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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How about a rebirth of John Stuart Mill, Robert..?
Let's get back to the real fundamentals, and how about a touch of morality and human decency in our economic model..?
When the poop really hit was in 1999 when under Clinton, Summers and Rubin pushed through the Commodity Futures Modernization Act of 2000, which has been cited as a public-policy decision significantly contributing to Enron's bankruptcy in 2001 and the much broader liquidity crisis of September 2008 that led to the bankruptcy filing of Lehman Brothers and emergency Federal Reserve Bank loans to American International Group[1] and to the creation of the U.S. Emergency Economic Stabilization fund.
You forgot the person who really, really pushed for this stupidity on the last day of the senate. Can you say Phil Gramm?
"You forgot the person who really, really pushed for this stupidity on the last day of the senate. Can you say Phil Gramm?"
Bingo !! It was Gramm-authored and passed by a Republican Congress, mostly on a party-line vote. It was, indeed, signed by Clinton, but it was essentially a Republican
Sane, careful re-regulation is what's needed to prevent another crisis. The "non-bank banks" created this credit behemoth and should not exist in our economy.
This is SO important to remember and tell people who are brainwashed by Fox and the neoCONS.
Phil Gramm, the Enron Loophole, and the Commodity Futures Modernization Act:
http://www
This article has some very interesting stuff about Phil and Wendy Gramm's ties to Enron. Wendy Gramm used to be chair of the federal Commodity Futures Trading Commission. She was also on the board of Enron.
You are so right Professor Reich- there are NO DEBATE on the what to spend on - and we have do better then FDR. Many of the spending programs worked while money was being spent, but as soon as the programs ended, recession re-appeared.
We may have to wait to see what these programs are - how we spend is just as important as to how much.
the idea "as soon as the programs ended, recession re-appeared" is not supportable.
Recessions in:
summer of 1937 (GNP rises 5.0%, unemployment falls to 14.3% for the year)
year long - 1938 (GNP falls 4.5%, unemployment was 19.5%)
Spending was cut (in 1937) because of fear of deficit spending.
It's in the history books-
The top 1% in America control something like 40 Trillion in assets.
4 0 T r i l l i o n.
They could "bail us out" if they gavea fuq.
Or if we, the other 99%, weren't totally cowed.
Damn straight.
Tax the rich -- it's patriotic that they be expected to pay their fair share.
(And yes, I get the not-such-a-nuance between income and assets.)
They are already paying 85% of the taxes
A dollar tossed to the alread-rich, but temporarily unpofitable, will not circulate through the economy as much as a dollar INVESTED in either an infrastructure project, or the working stiff building it.
This ain't rocket science; it's an axiom of every economics class I've ever taken.
While they government is at it, spending on savings banks and companies which they should let go bankrupt, why not spend some on Culture?! Education!!!!!!!!! bring back great public schools and culture related works projects!!!!!
Why not. We won't be able to pay back the money we borrowed anyway.
Hmmmm, not until BOOSh gets out of office
The 'problem' may be that the Repos tend to believe that 'the government' will
spend its money unwisely & inefficiently (on excess bureaucracy) more than on
'unnecessary projects', when such money should just be left in the hands (or
pockets?) of wealthy citizens.
'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.'
We forget that Alaska's 'bridge to nowhere' was to an island where there was to
be a major airport expansion (also at federal expense, no doubt) for the city of
Ketchikan, 'the southeasternmost sizable city in that state', 'With an estimated
population of 7,368 in 2007, it is the fifth most populous city in the state.' (Wiki)
They only believe inefficiency is in the social services sector. The Defense Department, on the other hand, deserves as much money as they can throw at it.
Here, here "Soulsurfer"
A dollar (or a Billion) paid to a corporation is "an investment "
A dollar spent on a person is unaccepatable "waste fraud and abuse" ....
Of course we ALL share in the benefits of investing in, ..say..Hal
End corporate welfare as we know it
tm
Well, yeah. I don't buy into this, but I understand the 'logic'. Federal
spending on DOD makes Repo sense, as Defense is a primary
responsibility. Also quite profitable, as this 'materiel' gets used or
obsoleted, and it is *manufactured* by US after all. Military inefficiency
is not necessarily desirable, but maybe inevitable & probably profitable.
Technically, it's 'good' that it gets used (destroyed?) or obsoleted, so
we can build more. Horribly ironic, in a very literal way.
