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

[JBS]

It's still trickle-down.

[GhostOfSchlesinger]

In this corner, raw materials, innovative ideas, product designs/prototypes, and tools and empty houses, land and retail space.

In this corner, unemployed workers.

The workers would LOVE to buy that house, rent that office space, or purchase some of those really cool innovative products.

On problem: They're unemployed, so they can't afford any of it.

Conservatives say, "Great, then cut the taxes of high income earners so you can rent the retail space, bring the innovative product to market, rent the retail space and hire the workers to buy it."

But, entrepreneurs, being an intelligent lot, realize that . . . well . . . this just isn't the time to build that factory and launch the new product. Why? Because nobody's got any money.

BUT, what if the workers DID have money. What would they buy? What if they had jobs and the stability offered by steady employment and a secure household? What might they do?

Well, historically, it appears that happy and secure working folks tend to . . . buy stuff . . . .

Which creates demand.

Which makes gets those entrepreneurs excited about bringing that new product to market.

You see, supply side won't work right not. Not in this situation. We can't untax ourselves out of this mess. This requires major stimulus of the sort that can only arise from Keynesian solutions - a fact of which even conservative financial eggheads seem to get.

IGNORE the wacko rightists.

Just a thought.

[marbou]

Ghost, you forgot a line. After:

Which gets those entrepreneurs excited about bringing that new product to market.

You should add:

Which creates more jobs in China.

[rockyb26]

agreed

[Rick in Arizona]

The present crisis offers the Obama administration a great opportunity to do lots of things that have been neglected for too long. Refurbishing highways, bridges, New Orleans' flood protection. Since they are spending money, spend it on something that is useful.

[JHancock]

Exactly.

[Peter007]

Do you believe that building bridges and roads using money borrowed at 5% and 8 % will be profitable? If its not than we will sink deeper and deeper into the hole. If it produces profits it will be a good investment. In order to pay the cost of the roads and bridges back along with interest, this country will have to produce something very valuable for the rest of the world. Our profits will have to skyrocket. What will we produce?

[RedneckDem]

So, you advocate letting them fall into disrepair and, consequently, lead to deaths??? New roads and bridges stimilate the economy (jobs to design and build), as does the convenience of shorter commutes. If they are built upon a platform taking into consideration the future of travel (i.e. light rail, electric cars, other modes of mass transport).
I think you need to state the overall point of your argument and then how infrastructure improvements somehow don't fit into your projections. For example- If we continue to offshore jobs and produce nothing, what is the point of infrastructure improvement? At least we'd know where you are coming from.

[DiogenesOfAlaska]

When was the last time you had a look on where the yields on treasury bonds are at?

[opines]

When FDR employed Keynesian pump-priming during the Great Depression, the national debt was relatively low. Keynesian economics required that once the pump-priming had achieved its goal of getting the economy moving, that the deficits incurred be repaid.

Given today's multi-trillion dollar national debt, it is irresponsible to propose additional trillions of unfunded borrowing without so much as a mention of the threat of runaway inflation.

Perhaps, Mr. Reich has concluded that runaway inflation is less a threat than a Depression.

This country has survived deep depressions, but runaway inflation is a system ender.

[cheforacle]

Right now we are in a rare deflationary cycle actually.

[Peter007]

This deflationary cycle is about 6 to 10 months old. Our last inflationary cycle lasted 10 years. Usually the way to end inflation is by causing a recession. The amount of money being pumped into the system now and the corresponding low production would cause hyper inflation. That will either destroy the country or lead to a depression.

[liveandlearn]

watch now (the pbs documentary) this weekend. robert kuttner explains how his theory of stimulation requires a 10% of gdp expenditure over the next 2 years by the federal government. then the economy grows and afterwards, the government pays down the debt. of course, the stimulation needs to tackle real needs like the infrastructure. he also suggests that now is the time to restructure our economy and make the people who take care of children and elders professionals who will take good care of their charges and be paid accordingly. no more exploiting some segment of our society with bad labor choices. all necessary jobs paid adequately.

[Kache]

If we paid teachers the salaries we pay doctors we'd have cars that fly. You tend to get what you pay for. Pay doctor salaries to teachers and you'd get the same intelligence and commitment signing up for the job. Imagine what you'd do with all the products you don't have because no one has thought of them because their teachers were paid less than hod carriers.

[opines]

It is argued (by the wealthy) that a recession/­depression is no time to raise taxes on the upper brackets. Of course, during the boom times, Bush lowered taxes on the wealthy.

