Keynesian Misinterpretation

[unlawflcombatnt]

KEYNESIAN MISINTERPRETATION

Keynesian economics has been criticized for its advocacy of government spending to prop up AGGREGATE DEMAND. But it is a mistake to define Keynesian economic theory simply as advocacy of increased government spending. This was a very limited part of his theory.

Keynes' greatest contribution to economic thinking was his recognition of the importance of AGGREGATE DEMAND. Keynes correctly identified aggregate demand as THE most important factor in economic activity. Keynes explained why aggregate demand was the major driving force of an economy. With no aggregate demand, there is no production or industrial output. Low aggregate demand results in low production and industrial output.

Keynes advocated increasing aggregate demand through increased government spending if it was insufficient to drive industrial output. This could be done through government deficit spending. This was NEVER intended to be anything but a short-term fix. This temporary fix was designed to put labor back to work, thus increasing labor/consumer income, as well as the increased consumer demand that would follow. The desired end result was to put labor and production facilities back to work, returning them to their wealth-creating function.

No production or wealth is created when workers and production facilities sit idle. By temporarily increasing aggregate demand, those facilities would be restored to their wealth-creating function. With the newly increased aggregate labor/consumer income, and the increased consumer demand that resulted, a self-perpetuating cycle would be initiated. The increase in consumer income and production demand would cause FURTHER increases in demand for workers to provide that production. As a result, more workers would be hired and aggregate labor/consumer income would increase still further. Again, this would further increase consumer spending and demand, causing even further hiring of workers to provide the increased demand. Though not specifically stated by Keynes, but of equal importance, the ever increasing demand for labor would increase wages as well. This would even further increase the AGGREGATE DEMAND that Keynes was trying to prop up.

Keynesian government "pump-priming" efforts were less successful initially than would have been predicted. There were 2 general reasons for this. The 1st related to the magnitude of "pump-priming" necessary. The other related to consume behavior.

The biggest reason for the suboptimal result of Keynesian aggregate demand infusion was that it was not large enough. The pre-World War II government spending increases that Roosevelt put in place were simply not enough to adequately jump-start the economy. Inadvertently, it was the much larger increase in government spending caused by World War II that successfully jump-started the economy. The massive government spending that entailed increased AGGREGATE DEMAND enough to get the economy rolling again, and end the Great Depression. Keynes was proven right about the necessity of aggregate demand, and that increasing it would restore the economy to normal. But no one knew how much was necessary until the onset of World War II.

The 2nd reason Keynes' ideas were not initially successful was due to consumer behavior. The limited increases aggregate consumer income did not have the magnitude of effect on consumer spending that was anticipated. After years of low income and poverty, Americans were less likely to spend their increased income than they would have been today. They held on to much of their increased income, instead of spending it. Consumers were uncertain as to what the future might bring. The less than predicted consumer spending caused a less than predicted increase in consumer production demand, and aggregate demand as a whole. The suboptimal production demand increase caused a suboptimal demand for labor to provide that production.

The Depression had caused consumers to semi-permanently lower their spending habits. Again, the result was consumer spending & demand lagged behind consumer income. One might say there was a pronounced lack of "consumer confidence." This understandable lack of confidence fed back on itself, however, causing aggregate demand to be insufficient to resurrect the economy.
Again, it took the massive increase in production demand, employment, and consumer income caused by World War II to break the cycle.

Keynes never envisioned increased government spending as a PERMANENT solution to an aggregate demand deficiency. It was to be a TEMPORARY solution only. Once the economy was doing well the debt was to be paid down. The fact that it wasn't has nothing to do with Keynes, or his theories.

Many who discredit Keynes are fully aware of this point, but claim otherwise. They attempt to dismiss Keynes as simply an advocate of "big government." Again, his critics are being dishonest with this claim. Their true dislike of Keynes has nothing to do with Keynes' alleged advocacy of big government or government spending.

The REAL motivation is Keynes' recognition of the importance of AGGREGATE DEMAND. Acknowledgment of this importance discredits many popular, yet illogical, economic beliefs. It refutes the completely illogical notion that "investment creates jobs." It refutes many tenants of classical economics, as well as monetarism and supply-side theories.

In general, acknowledgment of AGGREGATE DEMAND's significance refutes the beliefs that "trickle-down" economics, or "priming the pump" from the top, is of any benefit. In a more practical sense, it refutes the benefits of high-end tax cuts, corporate tax cuts, and labor cost reduction through outsourcing. In fact, Keynes showed that anything that was bad for the consumer was bad for business, as well as labor and the overall economy in the long run. Keynes demonstrated that reduced aggregate demand would hurt the economy, regardless of how much investment capital was available. He showed clearly that it is DEMAND that creates jobs, not investment. The Great Depression proved him right.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[tkmorris]

1. Superb analysis

However, I'd expect a post like this to drop like a rock in the present environment. Please repost this during calmer times, I'd love to discuss Keynesian economics with you.

[unlawflcombatnt]

2. Thanks

Thank you for your response. I do expect it to drop like a rock. I probably will repost it at a later date.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[POLEIS]

5. Drop it in Editorials and Other Articles for now

if you'd like some wider feedback today.

:)

[unlawflcombatnt]

6. Thanks for the advice

Thanks for that advice. I'll try that.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[Kipling]

3. I agree. This is why Germany is in her current mess.

Low consumer spending. That's why Merkel's VAT rises are suicide.

[unlawflcombatnt]

4. VAT

Does VAT mean "value added tax"? If so, I can easily see why that would wreck an economy.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[PsycheCC]

7. Would you say Clinton favored Keynesian over supply side econ?

This reminds me of what I've heard about how Clinton's economic policies helped BOTH the poor and the rich, unlike Bush with his notion that "high-end tax cuts" promote investment and therefore create jobs.

Could you comment a little about how Clinton might have viewed Keynes? Or perhaps about how Clinton differs from Bush and why the Clinton years were so much more profitable for the WHOLE country?

Thanks for another great piece Unlawful.

[unlawflcombatnt]

8. Clinton & Keynes

I think Keynes would have approved of Clinton's handling of the economy. Clinton was trying to pay down the debt during a time of proseperity. This is exactly what Keynes would have recommended during a time of prosperity. I suspect Keynes would have approved of paying down the debt with higher taxes on the more affluent, rather than the less affluent.

Keynes probably would not have approved of Clinton's advocacy of free trade, as it clearly reduces aggregate American consumer income and demand.

Keynes would never, ever have advocated cutting taxes on the rich to stimulate economic growth. (Neither would anyone else with an IQ over 50.) Keynes believed in stimulating the economy through increasing aggregate demand. Cutting taxes on the rich does nothing but increase savings and provide funds for a potential increase in investment if increased aggregate demand makes it beneficial.

Keynes definitely would have preferred Clinton over Bush.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[1932]

12. Clinton asked JK Galbraith (a Keynsian) to write a book with him.

JKG declined. His biographer, Richard Parker, says it was possibly because he disagreed with Clinton about economics (and Clinton doesn't realize this).

[PsycheCC]

31. Thanks for the interesting response Unlawful.

I guess Keynes wouldn't have envisioned a time when so much outsourcing would become possible or profitable for big corporations.

[unlawflcombatnt]

32. Outsourcing

I don't think anyone in the past could have envisioned this degree of outsourcing. It simply wasn't possible until fairly recently to transfer the entire production operations of companies to foreign countries.

