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.

Comments

[000Jade000]

I believe that Keynes coined the term "financial disarmament." That sounds good to me. Strip Wall Street of its control over monetary policy, dismantle hedge funds, freeze the instruments of speculative trade, and democratize monetary policy.

More than one debate can happen simultaneously. The debate that I want to hear right now is how can we make sure that this NEVER happens again? It seems that we should be talking about a new Glass-Steagall Act and a new Shad-Johnson Accord. We should be questioning the legitimacy of hedge funds, and condemning the insanity of the banksters' "exotic" financial instruments. We should ask ourselves if the Treasury is really a privatized entity.

There are statisticians who believe that our unemployment rate is really 15%. That's the percentage calculated when using the pre-Bill Clinton definition of unemployment. If it is actually possible to dig ourselves our of this mess without losing our dollar system or worse, there will be plenty more people looking for a job. So maybe a good place to atart for the Obama admin.'s "wise use of the money" would be to place a ban on no-bid contractors. Also, have a number cruncher look to see where unemployment is the highest, and see what kinds of jobs can immediately spring up in those locations.

[Peter007]

You're talking silly now. Wall street doesn't control monetary policy, the Fed does or they think they do. . No one person controls wall street. Also, Hedge funds aren't evil just because you hear them mentioned on the news. A hedge fund is very similar to a mutual fund only they are allowed to take higher risks. Only wealthy people can invest in hedge funds because of the risk of loss. The government protects the general public from the risk of the hedge funds because you aren't allowed to invest in them. Also, high risk ventures like solar energy, wind turbines, and alternative fuel companies need hedge fund money because they are considered high risk ventures with a high probability of failure.

[000Jade000]

Doesn't seem silly at all to me. The Wall Street bankers, the Fed, and the Treasury are all on the same team. If they weren't, why did the Treasury recently repeal a 22-year-standing tax code so that the merging banks could receive a windfall for their ineptitude? Around $140 billion has been "earned" by the banks so far with that change. And when the Fed took over Fannie and Freddie, what they were really doing was giving them an unlimited line of credit -- money funneled to them through the Fed did not require Congressional approval.

Hedge funds are a BIG problem. It is high-stakes gambling, but gambling on money that didn't exist in the first place. There is no access to government loans in the case of default, which is why we have the problems we do now. The derivatives industry is estimated to be an industry "worth" a quadrillion "dollars." And it's estimated that our banks have been exposed to anywhere between $62 and $180 TRILLION in toxic derivatives. (The GDP of the world's economies is $60 trillion.) Paulson was trying to scrub the toxins off of his buddies' portfolios with his bailouts. (There is NO access to government loans in the case of hedge fund defaults, remember.) But you can't bail out a black hole. And banks are likely mostly illiquid at this point.

[Kache]

"Also, high risk ventures like solar energy, wind turbines, and alternative fuel companies need hedge fund money because they are considered high risk ventures with a high probability of failure."

That's what we need to fix. We need to make investments in alternative energy as solid as an investment in Southern Edison. All it takes is setting a floor price for energy to prevent Saudi Arabia from devaluing the investments by flooding the market (which they have threatened to do).

[WilliePilgrim]

Fiscal "hawks"? Is that what it's come to? We're now applying the word hawk to those who oppose increased government spending as a strategy to thwart a full blown depression, so I suppose those in favor of increased government involvement with the economy are "doves", correct?
Yet another illustration of just how proposterous and misleading the rhetoric has become. I would suggest that it is a manifestation of how our leading minds are fascinated by the ideological shadows projected on the wall rather than the reality of the situation. Ad we the audience? We slurp it up.
I hope someone in leadership turns around and pulls the projection screen down so that we'll take a look at what is really going on.
Mr Reich's a smart man but if we're going to replace reality with shadow puppets we'd better be prepared for monsters of our own making to enter stage left and make a mess of things.

[Kache]

Yeah I noticed that doublespeak too. The Rovian language is SO usefull, regardless of who uses it.

[CSE]

[Quote] - "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. "

When someone has no income how will a tax cut help? Even those who will struggle under reduced incomes will not see any significance to a tax cut given their new economic plight.

