Keynesian common sense in China

[CHIMO]

Two great fallacies about what to do in a recession were exposed 70 years ago by JM Keynes (Bulls on a roll: stockmarket has best week this year, 20 July). Keynes's insights were taught as common sense in university economics departments until about 35 years ago. But the fallacies are rife again.

Fallacy one is that if you reduce interest rates and increase the money supply then businesses will borrow and invest and create a recovery in output and employment. No, said Keynes, businesses will not borrow, even at zero interest rates, if there is no demand for their output. And who wants to lend at low interest rates? Certainly not banks, and not to businesses who appear to have not much demand even for their existing output.

Fallacy two is that if you cut wages and costs fall then prices can fall and demand will increase, lifting output and employment. No, said Keynes again. Even if prices do fall, how can demand increase if people's incomes have fallen? Especially when people are unemployed or afraid they could become so.

The economics profession now apparently thinks these fallacies have ceased to be false. Is that because of globalisation? Foreigners will buy our nice cheap goods? The only country that seems to be having any success in dealing with recession and might be able to buy any goods is China. And how is China dealing with the recession? It is following the kind of policy Keynes advocated. The Chinese government is pumping money directly into the economy – into construction and health, for example. It is not giving taxpayers' money to banks to stash away, it is giving it to the people who will spend it in the economy. It is not worrying about inflation or government debt. Of course one could wish China's new deal was a greener one. But why haven't we got a green new deal here?

http://www.guardian.co.uk/business/2009/jul/21/letters-keynesian-economics

[jody]

1. Those who study inventory theory know that cost of carrying stock is high. Such costs include

interest and with other factors encourage businesses to reduce prices to attract buyers.

Low inventories in turn may encourage producers to increase production.

Government's artificially low interest rates allows businesses to keep products in stock, e.g. cars, because the cost of carrying inventory is artificially low and businesses gamble on an upswing in demand so bloated inventories can be sold at government subsidized high prices.

Result is economic constipation with inventories stifling recovery.

[CHIMO]

2. Not Sure

How that applies to this piece on China.

However, the recent run-up in commodity prices due to Chinese build up in inventory could lead to a good fall in our green shoots, if they suddenly stop buying.

They have the cash to sit out the downturn.

[jody]

3. Inventory regardless of location incurs inventory holding cost. When the U.S. and other nations

artificially reduce interest cost, it encourages inventory holding that would otherwise not occur if inventory costs would naturally force businesses to reduce prices to clear inventory.

[CHIMO]

6. Right

And Adam Smith is dead.

[jody]

10. Not sure what your post means. I was discussing inventory management and the effect of interest. n/t

[theoldman]

4. Roosevelt was right in putting money into the pockets of the buyers.

It does not help to put money into the sellers pockets by low taxes or low interest rates if they cannot sell the product. In my opinion not enough money is going into the buyers pockets today.

[jody]

5. Agree, that's the point I made in #1. n/t

[OHdem10]

7. Keynes' insights were taught in Universities until about 35 yrs.ago...

That is when the Congress had fully digested the Regan Kool Aid
including certain Democrats. The GOP went full bore ahead determined
to destroy any vestiges of FDR. They did a pretty good job including
rendering our Party mute.

[AdHocSolver]

8. Keynes' premise: Economies are demand driven. Current "theory" based on "supply side economics".

Actually, all economies are demand driven. If they weren't demand driven, buggy whip manufacturers would be profitable today.

Supply side economics says give the corporations tax breaks, subsidies, and other incentives (such as taxpayer bailouts of billions of dollars to reward the corporations for their stupid mistakes, unconscionable greed, and outright thievery) and they will create jobs. Of course, if those jobs created are low paying jobs in China, it isn't the corporations' fault, since the government never insisted that those jobs be created in the U.S.

All the pundits, "economists", corporate shills, and government hacks who have been spouting supply side economics (also, known as Reagonomics and voodoo economics) have been lying to a credulous public.

I earned my degree in economics over 40 years ago when Keynesian economics was still acceptable in academic circles. I have been posting these kinds of comments for the past several months. Accept for a few cases, it feeels like I have been just "spitting" in the wind.

