they may come in the form of interest-rate adjustments, bailouts, public works and stimulus programs, even the conservative-favored tax cuts, they have as their end-goal one thing and one thing only: to increases consumer spending, or, in other words, demand.

Thus in a widely circulated 2 minute video, Robert Reich asks “what is Wrong with the Economy argues that our current economic problems can be attributed to a declining middle class. “The vast middle class,” Reich concludes, “unable to borrow as it once could, no longer has the purchasing power to get the economy growing again.” The solution is of course to increase demand and thus spending. Nobel Prize notwithstanding, Paul Krugman is unable to suggest, as a final goal, anything much beyond this. As he puts it in “The Return of Depression Economics,” today, like during The Great Depression, we are experiencing “failures on the demand side of the economy—insufficient private spending.” (182). As he analyzes recent economic crises, Krugman sees a world that “is lurching from crisis to crisis, all of them crucially involving the problem of generating sufficient demand.”(184). His recommendation to policy makers? “Get credit flowing again and prop up spending” (184).

Like most post-carbon thinkers, I entered this world carried by some strong values associated with a traditional liberal or progressive position. Talk like this from two of our most well-known and seemingly astute liberal economists tempts me to sever all personal ties with the label “liberal.” Even if we set aside the ecological havoc that this consumption imperative has and will continue to cause, the suggestion that our principle public goal should be to increase spending and consumption is embarrassing and violates every spiritual and moral tradition that I can think of, except the ones that have sprung up as clear apologies for this sort of being in the world.

If the moral or spiritual dimensions of the liberal imperative to spend and consume are troubling, on some level we might be relieved to be reminded that it might not plague us with its numbing value all that much longer. As has been widely discussed in postcarbon circles in recent months, growthism is about to run headlong into some very uncompromising natural limits, of which economists on the mainstream right and left appear completely unaware. Though as I will argue later, conservatives may, in fact, be showing more awareness, if we can call it that, than the liberals. For it is not simply that a Krugman or Reich believe that this most recent economic crisis in fact happened to be caused by problems on the demand side of thing, the field of economics in general insists almost without exception that demand is the ONLY thing that could really end economic growth. Thus in an otherwise interesting book about the various cultural preconditions for the past 300 years of economic growth, investment banker William Bernstein declares that “ecological, economic, and demographic forces to not thus seem likely impediments to growth.” As he explains it, “Economic historian Simon Kuznets pointed out that a slowdown in economic growth can come from either of the two basic economic sources: supply or demand. He believed that supply, driven by man’s innate curiosity and industry, could not be the source of stagnation” (The Birth of Plenty, 375,374).

This of course causes economists, or those in the throes of their thinking, to say some pretty silly things about energy and oil which one would ordinarily see as subject to laws other than that of a demand-side economics. As another Nobel Laureate, Robert Solow infamously put it, [Since] “it is very easy to substitute other factors for natural resources, then there is, in principle, no problem. The world can, in effect, get along without natural resources.” Or in a book proclaimed by Bill Gates as “the only book I’ve seen that really explains energy, its history and what it will be like going forward,” Peter Huber and Mark Mills boast, “What lies at the bottom of the bottomless well isn’t oil, it’s logic. Fuels recede, demand grows, efficiency makes things worse, but logic ascends, and with the rise of logic we attain the impossible—infinite energy, perpetual motion, and the triumph of power. It will run out but we will always find more” (The Bottomless Well xix). Similar to this are Krugman’s closing lines in “The Return of Depression Economics”: “the true scarcity in Keynes’s world—and ours—was therefore not of resources, or even of virtue, but of understanding”; “I believe the only structural obstacles to world prosperity are the obsolete doctrines that clutter the minds of men” (191).

As I mentioned earlier, such thinking is likely to be overrun by unignorable aspects of reality. To the extent that liberals cling to the notion of demand as the source of all economic problems, their thinking will become increasingly irrelevant to future debates. I would like to conclude by noting that in a way that is equally alarming, conservative economics, even it its most naïve and populist forms, are more likely to find a prominent place in serious discussions about the economy in this future. As I mentioned above, though the differences are slight for most practical purposes, conservatives have ventured on to the near side of the supply and demand equation, though in a highly troubling way.