[MFI-Miami]

We need to begin to build durable goods and tangible things of value in this country again. We can not prosper by simply selling tax shelters or having banking executives making millions of dollars shuffling money from one institution to another. This is something the Bush White House never understood. The stimulus package Obama is pushing for is a great first step but we need to understand there is only so much the government can do. We do need massive investment in our rail system, highway system and our ports but that will only do so much. Until we start thinking 10, 20, 30 years ahead in or strategic planning, begin to think in terms of global competitiveness and shed our arrogance of being the world's only superpower, we are destined to be the world's wealthiest third-world nation.

[Peter007]

I agree with most of your ideas. One concern I have is that many people believe we need massive investments in our concrete infrastructure. That idea may be more appropriate for developing countries without a good infrastructure. It may have been a good idea in 1875 or maybe 1925, I don't know, but my impression is that our competitive disadvantage is not due to a poor road system or train system. The 21st century may need a new type of infrastructure. Our only advantage in this new world may be our flexibility to adapt to new market demands quickly. In order to be flexible, we need to be free to invest in new ideas before our competition. State sponsored 5 and 10 year plans may preempt that concept.

[Doofus]

A lot of analysis will go into *where* to build new infrastructure. Much of that
will be political, meaning that states or cities or regions without sufficient
clout will get less, but hopefully 'population concentrations' will get a lot.
The northeast would benefit from extensive high-speed rail improvements,
where *suddenly* that area extends all the way west to Chicago, for sure.
Power grid modernization will benefit folks everywhere, presumably.
Bridges-to-nowhere in Alaska, not so much; bridges-to-somewhere, more.

[canucklivinginUSA]

Damn, that's some sexy talks right there. :)

You and MFI speak my language, I like

[canucklivinginUSA]

Now we're talking. Go back to drawing board and create new durable goods that won't be outsourced. You cannot avoid globalization, but you can learn to adapt and thrive throughout the competition

[rockyb26]

ultimately we need to start valuing the american worker. i doubt that so many people would be unemployed if american businesses were hiring americans rather than outsourcing for cheap labor. they outsource b/c non-american workers do not demand healthcare coverage and a competitive living wage. they are too busy trying to increase their profits to fairly compensate the american workforce. seems like if we can find a way to provide good paying jobs and provide healthcare that is not tied to employment we wouldn't be in the trouble we're in now.

[Kassandra]

I'm very glad to hear you say this, Mr. Reich.

[realpolitic]

Many conservatives base their objection on the spending to rebuild infrastructure for the purported reason that is takes so long to get underway. I think it is a rationalization. At some point we have to do something to repair our roads, bridges, and electrical infractructure. As a wealthy country, do we really want a second-class infrastructure? Any private businesss makes investments or goes broke. We must make such investments as a country.

[polaris12]

I agree we have to invest in modernizing our infrastructure, but it is not clear to me how that is going to do very much for employment, because how many people are actually construction workers? It seems to me to be a rather small percent of our total employable population. Rebuilding our manufacturing base might do more for employment, but is that even possible given the amount of manufacturing that has been turned over to China.

[jcdf]

Its whats connected to the construction industry that also creates jobs. Things like trucking, manufacturing like Catapiller equipment, steel manufacturing, white collar jobs like engineering and architectural firms, accountants. It does spread the wealth.

[Doofus]

Think of material & equipment requirements also, assuming we don't have
to import too much of that.

[realpolitic]

Yes, certain infrastructure projects would be contracted out and that would boost employment if contractors needed to hire. Also, such projects would keep many city and state employees from being laid off in this time of low tax revenues. I do not know the numbers of of people that may be employed through such programs, but it would help local economies and accomplish the necessary goal of maintaining our bridges and levees.

Yes, doing system to rebuild the manufacturing base is a structural problem and not responsive to Keynesian type public works programs. Perhaps we can no longer compete in the manufacturing sector given low wages abroad and the ease of shipping. Obama and Clinton said retraining must be necessary. Governments should do whatever they can to maintain a manufacturing base. They often make large concessions to manufacturers, but it is still difficult to compete given a world economy.

[Peter007]

I agree, too many minds are stuck in 1850's economic ideas. We are not a 3rd world country that lacks roads and bridges.

[Peter007]

I have heard that many of our roads and bridges are in need of repair. Do you believe that our current crisis was caused by a lack of infrastructure?. Do you think that the reason we can't compete with China in industrial production is because we don't have enough roads? I can't make the connection between the number of school buildings we have and the 600 billion dollars going overseas for the price of oil. Would more school buildings solve that problem.? We already have some of the best Universities in the world. ,,,,,Our country boomed between 1890 and 1975. That was the era of the gas powered car and the design of our cities and suburbs mimic that event. . Will the automobile be in the economic engine of the future? I hope not.

