Adair Turner: Is It Debt Deleveraging Or The Fall In Labor Share?

Adair Turner was interviewed by INET about his new book which I have to buy and read. The book came out this week. It is called, Between Debt and the Devil. Here is the interview. (link)

He lays out an exquisite analysis of economics on many layers.

How the crisis was not expected due to economic theories that thought they had solved macroeconomic problems.

How debt is dragging down the global economy.

How debt monetization is the best solution to the current sluggish economic growth.

and more

Yet I question him… Is it truly deleveraging debt along side fiscal consolidation that is making some economies sluggish? It is an easy concept to grasp and accept. A larger portion of the economy would rather pay down debt than borrow to invest or consume. So the economy becomes sluggish.

But let me play the devil’s advocate…

I look at a different cause for economic sluggishness… the fall in labor share. It is not a concept so easy to accept. If you pay labor less, business should be able to grow faster right? You have lowered business costs. You have made it easier for firms to project higher profits, right?

Yet, I see the fall in labor share as a fall in effective demand, which has lowered economic potential and the social benefits in the economy.

The Channels of Money Flow for Business

Here is a simple diagram of the basic channels of money flows into and out of firms.

Let’s say that there are four basic channels for moving money. Firms can make money in each of those four channels. Firms can make money from the financial sector from lower interest rate costs and increased funds for investment. They can make money from the government from lower effective taxes, higher subsidies and higher govt. purchases. They can make money from labor by paying lower wages and increasing sales to labor income. They can make money in the foreign markets by lowering overhead costs overseas, increasing exports and selling more imports.