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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Why is it that the only time progressives speak of Keynes is when we are on the downside of the business cycle? Because that is when Keynes theorized it would be beneficial for the government to spend more, thus stimulating the economy. On the upside of the business cycle, the government was supposed to spend less. This is when progressives switch from Keynesian economics to "investment economics", i.e. this now the time the government needs to spend more money for the future of the country. At what point do progressives believe that the government should spend less (other than defense spending. That of course is TOO constitutional)?
Instead of taking more money to waste, why doesn't the government just take the money it's currently wasting and switch what they spend it on. I know progressives think this is what is going to happen with Iraq. Isn't there any other waste in government? Oh yeah, of course. They'll have to get to that later. First they need spend us into (I mean out of) another great depression.
Another point, even if upper-income people save their tax cuts instead of spend them, that doesn't mean that they're not helping the economy. They save their income by investing them in a bank that the bank can use to lend credit to the middle class or to a company for pay roll. Or the upper-class invests their money in a company or property or perhaps even in the stock market (more-so if capital gains taxes were cut). The point is, just because money isn't spent doesn't mean it isn't active in the economy.
And Reich forgets to include small businesses in the group of upper-income tax bracket. They don't save their money, they invest it in their company and use it to keep their existing employees instead of needing to lay them off.
Doing some Keynesian demand-side spending is fine and inevitable, but raising taxes at the same time will only defeat the purpose.
To me, this type of drastic deficit-spending demand-side Keynseianism is just as ideollogic
Its really promising that this Reich's post has been responded to with such vigorous and plentiful debate. Our economy is the source of our personal and national well being. It has been in the hands of ideologues for thirty years. It is about time that the subject was open to and a topic of discussion for everyday Americans. Economics is not voodoo and the more everyman knows about it the better off we all will be.
Who controls the issuance of money? Money is printed on a machine by those who control it and doled out in the form of loans to banks, governments, and corporations. The private corporation with ten stockholders called the Federal Reserve prints money and loans it to whoever is deemed fit to receive it. The whole notion of an economy is nothing more than a myth of gigantic proportions because its whole basis revolves around wealthy individuals whose main creed is greed. They've used their wealth to make us stupid, to make us believe in such things as "money," "work," "economy," and "materiali
So I guess the answer is to print more money -- print money until we run out of trees.
The republicans 'conservative' ideas were just repackaged failed thinking out of the 1920s and the same results happened today as in 1929 with the Stock Market crash. I was surprised when Reagan was talking trickle down that no one really rang an alarm bell and instead the country embraced it.
When Bush pushed it into full throttle no one batted an eye. No one bothered to think this is exactly what caused the collapse in 1929 and drove us into a depression. If this thinking failed so spectacularly once, didn't anyone realize it would surely do so again? The republicans and the country was insane because they believed that if they did the same thing over and over again they would get a different result.
I just shake my head.
I am by no means an economic or math person. I really do not do numbers well. But, it doesn't take a rocket scientist to know we were heading down this road. My only question during this conservative insanity was when. My answer came when the housing bubble crashed.
"Those who do not remember the past are doomed to repeat it." Santayana
I am reading Galbraith's "The Great Crash 1929" and he makes the point that these bubbles and crashes keep happening when the last one fades from memory. One of the reasons he wrote the book in the 1950's was to keep alive the memory of the crash of the 20's and its causes.
I must say, these are some of the most intelligent and thought provoking posts I have read in a long time. I mentioned Keynesian economics on my posts a week ago and a couple of bloggers thought I was nuts (talked them down).
Government spending and consumption stimulus is all well and good but what got us into this mess to begin with was not a lack of consumption, it was a lack of regulation, a Wall Street run amok with products based on smoke and mirrors ( I worked on Wall Street and witnessed it firsthand in the belly of the beast), highly leveraged companies and just plain greed. Reaganomics led this economy into the realm of the absurd as bubble after bubble turned to rubble causing destruction.
Economic cycles are part and parcel of a free economy, constant boom to bust is not. No degree of economic stimulus will turn this hell storm around until we have set in place the checks and balances that ensure us a rational level of economic activity. This MUST include CEO compensation caps and controls.
Fiscal sanity must prevail.
If we spend more federal dollars, we must tax more, because we can not afford to continue to charge up the national credit card.
http://en.
And don't give me than phoney jive talk by comparing the debt to GDP. This means absolutely nothing.
If there is one figure that should be paramount, it should be the interest on the debt.
Apparently, we are paying over $500 billion on interest every year and getting absolutely NOTHING for it.
http://www
We need to cut this interest cost to $0, because we could use every single dollar for the needs of the American people.
Our politicians have failed us.
I'm desperately looking for a job, and I'm all for government stimulating the economy. But let's not do it Bush-style, by giving money to UAW retirees. Is it too much to ask that we stimulate the economy with some INTELLIGENCE, e.g. paying the UAW to leave the useless GM factories, and start building bridges and roads, or wind farms? Please, let's not reward failure; we've had too much of that for the past 8 years, and there is so much infrastructure to rebuild anyway.