The ONLY action that will save the U.S. economy from prolonged recession/depression is to bring jobs back to this country, especially manufacturing jobs. At least 80 percent of what we purchase MUST be made here in the U.S. so that the money we spend circulates here in the U.S. Then Americans can earn income to spend on goods and services provided by other Americans. The money we spend on imports just leaves the U.S. and we go into debt.

Incurring such massive debt is unsustainable. This is why we are seeing massive job losses and the economy is collapsing. Even stimulus money will do no good so long as everything we buy is imported, since the stimulus money just leaves the U.S. In the long run, all the corporate cartel agreements such as NAFTA, the WTO, the IMF, and the World Bank, as well as tax laws that allow corporations to avoid taxes by offshoring production have to be rewritten to give American businesses who do provide jobs here a chance to compete.

Supply side economics is a fraud designed to provide corporations with a license to steal. Keynesian economics is REAL economics, not just a theory. The stock market does NOT drive the economy. Jobs, which make economic demand possible, drive the economy. This has become easy to see from Enron to AIG and everything in between.

Yet, except for a few exceptions, this country countinues to see the "king" as being beautifully clothed, rather than admit that he is stark naked.

[econoclast]

12. Contradiction

I find it fascinating that even though you declared "supply side economics is a fraud" you ended up making an argument based on the supply side!

You have concluded that no amount of stimulus spending will boost the economy because of our propencity to import. This is an anti-Keynesian argument. (I'm not saying it's wrong just not Keynesian)

And you assert that to create jobs we need domestic manufacturing. ie. Supply must come from domestic sources.

That is to say that we need to focus our efforts on the supply side of the equation rather than on the demand side. Which is the essence of "supply side economics."

Fascinating.

[AdHocSolver]

14. No contradiction. Keynesian stimulus spending works only if it pays wages to American workers.

Supply side economics promotes an economic model that says give the rich people a lot of money and they will deign to give some poor slob a job. No ironclad guarantee, but they will consider it.

The simplest description in economic theory relating to supply and demand states that, within a given market, the price of any particular good is determined at the point where supply, the quantity of a good for sale, equals demand, the quantity that buyers WITH MONEY TO SPEND want to purchase.

If the quantity of goods for sale, or the asking price, is in each case, higher than what buyers will pay, the sellers will reduce the price to sell more. Conversely, if buyers wish to purchase more of a good than sellers have to sell, buyers will offer to pay more, i.e., bid up the price, to get sellers to provide more of the product.

We need domestic manufacturing only so that the buyers, meaning the American people, have money to spend, that is, provide demand. If they have no jobs, no money to spend, you have a depression.

When Keynes described his observations, most products were manufactured in the U.S.A. Stimulus money was used to give people income so that they could buy products made in America, that is, made by other Americans. FDR's New Deal jobs creation programs amounted to priming the pump. The purpose was to create DEMAND, NOT supply. There was plenty of supply around that wasn't being bought.

[upi402]

9. Academic "economics" is bogus. It assume folks act in their best interest

I never felt it was valid when in college and KNOW it's based on false premises now.

Why does the school of economics exist? Maybe it pays the rent, for a bit. I think the Miltonistas like it very well, thank you.

[jody]

11. Microeconomics, industrial engineering, business management are inseparable and share common

scientific concepts that affect planning, scheduling, and control of production that in turn determine whether goods and services can meet customers' criteria for price, delivery date, and quality.

Macroeconomics lacks such a scientific basis particularly when government implements policies in speculation of consumer reaction from disparate, diverse populations as exist in modern societies.

[AdHocSolver]

13. There is no scientific basis for any economics, micro or macro.

Economic theory is based on definitions and observations of group behavior. What currently passes for economics in the media and academia has a decidedly procorporate bias.

The primary premise in corporate economics is maximizing profit above all other possible outcomes. By microeconomic "standards", the credit default swaps, Enron-style "cooking the books", bad loans, phony quality ratings of stocks and financial institutions, and mass offshoring of jobs, all of which maximized profits, were the correct way of doing business.

The fact that everyone playing the same game brought on an economic meltdown, which valid macroeconomic analysis would predict, belies your statements about microeconomics and macroeconomics.

Of course, the macroeconomic theory spouted concerning the money supply, so-called "free trade", and other economic issues by the pundits and the media is so much bovine excrement.