Re: RE: Re: RE: saving and aggregate demand

["Ellen Frank" <frank@xxxxxxxxxxxx>]

pen-l@xxxxxxxxxxxxxxxxxxx writes:
>I couldn't open this file.
>Please resend.
>
>And I'm not sure you're a liberal.
>You show some radical tendencies.

Hey Max.  Yeah, well I try to pass sometimes.  Though I gotta
say, liberals are a tough lot to fool.  Generally they hate
radicals more than they hate conservatives.

			Ellen
>
>Current conventional wisdom has it that business cycles are obsolete;
>pro-market policies have swept recessions into history?s proverbial
>dustbin.  The generation of policy-makers nurtured on notions of
>government economic management after World War II is retiring or dying
>off,  replaced by  ?new economy? enthusiasts like Bill Clinton.  Clinton
>famously declared in 1996 that ?the age of big government is over.?
>But what happens if the economy slips?
>	The old-fashioned big-government policies that pulled the US through
>many an economic downturn have, in the last decade, been mostly
>dismantled.   Many presume that the government will pick its
>recession-fighting programs up again, should the economy falter --
>cutting taxes, raising spending, priming the economic pump, as Reagan did
>in the 1980s and Bush in the 1991 recession.  Indeed, Treasury Secretary
>Larry Summers defended the administration?s plan to repay the federal
>debt by contending that Clinton is  merely ?reloading the fiscal cannon;?
> saving against the bad times when heavy federal spending and borrowing
>might really be needed.
>	But the tools of macroeconomic managment are not so easily taken up and
>discarded; not, at least, in the US political environment.   From the
>1930s, efforts to push through programs to ameliorate recessions and
>relieve unemployment in the US have been fraught with controversy and
>fiercely contested.     The 1930?s are often cited as the beginning  of
>the ?Keynesian Revolution,? when the programs proposed by British
>economist J.M. Keynes to end depressions -- public works programs
>financed through deficit spending -- were realized in Roosevelt?s New
>Deal.  Roosevelt, to be sure, pressed throughout the 1930?s to expand
>federal jobs programs, but did not actually succeed until the second
>world war.  After the war, it took years of careful and deliberate effort
>to craft the political and intellectual infrastructure for continued
>Keynesian policy in the US.  That infrastructure is now largely gone.
>Putting it back together again will not be easy.
>
>The Keynesian Consensus
>
>	When Richard Nixon declared in 1972 that ?we are all Keynesians now,? it
>seemed the consensus for active, government management of the economy was
> unshakable.   Just a few years after Nixon?s speech, Congress passed the
>Humphrey-Hawkins Act which committed the federal government to use its
>virtually unlimited taxing and spending powers to avert economic
>downturns and promote full employment.  In fact though, the Keynesian
>consensus was already shattering.  In 1967, the influential American
>Economic Association elected arch-conservative and Keynesian nemesis
>Milton Friedman president.  The prestigious American Economic Review
>published in 1969 Robert Lucas?s paper outlining the new theory of
>rational expectations which purported to ?prove? that government
>macroeconomic policy was useless.
>	Keynes had taught that the cycle of economic boom and bust could be
>eliminated with judicious government spending to create demand for goods
>and workers.  By running deficits, governments could fuel economic
>growth, borrowing (or printing) idle funds to pay the workers that
>private businesses were use.  Known as fiscal stabilization policy or
>expansionary macroeconomic policy, these tools programs proved highly
>effective in combating business cycles.  Even those initially hostile to
>Keynesian ideas in the 1930s could not deny the evidence of World War II
>when, thanks to massive government spending, the US economy went from
>deep depression to rapid boom virtually overnight.
>	But support forged during the war for federal involvement in economic
>matters proved hard to sustain once the war ended.  The American version
>of Keynesianism, though tepid and watered-down compared to European
>programs or to Keynes? own proposals, was sufficiently left-wing to
>galvanize unending hostility in the deeply conservative pro-business
>arena of US politics.  Continued government spending after the war faced
>determined opposition from businesses who decried swollen government
>budgets as ?creeping socialism? and complained that government programs
>amounted to ?unfair competition? with the private sector.  In 1954,
>radical economist Harry Braverman pronounced Keynesianism in the US
>?deader than the dodo.?
>	To be sure, business leaders supported the federal highway program, cold
>war military build-up, the Korean and Vietnam wars, but they did not
>support the deficit financing of these ventures, nor did they back using
>federal programs as tools of macroeconomic management.  By the early
>1960s, even moderate gestures toward fiscal stabilization had become a
>hard sell in Congress.   Keynesian economists worried openly about
>?implementation lags? -- the yawning gap between the onset of a recession
>and the time it might take Congress to do something.