So we are asked to conclude that there is never a good time to raise taxes on the wealthy.

Obama's campaign rhetoric promised to offset lower taxes on the middle class with taxes on the upper brackets increased to where they were before the Bush cuts. He should deliver on that pledge.

[Peter007]

The transfer of money from the wealthy will decrease their wealth, but it will not increase the wealth of the middle class. Wealth and money are two separate ideas. Wealth refers to capital available for production and profit. Money in the hands of the middle class and lower class is normal used to buy consumer goods. After the transfer has occurred, there will be less capital to use for jobs and production . The money will be spent on consumer goods and no wealth will be created. Do you spend the money on bread or on seeds and farm equipment?

[evlbstrd]

Just where does all of that useless profit from consumers go? You sound like a cartoon.

[DiogenesOfAlaska]

And what if a middle class gentleman were to use the extra money in his pocket due to tax cuts to buy stock?

[LDS50]

What do you do with the seeds and farm equipment if no one has money to buy the bread?

[Kache]

Does "dot com" ring any bells inside your thick skull? Companies that live off their investment instead of their profits are doomed. Profits require those very "dirty" sales you think are so demeaning to the wealthy class.

[julianne]

Since 1980, millions of ordinary citizens have viewed the rationalizations for the tremendous movement of wealth to the top as a flim-flam, in tandem with the devouring acceleration of the " inexhorable processes of globalization", both at the expense of the nation's economic and environmental security. Yet the media and political elites, with all their higher education and institutionalized powers, have not taken the necessary action to protect us and our posterity from all the relentless lawbreaking, hubris, and greed. Neither has our military. Perhaps we should begin to look not only at the alleged misguidance of our leaders and their failing "system", but at their omnipresent historical corruption and thievery that has resulted in so much national insecurity, death, pathology, and poverty. We might want to begin to look directly into the faces of those at the top of our economy and politics and begin to define particular citizens among them as the very bad people that they are and stop rationalizing that fact by believing that a new politics or some economic tweeking, alone, will halt or even mitigate all these foreseen and unnecessary catastrophies.

[proudem]

You are absolutely right.

The robber barons, in order to manipulate government legislation in their favor (social, economic and environmental ramifications be damned) have funneled money into (primarily ) conservative politicians. The problem has been that they simply do not have the numbers or the physical location to elect the corrupt politicians. So they have learned to manipulate, through religion and fear, a larger majority of people. In other words, the captains of industry, CEOs and other robber barons have managed to bribe politicians (through lobbyists) in order to convince people to vote for policies that help the upper echelons and actually hurt the middle and lower classes.

I have often wondered why people vote for less taxes for the rich while increasing the tax burden on themselves. Taxes are not the culprit of our economic meltdown. The way our tax dollars have been spent has certainly contributed to the problem.

Instead of spending money to benefit all of society, we have spent it in a way that only benefits a few. We are told that taxes are evil and that we could take more of our earned money home if only we weren't taxed so much. But who will pay for our streets, schools, infrastructure, etc, without taxes. The wealthy certainly have not been paying their share. The burden has fallen on the already stressed middle class. Yet we as a society, continue to elect theives and crooks to office. Why?

[marbou]

What do you do when the only choice is between a republican thief and a democrat thief?

[Evelyn]

In the last Great Depression, we got electric power to rural America, thus making those Americans a part of the 20th century and increasing their ability to be productive. In the coming Great Depression 2.0, we can use the same methodology to bring suburban America into the 21st century by making it green and sustainable.

[Novista]

May I recommend James Kunsler's "The Long Emergency"?

As to debate talking points, and priorities, serious thought applied to "730 bases in 130 foreign countries" -- start with Okinawa and Diego Garcia: are we getting our money's worth?

[Vuki]

The American governments since Reagan, including the Clinton Democrats, used supply-side economic policies as opposed to demand-side policies.. Both policies have the same objectives, but they attack economic problems from opposite ends. Supply-side economic principles address the objectives through the business sector, while the demand-side tackles it through the consumer sector. Roosevelt, in the 1930’s, used demand-sided economic policies to stimulate the economy, while fifty years later Reagan,Clinton, Bush used supply-sided economic principles to try and achieve similar goals.
Others who have followed Reagan as president have continued his principles, and the effect on some parts of society has been detrimental. In The Struggle for Democracy, Ted Lowie an expert on risk management “has suggested that what America has done is to introduce a new form of socialism; it leaves profit to the private market but it socializes risk, which is in effect assumed by the government, which then spreads the cost across the backs of the taxpayer.”­1 The result of these right-wing policies, and in particular those of Reagan, has been the development of a polarized society with a much smaller middle class. The gap between the rich and the poor became wider over the years as ‘benefits’ did not ‘trickle down’ as the supporters of supply-side economics predicted. In fact, these economic policies created racial, cultural, and economic problems as well as a social backlash and many economists suggest that the “cure became worse than the illness”.

