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The Rebirth of Keynes, and the Debate to Come
The economy has just about come to a standstill - not so much because credit markets are clogged as because there's not enough demand in the economy to keep it going. Consumer spending has fallen off a cliff. Investment is drying up. And exports are dropping because the recession has now spread around the world.
So are we about to return to Keynesianism? Hopefully. Government is the spender of last resort, which means the new Obama administration should probably be considering a stimulus package in the range of $600 billion, roughly 4 percent of national product -- focused on building and repairing the nation's crumbling infrastructure, providing help to states to maintain services, and investing in new green technologies in order to wean the nation off oil.
But between now and late January, when the stimulus package will be voted on, we're likely to be treated to a great debate over the wisdom of Keynesianism. Fiscal hawks will claim government is already spending way too much. Even without the stimulus package, next year's budget deficit is likely to be in the range of $1.5 trillion, considering the shrinking economy and what's being spent bailing out Wall Street. The hawks also worry that post-war baby boomers are only a few years away from retirement, meaning that the costs of Social Security and Medicare will balloon.
What the hawks don't get is what John Maynard Keynes understood: when the economy has as much underutilized capacity as we have now, and are likely to have more of in 2009 and 2010 (in all likelihood, over 8 percent of our workforce unemployed, 13 percent underemployed, millions of houses empty, factories idled, and office space unused), government spending that pushes the economy to fuller capacity will of itself shrink future deficits.
Conservative supply-siders, meanwhile, will call for income-tax cuts rather than government spending, claiming that people with more money in their pockets will get the economy moving again more readily than can government. They're wrong, too. Income-tax cuts go mainly to upper-income people, and they tend to save rather than spend.
Even if a rebate could be fashioned for the middle class, it wouldn't do much good because, as we saw from the last set of rebate checks, people tend to use extra cash to pay off debts rather than buy goods and services. Besides, individual purchases wouldn't generate nearly as many American jobs as government spending on infrastructure, social services, and green technologies, because so much of we as individuals buy comes from abroad.
So the government has to spend big time. The real challenge will be for government to spend it wisely -- avoiding special-interest pleadings and pork projects such as bridges to nowhere. We'll need a true capital budget that lays out the nation's priorities rather than the priorities of powerful Washington lobbies. How exactly to achieve this? That's the debate we should be having between now and January 20 or 21st.
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OK I'm convinced. We need a big infrastructure project. But here's the rub. We already have 11 trillion dollars in debt accumulated to fight wars and cut taxes. Will the Chinese buy any more of our debt? Or will they say. "we pass". And if they do, then who buys the debt or can we expect interest rates to rise dramatically offsetting any advantage of spending or making it a one shot only as business stops borrowing at the high interest rate? The spending package won't do much good in that event. Guess we have to risk it in any case, but it seems we may be getting close to learning a lesson about deficit spending.
All I know is that we send about $600 billion overseas to the Mideast for Oil. We also send baskets of money to China for plastic things and electronics. Sooner or later those countries are going to want a good return on those dollars. If our currency begins to lose value due to inflation, those countries will have an incentive to dump dollars and buy commodities ( $200 oil). We could end up sending our countries wealth over seas in the form of high interest rates . Your tax dollars already go to China. In the future its possible most of our taxes will go overseas to pay our nations credit card bill.
I think we just said the same thing, That could be the lesson on deficits. They are ok for awhile but not as Cheney thinks - - perpetually. The Reagan tax cut, no regulation mantra won't cut it in a time when a good deal of our debt is held by others. It only means foreign countries finance the tax cuts. So what does Bush do? Cut taxes on those most able to pay it and starts two neverending wars. Think that doesn't create huge deficits. Now when we need one to help us out of the Bush pickel , we risk real trouble. I am just a touch worried, but I have no other answer. Spend the money and full steam ahead.
Why can't we raise it from ourselves, by selling the equivalent of WWII war bonds to Americans?
I like the sentiment. We, as a nation, have to learn to save again. But hell, we can't pay the mortagage now?
We are selling bonds. In case you haven't noticed Americans can't afford to buy them now. Foreigners have to buy them. The issue on the table is the size of the American debt. Is your solution, more debt? Not that theres any thing wrong with that......
It is in the best interest for the Chinese to see our economy get back on its feet, so yeah, they will buy more of our debt
I think you are right or more accurately, I hope you are right.