[realpolitic]

Well, there was that bridge in Minnesota that collapsed. Then I googled bridges in poor shape and found that: "Over 250 other Wyoming bridges reportedly carry the same federal deficiency rating as one that collapsed in Minnesota," and that is one one state alone.

No, of course the economic crisis is not because of a lack of infrastructure, rather a lack of regulation. We have infrastructure, it is just deteriorating rapidly, as most was built during the Eisenhower administration. We need good grammer schools and high schools to send children to our best universities. Now most of the engineering and science graduate students in our best universities are from abroad.

Anyway, the levees collapsed in New Orleans and last summer in Iowa. The repairs cost billions. It may be smarter to rebuild our infrastructure then to spend billions after they have failed. A few years ago the entire electical summer on the east coast failed. New Yprok City was completely dark for a couple days. A Keynesian response to a deep recession is for the government to have public works programs to help the economy. The infrastructure and the economy need the injection of capital.

[ApolloSpeaks]

All the bold new experimental public works projects and stimulus shocks to the economy of FDR's failed New Deal couldn't prevent the collapse of America's industrial base in 1937. FDR proved himself to be a master of disaster more destructive in his plans and policies than the progressive Herbert Hoover whose tax hikes and protection policies started the Great Depression.

Now we have Bob Reich and the Liberal media urging Barack Obama to become the New FDR and bring us the same old Keynsian New Deal with its screwball theory that all economic crises, recessions and depressions, are psychological which the right amount of government spending can reverse and rectify.

Fortunately for Roosevelt the great industrial collapse of 1937, caused by his high tax policies and assault on industry (the "economic royalists"), was reversed by Adolf Hitler's invasion of Poland and the start of World War II. It was the growing need for US goods and services caused by the war that saved the US economy from total collaspe and FDR from electoral defeat in 1940.

[Photofarm]

What history shows is that the longer you prevent corrections, the bigger the corrections. The government is broke, so doesn't have money to spend. What Keynes economics does is give the government the excuse to try and micro manage the economy. This leads to a business distorting tax code, that leads to inefficiency of the economy.

Jimmy Carter vs Ronald Reagan clearly showed that Keynes policies were wrong, why do we have to go back and repeat failed policies?

[DiogenesOfAlaska]

It's a funny moment in the history of capitalism to be worried about 'business distorting tax codes' when the macroeconomic imbalances are such that you are free to wonder where the laws of supply and demand went when it comes to capital.

In a situation where your favorite equilibria just aren't there, acting like they are immutable typically leads to desaster.

[PWM]

Well Reagan drove the national debt up 189% in a mere 8 years. The difference between Democrats and Republicans is the first want to use tax money to pay for their spending while the latter want to borrow to pay for their spending. Morally speaking, the former is better. If a generation wants the largest and most expensive military in the world, then they should pay for it and not expect their grandchildren to pick up the bill. It is like buying a car. If I want a car I should pay for it, not pass the bill to my children and grandchildren.

I am still waiting for some Fiscal Responsibity.

[ApolloSpeaks]

Keynsianism and the New Deal

Poor Bob Reich eternally trapped in the terrible Dark Ages of FDR's failed New Deal. The Great Depression wasn't "Great" until FDR applied Keynes's wrongheaded theories of government spending to "jump start" weak or depressed economies. What should have been a small, normal economic depression lasting no longer than three years, like the depression of the 1890s, was prolonged another 8 years because by Keynsian interventionism and became the greatest and longest economic disaster in US history.

Don't believe me? Think that Reich has it right? Then hear the words of Hans Morganthau, FDR's Treasury Secretary, speaking before the House Ways and Means Committee in May of 1939:

"We are spending more money than we have ever spent before and it does not work. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises I say after eight years of this Administration we have just as much unemployment as when we started and an enormous debt to boot."

Keynsianism (now called Obamanomics) is nightmare economics, the wrong way to go in an economic downturn; but not for liberal dolts like Bob Reich who mythologize the failures of the past into successes to suit their blind faith in government power as the answer to every crisis.