>
>Full-Employment Budgeting
>
>	Throughout the 1960s and 1970s, coalitions of liberals and moderates
>tried to stem the backlash, quietly constructing a macro-economic policy
>infrastructure that would weave some basic fiscal stabilization into the
>fabric of federal law.  Under the Johnson and Nixon administrations,
>federal entitlement programs --  Social Security, Medicaid, Medicare,
>food stamps and the plethora of welfare programs -- were enacted or
>vastly expanded.  Economists called these automatic stabilizers, because,
>as enacted, eligible applicants could not be denied benefits for lack to
>funding.  Thus mandated spending levels would rise and fall predictably
>with the unemployment rate.  Entitlements legally committed the
>government to increase spending during economic downturns, regardless of,
>or despite, sentiment in Congress for Keynesian fiscal policies.  These
>programs were neither massive nor generous -- especially compared with
>their European counterparts -- but taken together they provided a bedrock
>level of federal spending in lean years as well as a minimal gauranteed
>income to prevent wages from plummeting in a recession.
>	With the sole exception of Reagan?s tax cut and military build-up in the
>early 1980s, automatic increases in entitlement spending have been the
>only significant source of fiscal stimulus in the United States since
>1973.  During the recession of 1991, for example, virtually all of the
>$47 billion increase in the federal deficit came about because of
>increased welfare and Social Security spending.
>	Furthermore, Keynesian-trained economists insisted that the budget
>deficits that resulted when recessions suddenly swelled welfare and
>Social Security rolls should not really count as deficits at all.  In
>annual economic reports, the president?s economic advisors carefully
>distinguished between a structural deficit -- where the governments
>budget was out of balance even with a booming economy -- and a cyclical
>deficit -- where the deficit soared unavoidably due to rising
>entitlements and falling tax collections.  Full-employment budgeting  --
>the position that balancing the federal budget should take a back seat to
>expanded financing of entitlements during a recession -- sustained
>Keynesian fiscal policy even during the Reagan-Bush years.
>	
>The End of Macro-Economic Policy
>
>	Though Reagan is credited with killing Keynesian economics, neither the
>Bush nor Reagan administrations were able to dismantle the policy
>apparatus inherited from the 1970s.  Despite substantial cuts in the
>average benefit for many welfare programs, for example, total spending on
>entitlement programs rose throughout the eighties, contributing (along
>with tax cuts and a military build-up) to the largest peace-time deficits
>ever run by the US government.   AFDC, Food Stamps, WIC and other
>programs, though perhaps meaner than before, enlarged their spending with
>each downward shift in the economy during the 1980s.  Deficits ballooned
>and a Democratic house resisted major changes in entitlements.
>Reagan?s budget director, David Stockman, contended in 1984 that Reagan?s
>huge deficits were a deliberate strategy to discredit Keynesian policy
>and part of a larger plan to undermine Congressional support for further
>expansions of federal spending.   While this may well have been Reagan?s
>intention,  Keynesian economics was not finished, politically, until Bill
>Clinton?s watch.
>	Upon attaining a legislative majority in 1994, conservatives in Congress
>single-mindedly set about deconstructing the key legislative vestiges of
>Keynesian economic policy in the United States.  Welfare reform, their
>most important victory, is instructive.  When the Personal Responsibility
>Act passed in 1996, much was made of the five-year lifetime limit on
>benefits, the work requirements and so forth.   Rarely noted was the fact
>that the legislation transformed the fiscal nature of most federal
>welfare programs.  Welfare benefits are no longer an entitlement.  Annual
>spending levels are now capped and will not rise with the unemployment
>rate unless Congress specifically allocates new funds.  It was this
>provision of the legislation that led HEW official Peter Edelman to
>resign in protest when Clinton signed the legislation.
>  The Food Stamp and Medicaid programs remain entitlements in theory,
>still available to all comers.  But in enacting the 1996 reforms,
>Congress turned responsibility for managing these programs over to local
>officials who have been turning away any applicants not already receiving
>welfare.  Meanwhile, conservatives have lobbied intensely to privatize
>and effectively dismantle Social Security -- the largest of all federal
>entitlement programs -- though so far without success.
> Republican leadership had hoped to bury Keynesian stabilization policy
>altogether by passing a constitutional amendment requiring an
>annually-balanced federal budget, which would put an end once and for all
>to full-employment budgeting.  The amendment failed to pass the Senate by
>one vote, but conservatives scored a partial victory with the Balanced
>Budget Agreement of 1997, committing Congress and the administration to
>balance the budget each year for the next decade, regardless of the state
>of the economy.  Whether the agreement survives an economic downturn
>remains to be seen, but the strident anti-deficit rhetoric of the last
>decade will certainly make stabilization policies a tough, if not an
>impossible, sell.
>Over the past year, the outlook for macro-economic policy has grown bleak
>indeed.  Clinton attributes the economic boom to tough spending caps and
>fiscal restraint and has made a fetish of further fiscal austerity.
