[Marxism] Doubts over effectiveness of pump-priming

[Louis Proyect <lnp3@xxxxxxxxx>]

http://www.thenation.com/doc/20090126/howl
Howl
By Nicholas von Hoffman
January 8, 2009

The nation's hopes--even the world's--are riding on it, but Barack 
Obama's stimulus plan is no sure shot. Nobody can say if it will work.

Some questions to ponder: What has to happen for us to say that the 
stimulus worked? Would it be a success if half the people who have lost 
their jobs secure some kind of employment? Would the benchmark be that 
one-quarter or one-third or half of the trillions in lost retirement 
savings were rescued? Would keeping in place two-thirds of those in 
danger of losing their homes be enough for us to say the stimulus has 
worked? Or should the standard be the Dow Jones Industrial Average 
clawing its way back to 10,000?

Except in the vaguest terms, no criterion has been laid down for what 
the stimulus is supposed to accomplish. Perhaps none can be.

Economists who a couple of years ago disagreed about almost everything 
have come together to buy into the central part of the Obama stimulus 
approach that is putting lots of government money into anybody's hands 
who will spend it and get business rolling again. Overnight, after 
decades of being ignored and discarded, the ideas of John Maynard Keynes 
and Alvin Hansen, the two major economists of the 1930s New Deal era, 
make sense again.

In the seventy years since the Depression loosened its grip on America, 
economists and historians have argued over whether or not Keynes-Hansen 
deficit spending, or pump-priming, as it was called, succeeded. The jury 
is still out on that one, but the Keynes-Hansen approach has been dusted 
off and even the stiffest opponents of deficit spending have abandoned 
the closely held principles of their professional lifetimes.

One such former opponent is Harvard's Martin Feldstein, chair of the 
Council of Economic Advisors in the Reagan administration and someone 
whose career has been spent in antipodean opposition to anything that 
smacked of Keynesianism. Things are so bad, in Feldstein's opinion, that 
he has put himself on record as saying there is no choice but to grab 
the buckets and pour water into the pump until America's distressed 
economy starts to chug again.

The pump, however, may be seized up. We do not know if, when money is 
put into millions of people's hands, they will spend it. After all, the 
middle-class segment of the baby boomer generation has just seen its 
retirement savings all but wiped out. These people, with retirement 
coming up fast, may be of a mind to save every cent they can get their 
hands on.

In the 1930s, when a reluctant Franklin Roosevelt decided to try 
Keynes-Hansen deficit spending, the overall situation was different from 
the one we are trying to live through. The leaning towers of debt built 
up during the crazy 1920s had collapsed by 1934. Thousands of banks had 
gone under, taking the savings of countless people with them. Bankruptcy 
had carried away debt-ridden, weak companies and individuals. Farmers 
were thrown off their land when they could not make their mortgage 
payments; city and suburban families lost their homes.

The deficit spending of the 1930s began in a society that was, thanks to 
massive bankruptcies, an economic tabula rasa. It had been reduced to 
near ruins, but in the process debt was swept away. In 2009, quite the 
contrary is the case.

Our current financial system is waterlogged with debt. Countless numbers 
of nonfinancial companies have the lead weight of indebtedness dragging 
them down, and personal debt is doing the same to the millions of 
individuals stuck with mortgages now worth more than their homes. No 
tabula rasa here, no debt-free new beginnings--and that raises a 
question: will the Obama plan be a stimulus to higher levels of economic 
activity or a life-support system maintaining an economically comatose 
patient?

We could go another way. We could sweep the table clean of debt by 
allowing massive bankruptcy to proceed for companies and individuals, a 
national liquidation. This was the plan advocated by Andrew Mellon, 
Herbert Hoover's treasury secretary.

Something like that had worked in the recession of 1920. The pain was 
sharp but short. In a few months the recession was over, and the nation 
was off into the Jazz Age. In 1933 the pain was sharp but hardly short. 
Government action not unlike what the Bush administration has been doing 
may have stopped the process from completing itself.

Stepping back and allowing bankruptcies to roll could not be 
contemplated without creating a huge program to keep the millions who 
would lose their jobs in their homes, fed and clothed. The politics of 
the Mellon approach are too horrendous to bear thinking about, so 
economists of every stripe, starting as far right as Feldstein and as 
far as left Paul Krugman, have no choice but to fall back on Keynes-Hansen.

Now let's see if it works.


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