Even those that did have such a vision, such as David Ricardo, who originated the concept of "Comparative Advantage," realized that free trade was only beneficial when it did not involve the movement of production facilities to foreign countries.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[Nederland]

9. Yawn

Once again you deny the obvious, that investment DOES create jobs--at least for the period of time that the investment continues.

[unlawflcombatnt]

10. Demand

Once again you deny that jobs are created in response to demand, not investment. Once again, you are completely wrong. If there is no demand, there are no jobs created. Jobs are created when workers are needed to provide for the increased production demand of consumers. Investment is completely worthless unless there is demand for the production it facilitates.

Investment does not create jobs. Investment has never created any jobs in all of recorded human history. And investment will never create any jobs in the future.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[Nederland]

14. Once again

You have a rather strange definition of demand. In the early thread I gave this example:

In the mid 1990's I worked for an internet startup. I worked there and received a paycheck for about four years. This company received about 40 million dollars of investment money and at one point employed over 70 people. In the end, the business plan depended on creating something, that, as it turned out, nobody wanted. Naturally the company eventually folded.

You admitted that in this case jobs were created, even though the demand turned out to be illusory. We therefore can conclude that actual, real demand is unnecessary for the creation of actual, real jobs. Given that this is the case, is it really fair to say that it is the demand that creates the jobs, not the investment?

[1932]

15. Although it was Keynes who said that the long term doesn't matter because

in the long term we're all dead, I suspect that Keynes would also say that the internet start-up example is TOO short term to prove your point. In fact, it disproves your point. Massive internet bubble investment created employment over a short term, but once those businesses crumbled under the weight of their irrationaliities, they left a lot of damage in their wake, with unemployment being one of them, and with another being that a lot of resources being wasted on speculation. Think of the places that money and people's time could have gone which could have produced better results (read the book Irrational Exuberance for more on this).

Most importantly, it's obvious that you can't build economies and nations on these resource-sapping, time wasting bubbles. Going from internet bubble to real estate bubble in the US might be the thing that does this economy in completely.

[unlawflcombatnt]

18. You're Exactly Right ( I mean correct)

The housing bubble is the result of over-investment of essentially non-existent borrowed money. This pseudo-wealth creation exists on paper only. It may very well do our economy in.

Meanwhile, the Right-Wing corporatists will be clamoring about "onerous regulatory burdens" and the need for even more money for (over-)investment until the very end. They still fantasize about the alternate reality world of the late 90's, when they claimed "the old rules of economics no longer apply."

The corporate right-wingers were proven wrong back then. Can't they learn from their previous insanity? Do they really have to proven wrong again?


unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[unlawflcombatnt]

16. Demand: Real vs. Anticipated

I would agree with you that real, actual, or current demand was not available to create those jobs. You have made a valid point here.

But anticipated demand, even if mistakenly anticipated, was present. So I'd still maintain that demand-related factors were responsible for creation of those jobs. Investment definitely facilitated it.

As such, I think it is "fair" to say that demand created those jobs. However, I agree with your statement that actual, real demand was not present, nor was it ever present.

But anticipated demand is a tremendously powerful driving force. I don't think that should be understated. Many businesses are started when they mistakenly anticipate demand. I certainly do consider this "demand."

However, no business has ever been started without real or anticipated demand. They are started with the anticipation that they will be able to sell products or services, and make a profit as a result. I suspect you actually agree on this point.

I think we are about 90% in agreement here. I think the main disagreement we have is regarding the importance of investment. I believe investment is important as well. But it has no value without anticipated or real demand for production. And it ultimately has no productive value if the anticipated demand fails to materialize, other than the temporary value of creating temporary jobs.

This may all sound like hair-splitting. But I think it's important to accurately split this hair. The relative importance of demand vs. investment determines which end any "pump-priming" should come from. Should the government "prime the pump" from the top to stimulate business investment, maintaining that "investment creates jobs"? Or should they prime the pump from the bottom, believing that "demand creates jobs"? I favor the latter.


unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[1932]

26. Keynes felt (and the New Dealers post-'37 believed) that

investment followed demand, which is why they were so interested in getting money in the hands of working people.

A random fact: before the new deal, 20% of the construction work force in America was made up by the federal government (which was less than the state/local gov'ts collectively). During the new deal, that jumped to 80%.

[unlawflcombatnt]

29. Investment FOLLOWS Demand

1932,

That's exactly what I think as well. It makes no sense to invest in the production of goods when no one can purchase those goods. Such investment would lead to the production of unsold goods.
The real (or anticipated) purchasing power of consumers must precede the investment, or there'll be no one to buy the products resulting from investment. Profits are made by sale of goods, not production.

You've posted some interesting numbers regarding the construction work force. It sounds like you have some good sources on the Great Depression. Are any of them available online?

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[1932]

34. The numbers are from Parker's Galbraith biography

They're at around page 100.

[Nederland]

36. Here is what Keynes said

http://www.marxists.org/reference/subject/economics/keynes/general-theory/ch03.htm

(yes, odd that the only link I could find to Keynes work is a Marxist website :))

This theory can be summed up in the following propositions:

(1) In a given situation of technique, resources and costs, income (both money-income and real income) depends on the volume of employment N.

(2) The relationship between the community’s income and what it can be expected to spend on consumption, designated by D1, will depend on the psychological characteristic of the community, which we shall call its propensity to consume. That is to say, consumption will depend on the level of aggregate income and, therefore, on the level of employment N, except when there is some change in the propensity to consume.

(3) The amount of labour N which the entrepreneurs decide to employ depends on the sum (D) of two quantities, namely D1, the amount which the community is expected to spend on consumption, and D2, the amount which it is expected to devote to new investment. D is what we have called above the effective demand.

(4) Since D1 + D2 = D = f(N), where f is the aggregate supply function, and since, as we have seen in (2) above, D1 is a function of N, which we may write c(N), depending on the propensity to consume, it follows that f(N) - c(N) = D2.

(5) Hence the volume of employment in equilibrium depends on (i) the aggregate supply function, f, (ii) the propensity to consume, c, and (iii) the volume of investment, D2. This is the essence of the General Theory of Employment.


As the bolded portion clearly says, Keynes believed that the number of jobs (employment) was a function of expected demand and expected investment. You seem to be claiming that employment is a function of demand only. That clearly is not what Keynes believed.

[1932]

40. Employment creates demand by

giving people money with which to buy things. That demand encourages private companies to invest in businesses which produce things to satisfy that demand.

I think that's what your summary says.

[unlawflcombatnt]

45. Great Summary

1932,

That's the best wording I've ever heard in summing up Keynes's theme from "General Theory." That's exactly what Keynes believed.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[Nederland]

51. No, that's not what it says

What is says is this:

The amount of labour N which the entrepreneurs decide to employ depends on the sum (D) of two quantities, namely D1, the amount which the community is expected to spend on consumption, and D2, the amount which it is expected to devote to new investment. D is what we have called above the effective demand.

Why try to translate it? It clear enough as it is. The size of employment is the SUM of two things: investment AND consumption.

[1932]

54. Entrepreneurs aren't the only employers, by the way.

The government employs a lot of people, and that's how the New Deal created aggregate demand.

And I can't believe you aren't deliberately misstating what Keynes stood for.

Where did you go to college? Who were your economic professors? Upon what are you basing this misstatement?

[Nederland]

58. Answers

I went to Virgina Tech 1985-1989.

I got a bachelor degrees in Philosophy and Economics.

I read Keynes, and what I am relaying here is what I learned.