[DiogenesOfAlaska]

Apollo, I am sure you know perfectly well what King Midas was told when asking for Dionysos' opinion on what would be the very best thing to do or to have?

Don't take it personally, but you sure asked for it.

And if you don't like philosophical voodoo, then at least make sure you don't mix up your private definition of Obamanomics (before the man has even taken office) with 'whatever it is that ApolloSpeaks will call a failure as soon as he gets the chance.'

[Octoberon]

Reaganomics failed - just like Margaret Thatcher's parallel strategy in the UK - because that kind of economic thinking leads to an overall reduction in economic activity, coupled with asset stripping. While, admittedly, by the late 1970s in the UK, Keynesianism also seemed to have run its course, in between times - and particularly during and after postwar reconstruction - it had led to strong growth in the UK economy, and to a period of affluence.

Keynesianism ran out of steam for a number of reasons. Not least amongst these was the rising price of crude oil post-1973. But monetarism fails for opposite reasons. Arguably (although the term hadn't been coined in those days), the Beeching rail cuts of the 1950s and 1960s in the UK were also monetarist at base, and their legacy now takes the form of a permanently altered rail infrastructure. Like it or not, and whatever the future for energy and fuels, most of the UK's goods are now carried by road.

So, if both philosophies have their shortcomings, which way should we go? Surely there's a lot to be said for rebuilding infrastructure because it's ENABLING, whereas factory close-downs and asset stripping are DISABLING. For that reason, I'm happy to take Mr Reich's advice.

[ApolloSpeaks]

Obama has already said that he plans to return to the failed policies of the New Deal; that is why Bob Reich is so excited. Like FDR Obama confuses growing the size and scope of government with economic expansion. Public works programs did zero to improve the economy or to bring down unemployment in the 30s. That's why after six years FDR's Treasury Secretary pronounced the New Deal a failure. I take very seriously that Great Society spread the wealth redistributionism will be the core of Obamanomics. I say this because Obama opposed Clinton's welfare reform bill saying it was too hard on the poor. Obama, the great iconoclastic progressive dwells in the mental world of the 30s and 60s and is intent on repeating the errors of the past blindly hoping that he'll get a different outcome. This is what is called insanity.

[Citizen54]

FDR's New Deal "failed"? Really? Supporting evidence?

[Peter007]

In the first recession ( 1929 - 1933) the value of goods and services that the economy produced fell by about 42% (but only by 36% once the effects of price changes are eliminated). The recovery in the four years that followed was slow and not completed by the time the second recession began. In this recession lasting 13 months from May 1937 until June 1938, output fell by 9% .

[ApolloSpeaks]

If FDR's own Treasury Secretary pronouncing the New Deal a failure in 1939 isn't proof enough then it means that you've bought into the fairy tale that the post war economic boom was caused by the New Deal and not by the war, the Marshall Plan and our massive exports to war ravaged Europe..

[jcdf]

Apollo, We are now in the nightmare called the "Bush Dark Ages of Reaganomics". It was a failed policy back in the 80's, it gave us record deficits then, and now Bush has super-sized the deficits with his incompetence. It is the Bush Administration that has asked for trillions in bail-out (stimulus) to get the economy moving. And by doing so has admitted that Reagonomic as a policy is a failure on a grand scale.The myth that the markets are more efficient and don't need government over-site is just that - a myth. The truth, what got us out of the depression was the massive pubic works project called ...World War II.

[ApolloSpeaks]

The "nightmare" of Reaganomics ended the disaster of stagflation created by Jimmy Carter and the Democratic Congress in the late 1970s. When Reagan was sworn into office we had double digit unemployment, inflation and interest rates, the worst economic crisis since the Great Depression-far more serious than what Obama is inheriting from Clinton's sub prime loan catastrophe If Reaganomics was a "failure" and a "nightmare" then I say lets have more of it-lots more of it.

[realpolitic]

Appollo is just another propagandist.

[realpolitic]

Apollo speaks more conservative revisionism. FDR entered office in 1933. From Wikipedia...

