[OPE] David Harvey versus Brad de Long

Brad de Long argues:

"The question is thus not can government deficit spending be financed--for it can--the question is at what interest rate will financial markets finance that deficit spending. That then tells us what level of economic activity it will support. Harvey cannot say that the debt overhang means that the U.S. government cannot borrow. He must be saying that the debt overhang means that the U.S. government can only borrow at a very high interest rate that will crowd out private investment and household wealth-supported consumption spending and leave the level of production unaffected or little affected. It could happen. Crowding-out is real. Is it likely to happen? Well, if it were going to happen we would have seen the interest rates on U.S. long-term government bonds spiking upwards to scarily-high levels as the stimulus bill moves through the congress and its chances of final passage grow. Did we? No. High long-term interest rates on U.S. Treasury bonds are simply not a concern right now."

David Harvey replies:

"My main point about the current US stimulus package is that it is too small to do the job (I am surely not alone in saying that) and that it is poorly targeted towards tax cuts rather than real stimuli for political and ideological reasons."

http://delong.typepad.com/sdj/2009/02/department-of-huh-in-praise-of-neoclassical-economics-department.html

What Harvey does not explain is, why the US Congress did not opt for a much more vigorous stimulus package anyway, if they thought that the economy would collapse. De Long is referring to an absolute excess of global investment capital which is hoarded at low interest rates; investors prefer to withdraw funds from production to protect themselves against risk, even if the return on their capital falls to a very low level. The government can counteract this only by directly investing in production itself.

In the American capitalist system, there is ultimately no other economic stricture on overspending, than an increase in unemployment, you cannot stop overspending in any other way. The real issue is then effectively how far unemployment will have to rise, and how far wages will have to fall, before investors are motivated to refloat the economy.

The real "limit of capital" is therefore the relationship of the growth of socio-economic inequality to the growth of the total debt distribution - at a certain point, the debt levels become unsustainable and confidence collapses, but the funds for economic recovery can only be obtained at the expense of a still higher level of socio-economic inequality with a higher rate of labor-exploitation.

Michael Hudson argues, basically, that the maximum sustainable debt level has already been reached, and that consequently spending, output, investment and employment can only shrink. But this is probably not the case, except in the short run, in part precisely because a very large hoard of capital still exists, which currently does nothing other than earn very low returns. Simply put, capitalists have all the buying power they need, workers don't. In the last instance, that power to buy is defended with military power, as Hudson notes.

Jurriaan

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Received on Mon Feb 16 01:38:30 2009