No, I don't have an advanced degree in economics, and I don't even work as an economist, but I do know for a fact that if you walked into the economics department of Virgina Tech (or probably any other school in the country) and said something as ridiculous as "investment doesn't create jobs" they would laugh in your face.

The current debate in economics today is not whether or not "investment" creates jobs, but which type of investment creates the most jobs of the desired type. Conservatives tend to tell you that the best way to create new jobs is to cut taxes and let private investment (i.e. rich people) determine where and what new jobs get created. Liberals tend to tell you that the best way to create new jobs is to increase government spending let politicians and government officials determine where and what new jobs get created.

THAT is what the real debate is about, not the ridiculous notion that investment doesn't create jobs.

[1932]

66. Who were your professors at Virginia Tech?

I doubt your professors would agree with your reading of Keynes. Even if they were rightwingers, I'm sure they at least understand what Keynes was arguing.

And ONCE AGAIN: nobody disagrees with the idea that investment creates jobs. Keyne's was trying to figure out a way to encourage investment to create jobs at a time when unemployment was sky high and people were miserable.

He VERY CLEARLY argued that the government needed to increase aggregate demand by INVESTING in public works programs that would increase the number of employed.

[Nederland]

72. Really?

And ONCE AGAIN: nobody disagrees with the idea that investment creates jobs.

Really? I thought that's what we were arguing about. My mistake in misreading this portion of the OP:

The REAL motivation is Keynes' recognition of the importance of AGGREGATE DEMAND. Acknowledgment of this importance discredits many popular, yet illogical, economic beliefs. It refutes the completely illogical notion that "investment creates jobs." It refutes many tenants of classical economics, as well as monetarism and supply-side theories.

[1932]

78. I think it's implied in that post that we were talking about

what the first step should be, and not that investing wasn't one of the steps.

Anyway, I'm not unlawfulcombatnt and you were replying to my posts, so I don't know why you're refuting my arguments by quoting posts I didn't write.

[unlawflcombatnt]

44. Keynes

You don't need to go to a Marxist site if you have the book, and can read directly from it, as I can. Keynes never implied that investment alone would create jobs, nor that it could substitute for consumer demand. In fact, he clearly states that investment is limited by the returns on it. Without returns, or potential returns, NO jobs are created.

Keynes described the limits of investment in his description of the "marginal efficiency of capital."

from pages 136-137:
"If there is an increased investment in any given type of capital during any period of time, the marginal efficiency of that type of capital will diminish as the investment in it is increased, partly because the prospective yield will fall as the supply of that type of capital is increased...
It follows that the inducement to invest depends partly on the demand schedule."

Keynes is difficult reading. But he stressed the importance of aggregate demand, as well as the limits of investment. Investment without anticipated returns = 0 jobs. This is the point you seem to be missing. We cannot "invest" our way to more jobs. Only demand for production can do that. And reduced consumer income reduces that demand for production, and the jobs it would create.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[Nederland]

52. Flatly untrue

Investment without anticipated returns = 0 jobs.

This is completely untrue. If I invest $10 million dollars in a factory and hire 1000 people to produces widgets that I know nobody wants, I have still created jobs. The fact that they are producing worthless items is irrelevant because the money that I pay those people will be used by them to buy food, clothing and all sorts of other things that create economic activity.

That's why Keynes said that employment was a function of consumption AND investment. The reasoning is a simple logical argument. Creating a job requires having money to pay someone to do it. That money can come from one of two sources: investment OR sales of a product. EITHER one will do. You can get the money to pay for something by selling stuff, OR you can get it from an investor. You keep on saying that one of those sources of money creates jobs and the other doesn't. That's NOT what Keynes said because its not remotely true.

[1932]

55. The point is, with no hope of returns, nobody will invest!

This is significant because laissez-faire capitalists believed that the government needed to get out of the way of the invisible hand. Let them accumulate their wealth and they would invest it sensibly and the market would correct itself on its own (they were afraid of the government regulating their activities or becoming a market participant taking profits that could have gone into private hands).

But the fact is, when there's no promise of returns, capitalists don't invest it. They sit on their wealth, or they use it in a way that doesn't benefit society broadly (they buy and sell luxury goods and big houses, while everyone else is shut out from this high-end economy and are unemployed and hungry).

And yes, Keynes believed that employment, consumption and (public and private) investment were variables in the formula. But that's half the story. The important question Keynes answered was how do you reduce misery and how do you make the economy grow. The answer was not to do nothing, or to stimulate investment through monetary policy (giving the private sector cheap money). His answer was to create the fullest employment possible by having the government invest in public works projects building infrastructure that the private sector wouldn't have built either because they didn't see the return, or the return was too diffuse and long term to be profitable in a manner private investors would find suitable).

By the way, those jobs were not created with private investment or sales of products. They were created with government borrowing and goverment tax receipts. That was what Keynes thought should happen.

Anyone who is confused about this should read the first 120 pages of Richard Parker's biography of JK Galbraith. It explains all of this.

[Nederland]

59. Why read Richard Parker

When you can read Keynes directly?

[1932]

67. I'm going to venture a guess that Parker knows more about economics

than you do.

You have both read Keynes. Your interpretation is very different from his. I'm not going to tell people to trust the opinion of anonymous posters on the internet. But if they want to know the opinion of someone who isn't anonymous, who has written a very interesting book about the man who was at the center of US economic policy at a crucial time during american history, and who was a Keynsian, they can read about 50 pages in that book and they'll understand Keynes.

[unlawflcombatnt]

80. Yes

Without any consumer demand, current or anticipated, there is no anticipated return on investments. And no investment will be made in that case, and no jobs will be created. Jobs cannot be created without at least anticipated demand, or anticipated return on investment.

And the reason this point needs to be stressed is that investment alone cannot create jobs. It must be preceeded by at least an anticipated return on that investment.

Increasing investment capital, by reducing aggregate income and demand through labor cost reductions, does not create jobs. It destroys them, because it reduces the production demand necessary to maintain them.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[unlawflcombatnt]

57. Investment

If you invested in a factory with no anticipation of any expected returns, you'd be the first person in human history to have done so. Even King George isn't foolish enough to do that.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[Nederland]

60. Simple question

Does anticipated or actual demand for a good ALWAYS result in investment money to produce that good?


This is, IMHO, the key question. Please answer yes or no.

[unlawflcombatnt]

73. I understand your point

No.

I think your point is that investment capital must be obtainable, if there is demand, in order for it to be invested. I completely agree with you, if that's the point you are making. If there is absolutely NO investment capital available, there will be NO investment, regardless of demand. Given the ease with which banks loan money out today, I think the complete unavailability of investment capital is extremely rare.

The real situation usually is a matter of degree. In other words, if investment capital is limited, then the amount of demand will determine whether it is invested. If investment capital is severely limited, than it would take a very large amount of demand (real or anticipated) to cause that money to be invested.



Another related point is worth mentioning. If investment capital is over-abundant, as it is in our current economy, it takes less demand (and less certainty about anticipated demand) to drive investment. In other words, "riskier" investments are made in regard to potential return.

I'd like to revisit the concept I've described as anticipated demand. Keynes refers to this in "General Theory." One such reference comes from page 141 where Keynes states:
"The most important confusion concerning the meaning and significance of the marginal efficiency of capital has ensued on the failure to see that it depends on the prospective yield of capital, and not merely on its current yield."

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[ProudDad]

82. Yeah, this kind of

phony "job creation" really worked out great for the S.F. Bay Area! :sarcasm:


In my case, the Dot Com Bust cost me at least 3 years of unemployment in the last 5.

