The Age of Oversupply

Overcoming the Greatest Challenge to the Global Economy, Daniel Alpert, Portfolio/Penguin.

In the introductory chapter of “The Age of Oversupply,” author Daniel Alpert, an investment banker and Century Foundation policy expert, describes a meeting with Japanese bankers and lawyers. The encounter took place in 2005, when the U.S. economy was roaring along and Americans were oblivious to the soon-to-burst housing bubble. Japan, meanwhile, was coping with chronic deflation and still trying to sort out leftover debts from a long-past credit crisis. A Japanese lawyer commented to Alpert that the U.S. would never make Japan’s financial mistakes. Alpert presciently responded, “Unfortunately, I think the U.S. is next up in terms of this type of foolishness.”

The reminder of Japan’s troubles is ominous to anyone following today’s lagging recovery. If the U.S. doesn’t resume strong economic growth and escape the shadow of the last recession, it could end up suffering through decades of poor economic conditions—just like Japan.

In subsequent chapters, Alpert makes a convincing case that the U.S. economy won’t fix itself. The usual policy remedies for a recession, including monetary stimulus and tax breaks, aren’t working this time. That’s because, Alpert explains, the causes of the recession go beyond any one country or currency. They are rooted in severe trade imbalances that formed when emerging nations abandoned socialism and joined the global economy. The emerging nations cheaply produce consumer goods, which they export to developed countries, but they don’t use the proceeds to increase their own consumption. Instead, they lend their profits to the governments and citizens of advanced nations. Thus, emerging countries have expanded the global supply of labor and capital but haven’t done much to increase global demand. Instead of matching up (as the economics textbooks say they should), supply and demand are wildly off-balance. The global economy has a bad case of oversupply.

So, it makes sense that U.S. policy hasn’t worked; it hasn’t done enough to increase demand. For example, a payroll tax holiday might spur hiring in normal times. But in an environment of oversupply, businesses have no motivation to hire more Americans when millions of workers in China will do the same jobs for lower wages and there is no demand for additional products anyway.

Fortunately, Alpert is ready with numerous proposals to build demand and grow the economy. For example, government investments in infrastructure and renewable energy would put people to work, allowing them to consume more, while at the same time making the economy more efficient in the long term. And carefully implemented debt forgiveness would help people whose mortgages are underwater and enable them to start spending again.

Alpert also suggests that the U.S. government choose promising industries and subsidize them as part of a competitiveness strategy, an idea that is not so well fleshed-out as his other proposals and somewhat less convincing. While he correctly points out that the government already subsidizes many activities through the tax code, it’s not clear that subsidies are helpful to the economy as a whole. After all, mortgage subsidies didn’t turn the housing sector into a permanent stronghold of the economy or prevent the disastrous housing bubble. Subsidies to other sectors might contribute to inflated expectations and produce more failed ventures requiring bailouts.

But on the whole, Alpert provides valuable insight into the forces holding back the U.S. economy and demonstrates that relying on standard economic procedures is not a viable option. “Today is one of those moments,” Alpert writes, “when we need bold and innovative governments[…] with a laser-like focus on bolstering economic demand in the short-term and improving competitiveness over the longer term.” If policymakers heed his wake-up call, the U.S. and other developed nations can resume prosperity.