Interesting that Dick Morris would bring up John Maynard Keynes in his article. We just discussed Keynesian Economic Theory last night in my Macro Economics class. What I find interesting about Keynesian Economic Theory, is that the focus is more on demand management than the Smith-like theories of self-interested consumers being the drivers of the economy.
One must ask, why does Keynesian Economics crop up every time there is a recession or depression, and why do we always return to the long debate between "trickle-down effect" and Compensatory Government Stabilization policy during these times?
In my opinion it is largely due to the fact that spending effects of "trickle-down" tax rebates to consumers are extremely hard to predict. Economists can no more say that one person will put their check into a purchase of a durable good (tv, refrigerator, car, etc) than into savings (bank accounts, paying off debts, or investing in stocks). And the effects of Compensatory policies can take years to evaluate and have very few control features for the measurement of success. Take a look at the recent tax year of 2008. We've had opportunities to examine both types of policy. We had a tax rebate for consumers and an additional tax deduction for Capital Investment from businesses. Neither has worked much in the way of stimulus to this point. Most Americans used their stimulus check to pay down debts as did most businesses.
We had 350 Billion (and much more injected from the Fed) of Government spending, which all of the analysts are saying ended up in savings as well, not in stimulus. I think Paulson made a huge error in bypassing the heart attack by purchasing equity in the banks rather than stinting the arteries to remove the blockage by purchasing and holding the bad debts. That's where Reganists got the S&L issue in the 80's correct.
In other words, the way I'm evaluating the current situation is this: While normally consumer and investment control are the best policies, putting too much control in the hands of a fearful consumer equates to increased savings. Putting too much control into semi-nationalization of firms and investments equates to increased savings. Expenditure GDP is based on four components: Consumption, Investment (Capital Investment), Government Expenditures, and Net Exports. We've discuessed the first two and found the net result to be toward savings. There are only two parts left in the overall GDP equation: Government Expenditures and Net Exports.
We've used government consumption in one form or another in nearly every economic downturn including the Great Depression, and the results are arguable as to their success; I am one to believe they mostly worked in each case, some more than others (I believe the Republican based expenditures worked better than their Democratic counterparts).
So why don't we figure out a way to do something untested, and revitalize our Net Exports? To me, that is the part of the equation that has gone unnoticed, yet in my mind has great untapped potential to energize the economy, create jobs, and transfer large sums of wealth back into the US economy. In my mind, there is a key difference between our situation now and the situation in the early 1930's. In that time the economies of nations were not nearly as global. Today they are, and if you look around, all of the economies in the world are trying to lean on government spending to increase GDP and swing things around. Today's globalized economies are all after one thing: economic equilibrium. All of which is a good self-interested ideal, but in the context of game theory, this "co-operation of nations" to spend their government capital would be something close to Nash Equilibrium. Nash Equilibrium does not always stand to benefit the whole group, and if one player finds a strategy that can break from this equilibrium, they can usually make the biggest gains. So, if every player in the global economic game has tried and is trying manipulations of the first three GDP components, naturally I think that everything we do in an effort to remake our economy should focus either implicitly or explicitly on increasing the Net Export number - beat the competition to increased exports, and we win the game. Somewhat of a Net Exports "Arms Race". Who really cares right now how much we sell to each other domestically. We can sell insurance to one another all day but if there is nothing to insure it profits no one.
How can we increase the Net Exports component of GDP? Create a revitalized financial system that foriegn investors are attracted to investing in (import currency holdings (not loans), export financials), produce and use more domestic energy (decrease energy imports), export energy resources, aquire foriegn companies (exchange of currency, export of business processes), help "manufacture ready" products and projects get to market (export products other nations need but don't have), create new breakthrough technologies (export US made technology), create and export US made media demand, export "Value Added Products" (especially ones that use materials that can be created easily within our own economic borders), etc., etc.
I think the biggest component of Net Export revitalization would be to export energy and energy resources that are new and high tech, and that are produced by technology that only the US has, or harvesting energy resources from places (such as space) that the US has superior control over.
Here's to winning the GDP race of the 21st century.
Tijs Limburg
KEYNESIAN FALLACY
By DICK MORRIS
Published on TheHill.com
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50aGVoaWxsLmNvbS8%3d&x=be99d77b> on February 3, 2009
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There are very few economists who really buy into Keynesian theory
anymore. Instead, the idea of "rational expectations" has taken its
place. The difference between the two approaches is essential to
understanding why Obama's stimulus package won't work.
Keynes felt that people would react automatically to a few dollars in
their hands. Consumers would run out and buy new products, and
businessmen, seeing the uptick in sales, would rush to open new plants
and hire new workers who would, in turn, generate more demand.
But that's not the real world. In reality, consumers, knowing there are
hard times ahead, save any money they get either by salting it away or
by paying down their debts and bills. That's why the personal saving
rate in the last quarter of 2008 was the highest in six years and
spending on residential construction was down 22 percent over the past
year. And the savings rate rose from 2.8 percent in November 2008 to 3.6
percent in December as the storm clouds grew grayer. And, in the real
world, banks hang onto their money for fear of making bad loans, no
matter how many bailouts or stimulus packages Washington passes.
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According to the Federal Reserve Board of St. Louis, the Fed is now
holding upwards of $1.7 trillion for American banks, more than twice
what it had in its vaults at the start of 2008. How did the Fed get the
money? Congress voted the Troubled Asset Relief Program (TARP) package
of bailout funds. The Fed purchased bank assets to get liquidity onto
their balance sheets. What did the banks do with the money? They gave it
right back to the Fed to hold in its vaults. They didn't lend it out.
They didn't use it to stimulate the economy. They are using it for a
nest egg to tap when times improve. Just like the theory of rational
expectations says they would.
If banks, suddenly awash in capital, don't decide all is fine and rush
to lend money; and consumers, given a tax cut or a pay raise, don't rush
to buy a flat-screen TV, then what good will the stimulus package do?
Not much. It is not until there is evidence that the underlying problem
-- massive personal and corporate debt -- is being solved that any
degree of confidence will return. And, without confidence, the rational
expectation theory means people sit on their money.
But the package will do a whole lot of harm by piling up capital that
people won't spend, banks won't lend and businesses won't invest. When
confidence rises and the money comes out of hiding, watch out for the
massive inflationary pressures all that extra cash will unleash.
Obama's stimulus package won't stimulate much except inflation down the
road, which will, in turn, mean the onset of another round of high
interest rates and renewed recession to check the inflation.
Republicans should defeat the stimulus package and then negotiate a much
smaller bill that emphasizes tax cuts and avoids the pork-barrel feeding
frenzy Obama has unleashed. You can see the stimulus package rotting
away before our very eyes.
People are turning against it as they see the things on which government
will now be spending money, just as they turned against Clinton's more
modest $35 billion stimulus package in 1993. Republicans should stay
away in droves. On this issue, they can recapture something they have
lost over the past eight years -- the mantra of less spending and
smaller government.
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