"The economy had hit rock bottom in March 1933 and then started to expand. As historian Broadus Mitchell notes, "Most indexes worsened until the summer of 1932, which may be called the low point of the depression economically and psychologically." Economic indicators show the economy reached nadir in the first days of March, then began a steady, sharp upward recovery. Thus the Federal Reserve Index of Industrial Production hit its lowest point of 52.8 in July 1932 (with 1935-39 = 100) and was practically unchanged at 54.3 in March 1933; however by July 1933, it reached 85.5, a dramatic rebound of 57% in four months. Recovery was steady and strong until 1937. Except for unemployment, the economy by 1937 surpassed the levels of the late 1920s. The Recession of 1937 was a temporary downturn. Private sector employment, especially in manufacturing, recovered to the level of the 1920s but failed to advance further until the advent of World War II."

http://en.wikipedia.org/wiki/New_Deal

The problem with conservatives is that they hate Democratic solutions so much they completely alter the picture of what worked and did not and then they believe their own false narratives.

[ApolloSpeaks]

The Depression which began in 1929 as a result of Hoover's progressive tax and protectionist policies should have lasted no longer than three years like the deptressiion of the 1890s. By 1932 there were signs that the economy was recovering until FDR began his irresponsible Keynsian experiments which turned a normal three year depression into the longest and greatest depression in US history. By May of 1939 Morganthau pronounced the New Deal a failure since unemployment was just as high as on March 4, 1933 when FDR took office. And now we have an incoming president, with his gleeful allies in Congress, who is aching to commit FDR's follies all over agian.

[realpolitic]

Unemployment fell by two-thirds in Roosevelt's first term (from 25% to 9%, 1933 to 1937) but then remained high until 1942.

[DASChicago]

The Bush tax rates should be repealed immediately. US parent based businesses who outsourced human capital and layed off workers should not be rewarded for this with tax incentives.

Out sourcing impede the cyclical cash flow with in the US..

Increase Tariff taxes on imported goods. Create new business incentives to manufacture in the US- all goods needed for inputs. The reduction of imported goods can create the demand for "new" US based enterprises to supply this demand. New business=employment growth.

Obama's to line by line and elimate programs that don't work. Workable programs can create a two-fer eco-benefit expansion=employment. Non-working programs pays for the enrichments.

Industry wide:
For existing companies threating consolidation and/or bankruptcy, should seek local bank financing. Bail-out receipent Banks should be instructioned to lend. If the company is suffering from poor management then a job creation plan should be included as a condition for obtaining the loan. As is for newer enterprises and startups both potentially can qualify for the Obama job creation incentives - per new hire.

For Mortgage Fixes:
Banks - write down interest to a fixed rate-close to prime, on mortgage loans for those facing foreclosure.

Credit Crisis:
Banks CC fee's and interest s/b capped at 10-15%-no higher. ATM fee's reduced by 50%.

Just saying ... as I've watched my 401k reduce to 101k, my peon 2 cents.

[Photofarm]

Trade restrictions, sounds like a repeat of the disaster after the crash of 1929 that extended and deepened the depression. ( Smoot-Haley Act )

[PWM]

Trade restrictions exist now. Guess what countries we don't trade with because of their foreign policy. My thinking is simple. Want to sell it to Americans then make at least 1/3 in America. If you don't want to hire Americans then find another market.

[fairandjust]

Bailed-Out Banks and Others (Investment Banks, Insurance, etc) - Must be FORCED to Stop Outsourcing Jobs out of the US. Some examples:
- JP MorganChase outsources some of their IT to India, and their customer Service Call Center to India.
- Citigroup outsources some of their IT to India, and one of their Call Center is in the Phillippines.
- Bank of America outsources some of their IT to India, Call Center in India

Banks CC fee's and interest s/b capped at 3-4%, (they can borrow from Fed at 1-2%) - let people pay down their debt - It is All Now Taxpayer financed. ATM fee's = 0

Let anyone Refinance their current mortgage with FHA backing - that way We ALL can save a few dollars and there will be less foreclosures - and the Mortgage Servicers get a capped $500 one-time service fee (they need to take some responsibility for the Fraudulent lending they did).

That would be a start.

[ArthurJames]

We also need a debate about the fact that the revival of the United States economy depends on the revival of the global economy - and vice versa. So the US needs to provide leadership to the rest of the world economy, and this needs to encourage other major countries to act in ways that will be helpful to us. To give leadership in this, we need to stand firm against protectionism ourselves, as well as coordinating our fiscal (tax cuts or spending) and monetary stimuli with other major economies. Markwell's book on Keynes and international relations leads me to believe that this is precisely what Keynes had in mind in the 1930s (after he got over his short temptation to protectionism) and would again today. Keynesianism has to be internationally focussed if it is really to work.