Robert Reich isn't the only economist saying these things. There's also Krugman and Stiglitz. I'm sure there are others as well. Why aren't any of them on the economic team?
I am not sure we need more on the team. Most of those on the team now understand it pretty well. Now you have to implement it and that can run into bumps in the road. Ask Paulson or Bernanke.
Some of the people currently ON the team have got to go. Like Rubin for instance.
Krugman doesn't want to, Stiglitz, I don't know
Whatever people such as Michael Boskin have to say about doing about this recession, be sure to do exactly the opposite. It was, after all, people such as he that got us into this mess in the first place. Mr. Boskin's New York Times editorial "Bursting the Bubble" has only one thing right, "Bad news needs to get through to the President.
Seems that Supply-Side, most resembling Says law (in my opinion) operates on a fundamental premise of “if we build it they will come.” It seems that this works well when there are few goods or services available, some pent up demand regardless or quality or suitability and of course, the ability to pay, work or barter for access.
Today, we have a huge over capacity and over supply of over priced goods and services, many that people do not really want to buy nor have the ability to buy. From Homes to Cars to Denim. This Supply Side “Push” of inadequate and costly goods through marketing and commercialism is broken.
In order to fully attain Keynes, we must not have government as the supply-sider make the same mistake of neglecting a “Demand” paradigm as opposed to a “Push” paradigm of what specifically what those goods and services should be.
Demand centric, spending on self-sustainable initiatives with multipliers of efficiency around energy, health care combined with the new types of jobs provide the most bang for our tax dollars. Innovation and industry life cycles in sync with that innovation is essential.
Otherwise we will crate a new ghost economy of subsidy sustained industries and jobs ready to be exported the minute we start them.
The US already has a ghost economy. Barter is not taxed. Stuff bought a sold on Craigslist is not taxed. Illegal drugs are not taxed. The war on drugs has cost us billions of dollars and we have nothing to show for it. Most drugs are more plentiful, stronger and cheaper than when the war started. Thank you CIA for inventing Crack. Drug testing is a farce that only enriches the testers. A study done in Oregon indicated that there was no difference in productivity with companies that drug test vs companies that don't. All of our efforts have been on the punishment side and nothing spent on treatment. The program could pay for itself, like the programs they have for gamblers.
Look at what Switzerland did. They began treating drug use and addiction as a medical problem. Once that was done, young people looked upon a drug user as someone with a serious problem and needed pity. Drug use stopped being considered "COOL". The program is considered a success.
to some extent we have to create some jobs to be exported. Otherwise why would China want to buy or hold our debt? We, of necessity, have to try to stimulate their economy as well to keep them interested.
Oh, fiscal hawks must know everything -- blah! blah! blah! I 'm sick of fiscal hawks! Ask those people these questions:: Who is spending right now in this country? Why is it that we are about to have another Christmas-
My answer to that last question? NO! The rich, with their exalted philosophies of "trickle down economics", have successfully proved that already .
And, they hunger for more!
Question number 1. Everyone appears to be spending less now. Question number 2....Xmas sales should be down because most people feel insecure with their personal finances, although black Friday sales were unexpectedly higher this year.
Maybe instead of Bashing Republicans we step back and examine what has been done so far with the bailout and assume that his program may work. This crisis is a credit crisis caused by the housing bubble bursting. The Fed has injected billions into the system in an attempt to get credit moving again. Suppose in the next 2- 6 months, the massive injection of cash reserves forces the banks to lend and mortgage rates drop to 4%. That may spur a huge increase in demand for homes, increase home sales, and housing prices may begin a slowly rise upward. The market will recognize that housing prices and mortgages are now secure and the CDO's and CDS's will immediately rise in value, causing bank profits to soar, causing the stock market to rise, cause 401k's to rise, causing pension funds to rise. The 700 billion invested in preferred stock yields a 5% to 8 % dividend to taxpayers. Thats a possible tax windfall because the treasury is only paying about 2% for the money but is getting an 8% return. Take off your partisan hats for a minute. Mortgage rates dropped big time last week.
That's a really convincing perspective. Should I go out today and buy a big car and mini-mansion? Since the profits will go to the government and I wont ever have to pay taxes! Whoopie!!
At this point I think I'll buy a real currency (i.e. commodity) thank you very much.
