Analysis of Richard Wolff Explanation for the Recession

Introduction

Robert Guell and Richard Wolff both have competing explanations on how and why the economy has acted like it has and how we have ended up in what some call the worst recession since WWII. The following is an explanation of each of their theories and a comparison of the differences and similarities

Explaining the theories

Guell's explanation of the recession is based on the idea that the bursting of the housing bubble along with wrong fiscal policy approaches is the cause of the problem.

Guell explains the housing problem as a supply and demand effect. The demand for housing was fueled by a perfect storm of rising house prices and increase in the amount of credit available.

Housing prices were rising in metropolitan and urban areas where the ability to build new housing was limited. Once these prices starting going up it had a contagious affect on surrounding housing. At the same time housing prices were going up there were all types of mortgages that made buying a house easier and more affordable.

On the demand side lenders were making money available to people that they would normally not lend to in the past. This is because banks no longer held the mortgages on the property. Once the mortgage was settled the banks would sell them and they would become securitized. With the risk to the bank no longer there they wouldn't require a 20 percent deposit. Lenders no longer cared or checked if a person could afford the house because they no longer had to assume the risk.

This easier access to credit and the increase in housing prices caused a "buy now before prices go up" mentality, which drove prices even higher.

The golden rule of what goes up must come down went into effect when the housing bubble burst. This caused the financial meltdown that initiated the recession. The governments response was slow (because of the difficulties in recognizing a recession) and to Guell only enough to prevent it from being worse not to fix it.

Wolff's explanation is based on a complex set of reasons, which were financial, social, moral and ethical. During the time between the end of the Civil War and the 1970s, US capitalism experienced a steady expansion fueled by the introduction of new technology. This resulted in a period of steady growth and rising wages. Although it did hit a few bumps with the Great depression and a few crashes in the late 1800's. By the 1970s things began to change.

First, the introduction of new technologies (for example the computer) led to a rise in productivity and a decrease in the number of employees needed.

Second a large number of women either entered the job market or increased the amount that they worked. The third was a massive wave of immigration. These two events coupled together caused an increase in the labor pool and made competition for jobs greater.

The fourth thing is that for almost 40 years before American businesses face little or no global competition. Almost every other country was trying to rebuild after World War II. Now those countries have rebuilt and are much more efficient and able to produce the same goods cheaper. American businesses decided it was cheaper to "join them than fight them" started moving their companies overseas where the cost of doing business was cheaper. This caused the loss of a lot of jobs further increasing job competition. t

As a result of these four events, since the 1970's workers' real wages have leveled off, and even declined in some years. This caused profits for companies to increase. The problem was that the workers no longer had the capital to spend to help drive the economy.