[ApolloSpeaks]

The current financial crisis was a left wing attempt to close the gap between rich and poor by giving have nots bad loans to buy unaffordable homes. A predictably disastrous "spread the wealth" program, supported by Obama and opposed by McCain and Bush, that brought us to the brink of economic collapse.T­here are no government solutions to poverty. Unless you work your way out of it, like thousands of motivated immigrants do, you deserve to remain poor.

[solace zhang]

A Left wing attempt? i'm sorry history shows this is a direct result of the neo-liberalisation of the economy vis a vis globalisation.
try right wing conspiracy.

[DiogenesOfAlaska]

Wow!

Are you simultaneously claiming that Obama brought about the crisis and used its negative effects to get into office? That would sure top it all off! The swiftboati­ng-master: ApolloSpeaks.

Are you even aware of who is the incumbent party? Your post doesn't sound like it.

Your hate against government solutions to poverty and your talk of who 'deserves' to remain poor is confused. It shows that you have not understood self-reliance. Otherwise you wouldn't harbour opinions about who desrves to be or remain poor. You simply wouldn't care. You are far from self-reliance.

[Kache]

So, all those bankers who refused to pay for honest appraisals in preference for fraudulently inflated appraisals were commies, right? OK........­. No problem, let's hang those bankers and appraisers that ran the housing market 50% over real value and then unloaded the mortgages on Wall Street. They're just commies, hang 'em.

[Vuki]

Appollo during the Reagan presidency, the deregulation of the finance and loan businesses led to two hundred billion dollars in financial loss with the collapse of the deregulated Savings and Loan industry. This event led to a financial crisis in America. To eliminate criticism of his government’s deregulation policies, Reagan deregulated the broadcasting industry whose industry leaders supported his policies. The repercussion of this change was that the broadcasting industry dropped most public interest programs in favour of programs more profitable to the company. Reagan, Bush McCain and Co. represents the conservative business elements and super-wealthy who portray themselves as tax suppliers and who consider the general populous who use social programs as tax users. Reaganites have protected and benefited the wealthy by cutting taxes, maintaining a low minimum wage, deregulating industry, decertifying unions, and by promoting conflict between the poor and wealthy, native and non-native, and women and men. These policies in Reagan-Bush America led to an economic downturn and stock market crash in 1987 with an accompanied banking scandal where investors lost millions. Junk bonds, mergers and corporate takeovers combined with free trade led to the ‘Mexicanization’ of the North American economy where unions and reasonable wages were discouraged, The Bush gang continued the same Reagan policies and you have the junk sub prime crisis.

[peterg76]

Supply-side economics was always a scam. Economists - the real ones, not the fake religious prophets - have know this all along.

[HoraceOvidson]

But let's make sure that the government spends on stuff that improves our quality of life. A welfare program for Halliburton does not represent good quality.

[MaryT63]

If I hear another republican ask for more tax cuts, I'll scream. I'd better start screaming because they will play that broken record again and again. My one question is 'how have the tax cuts of 2001 and 2003 contributed to the well being of this country. Where are the jobs these tax cuts were to create.'
It's called voodoo economics like Bush41 called it.
Thanks Mr Reich. I see you often on the Rachael show. Keep speaking and writing. I believe you.

[proudem]

I agree. Where are the jobs that the tax cuts of the last 8 years are supposed to have created? Certainly not in banking, automotive, manufacturing or transportation . Military?

[Antifascist-08]

They created a lot of jobs in China and some large accounts in offshore banks.

[ApolloSpeaks]

If it weren't for the Bush tax cuts the "Clinton" recession would have deepened because of 9/11 and the unemployment rate would be nearing double digits by now. The question now is will the Democratic caused financial mess bring back the high unemployment of the Carter years and the Great Depression.

