From: Rakesh Bhandari (rakeshb@STANFORD.EDU)
Date: Thu Jun 12 2003 - 22:47:06 EDT
>On Thu, 12 Jun 2003, Rakesh Bhandari wrote: > >> >I'm not making a general argument for the effectiveness of >> >Keynesianism. I'm making the more specific point that a high level of >> >government deficit spending can be expected to lower unemployment. >> >Whether the reduced unemployment is sustainable is a broader >> >social-political issue. >> > >> >The average unemployment rate in the U.S. from 1960:01 to 1969:12 was >> >4.78 percent, not so different from that at the end of the Reagan >> >deficit-spending episode. >> > >> >Allin. >> >> Yet the lowest unemployment fell to was 5%--and what was the average >> during these huge deficit years...6%, right?--despite massive props >> to effective demand: enormous unsustainable deficits which were >> higher even on an inflation-adjusted, full employment basis than the >> two previous decades; exports as stimulated by a steep competitive >> devaluation (that is, unemployment was exported).... > >What's a "steep competitive devaluation"? How is the U.S. supposed >to have engineered such a thing? I am thinking of the Plaza Accord--exactly how the Fed and Treasury cooperated with the BoJ I don't know off the top of my head...details are probably in Eichengreen and/or Brenner. The dollar fell around 30% against a basket of currencies, no? Or did it just fall that much against the yen? > The dollar fell substantially >against the pound, mark and franc over the first half (roughly) of the >1980s, but then rose over the second half, as U.S. unemployment fell. But the dollar fell against the yen, and it was Japan that had become a competitive nuisance for the US. So the US should have enjoyed net export gains as a prop to effective demand. But the point is that with all the props to effective demand one should have expected a greater rise in the level of investment and consequently a lower level of unemployment than one did over the course of the eighties and early 90s. Demand side economics failed. And the reason is simple: for the reasons Fred has specified, profitability had fallen even before the level of effective demand had dropped off; in fact that's why the latter fell off. Restoring effective demand need not ensure the profitable expansion of capital and thereby raise the level of investment. That's why consensus built around what Bhaduri calls the private management of effective demand or what Jessop calls the Schumpeterian workfare state to which Clinton gave the Democrats' imprimatur. Let's take the simplest game theoretic version of the Keynesian insight: "Since Keynes had provided a story of the determination of national income, his main point may be made in terms of a game involving the investment decisions to be made by firms. A firm invests in anticipation of an expanding market. This growth is determined by the investment made by the other firms in the economy. Our firm must literally make a guess at the scenario to be, for it faces irreducible uncertainty. If one firm invests while the others do not, it will not even recover its capital expenditure. If all firms but one invest, the withholding firm loses out on a profit opportunity. In this game, each firm must perforce guess the likely behaviour of its peer group. Now, apart from the two situations described, there are two more to be considered. In the first, all firms invest. This, of course, is 'win-win', and of no interest whatsoever. On the other hand, no firm invests. This is disastrous for the economy! It is in having alerted the world to this possibility that 'The General Theory of Employment, Interest and Money' attains its significance." --Pulapre Balakrishnan, EPW 2002. The best way to raise effective demand of which private investment is the most important component is to increase the risk that the withholding firm will lose profit opportunities and thereby find itself too weak to stay in the competitive game. That is, increasing the opportunity for profit through regressive taxes and anti labor legislation is the best Keynesian-Kaleckian solution to a drop-off in the level of effective demand of which (to repeat the point) investment is by far the most important component. If the investment boom materializes, then the working class gains employment opportunities and slow improvement in the real wage. The positivist Keynesian-Kaleckian framework is easily deployable for a right wing programme of demand management. And that's just where we are now. The redistributivist, public works social democrats cannot make their case from within the positivist framework which they share with the bourgeois economists. Social democracy is an empirically and intellectually discredited political program but it survives as an ideology due to importance of, to quote Jesse Jackson, keeping hope alive in a cooperative capitalism. Rakesh >Allin.
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