I think the point is that massive "investment" may create a localized bump in certain jobs but a long term change is only realized by creating an environment of demand that can sustain it.

[1932]

83. America is hurt -- it is not helped -- when people like you have their

time and education wasted doing nothing as a result of poorly allocated resources.

There is a huge opporutnity cost for America as a result of what happened to you.

[unlawflcombatnt]

85. Northern California Job Loss

ProudDad,

Thanks for your input. It sounds like you were one of the victims of the high tech job loss in Northern California.

I'd like to verify one statistic with you, since you are undoubtedly more familiar with it than I am. My understanding is that over 300,000 high tech jobs have been lost in Northern California since 2001. Is that correct?

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[ProudDad]

87. I don't know for sure about the 300,000 figure.

What I DO know is my job was sent to India. I suspect most of the high-tech jobs that didn't just disappear were outsourced.

I DO know that after the dot bombs pumped up the cost of real estate in the bay area, my girlfriend and I can't afford to buy a house and we make over $140,000 combined!

[unlawflcombatnt]

88. San Francisco Housing Bubble

From what I've seen online, the housing bubble is deflating in San Francisco. The news sounds encouraging for potential buyers in San francisco. The population is reportedly declining, while the number of homes is still increasing. The following is a link to a site where the San Francisco housing bubble is dicussed:
http://patrick.net/housing/crash.html

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[ProudDad]

89. Can't prove it from our house hunting.

The prices are still outrageous. The houses are still going for 110% of the asking price...but...it DOES seem to be slowing down a little.

Unfortunately, the prices ain't gonna come down, they never do.

The only hope we have is inflation. When my hourly rate can get to $150 I might be able to afford to buy a home in the S.F. Bay Area.

[1932]

11. FDR's Sec of Treas Miorgenthau convinced FDR to run a balanced budget

in '37, which reversed the programs and policies which were stoking demand. The result was the minidepression of '37, which reversed a lot of economic progress made up to '37. My understanding was that that was the experiment within the experiment that proved to everyone that Keynes was right, and the Roosevelt governement went back to focussing on aggregate demand afterwards.

Richard Parker writes about this in his biography of JK Gailbraith.

[unlawflcombatnt]

21. Thanks for that insight

I was aware of the drop back into a recession in 1937 or 1938. But I wasn't sure what the cause was. Thanks for that information.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[1932]

27. In '38, Democrats lost a lot of seats in Congress because of the '37

minidepression, which made it harder for FDR to convince congress to deficit spend (the '37 Congress would have helped him do whatever he wanted but, unfortunately, Morgenthau convinced him to reduce gov't spending).

FDR had to make sure the public was convinced that Keynes was right.

Galbraith left Harvard and worked for the New Deal in '38. His first job was to write a report convincing Congress that Keynes was right about deficit spending.

That's where I am in the biography right now.

[unlawflcombatnt]

30. Great Stuff

1932,

Again, thanks for posting some great information. I assume most of this is coming from the biography of John Kenneth Galbraith. Is that correct? If so, I'd like to get that book myself.

Thanks again for the insight.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[lostinacause]

13. Interesting post. There's something that I think I

disagree with but I can't put my hands on it. My macroeconomic skills have always lagged behind my microeconomic skills. I personally am inclined to thing that monetary policy is the way to adjust the economy especially with the amount of trade that America partakes in.

Regardless I don't believe that economic stimulus is the primary reason for the continued deficit spending that Bush has chosen to partake in. Bush likely wants the popularity associate with tax cuts and continued spending. Once people realize what the tax cuts cost America in terms of programs they are less likely to support these tax cuts thus it is beneficial to partake in deficit spending and let the next person in office deal with it.

(Also the Great Depression does not “prove” what you said it does. Given a single event as complicated as the great depression is, the Great Depression would only suggest that something was the case.)

I must also say I am impressed with your knowledge of economics seeing how you don't have a high level formal background in it.

[unlawflcombatnt]

17. Thank you for your response

I may have overstated my conclusion with the word "proves." A better phrase would have been it "provided strong evidence."

There are a number of writers who have attributed the Great Depression to a deficiency in aggregate demand. Though I can't fully re-state their arguments here, they made perfect sense to me when I read them. I know there are numerous complexities involved. I also believe here, as in many other situations, that the complexities obscure the big picture. These complexities may cause one to "miss the forest for the trees." I think my limited ability too see the "trees" makes it easier for me to see the "forest." Those more knowledgeable than myself may actually have more difficulty seeing the forest.

To me it appears very likely that over-investment in the stock market, and the resultant over-valuation it caused, was a factor. It also appears this stock market over-investment and over-valuation was representative of American business as a whole. There was simply more investment than could be put to productive use. The investment exceeded that necessary to provide for consumer production demand. Or, to put it in reverse, aggregate demand was insufficient to create adequate return on investment capital. With aggregate demand for production waning, there was a decline in demand for workers to provide that production. The loss of wage income by these workers reduced the amount of money available for consumer spending. The resultant decline in consumer spending reduced consumer production demand (as well as overall "aggregate demand.") This further reduced demand for workers to provide that production. This caused further job loss, and further labor/consumer income decline. This became a self-perpetuating cycle.

Job loss --> consumer income loss --> consumer spending decline --> consumer demand for production decline --> decline in demand for workers to provide production --> More job loss.

This cycle could only be broken by an infusion of aggregate demand Though technically the aggregate demand could be increased by "investment" as per its early inclusion in the Keynes's aggregate demand formula, in reality investment could contribute only a limited amount. (Some have disputed this point, but Keynes delineated investment's limitation in his "General Theory," when he described the 'marginal efficiency of capital.' )

As a result of this, Keynes recommended increasing aggregate demand through increased government spending, which also increased consumer spending. Again, this had suboptimal effects due to the reasons I described. There may well have been other factors, but the big picture seems to be that the increased government spending did not increase aggregate demand enough to end the Depression. However, we did come out of the Depression with World War II. And World War II did result in a massive increase in government spending, as well as a massive increase in aggregate demand.

Does this prove that the massive increase in aggregate demand caused by World War II brought us out of the Great Depression? Maybe not. But it certainly does provide strong evidence to that effect.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[kineneb]

19. a brief summary of your essay

"Where in the hell is the WPA when we need it?"

We are still driving on roads and bridges that were built by the WPA (~1933) in Lake Co (CA). Seems it was the last time there was any really big investment in the country's infrastructure.

[unlawflcombatnt]

20. Where's the WPA?

It's all been "privatized." Or should I say "corporatized," as well as "monopolized."

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[applegrove]

22. Of course. That is what I have always said. It doesn't matter to the

economy if it is schools or wars. The economy doesn't care. And neither do Republicans.

[unlawflcombatnt]

23. yes

Republicans certainly do not care. Maybe they'll start "caring" a little more as the economy sinks and some of them get voted out of office.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[gristy]

24. good stuff

:kick:

[AzDar]

25. Thank you, Unlawful Combatant...I always enjoy (and learn something)

from your posts.

[unlawflcombatnt]

28. Thank you

AzDar,

Thanks for your compliment. I'm always glad to hear that what I've written is helpful.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[robcon]

33. You miss the point, unlawflcombatnt

Aggregate demand is consumption + investment + government spending.

Why do you keep leaving out the most important variable, private investment, according to Keynes, in determining aggregate demand?

Consumption in his model is simply a function of income - passive, unlikely to change dramatically to improve or reduce economic activity.

Investment is the erratic, 'exogenous' variable that has the most to do with the state of the economy. More sophisticated analyses, break out investment between short-term investments (inventory) and long term investments (capital goods and services.)