[JoeAmerican]

America needs to build an industry we can export. We can't generate wealth in this country by borrowing or printing money. We need foreign funds.

Beyond defense, services and the entertainment industry, America should bite the bullet and become the leader in green technologies, to include massive investment in retooled auto manufacturing plants and infrastructure (i.e. convert gasoline stations, etc.). We need to develop products other countries need and want to get foreign funds flowing into this country again.

[Peter007]

The sad truth is that Keynesian economics has shown that it doesn't work. Monetary policy does. Because republicans espouse monetary policy doesn't mean that they follow it. Its been all rhetoric Republicans demanded smaller government but delivered bigger government. Republicans cried for more individual freedom but installed a police state..Bush ran as a conservative but he was not a true conservative. Now the public rejects Bush and the republicans and their economic policies. They believe that the past policies are "conservative " policies. The only place they have to turn now is the democratic party and their Keynesian policies. Thats the tragedy of the two party system. Its the tragedy of the republican party and the evangelicals that took it over with Jerry Falwell. It now has become the tragedy of the United States.

[liveandlearn]

read krugman's blog in tonight's new york times.

http://krugman.blogs.nytimes.com/2008/11/28/was-the-great-depression-a-monetary-phenomenon/

see what he says and proves about monetary policy.

as for the republicans, most of them can't think their way out of a paper bag. at least democrats go for brilliant thinkers.

[leftLibertarian]

"The real challenge will be for government to spend it wisely"

Good luck with that. We are all doomed.

[Peter007]

That article shoots down conventional monetary theory. Thats the 1st time I've heard of that. I did some quick research on the history of monetary policy and got conflicting results. One article said that the Fed didn't begin measuring money supply until the 1940's. It also said that it didn't differentiate between M1 , M2, and M3 until the 1970's. One article said money supply had contracted 30% between 1929 and 1932. I'm not sure who is right on money growth during the 30's. I may be wrong. But, these are my premises and conclusions. . .. . Too many dollars chasing too few goods is inflationary. Inflation is a disincentive for savings. Finally, savings equal investment and investments create profits.

[Doofus]

Isn't it widely accepted that WW2 pulled the US economy out of
the Great Depression, and the strategies that applied there are
*still* in effect to a considerable extent. To wit, the persistence of
the military/industrial complex, huge defense expenditures, etc.

Now the manufacturing that was done to support that strategy
is done elsewhere, and the fuel to drive it is mostly imported,
while the funds are borrowed from the 'third world'. Go figure!

[Greenheron]

good comment-hope the dems listen to Krugman; he is a smart guy and non-partisan. Tells it like it is, no BS. The new Pres is going to need all the help and brilliance he can get; for the sake of our whole country.

[DiogenesOfAlaska]

In my opinion, there would be a tragedy only if monetarism and Keynesianism were in fact (logical) alternatives (or opposites) and the only ones at that.

They are not. And as you mention, not even conservatives think so or act like it were so. Not even Reagan did. Pragmatism has been on for 30 years now. Only nobody figured out the right sort of pragmatism yet.

Your point about the illusionary nature of the movement of the pendulum is very strong: just because there are two parties and just because many voices in the media can handle at most two options at a time (and for some voices already that is too much) doesn't make it true that the world is black and white.

What's frightening is that this truth (about the colorfulness of the world) isn't exactly news, but nevertheless it is difficult to find enough people with a taste for argument. Could it be that the problem with 30 years of movement conservatism wasn't the wrong economic or fiscal policies, but the destruction of public discourse by means of a shameless abuse of the need for simplicity?

So do we have a tragedy of restricted policy options? No!
Do we have a tragedy? Yes! Of too many people putting their head in the sand, scared to death by complexity.

[rucognizant]

Keynesian Economics SURE WORKED FOR ME! I used to have a GOOD LIFE, until Jan 20 1981!
At age 41 my life took a distinctive downturn, and after the "hostile takeover" by the younger CEO's
( are you one of them?) following the '87 crash, causing the white collar recession of '89-90, I was forced to work at "dumb" jobs to survive,leaving insufficient time to produce the works of art that had provided me and my husband a very good living from 1962............................Going into that, dog eat dog, everyman for himself, Milton Friedman, (may he fry eternally!) greed oriented supply side world where people paid 10 times what a sneaker was worth but want a painting for 1/10 of what it is worth,
we have hit the skids as agreat civilization. Repiglicans have the aesthetics of a bedbug! And they have hogged all the wealth!
A TRAGEDY indeed but not for the reasons you cite!

