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Robert Reich

Robert Reich

Posted: June 12, 2010 10:28 AM

Why We Are Moving Toward a Recessionary Era, and Why Keynes is Being Exhumed

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Double-dip watch: Retail sales in May took their biggest nose-dive in eight months, according to Friday's report from the Commerce Department. Remember: Consumers account for 70 percent of the nation's economic activity.

American Corporations are sitting on huge piles of cash but they're not investing, and they're creating only a measly number of new jobs. And they won't invest and create jobs until they know there are customers out there to buy what they sell.

For three decades, starting in the late 1970s, the biggest economic problem America faced on an ongoing basis was inflation. Demand always seemed to be on the verge of outrunning the productive capacity of the nation. The Fed had to be ready to raise interest rates to stop the party, as it did on several occasions.

During this era of inflation economics, it appeared that John Maynard Keynes - and his Depression-era concern about chronically inadequate demand -- was dead. So-called "supply siders" told policy makers that if they cut taxes on corporations and the wealthy, they'd unleash a torrent of investment and innovation - thereby increasing the productive capacity of the nation. The benefits would trickle down to everyone else.

But the pendulum may now be swinging back to the earlier era in which demand always seems on the verge of trailing the nation's productive capacity. The biggest ongoing threats are chronic recession or even deflation, because consumers don't have enough money to what the economy is capable of selling at full or near-full employment. Despite gains in productivity, little has trickled down to America's middle class.

John Maynard Keynes is being exhumed because his Depression-era worry about inadequate demand is once again the nation's central economic problem.

Keynes prescribed two remedies -- both of which are now necessary: Government spending to "prime the pump" and get businesses to invest and hire once again. And, as Keynes wrote, "measures for the redistribution of incomes in a way likely to raise the propensity to consume." Translated: Instead of big tax cuts for corporations and the rich, tax cuts and income supplements for the middle class.

This post originally appeared at RobertReich.org