[ApolloSpeaks]

Bush's tax cuts ended the Clinton recession of 2000 which worsened because of the economic hit we took on 9/11. The economy was teetering on a recession until the government caused financial crisis of September 15th driven by a left wing spread the wealth program to make homeowners out of people who couldn't afford mortgages, made a deep recession a reality.. A completely brainless and ruinous policy like LBJ's catastrophic war on poverty. Now the Dems from the president on down are about to suffer the karma of thier economic stupidity. and blind compassion for the poor.

[DiogenesOfAlaska]

Excuse me Apollo, but you are such an interesting case to study. And to think that for a moment I considered the possibility that you might be a hard-working immigrant!

'Clinton recession' (surplus).
'financial crisis driven by a left wing spread the wealth program'
'democratic president'

Now I found the answer that was still open a few posts ago: you are indeed unaware of who is the incumbent party or president or administration.

'suffer the karma of economic stupidity'
sounds like you really arrived at your views based on analysis and thought.

But none of this even comes close to your final self-disclosure: 'blind compassion'.
Sorry to be the one who has to tell you, but if you think that there is such a thing as blind compassion, then you know precisely zilch about humanity, life or anything at all.

[Kache]

It is worse than that Mary. We have seen 3 distinct investment bubbles burst in 8 years, stocks (dot com), housing prices, and this last year commodity prices (oil, wheat, corn, steel, etc. inflated to 200% of it's real value). What causes these bubbles?

The fundamental requirement for a bubble is too much capital chasing too few opportunities. Capital can not sleep, it must be invested. And when there is too much capital, the price of assets to be invested in rises. A demand for investment greater than the supply of opportunity inflates the value of the opportunities.

Krugman has identified part of the problem that has created too much capital. The global flow of finances has created a locust-like swarm that can overwhelm any sector of the economy at any time, or occasionally even entire nations (Argentina) in a matter of a few months. The other major source of over supply of capital has been the 401K.

Capital does not create economic growth. While capital is essential, too much capital robs from demand, creating an artificial illusion of growth. In any transaction both parties increase their wealth. Transactions create wealth, not investments.

[local21]

Adding Robert Reich to Team Obama gives me even more confidence that they will put together a plan to get us on the road to long term recovery.

[canucklivinginUSA]

Karl Rove would not be pleased, and thats a good thing

[emerywood]

We are back to the wall. Seems like only John Maynard Keynes and his theory could save the economy from a complete wipe-out. There is no alternative, not even in theory. That being the case, and having no other solution, why not Keyne it to the hilt and take a gamble ? Does anyone really know for sure how to apply the Keynesian save ?

[sinope]

FDR did...

[ProfessorDuh]

It is now clear that the screaming Republican lust for privatization and deregulation was not intended to benefit ordinary Americans, as the Fox News propaganda claimed, but to permit massive accumulations of wealth by a small number of families.
If that risked wrecking the world economy, well, the greedy were more than willing to take that chance.
When you're a billionaire Republican, your interests are no longer dependent on a mere country like the late, once-great United States. You can safely watch it all burn from the fleshpots of Dubai.

[bertisbert]

Perfectly said, sir. The sad and destructive corrallary to your point is that the marketing machine of Rove, Fox News, and the rest of the establishment is so effective as to have duped so many ordinary, hard-working, and well-meaning Americans into backing these destructive policies while the greedheads take their profits off-shore, destroy American manufacturing, and then run the graddaddy of all ponzi schemes in order to squeeze that last few trillion out of our treasury.
Let's hope we are seeing the sea change that indicates that even the less-informed among us is saying "ENOUGH!"
Now, let's see if we are still the great nation that can embrace sacrifice, rebuild a middle class, and reclaim our status as a true world leader.

[Antifascist-08]

Keep it up guys. We have to drown out this nonsense about tax-cuts for the rich. It doesn't work and you can't tax people when they are unemployed.

[Anarpeace]

How about the rebirth of democracy. Without the foundation of a liberal America, the economy will continue to fall. The Congress, bankers, politicians and generals have been at war with our liberal democracy for to long now.

There is nothing that can prevent the stock market from continuing to fall -- it is out of control.

[curiousasheck]

I suspect the next 12 years will become known as America’s “Lost Decade.”

[noamjunior]

I suspect you think you are intelligent becasue you listen to AM radio

[StephCaster]

One can only assume you meant to say "the LAST eight years" since Bush managed to set our economy and foreign policy back about 20-30 years during this disasterous period of our history.