Jones's major flaw is his failure to note that Lord Keynes would have disapproved of many of the policies that were justified by reciting his name. For example, Keynes would have opposed to the financing of the Vietnamese war by resorting to the printing press rather than raising taxes. Jones rightly points out the inflationary effect of that expediency. One might also point out the insane insistence of the Bush administration that it could get away with the same mistake. Jones mischaracterizes many bad policies as Kenysian, but they should not be laid at the feet of Lord Keynes.
I also think that Jones is right that the government cannot spend its way out of the emerging depression I would point to one exception, that would be spending directed toward correcting the structural defects of the national and international economy. Building windmills in Kansas, is not going to save our ass, but shifting TV manufacturing back on shore might. The problems of the American based auto manufacturers are partly a consequence of the structural problems, and it is probably better to help them survive, although a tour through bankruptcy court might be required.
Finally Jones points to the most problematic part of the spend out of depression strategy initiated by the Bush Administration, but which is about to be followed by the Obama Administration, such a policy can lead to further structural problems, and quite possibly the collapse of the dollar.
Jones quotes Professor Willem Buiter of the London School of Economics:
There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury bills and bonds are still viewed as a safe haven by many. But learning takes placeWe are living in troubling and even frightening economic times.
Update: Although the Fed and the government are following policies that will be inflationary in the long run, prices are not going up, and people are acting like the money supply is drying up. This paradox is explained by the decreasing velocity of money. Economic blogger STOCK SHOTZ calls out attention to the recent reported drop of the M 1 multiplier. The money being added to the economy is not freeing up the money supply, and thus the velocity of money continues to drop, this could change rapidly as inflation sets in. People will rush out to spend money as soon as it is in hand during a period oh high inflation.
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3 comments:
Thank you, Charles, for pointing out that the problem with most "Keynesian" spending is that it isn't Keynesian at all!
We're seriously screwed if foreign government start dumping their dollars. Given that this has been the stick propping up our entire economy for my entire adult life, pulling it out could make the current problems seem minor by comparison. I'm pretty disturbed by the current stimulus proposal, given that it seems more like a huge gravy train rather than a sober attempt to try and fix the economy.
The fundamental flaws in our economy are numerous:
1. We (both government and individuals) borrow and spend too much and save too little. Excessive credit card and deficit spending has not been good for our economy.
2. Housing in the US has gone from a place to raise your family to a speculative investment. And speculators and anti-growth regional politicians have caused housing prices to inflate well above their true value.
3. Our extremely poor k through 12 system, especially in urban areas, are creating more an more individuals who are more of a deleterious economic burden to our society rather than an asset. This is probably costing us more than a trillion dollars in productive wealth on an annual basis, IMO.
4. Our dependence on the petroleum fuel economy causes us to send between 300 to 700 billion of our national wealth annually to foreign countries (depending on the price of oil). This doesn't include the 60 billion dollars a year that the military spends protecting oil imports from the Persian Gulf.
5. We have the most expensive health care system in the world (possibly twice as expensive as it should be) largely due to the fact that we lack a singly player health insurance system which is something that practically every western nation in the world has. This makes American products more expensive and makes it more difficult for private industry to higher full time workers in the US.
6. By some accounts, we may have wasted over a trillion dollars on a completely unnecessary war in Iraq. And we're still spending over ten billion a month in Iraq right now.
7. Our inherently inflationary, higher education system, is putting more students deep in debt and prevents many more from entering college in the first place.
With these fundamental flaws in the American economy, its amazing, IMO, that American has remained as economically strong as it has. But you simply can't run a society and a country as-- inefficiently-- as we have over the last 30 years and expect it to continue to prosper!
Marcel F. Williams
http://newpapyrusmagazine.blogspot.com/
Proprietary advantage is the first principle of American business. This unspoken foundation of American prosperity has been at the heart of American world dominance since the end of WWII. This quenticental American product strategy is one that uniquely meets customer needs, indispensable, and at the same time locks the customer in like a coiling python crushing its pray and gradually draining the monetary life out of him until he is withered in economic exhaustion.
At its best, such predatory business practices are immune to competition. In my long association with senior vise presidents, they are obsessed in the pursuit and maintenance of proprietary advantage. This practice is personified by Microsoft and more recently by Apple with the IPod and the IPhone. Once proprietary advantage is firmly established, it is relentlessly expanded into other ever widening business lines and products.
When a product loses proprietary advantage and becomes a commodity, it is sold to a low cost producer whose business model is to beat the competition to the price bottom. When this product or industry is commoditized, it is lost forever to American business. Such industries are TVs, computers, VCRs, and soon cars.
Today, the only way to maintain proprietary advantage is through superior and overwhelming technology. Because of this, patriotic business practice must nurture and highly value the prime source of the wealth of nations; science and engineering capability. But American business has shipped its software, engineering and scientific base offshore primarily to Asia to reduce associated local wage rates.
Young people see what is going on and choose finance, law and other well paying but parasitic professions as their life’s work while the engineering profession withers on the vine.
American business has been eating the seed corn of its prosperity and now it is gone. The captains of American industry decry the lack of on shore US technical capability and at the same time outsource whole business lines to Asia. They then are surprised when Asia beats them to death through their own home grown proprietary advantage.
The chickens have come home to roost. America is now an empty shell of accountants, lawyers and bankrupt financiers. A generation of profound pain, of relearning, of reappraisal and of business evolution is ahead. A twenty year period of retrenchment will precede a philosophical shift and business readjustment before a rebirth of American prosperity begins again… if we are lucky.
Axil
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