[Articulator]

We've been heavily favoring supply side economics since Reagon. It's time to ask questions. The argument that Keynesian economics doesnt work seems to me so far to be coming from those who have been clinging to an ideology are trying to throw it out there to keep their world intact. I want arguments based on facts and not psychological needs.

[Peter007]

In the first recession the value of goods and services that the economy produced fell by about 42% (but only by 36% once the effects of price changes are eliminated). The recovery in the four years that followed was slow and not completed by the time the second recession began. In this recession lasting 13 months from May 1937 until June 1938, output fell by 9%

[Shake-A-Spear]

Isn't there enough empirical evidence out there, accumulated over the years, through recessions and the Great Depression, to answer once and for all the debate that rages endlessly and continuously; Cut taxes during a recession?? and, if yes, for whom? Upper or lower brackets? Does or does not massive governemtn spending work? Has ti worked in the past? Is the present any different and if so HOW? What's the best way to encourage consumer spending? Etc. Etc.
Maybe we now have a president who will help educate us all by using the past's accumulated data to make clear the course he will ask Congress and the American people to take.:

[FemWorkingClass]

The next administration will enable the tapeworm economy to continue function as siphon from the USTreasury.

http://www.dunwalke.com/contents.htm

Holder as AG will see to it. Business will continue as usual.

[Peter007]

You need to understand how wealth is created. The governments printing of money is not wealth creation. Wealth is the accumulation of capital and its used to produce a higher standard of living. Profits are used for investments and the investments should create wealth. If you borrow money for capital investments, you have to be smart enough to invest in something that will give you a greater return than the borrowing cost of the capital. Its better to use profits for investments rather than borrowed money. Will a new road and a new bridge create profits.? We need a better answer other than " We hope it does ".

[DiogenesOfAlaska]

This is a very good moment in time to not be overly ideological:
Did those fincial firms that operated with excessive leverage in past years have all the wisdom you require the government to have before it spends a dollar? I don't think so.

I totally agree that 'If you borrow money for capital investments, you have to be smart enough to invest in something that will give you a greater return than the borrowing cost of the capital.'

And was that what all the SPVs did? No. Their 'hopes' were dashed, too.

This is a moment of urgency. You could even call it the gamble for resurrection of capitalism. I exaggerate on purpose, to make it clear that your financial logic isn't sensitive to distress phenomena.

[Citizen54]

I'm not sure I follow your point, but the concept is not that a new road and a new bridge create profit. Building new roads and bridges creates JOBS! Jobs, man! Why is it so hard for some people to understand that Americans need jobs? We are not all trust-fund babies or hedge-fund libertarians. We cannot all make our living tricking other people out of their money.

[Articulator]

There's an element of truth in both sides depending on what the current situation is. The extremes dont work, they are ideology based and reality doesnt follow ideologies. I think the pendulum has swung already, we've been doing supply side economics since the early 80's (including Clinton). Corporations are paying far less in taxes now, percentage wise, than they were when American grew into a superpower. With tax cuts for the wealthy, we are depending on the top 1 or 2 percent of the people to "save us", hoping that they have our, or even the interest of the US, in their mind. I'm willing to bet that a lot of that money at the top was invested overseas in countries like China. There are millions of people out there with the potential to come up with new ideas if they can get started. Every tax dollar spent building roads, bridges, spent on our schools, etc. gets spent that year back in the US economy. Any person can get online and buy stocks. Keeping a middle class and facilitating the average person to get involved with IPO's and venture capital pools may be better than tax cuts to the top 1 or 2 percent.

[argeec]

There is ample evidence.
Germany and Sweden were the only two western countries to emerge from depression before WWII. They did it via large programs of public spending, like the autobahn and the creation of Volkswagen. The US didn't spend enough to end the depression before WWII.

[argeec]

Sweden also solved a similar banking crisis in the 90s.

http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html?_r=1&scp=2&sq=sweden&st=cse


Maybe we should hire the Swedes as consultants.

[R-Star]

This guy is smarter than you or I. Hopefully he is right.