Government spending is also exogenous to the model, of course.

If you acknowledge that government spending and taxing can 'prime the pump' or retard the economy, why can't you acknowledge that investment does the same? They have parallel roles in Keynes model, and act in exactly the same way.

[1932]

35. This argument is addressed in the Nederland sub-thread,

however, I'll add my two cents:

If you read Parker's Galbraith biography you bet the impressions that Keynes definitely didn't think this.

Keynesians' objective was not a focus on encouraging investment through monetary policy or making sure businesses had fat profit margins by any means neccessary (eg, tax code).

Keynesians' objective was to increase agregate demand by increasing the money that people who worked for a living had in their pocket through full employment and good wages (and, for farmers and small business people, good earnings).

Private investment was not the most important part of the equation. In fact, it seems like that was the point about public works projects. Keynesians believed that if there was no private investment, then the public should step in with public investments. The focus had to be on making investments that had good returns (like, roads made it faster and less expensive to get to work and to ship goods). Some of these public works projects had benefits so broadly reaped over such a long term, they would never be done by private investment, incidentally.

[unlawflcombatnt]

37. Robcon, it is you who misses the point

Private investment was the least important variable. Keynes certainly did believe in raising aggregate demand to stimulate the economy. He just as certainly put limitations on the benefits of private investment. In "General Theory" he made it clear that the benefits of private investment were limited by the rate of return on that private investment.The following passages from page 135, as well as the text that that followed, describe Keynes's thinking on investment:

"When a man buys an investment or capital-asset, he purchases the right to the series of prospective returns, which he expects to obtain from selling its output..."
" ...the prospective relationship between one more unit of that type of capital and the cost of producing that unit, furnishes us with the 'marginal efficiency of capital."

The "marginal efficiency of capital" limits the benefit of private investment. The only way to increase the "marginal efficiency of capital" (or the benefit of further investment) was to increase Aggregate Demand in another area. And the other 2 areas were consumer spending and government spending, neither of which had the limitations that were placed on private investment. In other words, private investment could provide only a limited addition to overall Aggregate Demand.

Keynes clearly understood the limits of private investment. Again, it was the least important contribution to the aggregate equation.


unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[robcon]

39. Laughable, unlawflcombatnt.

You wrote: "The "marginal efficiency of capital" limits the benefit of private investment. The only way to increase the "marginal efficiency of capital" (or the benefit of further investment) was to increase Aggregate Demand in another area."

You don't even understand the economic terms: marginal return, marginal value, marginal costs, etc.

It's not really productive to discuss this with you, unlawflcombatnt, until you crack open an Eco 101 textbook, and look at the definition and examples of marginal returns - it has nothing to do with 'limited nbenfit of private investment.'

The way to increase the "marginal efficiency of capital" is to come up with better ideas, techniques and technology for capital spending.

[1932]

42. There's no incentive to create new products unless someone can buy them

Henry Ford created a product so few people could afford that he had to make sure that his workers were paid well so that he had customers.

Your misunderstanding of Keynes's argument about demand and investment doesn't put you in a position to be so condescenending in your reply.

[robcon]

46. You are way off the mark, 1932.

Henry Ford's contribution was to lower prices of cars by his sophisticated (for its time) use of the assembly line. Despite paying a much higher wage than most other companies, he had tremendous turnover because Ford's assembly line jobs were absolutely brutal. He didn't pay any more to his workers than he had to.

I think unlawflcombatnt's arguments are so simplistic and contrary to the basic thrust of John Maynard Keynes, that I think my ridicule is appropriate. He's not even close. He seems to have fallen for a "investment is unimportant" meme and he can't shake it.

The biggest determinant of the state of the business cycle is private investment... statistically that's true, and Keynes' model shows the theoretical basis for the connection between investment and prosperity or recession.

[unlawflcombatnt]

48. Robcon, it is you who is way off the mark

The biggest determinant of Aggregate Demand, and the driving force of our economy, is consumer spending. It is not private investment.

If you weren't so blinded by your own "investment creates jobs" mantra, you could easily see this.

If you'd done any reading at all of online news stories, you'd have run into the phrase "consumer spending is 2/3 of all economic activity" multiple times. I've seen this phrase no less than 40 separate times. You are simply wrong about investment, and your interpretation of Keynes. You have taken isolated parts of Keynes's writings to try to prove your pre-conceived false assumption.

Keynes was the 1st major proponent of Aggregate Demand, and how it moved the economy. Keynes believed that Aggregate Demand was the fundamental driving force behind the economy. Keynes definitely placed limits on the benefit of investment when describing the "marginal utility of capital." He stated that the benefit of private investment was limited by the return on that investment. And again, the return on that investment is determined consumer spending, and the production demand it creates.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[robcon]

50. This is pretty tiresome.

unlawflcombatnt wrote: "The biggest determinant of Aggregate Demand, and the driving force of our economy, is consumer spending. It is not private investment.

If you weren't so blinded by your own "investment creates jobs" mantra, you could easily see this."

Should be rewritten...

The biggest part of Aggreate Demand, but the subsidiary force in determining output, is consumer spending. Investment/government spending creates (or eliminates) jobs by the 'multiplier effect' (a key part of the Keynesian model, but one whose mathematics were developed by Keynesians, not Keynes.) As you SHOULD know, unlawflcombatnt, there is no multiplier effect for consumer spending.

The KEY element, the KEY finding of Keynes, is that exogenous forces, like investment and government spending, are the primary determinant of the state of the economy. This meant interest rate/monetary policy alone cannot affect the state of the economy as much. Taxing, spending and the 'animal spirits' that guides entrepreneurs and corporation are the key factors.

Consumer spending, as Keynes propounded at length, is a function of income, and is much more passive and unchanging, while investment and government spending, which are determined not by current income, but advances in technology and the perceived prospects for the future (investment) and the political process (government spending/taxation), largely determine whether the economy is in recession or growth.

Those are pathetic straws you're grasping, unlawflcombatnt. You would LIKE for Keynes to agree with you, you would LIKE to have some power in consumer spending, but it doesn't work.

[1932]

56. Are you talking about the Neoclassical Synthesis of the 1950s

when you refer to the mathmatical work done by later Keynsians?

If you are, you should be aware that Keynes's closest colleagues considered that "refinement" a loss of Keynes's most original insights.

That's according to the Parker biograpy of Galbraith I keep mentioning (p. 171)

I haven't read the General Theory of Employment, Interest and Money, however, judging from my reading of Parker's book (which has two chapters talking about Keynes), Unlawfulcombat has summarized Keynes's theory accurately.

I think you're confusing latter modifications of Keynes (which, as Parker's notes, Keynes's closest colleagues saw as inconsistent with Keynes's original insights and arguments) with Keynes.

You might owe Unlawfulcombatnt an apology.

[Nederland]

61. Ahhhhh

I haven't read the General Theory of Employment, Interest and Money, however...

Now it all makes sense. I suggest you actually read the work of the man we are discussing before commenting more. Its availible online here:

http://www.marxists.org/reference/subject/economics/keynes/general-theory/index.htm

[1932]

63. Richard Parker spends two chapters on Keynes in his Galbraith bio

and his summary is the exact opposite of what you're saying.

Parker or Nederlander? I'll go with Parker. Who are you? Where did you study economics? What have you written that has been reviewed by your peers?

[Nederland]

65. Tell you what

You go with Parker, I'll go with Keynes.