I believe this is obama's plan. To put people to work rebuilding our infrastructure.
For the auto companies, he is wanting some caveats with it. He wants demands that they begin building smart cars and fuel effecient ones that are battery operated. He demands the auto companies retool for the future and knock off doing these SUVs that get only 12 miles to the gallon.
Obama also wants to do wind farms and the grids powered to make them feasable and green jobs.
This is big part of Obama's plan.
The only comment I personally would like to make about the article is in the realm of questioning the lack of giving among welfare recipients. I believe the author's suggested explanation too simple. I suggest, instead that there are other factors beyond liberal attitudes at work in many of those households. The foremost factor being that of pure pragmatism. According to Maslow's heirarchy of needs, basic survival and personal security trump other needs such as achievement, morality and even problem-solving. But, my second point is based on the fact that within this paradigm concerns of family greatly outweigh that of society. This is important not because the extremely poor do not give, a large segment of them are extremely generous with their resources; however, they tend to limit their giving within their perceived 'family' (in-group). This limitation also means that the type of resources they share are not measurable by standards such as those both authors employ. Further, this demographic has no reason whatsoever to self-report. A charitable contribution deduction on their income tax forms would have no value for them whatsoever, nor would feeding the family next door qualify to the IRS even if they tried to report it.
Thanks and Ciao for now!
Mr Reich wrote: "Government is the spender of last resort"
I recently issued a challenge to certain business leaders to "Put your money where your mouth is." To my surprise and delight, the individuals to whom I directed the statement responded resoundingly. YAY and thank you very much!
Now, in the spirit of equality and progressiveness, I would like to issue the same challenge to the Liberal Left.
In November of 2006, writer Ben Gose from the Chronicle of Philanthrophy published an article: Charities Political Divide - http://phi
I would love to hear what readers, writers, politicians and leaders have to say about this article and I would especially love to hear the responses in the form of a reply to my challenge.
Continued.
You are right! Thank You Sir!
The more I see of this fiasco in the economy the more I believe the so called brains on Capital Hill have missed the bull’s eyes. (It reminds me of the
Star Trek movie when Khan is trying to kill Kirk and Kirk shouts you keep missing the mark Khan.)
IT'S THE CONSUMER STUPID we need real money in our wallets not b.s. loan's or b.s. credit cards.
That's the problem. There are no "brains on Capital Hill" that can solve this problem. They can't create the perfect market. No one can. It doesn't exist. We can only use the fairest market available, the "free market". Why is it the fairest? Because individuals are allowed to engage in voluntary interactions that they perceive as the best course of action for themselves. They don't always make the "best" choices, even by their own hindsight evaluations. They do, however, attempt to make the best choices and get much closer than most progressives probably believe. In the government controlled market, the actors also try to make the best choices for themselves and often get very close as well. The problem is, in the government controlled market, the actors are mainly politicians. What is best for them is often not best for those that depend on the market.
Replacing good living wages with cheap labor and creating a smoke and mirrors here’s a credit card to keep you happy economy is a scam. Even Henry Ford I'm sure a conservative realized you have to pay a decent salary to workers if you are to have consumers. The obscene compensation that CEO are getting is criminal more like the days of Rome or the aristocracy of France before the revolution and then a few heads came off. I hear some of these talking heads on T. V. saying that these CEO’s work hard for their money well I'll tell you what, the guy who picks up your garbage or the nurse who changes your bed pan or the waiter who serves you a meal works just as hard but in a different way and doesn't have the inside information or contacts to make what I call something for nothing money.
Fairness, transparency, education and accountably this is what the American people want and deserve. Otherwise we are doomed to fail and I would hate to be around if we find ourselves in a violent revolution.
When asked why he paid such a good salary to his workers, Ford replied he needed to have people, especially those who worked for him, to be able to afford to buy his cars.
the man was no dummy. Ford paid the highest wage in factories for the time and knew that if he did he would also benefit from his employees buying his cars.
Too bad we have such stupid owners and CEOs around these days. They may have a business degree but, by no means understand business in it's basics.
Henry Ford built a cheap and reliable car for his empoyees to buy with their high wages
Today the high wages are still there but ford cars are crap and the employees wont buy them because they know they are crap..and they wont buy a GM or Chrysler product either and for the same reason..
It's quite easy to judge about the wisdom of financial decisions, when you have no resources on the line in these decisions. Doesn't the recent collapse of the American auto sector (which averages about $73/hour including benefits) versus the foreign companies which are at least surviving (averaging about $44/hour in the states), tell you how wrong your analysis is? You aren't producing products for your workforce. You're producing them for the open market.
There are stupid CEOs and owners to be sure. But in this congress, and with this president, it pays to be stupid. Isn't the going rate for corporate stupidity about $7 trillion?
"Henry Ford: He produced an affordable car, paid high wages and helped create a middle class. Not bad for an autocrat." By LEE IACOCCA
http://www
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