While the prominent conservative notion that our economic woes have been caused by too much regulation and taxation carry considerable political weight, very few independent economists really believe this. But what is interesting about this position is the way that instead of addressing only the issue of demand, conservatives are more inclined to consider supply and productive capacity and thus in at least one sense, occupy the same reality-based world that postcarbon economics currently owns, even as these conservative thinkers, in my estimation, have stumbled upon this important terrain completely unaware (only looking for tax cuts and a competitive advantage, a cynic might suggest). As long as liberal economists are only able to think about demand, in other words, to the extent that there will be a real debate, it may increasingly be among those of us trying to explain why our industrial capacity has begun to decrease.

It is already possible to see the outlines of this debate, such as it is. Postcarbonites believe that the peaking of oil and other natural resources, as well as the mounting ecological costs of a destroyed planet will decrease the amount of net energy that we, as a species, will be able to direct towards the creation of all our industrial wonders. Conservatives, in contrast, will argue that it is precisely this belief in limits that is decreasing our economic capacity, or supply—whether through the environmental regulations that make off-shore drilling more expensive or the malaise or “lethargy,” to use a word favored by Huber and Mills, that this belief in limits will cause.

It is also easy enough to see how this debate will sharpen in coming years. For regulations that do attempt to preserve our planet for another generation or two, however justified, will in fact limit productive capacity. There will be increasingly difficult choices to be made between the last remnants of ecological health and a world economy that will crash, or continue to crash, if its remaining industrialists are not allowed unrestricted access to the natural resources they want. Part of the attractiveness of the current demand-side liberalism is that, enchanted by its magical thinking of perpetual low-energy economic innovation, it needn’t concern itself with these unsettling difficulties.

Conservatives, on the other hand, have begun to confront these challenges and arm themselves for the upcoming fight. As Naomi Klein has discussed in a recent article from The Nation (November 28), climate change deniers, for instance, see the belief in global warming as a plot to destroy capitalism, the market economy, and fundamental freedoms. As Klein puts it, “there is a significant cohort of Republicans who care passionately, even obsessively, about climate change—though what they care about is exposing it as a ‘hoax’being perpetrated by liberals to force them to change their light bulbs, live in Soviet-style tenements and surrender their SUVs. For these right-wingers, opposition to climate change has become as central to their worldview as low taxes, gun ownership and opposition to abortion.”

Despite the absence of science and a tendency towards paranoid conspiracy theories, this growing conservative obsession with denying global climate change is grounded in a crucial economic view of things. This fear springs from a true concern–far more reality-based in some ways than the demand-side focus of most liberals–that our future ability to obtain the supply of goods and products necessary to maintain economic growth may be hampered by environmental concerns. As Klein points out, “the deniers did not decide that climate change is a left-wing conspiracy by uncovering some covert socialist plot. They arrived at this analysis by taking a hard look at what it would take to lower global emissions as drastically and as rapidly as climate science demands.” Looked at this way, the great deniers are Krugman, Reich, and the other spokespeople of an Obama type liberalism. Klein continues: “when it comes to the real-world consequences of those scientific findings, specifically the kind of deep changes required not just to our energy consumption but to the underlying logic of our economic system,” hardcore conservative climate change deniers “may be in considerably less denial than a lot of professional environmentalists, the ones who paint a picture of global warming Armageddon, then assure us that we can avert catastrophe by buying ‘green’ products and creating clever markets in pollution.”

The argument about economics, then, will ultimately be one of values and priorities, rather than technocratic decisions over government spending or balanced budgets, of how we as a society and a planet will find a balance between competing ecological limits and human needs, between a sustainable future and the economic freedoms we have come to expect. As long as they are arguing about how we might increase consumer spending or assure continued access to credit, this battle will have to be fought without the help of traditional liberal economists.

Erik Lindberg

Erik Lindberg received his Ph.D. in English and Comparative Literature in 1998, with a focus on cultural theory. After completing his degree, Lindberg began his career as a carpenter, and now owns a small, award-winning company that specializes in historical restoration. In 2008 he started Milwaukee’s first rooftop farm, and was a co-founder of the Victory Garden Initiative, as well as a member of Transition Milwaukee’s inaugural steering committee. He lives in Milwaukee with his wife and young twin boys.