[1932]

68. Ok, I'll read the General Theory too.

I'll read it sometime in the next six months and we'll see what that Virginia Tech degree in philosophy and economics is worth.

But I don't know why anyone would give more weight to what you or I had to say about it than Richard Parker or JK Galbraith or FDR or Hansen, since they're the people who have proved they know what they're talking about.

[Nederland]

62. Read this

(note to mods, this is an un-copyrighted work and therefore not subject to cut and paste limits)

Chapter 18. The General Theory of Employment Re-Stated

Section II

There will be an inducement to push the rate of new investment to the point which forces the supply-price of each type of capital-asset to a figure which, taken in conjunction with its prospective yield, brings the marginal efficiency of capital in general to approximate equality with the rate of interest. That is to say, the physical conditions of supply in the capital-goods industries, the state of confidence concerning the prospective yield, the psychological attitude to liquidity and the quantity of money (preferably calculated in terms of wage-units) determine, between them, the rate of new investment.

But an increase (or decrease) in the rate of investment will have to carry with it an increase (or decrease) in the rate of consumption; because the behaviour of the public is, in general, of such a character that they are only willing to widen (or narrow) the gap between their income and their consumption if their income is being increased (or diminished). That is to say, changes in the rate of consumption are, in general, in the same direction (though smaller in amount) as changes in the rate of income. The relation between the increment of consumption which has to accompany a given increment of saving is given by the marginal propensity to consume. The ratio, thus determined, between an increment of investment and the corresponding increment of aggregate income, both measured in wage-units, is given by the investment multiplier.

Finally, if we assume (as a first approximation) that the employment multiplier is equal to the investment multiplier, we can, by applying the multiplier to the increment (or decrement) in the rate of investment brought about by the factors first described, infer the increment of employment.

An increment (or decrement) of employment is liable, however, to raise (or lower) the schedule of liquidity-preference; there being three ways in which it will tend to increase the demand for money, inasmuch as the value of output will rise when employment increases even if the wage-unit and prices (in terms of the wage-unit) are unchanged, but, in addition, the wage-unit itself will tend to rise as employment improves, and the increase in output will be accompanied by a rise of prices (in terms of the wage-unit) owing to increasing cost in the short period.

Thus the position of equilibrium will be influenced by these repercussions; and there are other repercussions also. Moreover, there is not one of the above factors which is not liable to change without much warning, and sometimes substantially. Hence the extreme complexity of the actual course of events. Nevertheless, these seem to be the factors which it is useful and convenient to isolate. If we examine any actual problem along the lines of the above schematism, we shall find it more manageable; and our practical intuition (which can take account of a more detailed complex of facts than can be treated on general principles) will be offered a less intractable material upon which to work.


Now read the third paragraph several times. Now read it again. Got it? There is NO WAY that Keynes didn't believe that an increase in investment didn't result in some increase in employment.

NO FUCKING WAY.

[1932]

64. Why is this so hard for you to grasp?

Keynes wrote letters to FDR telling him to invest government money in jobs-producing public works programs in order to generate agregate demand so that private industries would make investments in activities that would satisfy the new demand.

The alternative was not to do anything, reduce corporate tax burdens, play with monetary policy so that corps had cheap money to borrow if they wanted it. Guess what? That wasn't what Keynes advised. He didn't think that the invisible hand would correct the market. He said that the government had to play an active role to increase employment and would have to make investments itself because no private corporation would build up production capacity or enter new markets if there wasn't a public with money to consume the new products.

Incidentally, I think consumer credit has thrown a wrench into Keynsian economics. Today, if you can convince underpaid and unemployed consumers to take on a huge debt burden themselves (in you shift the burden of borowing off private businesses and off the government) you can stoke consumption without having to build up actual wealth in the working class. In other words, MBNA is today's WPA.

[Nederland]

69. Exactly!!!!

Now you get it.


Investment creates jobs.

Jobs provide people with money.

People with money create demand.


THAT is the sequence of events, not this ridiculous notion that "investment doesn't create jobs". Investment (whether public or private) is what creates jobs that gives money to people that creates demand. What Keynes was pointing out to FDR was that in a depressed environment of the 1930s there were enormous psychological barriers to people investing and consuming more. To get people out of their "funk", government needed to act because private markets wouldn't.

[1932]

70. Shit, I've been saying that from the beginning.

Now YOU get it?

Private investment wasn't creating jobs during the Depression because there was reduced demand due to unemployment (and low producer prices for farmers). The strategy was to get money in the hands of the people in order to create agregate demand that would encourage investment and stimulate growth. Keynes suggested that the government engage in public works programs that would increase employment, create agregate demand, and which would develope infrastructure (which would return its investment). He definitely didn't advise the government to give cheap money to private corporations to invest when there was no agregate demand to satisfy.

[Nederland]

75. Could have fooled me

It seemed to me that you were defending the OP which explicitly stated that investment didn't create jobs.

[1932]

77. Not a hard job.

I've defended from the beginning the argument that Keynes thought that increasing aggregate demand was the key issue and that he thought the government should encourage it through public works programs.

In the 50s, "Business Keynsians" darmatically underemphasized the full employment part of Keynsianism, and Keynes colleagues believed that contradicted Keynes's central beliefs. Parker writes about this at about p 200 (Chapter 10, IIRC).

It sounds like you're a business Keynsian?

[unlawflcombatnt]

79. No

That's your interpretation of that passage, not mine. That emboldened passage simply states a relationship between aggregate income, employment, and investment. You've stretched the interpretation to the breaking point.

The non-emboldened portions imply investment is related to consumption

"But an increase (or decrease) in the rate of investment will have to carry with it an increase (or decrease) in the rate of consumption; because the behaviour of the public is, in general, of such a character that they are only willing to widen (or narrow) the gap between their income and their consumption if their income is being increased (or diminished)"

This means that investment must be determined by the rate of consumption, which is completely consistent with everything else written by Keynes. It means consumption necessitates investment, not vice versa.

Again, the marginal rate of utility of investment is determined by the "prospective" or real rates of return. Rates of return are determined by consumer spending, not investment.

This is concept is mentioned several times, in several different ways, in several different places.

Investment does NOT create jobs, and Keynes never made any such claim.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[1932]

49. You're wrong about Keynes and about Ford too.

A job on the auto assembly lines in Michigan was a great job for years, and it started with Ford.

People came from all over America to get those high paying jobs.

I'm curious: where'd you go to college and high school?

[RaulGroom]

38. Good piece.

The unfortunate thing that's happened over the course of my lifetime is that the economic discourse has become dominated by a screaming match between Keynesians and people who simply deny that the Keynesian economic model is useful for anything (mostly using arguments that demonstrate that they have no idea what Keynes was talking about).

In my opinion these people shouldn't be engaged at all. They are in charge now, which is too bad, but arguing with them is fruitless, and every decade we fall farther behind on the task of developing a comprehensive understanding of the way the modern industrial export capitalist economy really works.

One thing I would be interested to get your take on, unlawfulcombatant, is this: one thing I've thought a lot about in my life is what exactly is the right way to approach the problem of chronic underinvestment in high technology, which leads to this quasi-malthusian problem of increased investment yielding smaller and smaller returns. Obviously our current system, where we basically create this monster high-tech war economy and the ancillary benefits trickle down to the civilian economy, is highly inefficient.

But in a perfect world (or even a less-unperfect one), how do you allocate those technology resources? Should everything be funneled through the university system, where it is at least subject to peer review, or is there a way to keep a Pentagon-like agency inside the government but allow it to be involved in a whole raft of high-tech pursuits instead of just warmaking?

