[quote=EconProf]You are making this much more complicated, and ideolgical, than it needs to be. Keynes advocated stimulating aggregate demand, whether consumption, investment, or government during the Great Depression, i.e., when output fell well short of potential. His theory was that to expand output when there was so much slack in the economy would not be inflationary–indeed deflation was the problem back then. There is increasing debate among economists now as to how well that really worked (See Amity Schales’ book, The Forgotten Man). After all, unemployment was still 17% in 1939.
Today’s politicians latch on to Keynesian theory as an excuse to expand government and give it a theoretical justification. But we are increasingly looking at the behavioral effects of government policies and discovering that they can be both large and harmful. Looking back at two years of TARP, cash for clunkers, subsidies for GM, green initiatives, proposed tax hikes, we can see that businesses and consumers are rightfully afraid of their future. Businesses can’t predict their future costs or regulatory environment, so they sit on their cash hoard. Yes, they are fraidy-cats.
From your comments we would agree that the boom of the Bush years was an artificial one–fueled by easy money, overleveraging by consumers, banks, businesses and other assorted culprits. Plenty of blame to go around. And our current problems are prolonged and deep because we are in the painful deleveraging process.
We’d also probably agree that capitalists want to do what it takes to maximize profits in the future–that’s what makes for hiring and spending if conditions are right. Which is why I don’t understand your statement that “…it has zero to do with government policies and regulations.” If you believe that then you probably have never started a business or hired a work force.[/quote]
Last things first, I’ve started businesses, run businesses for others, and been paid pretty handsomely to tell others how to run their businesses. Currently I’m the CFO for a small business whose clientele is exclusively big business because small business rightfully can’t justify spending millions on IT. I can’t afford to be bound by ideological thinking. Whether it’s politics or religion or economics, to quote Robert Langdon, faith is a gift I have yet to receive. I deal in empirical evidence. Anything less would be a disservice to my employer.
In the last 2 weeks I’ve spoken with 3 CFOs and CIOs for billion dollar companies. All had proposals in their hands for us to do work for them. All 3 said their plans had been put on hold despite issuing RFPs with immediate start dates within the last quarter. All 3 said their plans had been put on hold because of uncertain consumer demand. Not regulations. Not health care reform. Not tax uncertainty. Not political uncertainty. Businesses deal with government demands. It can eat into their margins. But it doesn’t keep them from doing business. Lack of customers does.
As to the high unemployment that remained in 1939, you conveniently didn’t mention Roosevelt’s mistake in ’37, which was instrumental in creating a new recession. Wasn’t very Keynesian of him.
And yes, I think the boom in the middle of the last decade was somewhat artificial. War is a temporary expansion of the economy. The tax cuts from the early part of the decade did little to build the economy. They, along with a couple trillion spent on wars, (in addition to the criminal expansion of consumer debt) set the wheels in motion for the pop culture debt crisis we have today. I have no way of knowing for sure, but I suspect that higher top marginal tax rates, slightly higher interest rates, and no unneeded wars would have lead to a much more stable economy entering the new decade.