As for the other, 'social services', that's just giving money to poor, lazy
people. (I don't personally believe that.) It *is*, probably not 'investing'
in infrastructure either, however. UNLESS you hire folks to build it.
Now there's an idea!
Money spent on military equipment, certainly to the huge extent that we
do it, is an obscene waste, but it's also a large part of our precious
manufacturing base.
And a town of 7,368 deserves/needs a multimillion dollar federal expenditure because of ?
Americans sneered at the rapidity at which the Soviet Union dissolved.
A year ago no one would have guessed at the depth of this disaster. Will we go the way of the U.S.SR?
A blip on the screen of history?
You might need to read Krugman's essay on the rise and fall of the USSR. You are quite off by a thousand points
How about a link to that? I'd like to read it.
You talkin' about ' CAPITALISM'S MYSTERIOUS TRIUMPH'? - 'SYNOPSIS:
Communism failed because of an inability to provide a sustaining reason
for existance; only under crisis could it work.'
http://www
Basically, communism failed (supposedly) because those living 'under it'
lost faith that it was working. If that's true, why couldn't it be true of capitalism also?
Maybe the difference is that 'greed' works better under capitalism than under
communism.
Thanks for this very stimulating post. I hope you will post here on a regular basis. If you should choose to elucidate any of the matter being discussed in the comments, I am sure we would all find that most useful.
Hey Robert, do you think its wise to raises taxes on the rich in this crisis, or just let Bush tax cuts expire? I am quite not an expert yet on expansionary fiscal policy, so, I was just wondering if its wise to raise taxes
I, too, am interested in an analysis of this.
To me, raising taxes on the really rich just does not matter, because the taxes come out of their superfluous income (income way above the "disposable income" category). I am not sure if those in the $250K category who live in NY, SF or LA count, but I am sure those in the $1 mil category can afford the raise in taxes.
Even so, it is hard for me to believe that for someone making $350K, paying an extra $3000 in taxes would really dampen their entrepenurial spirit.
Yeah, that is what boggles my mind. How is paying an extra 3% stiffles their entrepreneurial spirit. If that was true, then Finland, Sweden and Norway wouldn't be leading the way in innovation(same with Japan). I really would like to understand that
It doesn't seem like the restoration of the earlier tax rate (prior Bush yet still far lower than historic rates) would have much effect on the spending that's required to get the economy moving for the middle and lower class. It may be a small salve for the coffers of the treasury. Being that it was primarily the "rich" who created the present mess, the rich who have done precious little with their "trickle down" gains, let 'em pay a little.
Seriously, let's begin to have a real debate about capitalism. About bankers being important or even needed. Let' s make the "bailout" money not loans but investments. The beginning of the government, you know us taxpayers, owning the means of production. The 700 billion dollars should be a piece of the pie not a bridge to nowhere.
The brits did that, I simply don't understand why we can't
Yeah, because that worked so well for the Soviet Union.
LOL, spot on.
The $700 billion (or whatever) is basically going to protect current wealth. It's not
going to be about government owning the means of production, or anything even
close to that. Otherwise, 'we' wouldn't be doing it. Things have reached the point
at the end of the Bush era, huge debts & deficits & all, that the infrastructure of
capitalism needs some very serious protection, obviously. That need not include
manufacturing, because 'we' offshored that.
Considering that FDIC now owns hundreds of banks, let's try running some of them as non-profits. Sure we're going to have to shoot some capitalist fundamentalists just to put them out of their misery, but, not-for-profit banking works in Moslem countries (where usery is still considered a sin).
Yes, and there's not enough demand in the economy to keep it going because consumers spend too much of their income paying interest on their existing debt. Yet Mr. Reich opposes rebate stimulus on the grounds that it would be used to repay debt.
As the saying goes: Of course the government wants people to pay down their debt... during the next administration.
I've always been astonished by the conventional wisdom that using fiscal stimulus to pay down private debt is somehow a bad thing. For one thing, it's the only kind of deficit spending that's not inflationary.
Every dollar of money is backed by a dollar of debt. If a dollar of new money is loaned into the economy in exchange for a dollar of new public debt, but that dollar of new money is used to pay down a dollar of existing debt, then the retirement of that dollar of debt also retires the dollar of money it was backing.