[unlawflcombatnt]

53. Thanks

RaulGroom,

Thank you for your compliment and the insight. You're right on the money about the screaming match between Keynesians and those who refuse to acknowledge the value of what he wrote. That is exactly why I wrote this post.

With limited formal economics background, I arrived at some of the same conclusions Keynes did. The concepts of aggregate demand, marginal propensity to consume, and the limits of private investment I arrived at independently. I knew little of Keynes, other than that he was demonized as an alleged advocate of "big government."

I was delighted to find out that Keynes had already described these concepts over half a century earlier. This made me kind of a de facto Keynesian. I initially posted mainly to my own blogsite. A large part of my initial intent was to find out whether what I said made sense to others. Once I learned of Keynes's works describing aggregate demand and "marginal propensity to consume," I realized I had the right idea. Since that time, what I've written has been vetted through several economists, who thought I was correct in my statements.

This is when I decided to enter the "screaming match" myself. I don't mind the screaming at all, if I know I'm right. And now I do know that.

The worst popular economic myth is "investment creates jobs." I will enter any and every screaming match I can to dispel this economic fantasy. It may seem like some of the discourse in this thread about the issue is splitting hairs. But it is extremely important to split that hair correctly, because the implications are huge. It determines whether we should prime the pump at the bottom or the top.

Most people that have not received previous right-wing economic brainwashing understand that consumer spending and demand drive our economy. At least once a week I read a passage stating that consumer spending is 2/3 of economic activity. In my opinion, it may be higher. Common sense should tell anyone that you can't make up for this 2/3 by increasing investment. (The contribution of consumer spending, or "personal consumption expenditures," can be verifed in the Bureau of Economic Analysis' GDP statistics. Consumer spending is always around 70% of our total GDP. The link for this is:
http://www.bea.doc.gov/bea/dn/nipaweb/TableView.asp?SelectedTable=5&FirstYear=2004&LastYear=2005&Freq=Qtr)

Much modern economic theory is designed to disprove simple common sense. Keynes even alluded to this himself in "General Theory." He stated that much economic theory was designed to prove ideas that the common man found illogical. That's the major function of these corporate-supported Right-Wing Economic think tanks -- to concoct some kind of "proof" of their illogical economic mythology.

I don't have a good answer to your question about chronic underinvestment in technology. I suspect that the "demand" for such investment is a problem. This demand may be affected by the outsourcing of American high-tech jobs. It may be that due to the extreme labor cost reductions and the price reductions this has allowed for, the potential returns from such investment aren't sufficient to stimulate further investment. Maybe we've simply under priced the products of high tech investment enough to kill investment incentive. Reducing outsourcing might increase the investment incentive. It may be necessary for the government to invest directly itself. But again, I don't really have a good answer here.

I'm currently reading economist Ravi Batra's "Greenspan's Fraud." It is outstanding. Maybe Dr. Batra has a suggestion on how to increase high tech investment. If I find such a suggestion, I'll share it. ALL of Batra's statements are logical and make perfect sense. He'd definitely be considered a "demand-side" advocate.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[leveymg]

41. Is Bush a Keynesian, a Supply-Sider, or Some Weird Mutant of Both?

Spend so heavily, so selectively, and aggregates so much debt going forward that it primes the pumps of Big Business and kills Big Government at the same time?

[unlawflcombatnt]

47. Bush is a "fun-demented" Supply-Sider

I think the best of those word to describe Bush is "mutant."

Bush talks publicly of giving money back to consumers so they'll have more to spend. That sounds like a Keynesian Demand-Sider.

But Bush's actions completely contradict his public statements. Bush's taxation and Corporate Welfare advocacy make him a supply-sider. A true Keynesian demand-sider would have cut taxes on the lower income taxpayers in order to stimulate consumer spending. Instead, Bush lavished most of his tax cuts on high-income taxpayers who devote relatively little of their income to consumption spending. High end tax cuts will theoretically increase investment. The problem with that is that there has to be something to invest in. And that "something" to invest in is created by consumer spending and demand for production of that "something." Since wages have been declining, there has been little to invest in. Real estate and bonds have soaked up a lot of this excess investment capital. Much still remains in corporate cash-on-hand accounts.

Bush's supply-side, high-end tax cuts have created no additional jobs. Even if the excess capital had been invested, it would have created no jobs. That's because investment does not create jobs. Only consumer production demand, and demand for workers to provide that production, can create jobs.

I'd describe Bush as kind of a "fun-demented" Supply-Sider.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[EVDebs]

43. Marginal propensity to consume gives the people POWER

and capitalists knowing this set up a system of government that tamps down the power of the people and replaces that with 'malefactors of great wealth' excess power.

You can have a democracy or great wealth but you cannot have both-
Louis Brandeis

[FogerRox]

71. SOme side bars

About 1927, tax legislation was passed to benefit the makers of Radio tubes-- at the time about 60% of tubes were bought by the Military. During this time there was relatively more poor and a smaller, less wealthy middle class-

My grandfather told me built himself a radio in the mid 20s-- it was cheaper.
Jump to post WW2--- A larger, wealthier middle class was buying up TVs---at a much higher rate than radios were bought in the middle 1920s, I dont know of any supply side style tax breaks that fostered this buying-- >wink<
-----------
Next-- yes I heard FDR went whole hog on Keynes in 37-38.
---------
Next- Outsourcing of jobs-- globalism is much older than any of us here-- go back to the Dutch-- prior to the Tulip scandal of --- was it 1629. The Dutch had the largest fleet of ocean going ships, 6000+, their craftsmen ot tradesmen were the envy of the world, this was the middle class --- and it was a large- relatively speaking -- middle class. By the onset of the new century-- investment went abroad-- new craftsmen were hired-- in areas where wages were cheaper-- then the 30 years war-- The Inquisition.

In general terms we see the Portuguese, Spanish, French & British all follow this pattern--
A formidable Middle class is built, an Empire- if you will-- and then A country enters into trans-national-economic alliances, I will call it Globalism-- that Empire then declines.

The US is following this path to decline. China appearers in the batters box
------------------
Supply side is a valid and needed tool. Once every 100 years or so. The railroad grants in the post Civil War era-- from 1866 to 1896, 6 transcontinental railroads were completed.
At the Time Market forces dictated that the need for rail lines went as far west as Chicago and New Orleans. Most rail lines stayed east of the Appalachians.
6 transcontinental railroads became the backbone of am infrastructure that led to the winning of WW1 & WW2. With vast amounts of coal & Iron-- engineers were needed to build cool stuff-Schools to train said engineers were needed--- workers needed to be trained to a higher level- to be educated in school at a higher level.

By 1975 the form of Iron favored by Miners - hematite-- was used up-- hematite is softer and near the surface. Miners then went deeper to find Taconote, which is harder and must be crushed first before going into the furnace. Currently Taconite mines are 1 mile deep+ and have to go deeper. The Worlds fish catch peaked in 1975, and has been in decline since. Ever hear of the term PEAK OIL-- enuf said.

The Planet has about 6 billion people and the management of resources to this point has been somewhat poor, I doubt 6 billion is sustainable under the current system.
---------------
In the battle for resources the Project for a New American Century, seems to look at oil. In 100 years that concept will have been long gone-- the future resource cache is in space.
SO who will build the railroads to space-- to get the resources to foster the next big boom?

[EVDebs]

74. You've obviously read Wealth and Democracy by Kevin Phillips

We can only fight the decline of the US economic empire by empowering the consuming classes and putting higher taxes on the outsourcing multinationals and the wealthiest few in our 'top heavy' society.

