Dr. Ravi Batra: New Thinking on the Economy

Monday 16 March 2009 by: Matt Renner, t r u t h o u t | Interview

Maverick Southern Methodist University economics professor Ravi Batra says thefinancial crisis is just one symptom of a long-festering economic disease - adisease caused by neglecting basic economic principles over the past 30 years.Comments made by President Obama seem to echo Dr. Batra's understanding of a domestic economy choked by consumer debt."Even as we're focused on the financial system and the credit markets, we arelaying the foundation for what I'm calling a post-bubble economic growthmarket," Obama said Friday afternoon, adding "the days when we are going to beable to grow this economy just on an overheated housing market or peoplespending - maxing out on their credit cards, those days are over."Dr. Batra insists that pursuing economic policies that begin to reverse a declinein the real wages of individual consumers is the only way to heal the limpingeconomy. Changes in the "wage-productivity gap" - or the difference betweenhow much consumers earn and the value of goods and services an economy produces - can explain the current situation and can help guide policy-makers outof it.I spoke with Professor Batra about the current meltdown and how it can be viewed through the lens of the wage-productivity gap.

Matt Renner:

What is the wage-productivity gap and how does it affect thehealth of an economy?

Dr. Ravi Batra:

The wage-productivity gap is the gap between the real wageand labor productivity. The real wage is the purchasing power of the averagesalary. If productivity rises fast and the real wage rises slowly, then a wage-productivity gap develops and grows.

MR:

When there is production and wages don't keep pace, what is the result?

RB:

Productivity is the main source of supply, whereas wages are the mainsource of demand. If this wage-productivity gap keeps rising over time, supply will rise faster than demand and then we face the problem of overproduction.Many like [former Federal Reserve Chairman Alan] Greenspan and othereconomists love the productivity rise, but if it leads to overproduction, that leadsto high unemployment such as we are seeing now. Overproduction is a disasterand it leads to depressions.If businesses don't sell what they produce, they lose money, and when they losemoney, they have to lay off people.

MR:

In the United States, how did the recent wage-productivity gap begin torise?

RB:

It started off with [President Ronald] Reagan. The wage-productivity gapstarted to develop in 1981. Reagan's economic policies increased productivity while restraining wages. One example is "free trade," which increasedproductivity but also reduced the real wage in the United States.Also, the policy of regressive taxation. Reagan raised every tax that burdens thepoor, but sharply reduced the income tax; all this caused a fall in consumerdemand. Economic growth fell after Reagan's policies were introduced. Slow economic growth leads to pressure on wages because low growth means low demand for labor relative to labor's supply, so wages fall.

The third reason the wage-productivity gap grew as a result of Reagan was the"merger mania." Big firms were permitted to merge with each other. Each timethere was a merger, there were layoffs, which also exerted downward pressure on wages. Mergers also increase productivity, further widening the gap. Reagan'santi-union policies were also responsible for the falling wages.

MR:

If the wage-productivity gap was widening, how did policy-makersprevent the inevitable overproduction and economic contraction?

RB:

Each time the wage-productivity gap goes up, the economy will contract because of overproduction. What they did was come up with a scheme to createdebt in the economy because, by creating debt, they could raise demand to thelevel of supply.Initially they started off with increased government debt. The deficit went upunder Reagan, which raised demand to the level of supply. Then Greenspan took over as Federal Reserve chairman and whenever there was the threat of overproduction, like when the stock market crashed in 1987, he brought interestrates down sharply. By bringing interest rates down, he lured people into borrowing. This began to create private debt on a larger scale.This really postponed the wage-productivity gap problems for the future because under these policies, productivity rose every year, so debt had to increaseevery year unless wages were to rise. Since productivity rises exponentially, debthad to rise exponentially as well. In such a situation, it is not hard to imagine aday when the credit system would simply explode. That's what happened startingin 2006 or 2007.

MR:

The financial emergency, or the freeze in lending, is being touted as themost pressing aspect of the crisis. Why are banks unable or unwilling to lend?