Re: Euro Rates Slashed

[larson@xxxxxx (S R Larsson)]

>S R Larsson wrote:
>
>>Can anyone who's a POST-KEYNESIAN on this list explain to me how interest
>>rate cuts can help cutting unemployment, when at the same time budgetary
>>austerity is being institutionalized via the EMU system? I say statistics
>>show there is at least a 9:1 advantage in using fiscal policy to boost
>>investment -> increase employment, over cutting interest rates.
>
Doug Henwood:
>How can you explain the U.S. in the 1990s then? We've had a sharp
>tightening in fiscal policy combined with a fairly indulgent Fed.
>Investment levels are fairly high by U.S. standards, esp the prized
>producers durable equipment (nonres structures is very low, depressing
>total investment figures). But we've had strong employment gains too. In
>the U.S., L is cheaper than K anyway.

With a relatively small public sector (as in the case of the US) tight
budget discipline has a smaller effect, quantitatively, on aggregate demand
than in e.g. Scandinavia. This means it doesn't take as strong an
improvement in the private sector to outweigh the negative effects of
fiscal prudence. Benefits in purchasing power in the US during the '90s
has, as I understand it, been distributed to the already affluent and to
those well below the median household income. The first group has
benefitted from the performance of the stock market, while the second group
has gained from an expansion of the low-skilled service sector. This is my
impression of the US economic development.

Given the accuracy of this description, the continuously good performance
of the US economy is to a large extent due to good future expectations
produced by the stock market. This sounds too simple, but fundamentally I
think there is a lot to it. Anyone investing on the stock market feels
better off and has more to borrow on when the index rises; with a
fine-tuned and very well developed credit system (here I think America is
notably ahead of Europe) those with shares in their portfolios are easily
rewarded. But this general state of good confidence in the future affects
the rest positively in that lenders feel the risk of credit losses is down.
Therefore they expand lending and thereby help perpetuating a good state of
affairs.

The critical piece is, I think, the credit system, and this is why it would
be more interesting (from a Post Keynesian perspective) to study the
relation between the interest rate and private consumption, than its
(in-)significance for investment. Also, it would be interesting to see (in
Minsky's tradition) how large a part of the last ten years' stock market
investment has been credit driven; if credit money floods the stock market,
then credit money helps creating the good state of affairs that the rest of
the economy is benefitting from.


/srl

-----
Sven Robert Larsson
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