The Great Recession of 2008-09 is over, that is, by the way these things are officially measured.
All will agree, however, that economic recovery is anemic. Only the very wealthiest Americans have enjoyed increasing prosperity. With that proposition, general agreement ends.
What will it take to improve this economy for the majority? Did the administration's "stimulus," a large part of which was tax cuts, succeed, fail, or something in between? Should the federal government do less? Or more, and if so, exactly what? And let us not be naive, add to this the Republican political stake in continued economic weakness, and we have the perfect formula for political stalemate.
To make sense of this imbroglio it is instructive to go back to the 1920s and 30s and the onset of the Great Depression
Prior to the arrival of the great economist John Maynard Keynes, predominant economic theory held that full employment was the natural and automatically achieved equilibrium of capitalism. This idea dates back to the French economist J.B. Say. "Say's Law" held that the act of production generates income sufficient to purchase that production, resulting in an automatic market-clearing mechanism.
While Say's Law has abstract, intuitive appeal, real economies don't work that way. Triggered by financial collapse in 1929, and followed by multiple bank failures and general financial panic, the American economy slumped into deep and enduring economic depression.
According to orthodox theory of that time, declining wages would motivate businesses to hire workers who could afford to purchase goods, prices of which would be reduced to clear the markets.
Falling interest rates would enable businesses to invest to produce the cheaper products produced by fully employed workers at their reduced wages. Oh, sure, there might be some short-term pain. But if people would just tighten their belts, work harder - never mind if there were not jobs to be had - all would be well in the long run.
The test of a theory is whether it is useful in analysis, explanation, and whether real world results are generally in accordance with analysis based on that theory. In contrast to orthodox theory, the Great Depression dragged on, supposed full-employment equilibrium not materializing.
It was John Maynard Keynes who, with his path-breaking book of 1936, "The General Theory of Employment Interest and Money," laid clear the fallacies of conventional economic orthodoxy. And he reminded us that we're all dead in the long run. Results were needed quickly if capitalism was to be saved.
Keynes explained why full employment equilibrium does not happen automatically - it was possible, even likely, that equilibrium would be at less than full employment. The act of production does not necessarily create the income by which to purchase that production.
If labor is unemployed, not sufficiently paid, or otherwise chooses not to spend, markets will not clear. Demand for product will be insufficient to induce business to produce or to invest, even at low interest rates. Unemployment will continue.
Demand, made effective by purchasing power, is the driver of a market economy.
In the macro economy, a key concept is "aggregate demand," consisting of four components: private consumption, private domestic investment, net exports, and government purchases of goods and services. A cornerstone of Keynesian theory is that personal consumption and private investment cannot be depended upon to purchase all the goods and services that could be produced by a fully employed economy.
What about exports? While some Asian countries have built their economies through net exports, not all nations can be net exporters.
Keynes held that if, for whatever reason, consumption, investment, and net exports are insufficient to clear the markets of production by a fully employed economy, it was the option - indeed the responsibility - of the federal government to step in to compensate for the deficiency of aggregate demand. There would always be public needs for which government could be "spender of last resort" to produce full employment.
Spending programs of the 1930s on huge power dams, post office and other public buildings, and programs such as the Civilian Conservation Corps provided employment for millions of previously unemployed people. Keynes explained the logic of government spending, even if financed by borrowing, to achieve full employment.
A balanced federal budget was held to be secondary to full employment. If government spending, along with reduced tax revenues, required government borrowing, that was preferable to unemployment and idle capacity. Public debt could be reduced when the economy approached full employment and tax collections increased. This was initially proposed for budget surpluses acquired during the Clinton administration.
Critics of Keynesian theory like to point out that the spending programs of President Roosevelt and the New Deal did not end the Great Depression. It was WWII that brought American prosperity. Fair enough.
But it was precisely the federal spending on planes, tanks, guns, and ships that employed previously unemployed people and brought idle plant capacity up to full potential. In addition to meeting demand for wartime goods, this now enabled workers to buy civilian goods and services that were produced. The wartime expansion of Badger Ordinance in Baraboo was a regional example of this.
It was demand, particularly government demand, that got the economy humming during the 1940s. It is curious that critics of Keynes fail to realize that in citing WWII as getting America out of the Great Depression, they are themselves making the case for Keynesian economics.
But that is the same logic, or lack of logic, by which these same critics insist that more tax cuts are the solution to encourage business to invest and hire more people, even when consumers don't have the money to make effective the demand for that product. That's why we mainstream economists refer to "supply side" economics as economic snake oil.
The American economy is demand-driven, which brings us to our topic for next week: income inequality, and why it matters.
