Transactions of Decline
As indicated above, the rebalancing process can be thwarted by intervention.
The tendency of wages to decline is highly undesirable, both socially and politically. For this reason, governments intervene via labor legislation to ensure that wages do not decline. While this may be a popular move, it ensures that the underlying problem, an excess of consumption over production, continues. The rebalancing mechanism cannot resolve the issue. The upshot is unemployment, directly in an economy in which layoffs are permitted, or indirectly, through business failures, where layoffs are discouraged.
In the modern welfare state, what happens then is that governments engage in what Jane Jacobs, in her very important book Cities and the Wealth of Nations, called “transactions of decline.” Such transactions drain funds away from productive activity, toward the maintenance of non-productive activity; and because they do not provide the means for regeneration – but rather the perpetuation of stagnation – it is self-defeating, a continuous drain on other, productive activities. Not only is such subsidized activity not productive, it takes away resources from activities that are productive. “Heavy and unremitting subsidies are transactions of decline, and once adopted the need for them grows greater with time, and the wherewithal for supplying them grows less.”[1]
Where these economies are regions within a sovereign state, the burden of these transactions of decline is effectively borne by the “export economy.” The government taxes productive activity there to finance the consumption in the “import economy” that exceeds that economy’s remunerations. This is one way in which excess effective demand is financed.
[1] Jane Jacobs, Cities and the Wealth of Nations (New York: Random House, 1984), p. 193.