>White House press releases conceive the future exclusively in terms, not
>simply of budgetary balance, but of burgeoning surpluses and massive debt
>repayment.  Rather than fight recessions or expand jobs programs, three
>and one-half trillion dollars of tax revenue will be used to buy back
>federal bonds from financial institutions.
> Clinton?s millennial state of the union address laid out the goal of
>Clintonomics:   ?Make America debt-free for the first time since 1835.?
>Candidate Gore assures voters that he plans to reduce the debt ?even if
>the economy slows.?   Sounding uncannily like the ghost of Herbert Hoover
>or Calvin Coolidge, Gore maintains that a recession will provide  ?an
>opportunity? to cut government spending  ?just like a corporation has to
>cut expenses if revenues fall.?  When Bill Bradley floated a modest
>proposal to use surplus funds for health care,  Gore attacked the idea as
>?fiscally irresponsible,? and warned it might plunge the US economy in
>recession.   Hillary Clinton, running for the Senate from New York,
>declared that most problems facing the country ?cannot be solved by
>government? and staunchly supported running budget surpluses to pay off
>the national debt.   When Democrats are hawking debt reduction and warn
>that deficits cause recessions,  Keynesian policy has truly drawn its
>last gasp.
>It is no good thinking these statements can be unsaid, conveniently
>forgotten when the next recession revives talk of an active,
>pro-employment government.  The political programs that buttressed
>American Keynesianism are gone.  The intellectual backing and public
>rhetoric that sustained Keynesian ideas no longer exist.  College
>economics textbooks, through which hundreds of thousands of voters and
>policy-makers learn the rudiments of macroeconomics, barely bother with
>Keynes these days -- or recessions for that matter.  The hottest new text
>by Gregory Mankiw  (for which Prentice-Hall paid an unprecedented $1.4
>million advance) does not even mention economic downturns until  a few
>pages at the very end.   Outside of obscure left-wing publications, one
>no longer even encounters ideas like ?economic crisis?  or  ?fiscal
>policy? or ?public investment.?
>
>Life After Keynes
>
>	So what if the ?new economy? turns out to be the same old economy?  The
>last US recession officially ended in 1991.  In the eight years since,
>GDP has grown steadily and unemployment rates have fallen.  If this is
>just the start of an endless millennial boom, there is no reason to
>worry.  But what if  the US on the brink of a Y2K recession?  This is not
>the first time in history that Americans have lived through a prolonged
>boom -- the economy grew for eight years straight in the 1960s -- but it
>is the first time since the Depression that politicians and policy-makers
>have rested their hopes so utterly on the boom?s continuing.
>	If Keynesianism is dead and buried in the US,  it is rotting in the
>ground in Europe, where the agreement that forged a common currency
>virtually forbids governments from public sector borrowing.  Through much
>of developing world, IMF-imposed austerity plans have killed efforts to
>spur internal growth with public spending programs.  Many on the left, of
>course, do not mourn Keynes? passing.  Keynes, after all, despised the
>British Labor party and proudly proclaimed his allegiance to ?the
>educated bourgeoisie.?   Socialists have long argued that Keynesian
>programs were meant not to help workers or humanize the economy, but to
>placate and defuse a potentially powerful workers? movements awakened by
>the Depression.  Environmentalists too criticize Keynesian thinking for
>its mindless worship of economic growth, it?s prediliction to solve all
>economic problems with more production, more work, more growth , more
>stuff.
>	But Keynes? understanding of capitalist economies was, nevertheless,
>profoundly radical.  Any effort to construct a new kind of economic
>policy in the future will need to build on and attend to his fundamental
>insights.  Keynes understood that the matters of debt and budget
>deficits, of interest payments and paper wealth that so obsess private
>business people and financial interests are, ultimately, irrelevant to
>all but the wealthy elite.   The central insight of Keynesian thought was
>that real wealth lies in the people, resources and productive apparatus
>of a society and that citizens can, through the collective power of
>government, harness those resources for internal development.
>	In the early years of the New Deal, government jobs programs funded
>public art works, community theaters, oral history projects and the
>clearing of hiking trails in national forests -- programs that would warm
>the hearts of environmentalists and radicals alike.   Such efforts were
>disbanded in the face of business opposition.  In the end,  Americans got
>a timid version of Keynesianism, complete with pro-business tilt and
>anti-government bias, tht flexed the collective muscle of government
>weakly indeed and only at the federal level.  The best US Keynesians
>accomplished were to secure a minimal living standard for the very poor
>and very old and provide a fair number of makeshift defense jobs for the
>otherwise unemployed.
>	Should the US boom prove not to be eternal, it is inevitable that many
>voices will call to reestablish the dismantled and discredited programs
>of postwar American Keynesianism.  It will be wasted breath.  The real
>challenge for the new millennium will be to forge a post-Keynesian
>economic policy.   This will entail thinking about how citizens can
>harness their collective power to produce more leisure rather than more
>jobs,  more equity rather than more income,  more conservation rather
>than more production, more satisfaction