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
All will agree, however, that economic recovery is anemic. Only the very wealthiest Americans have enjoyed increasing prosperity. With that proposition, general agreement ends.
What will it take to improve this economy for the majority? Did the administration's "stimulus," a large part of which was tax cuts, succeed, fail, or something in between? Should the federal government do less? Or more, and if so, exactly what? And let us not be naive, add to this the Republican political stake in continued economic weakness, and we have the perfect formula for political stalemate.
To make sense of this imbroglio it is instructive to go back to the 1920s and 30s and the onset of the Great Depression
Prior to the arrival of the great economist John Maynard Keynes, predominant economic theory held that full employment was the natural and automatically achieved equilibrium of capitalism. This idea dates back to the French economist J.B. Say. "Say's Law" held that the act of production generates income sufficient to purchase that production, resulting in an automatic market-clearing mechanism.
While Say's Law has abstract, intuitive appeal, real economies don't work that way. Triggered by financial collapse in 1929, and followed by multiple bank failures and general financial panic, the American economy slumped into deep and enduring economic depression.
According to orthodox theory of that time, declining wages would motivate businesses to hire workers who could afford to purchase goods, prices of which would be reduced to clear the markets.
Falling interest rates would enable businesses to invest to produce the cheaper products produced by fully employed workers at their reduced wages. Oh, sure, there might be some short-term pain. But if people would just tighten their belts, work harder - never mind if there were not jobs to be had - all would be well in the long run.
The test of a theory is whether it is useful in analysis, explanation, and whether real world results are generally in accordance with analysis based on that theory. In contrast to orthodox theory, the Great Depression dragged on, supposed full-employment equilibrium not materializing.
It was John Maynard Keynes who, with his path-breaking book of 1936, "The General Theory of Employment Interest and Money," laid clear the fallacies of conventional economic orthodoxy. And he reminded us that we're all dead in the long run. Results were needed quickly if capitalism was to be saved.
Keynes explained why full employment equilibrium does not happen automatically - it was possible, even likely, that equilibrium would be at less than full employment. The act of production does not necessarily create the income by which to purchase that production.
If labor is unemployed, not sufficiently paid, or otherwise chooses not to spend, markets will not clear. Demand for product will be insufficient to induce business to produce or to invest, even at low interest rates. Unemployment will continue.
Demand, made effective by purchasing power, is the driver of a market economy.
In the macro economy, a key concept is "aggregate demand," consisting of four components: private consumption, private domestic investment, net exports, and government purchases of goods and services. A cornerstone of Keynesian theory is that personal consumption and private investment cannot be depended upon to purchase all the goods and services that could be produced by a fully employed economy.
What about exports? While some Asian countries have built their economies through net exports, not all nations can be net exporters.
Keynes held that if, for whatever reason, consumption, investment, and net exports are insufficient to clear the markets of production by a fully employed economy, it was the option - indeed the responsibility - of the federal government to step in to compensate for the deficiency of aggregate demand. There would always be public needs for which government could be "spender of last resort" to produce full employment.
Spending programs of the 1930s on huge power dams, post office and other public buildings, and programs such as the Civilian Conservation Corps provided employment for millions of previously unemployed people. Keynes explained the logic of government spending, even if financed by borrowing, to achieve full employment.
A balanced federal budget was held to be secondary to full employment. If government spending, along with reduced tax revenues, required government borrowing, that was preferable to unemployment and idle capacity. Public debt could be reduced when the economy approached full employment and tax collections increased. This was initially proposed for budget surpluses acquired during the Clinton administration.
Critics of Keynesian theory like to point out that the spending programs of President Roosevelt and the New Deal did not end the Great Depression. It was WWII that brought American prosperity. Fair enough.
But it was precisely the federal spending on planes, tanks, guns, and ships that employed previously unemployed people and brought idle plant capacity up to full potential. In addition to meeting demand for wartime goods, this now enabled workers to buy civilian goods and services that were produced. The wartime expansion of Badger Ordinance in Baraboo was a regional example of this.
It was demand, particularly government demand, that got the economy humming during the 1940s. It is curious that critics of Keynes fail to realize that in citing WWII as getting America out of the Great Depression, they are themselves making the case for Keynesian economics.
But that is the same logic, or lack of logic, by which these same critics insist that more tax cuts are the solution to encourage business to invest and hire more people, even when consumers don't have the money to make effective the demand for that product. That's why we mainstream economists refer to "supply side" economics as economic snake oil.
The American economy is demand-driven, which brings us to our topic for next week: income inequality, and why it matters.
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