You want to raise taxes ... you go where the money is !

[FogerRox]

76. Guilty as charged-=--

Maybe it would be easier to say that Lincoln won WW2


additionally

Ford paid folks like $3 when the average worker got $1. NOt exactly Ford paying what he could get away with ---- see up thread.

[unlawflcombatnt]

84. Exactly

You definitely want to go where the money is for taxes.

You want to put the burden of taxes where it will do the least damage to the economy, which means on the highest income earners. The reduction in capital investment that this could potentially cause would do little economic damage, because investment capital is abundant at present. Reducing it some by increasing high-end taxes would have little, if any, deleterious effect on the economy. The "means of production" are not lacking at present. Industrial capacity utilization is less than 80% at present. This means there is ample room to increase industrial output without investing much capital.

In contrast, increasing the tax burden on the "consumer" class will damage the economy, because it will reduce take-home pay and reduce the money available for consumer spending. Current wages are already insufficient to maintain consumer demand, when taken alone.

This "wage-deficient" consumer spending has been supplemented by debt-financed consumer spending. This is becoming an ever increasing component of total consumer spending. At present, the $200-300 billion/year of home equity loan borrowing is equal to 1.7-2.5% of our $12 trillion GDP. Credit financed spending adds even more to consumer spending. Neither are sustainable in the long-run.

Shifting the tax burden to the lesser affluent will reduce consumer spending, as well the production demand it creates. It reduces the "means of consumption," which is the current limiting factor for our economic growth. Again, consumer spending is 2/3 of economic activity. It is the biggest component, and it is absolutely essential.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[unlawflcombatnt]

81. Borrowing "Bubble" obscures Demand-Side Problem

FogerRox,

Good post. The part about the Portuguese, Spanish, French, & British declining after they entered their "Globalism" stage was especially good. It certainly does seem like the U.S. is following suit.

Also, I have to agree with your point where you said that Supply-Side is a valid and needed tool about every 100 years or so. If consumers were relatively affluent, and our country was severely lacking in capital, and severely lacking in the production facilities that capital could build, supply-side policies might help. As you've implied, however, that situation is pretty rare.

At present, based on wages, consumer debt, productivity, corporate profits, and industrial capacity utilization, supply-side concessions are of no benefit whatsoever.

Corporate profits and productivity increases have far outstripped wage increases. Industrial capacity utilization is less than 80%, while it had been 85% during much of Clinton's presidency. (Decreased capacity utilization = decreased production demand.)

Consumer spending growth has greatly exceeded wage growth, which means most of the consumer spending growth has been due to increased consumer "deficit" spending.

The "demand" side of our economy has been greatly assisted by consumer spending financed with borrowed money. From $200-300 billion per year of consumer spending has been financed by home equity loans alone. This is 1.7-2.5% of our $12 trillion GDP. Subtraction of 2.5
would put our GDP growth near the 1% mark. The demand side of our economy cannot be propped up this way indefinitely. Aggregate wage income needs to increase to compensate for the ultimate bursting of the current Housing/Borrowing Bubble.

The fact that demand has been maintained through borrowing has obscured the true Demand-Side deficiency created by the Wage-Productivity gap. Wages alone have not maintained the necessary demand our economy required under Bush. But debt-financed consumer spending has taken the place of those wages. Borrowed money has filled the potential spending gap that would've otherwise been created by the Wage-Productivity gap. As a result, the Wage-Productivity gap has gone unnoticed. This has allowed Right-Wingers to defend their delusional economic policies and claim that there is no "demand-side" problem.

But there most certainly is a demand-side problem. It's simply been obscured by the "borrowing bubble." When the borrowing bubble bursts, however, this problem will become apparent.

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[unlawflcombatnt]

91. Marginal Propensity to Consume

The "marginal propensity to consume" also means that as wealth is transferred to the more affluent, less will be devoted to consumer spending, while more is available for investment.

Obviously, some kind of balance needs to be struck between the "means of consumption" and the "means of production." The benefit of increased investment is limited by consumer ability to purchase the products of that investment. This is why I've stressed the point about the limitation of investment in creating jobs. Investment creates NO jobs unless consumers can purchase the production facilitated by that investment.

Shifting the tax burden away from the affluent, as well as increasing income in general to the affluent, throws the investment/consumption ratio out of balance. This results in consumers being unable to purchase sufficient production through take-home wages alone. This results from the effects of the "marginal propensity consume" as the income gap between the rich and poor increases. The resulting reduction in consumer spending would normally reduce consumer demand for production.

However, the increased ease of credit and borrowing has obscured this problem. The maintenance of consumer spending through credit and borrowing has given the false impression that the "demand" part of our economy is doing well. It is not. And it cannot be maintained at the current level through ever increasing consumer "deficit" spending.

When the current borrowing bubble bursts, the previously obscured demand deficiency will surface. When this happens, our economy will decline, and maybe even collapse. Only an aggregate American wage increase will prevent this. Furthermore, this increase needs to be slanted toward the lower income earners, due to the "marginal propensity to consume."

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[PeaceProgProsp]

86. For those who don't think Keynsians believed that full employment was

key to econmic recovery, stability and growth, you should know this:

After the Depression and after WW2, Democratic New Dealers tried to pass a Full Employment Act. They interpreted Keynes in a way that convinced them that a full employment act would even out the ups and downs in the US economy and guarantee steady growth (by ensuring demand). Republicans (who had been increasing their power after the '38 elections) had enough power to water down the bill drastically. The bill that passed didn't do much for employment.

Truman ended up not being much of a Keynsian, so that was that for the politicians who believed that maximum employment was good for the economy.

[unlawflcombatnt]

90. Thanks

Thanks for your input.

I found an interesting economics link showing the GDP numbers for each year of the Depression. GDP decreased from $315 billion in 1929 to $222 billion in 1933. From this point on it increased steadily to $310 billion in 1937. Then it declined to $296 billion in 1938. It then began increasing again at almost an 8% annual rate until 1940. In 1941 it increased a whopping 14%. World War II didn't start until December 7th, 1941, so the growth rate was accelerating even before World War II broke out. In 1942, GDP grew by 15%.

I wish I had the information for 1943-1945. From the information I have, it appears that GDP growth had actually picked up a lot of speed before World War II even started.

These numbers are on the last page of the following link:
http://www.econ.wayne.edu/bbekdac/ch10lect.htm

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."

[1932]

92. According to Parker's book, there was so much new consumer demand

that FDR had a very hard time convincing corporations -- especially the big three auto mnfgs -- to swtich over to wartime production.

Even after Ford promissed to do so, they waited two extra months claiming that they had to use up all their backlog of supplies to make passenger cars before they could start making tanks. FDR was so angry, he confiscated the entire 200,000 production run from those two months for government use.

And mind you, these companies were making a fortune off the new cost-plus government contracting, which FDR also had to do to lure corporations away from selling into the growing demand for consumer goods that the Keynesian policies had created.

[unlawflcombatnt]

93. Keynesian Policies

1932,

From the GDP numbers I saw from the site I posted earlier, it looks like our GDP increase was starting to accelerate before World War II started. That makes it look as though we might have come out of the Depression without World War II even taking place. From what you're saying, that even seems like an even more likely possibility.

Is there any suggestion in Parker's book that we might have come out of the Depression, even without World War II?

unlawflcombatnt
EconomicPopulistCommentary
___________
The economy needs balance between the "means of production" & "means of consumption."