From: Rakesh Bhandari (rakeshb@STANFORD.EDU)
Date: Thu Jun 12 2003 - 05:55:32 EDT
Allin writes: > > >The '80s present a classic case of falling unemployment associated >with fiscal expansionism, in the U.S. at any rate. > In late 1982 the >unemployment rate stood at almost 11 percent, following the Volcker >"monetarist experiment" and double-digit interest rates. Over the >rest of the decade, Reagan's policies of increased military spending >plus tax cuts expanded aggregate demand and there was a more or less >monotonic fall in employment to around 5 percent by the end of 1989. Well touting a 5% unemployment rate as proof of the success or effectiveness of Keynesianism (if that is what is implied here) only shows how far standards had fallen from the 1960s! Which was my point. In addition to allowing the dollar to slide in a beggar thy neighbor policy, Reagan/Bush ran massive unsustainable deficits which the Fed kindly accomodated and still were not able to reduce unemployment below 5%, which of course was the official rate. As I said, the ability of the govt to use fiscal policy towards the end of full employment is far from obvious. Of course if there are no easy govt solutions to the problem, then we are left with some unpleasant and disturbing realities. (some of that problem "hidden" by the explosion of the US prison system). Disturbing enough that some very reactionary people thought it was important to fund the revival of racial Social Darwinism which hit the American bookstores by the mid 1990s. >The rate of growth is another matter. Nobody claims that government >deficit spending enhances growth regardless of the nature of the >deficit spending. Nobody? The addition to effective demand by way of massive govt deficits should at least increase the propensity to invest in the expansion of private enterprise and thus the rate of growth. > > I also asked what we are to make of Japan's Keynesian experiment. > >What Keynesian experiment? The topic here is fiscal policy, and so >far as I can tell Japanese public-sector demand in real terms peaked >in early 1997. In 2002, a modest increase in government consumption >was entirely offset by a decrease in public-sector investment. Take a >look at the data. You mean the data (off the top of my head) which shows that Japanese govt debt is already at 120% of GDP with more than 50% of income tax revenue going to those who clip govt coupons just as burdens on the pension system mount? I am not surprised that Japan cannot keep on adding to the govt debt, but the question is why the running of deficits over many years did not allow Japan to ride out the storm until privately led effective demand took off again. Perhaps one underlying problem (I think mentioned by Gil on pen-l) is that the US has threatened trade sanctions and a possible trade war if the BoJ were ever to allow the yen to depreciate for a sustained period? When Krugman was at Stanford, he underlined the importance of Ronald MacKinnon's work which I don't know. Yours, Rakesh
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