Fred, I take it that in your 7276 you agree with Krugman that there is no Keynesian led expansion now underway? Unlike the post-Keynesian Paul Davidson, Krugman seems to think that the Reagan deficits themselves did little to power an expansion which he attributes mainly to the housing boom after interest rate reductions. Well, I do think tax breaks and govt deficits will have to do the lion's share of the stimulus this time around. Krugman however did forget the one factor which Bush has over Reagan. The latter had to break labor (roll back unionization, contain pensions, and slash the social wage); the former already inherits a labor movement on its back. This has allowed for considerable rationalization in the downswing--because of ruthless layoffs productivity has increased even during this recession!--there'll be a higher rate of exploitation in the upswing. Even newly hired skilled workers will be relatively cheap once the economy picks up again. But Fred, here is where I am a bit confused by both your recent Monthly Review piece and your post here: You seem to emphasize the negative underconsumption effects from rationalization and intensified exploitation over the positive stimulus effects on the rate of profit and therewith capital accumulation? rb >Rakesh, I pretty much agree with Krugman here. I especially agree that a >dangerous new factor for the US economy is its "fall from grace" in the >eyes of foreign investors, as we have discussed in recent posts. If >foreign investors cease to provide the US with $1.2 billion every day, as >they seem to have in recent months, then the effect could be very nasty >for the US economy. My comparison would not be with 1983, but with the >late 1990s, the heady years of record capital inflows. > >The main factor which Krugman leaves out, characteristically for >mainstream economists, is PROFIT. As we have discussed, the share and the >rate of profit declined precipitously from 1997 to 2001. Profit has now >stopped declining, and has even increased a little, but still has a long >way to go to recover the 1997 peak. I think this is the main reason why >investment spending will remain weak in the months ahead. > >Furthermore, I think low profits will also have additional negative >effects on the economy. In order to increase their profits, businesses >continue to try to cut costs aggressively, mainly by laying off workers or >reducing hours,. Sooner or later (and I think pretty soon), these >reductions in workers' income will cause consumer spending to decline >(consumer spending cannot be propped up by debt forever). And when that >happens, we will be back in a recession, which is likely to be worse this >time, because it will be compounded by more business bankruptcies, more >personal bankruptcies, and a reduction of capital inflows. If the capital >inflows turn into outflows, then we will be in really serious trouble. > >Comradely, >Fred >
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