The result is one dollar of private debt being refinanced as one dollar of public debt at a much lower interest rate -- with no inflation of the money supply.
This is also why TARP is not inflationary. Money doesn't "circulate" as commonly believed. It is continuously being created and destroyed through the issuance and retirement of debt.
If the State is now explicitly backing the private debt of banks, then why won't government also assume the private debt of consumers?
I'm pretty sure this is gibberish, but maybe I just don't understand your terminology. Feel free to expand on whatever obscure analysis you are making, and I will try once more to find some content in your cryptic writings. I especially would encourage you to provide some explanation of your fourth paragraph, to wit.: when the government pays the dollar for the outstanding dollar's worth of debt, the debt has been retired, but the dollar continues to exist, in the pocket of the party who formerly was the creditor. In what sense has that dollar been "retired"?
When banks issue loans, the money supply expands. When loans get repaid, the money supply contracts. When loans are used to repay other loans, the expansion and contraction cancel each other out and the same amount of debt remains.
The only difference is that now the Treasury is the debtor and the Federal Reserve is the creditor. This is a vastly superior financial structure, because this particular line of credit between these two institutions offers a lower interest rate than any other kind of debt in the entire global economy.
In other words, if we used this strategy today, we could refinance every home mortgage in America at the current Fed rate of 1.0%, and the homeowners would pay their reduced mortgage payments as an individual income tax to the federal government instead of to a private bank.
Don't think of the repaid dollar as going into the pockets of a banker who will use it to buy a double cheeseburger. The dollar was never theirs to loan in the first place. Upon repayment, the dollar becomes a reserve asset in the banking system, taking it out of the money supply until the bank issues more loans. The banking system is effectively outside the money supply.
I guess another way to look at it is that this plan does the same thing as TARP -- the government loans money to banks to boost their capital reserves -- except that this plan would also refinance $700 billion in home mortgage debt at a much lower interest rate and spread the risk of unaffordable debt across the tax base. Now that's an incentive for the government to regulate lending standards and for those in the top rate bracket to care about the plight of the working poor.
He is actually spot on in his analysis.
Pretty simple stuff:
more jobs=more taxpayers=more taxes collected to shrink the budget deficit and the debt
Even the wealthy lose if they don't have enough customers with enough money to buy the goods and services they sell - a situation that perfectly describes what is happening now: a spiraling-down economy.
The Republican mantra that giving more tax cuts to the wealthy is what creates jobs has proven to be a joke. Over the last eight years, Bush has given numerous tax cuts to the rich, along with more de-regulation of Wall Street. Look what that has gotten us. Supply-side economics is a proven failure.
Seriously, that mantra makes no sense to me
It seems fairly reasonable. Also points to the deflation that may be occurring even as we type. What do you find nonsensical in "evekendall"'s post?
-USA'er (accident of birth) who was lucky to have lived in "Canuckland" for a bit
Tax cuts for the wealthy protected their wealth. They *could* choose to invest
it here in the Good Ol' USA, or not. Evidently, they 'offshored' it instead. Think
of it as a marketing slogan that worked pretty well for almost a decade.
How about working less, having less, and distributing what there is more equally?
Some might argue that would mean having (aspiring to) MORE out of life....
I'm pretty sure the working less is going to be an ongoing thing for a while. Followed by the having less. I don't see the third part ever happening in this country (or most others) without a bit of - shall we say - upheaval. If you know where the upheaval list is let me know. I'll sign on.
Sorry Bob. Ronnie Reagan used military Keynesianism and it dragged us down.
So did the Vietnam war, which was military Keynesianism on drugs.
David Rockefeller effectively began the end of the Vietnam war in his address at the Congress of International Industrialists (later known as the Trilateral Comminssion) in 1971 at the Fairmont Hotel in San Francisco. He announced that Chase opposed the war. His reasoning was - a bridge over the Mekong was less valuable than a house in Hoboken. The house would get built once but have multiple mortgages over it's lifetime. The bridge would get built repeatedly (it WAS a war zone) and never produce a single home equity loan.
Military Keynesianism worked because Lend/Lease allowed us to use British capital to invest in U.S. industrial output. By the end of WWII we had vacuumed all of the wealth out of the British Empire. War is profitable only if you take possession of land, wealth or markets afterwards. That's what the Marshal Plan and Bretton woods did.
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