Food ADM@27.38 P/E 7.33 Yield 1.9%
Fertilizer TRA@ 14.71 P/E 2.86 Yield 2.72%
Diversified Energy BP P/E 5.36 Yield 6.92%
If you want to avoid the evils of a "planned economy" press hard for a citizen financed democracy.
What is a citizen financed democracy?. Does than mean each candidate gets an equal amount of campaign funds? Does it include 3rd and 4th party candidates?
You should know that every major economy in the world is planned.. but ours (for the most part). And that is why our MFG as a percent of GDP has gone from 32% to under 10% with the auto industry being half of whats left. Thats why we are by far the worlds largest debtor nation and have the largest trading deficits and have to borrow from communist countries.
Regards
Take off your partisan hat and realize that if the housing bubble is the cause of the problem, the bailout did not address that cause.
Buying up bad debt from lending institutions, and that is what we were first told it would be used for, will not keep future ARMs from resetting at unaffordable rates, homes will still be forclosed on, home prices will stay low or continue to drop, credit cards and auto loans will still be defaulted on and more people will be layed off.
We have not seen reached the bottom yet.
Ok, If you truly believe that , there are plenty of ways you can make money in a market going down. Place your bet. An old saying on wall street is, " don't fight the tape". It means the market does what it does and not what you expect or want it to do. I'm not 100% sure of anything now. I do know the ARM on my house is at 3% and I expect it may go lower.
"The 700 billion invested in preferred stock yields a 5% to 8 % dividend to taxpayers. Thats a possible tax windfall because the treasury is only paying about 2% for the money but is getting an 8% return.'
The bailout money is being invested in "preferred stocks"?
Yes, the United States Treasury has now become the largest hedge fund in the world. The preferred stock position with Citibank also requires that Citi not pay a dividend to common stock holders. Thats a good deal for the Treasury.
the bail out to date "might" work, but it might not too. The evidence so far is it will not spur employment sufficiently to stop a serious recession. Hence, the need to put money to work buying goods and services directly. That could turn out to be a one shot deal too just like the first stimulus package but it has a better chance if we can direct it to worthwhile projects rather than into the pockets of the banks which is where most of the first stimulus package went.
The 1st stimulus package went into the pockets of the taxpayers. I enjoyed my $600. I would like another . The bailout money is not really going into the pockets of the bankers. per se... Most of it is a loan and its expected to be paid back to the govern't with interest. It could be a good investment. I hope.... I hope.... I hope... The 2nd stimulus package will go to state governments. You can hope that some of it will trickle down to you. If you are a large construction company with political ties, or a Washington DC planning firm with political connections. you should be happy. Go out now and buy a new car, you can afford it.
The Bailout preserves the status quo.
http://www
Just look at the $700billion bailout to see that congress can't be trusted to spend this amount of money without throwing in huge chunks of pointless give-aways to special interest constituency groups. They threw in an extra $150 billion just to "grease the skids" for the bill to make it through. If you start massive deficit spending, a huge percentage of it will be money that won't be wisely targeted to stimulate the economy but instead wasteful pork. Besides, the deficit is already 10 percent of GDP.....la
That's with Bush as President. Hopefully, Obama can get them onto a better course. We do need to spend on infrastructure and green energy. The bailout money may disappear into thin air with nothing that we can see to show for it, but not so with infrastructure. We'll be able to see it, use it, know where the money has gone. Psychologically, it will help and that's the beginning of turning things around.
Did you ever consider that the governments desire to build so many new roads and bridges during the past 60 years was an appeasement to the auto industry. That maybe all of these roads and highways are a major contributor to urban sprawl and energy inefficacy ? . The Robert Moses highway road projects in New York City during the 50's and 60's destroyed neighborhoods and instead of relieving traffic congestion, increased it. Just a thought. Our towns and cities are built for cars, not people.
As your name suggests, you are refreshingly post-ideological. Or should I say: pre-ideological? Wasn't it the two volumes of adamsmith1 that presaged Hegel, Marx and all that stuff that anglosaxons never cared much about, since they had: those two volumes of adamsmith1.
I am certainly not going to deny or challenge the wisdom of the requirement in Reich's article that it's all about 'spending it wisely', and I fully agree with your precaution in this respect.
But: in economy or policy making you have to 1) cut down to alternatives. 2) be aware of and USE your freedom of management or policy choice.
The fact that TARP has some flaws can only mean that it has to be done better. The fact that congress has a way of adding wasteful pork can only mean that congress has to act more responsibly. Etc.
I still think you are non-ideological and reasonably non-partisan, but I also feel very strongly that you are still too fond of the old government bashing, based on the part of the past 25 years when things were fine. You have not yet fully realized the extent to which the private sector has failed miserably. Of course, everything must be done to get the private sector going again. That's how Keynes became a Keynesian in the first place.
Too bad we can't ask adamsmith1 about this impasse.
I usually agree with RR but ever increasing incentives to consumption is hard on the environment as most of what we buy goes to foul our air, water and landfills, or ruthlessly exploits these elements in not so far away places.
If we want greater social security and justice we first need to ensure that the true cost of consumption is paid by the consumer. Whether that be the cost of infrastructure, environment remediation, pensions or health care. Government should only be used as the vehicle, through which common expenses are funded.
I don't believe our system of government can sustain budget deficits as deep as is being proposed. That is a fool’s dream, as unrealistic as any Bush has subjected us to. Historically speaking, FDR's new deal would have probably evolved into just another form of "central planning" had WWII not occurred, along with the destruction of most foreign production capacity.
In the long run, the way to retain the value of the dollar and our freedom is to reduce consumption and increase productivity through socially, environmentally responsible, and conservative (as in conservation) growth.
It sounds like you're advocating a consumption tax, or "fair tax." If that is the case, I completely agree. I also completely agree with your assessment of the huge deficit spending being advocated by RR as being a fool's dream. If the deficit were not already so huge I might have some sympathy with his plans, but not at this point. Your last sentence was very well put.
You need to put things into perspective. As a percentage of GDP, it makes more sense and it certainly is not a fool's dream.
I usually agree with RR but ever increasing incentives to consumption is hard on the environment as most of what we buy goes to foul our air, water and landfills, or ruthlessly exploits these elements in not so far away places.
If we want greater social security and justice we first need to ensure that the true cost of consumption is paid by the consumer. Whether that be the cost of infrastructure, environment remediation, pensions or health care. Government should only be used as the vehicle, through which common expenses are funded.
I don't believe our system of government can sustain budget deficits as deep as is being proposed. That is a fool’s dream, as unrealistic as any Bush has subjected us to. Historically speaking, FDR's new deal would have probably evolved into just another form of "central planning" had WWII not occurred, along with the destruction of most foreign production capacity.
In the long run, the way to retain the value of the dollar and our freedom is to reduce consumption and increase productivity through socially, environmentally responsible, and conservative (as in conservation) growth.
We can do this by adopting a tax system that discourages consumption and encourages production and investment while removing all taxes on subsistence consumption.
A switch from an income, wage and corporate tax to a universal transaction tax with a pre-bate equal the tax paid on subsistence consumption and a rebate of investment, cost of production and charity would fairly achieve this goal.
The rate could be too small for cheaters to risk not paying. The banking and credit system's existing IT infrastructure, could make tax collecting and pre-bate/rebate payments very efficient.
For the consumer it basically says, "if you have money to buy, then you have money to pay the taxes". While at the same time every dollar you earn you keep, creating a huge incentive to work, save and take-on business risk to increase production.
Think of all those poor tax accountants and H&R Block employees! What will they do?
Real wages have been growing slower than inflation for decades. The Republican Corporate Party wants to squeeze wages and reward investment at every turn. Eventually, people run out of income to spend and credit to access.
Endless greed, thy name is the Republican Party. They are the scourge of the Earth.
It all comes down to the simple formula:
Economic Flow = Industry + Exports + Consumer + Government = 0+0+0+Stimulus
If the Stimulus Builds a New Industry we get more permanent Jobs, more Consumers, and maybe more Exports and that is a Quadruple PLUS!
If Gov Stimulus adds new and permanent jobs and increased Consumer Spending then it’s a double PLUS!
If the Stimulus increases our Exports we get a double Plus!
__________
Why are we in such a CRISIS?
1. Our Industries and jobs, except for Big 3, have been shipped overseas, especially over the last 8 years.
2. Since we lost our Industries our Exports are also down giving us a double HIT to our economy.
3. With the Credit Bubble the Consumer used home refinancing and fairly cheap credit to become over 60% of our economic Flow! Purchases of Oversea goods boomed but these Imports hurt our Economy as money flowed out of it to China and elsewhere.
__________
What is Obama’s Limit on Spending?
The Republican Government under Bush-Paulson has, according to Bloomberg, "Pledged $7.7 Trillion to Ease Frozen Credit" and wants to add $800 Billion MORE!
Republican CRISIS EFFORTS = $8.5 Trillion all to BANKSTERS!
So that means Obama can use up to $8.5 Trillion without "ONE WORD OF CRITICISM" FROM THE REPUBLICANS!
The Trigger is $8.5 Trillion!
As long as Obama stays under the Trigger Republicans should be VERY QUIET! Shhhh! Shhhh!
John Maynard Keynes was against corporations. He thought a company should do one thing and do it good. If there was no more call for the product then the company should disappear.
Do one thing and do it well.....t
Until they became predatory and forced others out.
No! A corporation is a collection of companies. What is with all the apologists? Someone makes a comment which is known to be true and a bunch of jokers jump up and say "No, No, No, water boarding is good for America. All I can say is keep drinking the kool aid and see what happens.
When Sam Walton was starting Wal-Mart, he had the good sense to sell only American made goods, because he was smart enough to realize that without jobs, the American worker could not be his customer. It has taken a while to spin down, but the US economy will die if the only thing we do is sell each other cheaply made hamburgers and cheaply built houses.
But something happened along the way. they got too big to fail, we are told. Then we shoujld break them up again.
Really, Mr. Reich. This is such a backward forward looking statement, at the end of which you end up at Washington lobbyists.
I think you should forget Keynes and instead review those 3 laws that were passed on Dec. 24th, 1913 which is the origin of the current failures.
If you abolish the graduated income tax law and replace it with a single income tax rate for personal and a single income tax rate for business with zero exceptions by law, you automatically eliminate Washington lobbyists.
If you abolish the Foundation Laws, you will restore government for the people, by the people.
If you abolish the private bank known as the Federal Reserve and replace it with a true U.S. national bank, you will terminate the English Rothschild control over the U.S..
Then if you got some spare time, you can advocate the release of the hydrogen economy which will empower each citizen with the ability to produce their own electrical power which will rid humankind of the global oil cartels!
Now, about those infamous three 1913 laws. A single rate tax will, no matter the rate, which could soon be enormous, mean the poor pay more and the rich less than now. Maybe. All those deductions currently disproportionally cutting the taxes of the wealthy will be disallowed. So, be careful of what you ask for.
As for "Foundation Laws," I haven't a clue what they're about nor why, whatever they are, they're infringing on the people's government.
Another mystery is how the Federal Reserve is enabling the nefarious "English Rothschild" conspiracy, an insidious mix of Anglo-Saxons and Semites, to control the U.S. Less than eight months after December 24, 1913, England entered WWI and began a downward spiral in wealth, power and influence that may have only bottomed out in the last few years.
Finally, the "hydrogen economy" is now better known as "Hindenburg Economics.
During most of the 20th century the highest tax rate in the US was over 75% and as high as 94%
Let me explain further.
There is a 60's Senate record showing the federal income tax return for a very rich Nelson Rockefeller. He paid grand total of $650 in federal income tax which wouldn’t even pay for the weapon used by 1 soldier to protect him and his wealth should the U.S. be invaded.
It get’s better, his dear old grandfather, John D. Rockefeler, amassed the Standard Oil fortune. In order to protect that wealth from that taxation law in 1913, a tax avoidance scam was passed called The Foundation Law. The wealthy then moves the bulk of their wealth into a Foundation. There it is invested at 10% and only 5% of the total is disbursed annually to causes of their choice. The Fund grows forever. A wealthy person can route 1/2 of their per/annum income into the Fund each year which then is used as a deduction and zero’s out anything owing. Ask Gates what he pays in federal taxation now that he established his Fund.
The Reserve is a private bank that has never been publicly audited in 90 years, so you are ignorant of it’s inner records.
If Rothschild’s are insignificant, why did their 75 European properties escape the ravages of war in WW1 & II?
And you are really out-to-lunch on the Hydrogen Economy, but here is a site to keep you abreast and informed of its developments: http://www
I certainly don't have the time nor the interest to read all the posts,and I doubt this will be read by many.Like former Sec'y Reich,my formal training isn't in economics.
I wonder if we're heading for an ever increasing problemmatic economy.I will try to contact Mr Reich at, yrly intervals and see what various economic markers show.
Either learn how to spell or use a handy piece of software called spell checker.
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