demandside

Plus “Idiot of the Week” with Business Week staff and Right Wing rewrites.

Today being Wednesday, we’re going to go directly to idiot of the week, today featuring Business Week staff, a short note on the political campaigns of the Right for economic inaccuracy, and then back to the backcast with John Maynard Keynes and a letter to FDR from 1933.

http://www.guardian.co.uk/commentisfree/cifamerica/2008/nov/25/john-maynard-keynes-us-advice

First today we will do Idiot of the Week, with John Byrne and my favorite idiot, Business Week’s chief economist Mike Mandel.

This week with Amity Schlaes

The most recent orchestrated push by the Right has been for Amity Schlaes and her new polemic “The Forgotten Man.”  This is for the free market apoligists a necessary rewriting of history.  Necessary because we are right back there after the same free market excesses and the same financial sector crash, so if the return to New Deal style governance is to be avoided, the Right must persuade people the first New Deal didn’t work.

In order to perform that feat they needed two incredients.  One, a person of intellectual confusion and/or dishonesty, and two, an interval of seventy-five years so those who were on the ground are less of a threat to contradict.

In order, after such a period, for Ms. Schlaes to be taken seriously, she ought to be required to preach this “up is down and down is up” first to the recipients of social security, second to those collecting unemployment insurance, third to the depositors and their banks now protected by the FDIC, and fourth to those who wonder where the protections against the investment bank fiascos that are the new crash.  Only then should she be allowed into the arena of broader discussion.

She is allowed in, of course, by her position at Bloomberg News and the Council on Foreign Relations, and by way of an organized and orchestrated Right Wing media blitz.  It reminds one of the “drill baby drill” program of several months ago.  This one has no positive message to be disproved by events, as the “drill baby drill” program which lost its juice with the collapse of the oil bubble.  No.  Schlaes is merely attempting to rewrite history for the benefit of the frree marketeers and supply siders.

Now on Monday’s backcast, completely in concert with today’s theme, an open letter from John Maynard Keynes to President Franklin Roosevelt in 1933.  Three notes:  ‘A’ this is abridged from a much longer letter, ‘B’ the link to the longer letter is reproduced at the lead of the transcript for today’s podcast, and ‘C’ the letter appears three years prior to Keynes’ pivotal “General Theory,” and so does not include the complete revolutionary turn of his thought.

One line from this letter I may quote at the beginning of every discussion of the Fed and its inability to deal with this train wreck is:

The other set of fallacies, of which I fear the influence, arises out of a crude economic doctrine commonly known as the quantity theory of money. Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor.

http://www.guardian.co.uk/commentisfree/cifamerica/2008/nov/25/john-maynard-keynes-us-advice

JM Keynes

Dear Mr President,

You have made yourself the trustee for those in every country who seek to mend the evils of our condition by reasoned experiment within the framework of the existing social system. If you fail, rational change will be gravely prejudiced throughout the world, leaving orthodoxy and revolution to fight it out. But if you succeed, new and bolder methods will be tried everywhere, and we may date the first chapter of a new economic era from your accession to office. …

You are engaged on a double task, recovery and reform - recovery from the slump and the passage of those business and social reforms which are long overdue. For the first, speed and quick results are essential. The second may be urgent too; but haste will be injurious, and wisdom of long-range purpose is more necessary than immediate achievement. It will be through raising high the prestige of your administration by success in short-range recovery, that you will have the driving force to accomplish long-range reform. On the other hand, even wise and necessary reform may, in some respects, impede and complicate recovery. For it will upset the confidence of the business world and weaken their existing motives to action, before you have had time to put other motives in their place. …

My second reflection relates to the technique of recovery itself. … Broadly speaking … an increase of output cannot occur unless by the operation of one or other of three factors. Individuals must be induced to spend more out of their existing incomes; or the business world must be induced, either by increased confidence in the prospects or by a lower rate of interest, to create additional current incomes in the hands of their employees…;

or public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money. In bad times the first factor cannot be expected to work on a sufficient scale. The second factor will come in as the second wave of attack on the slump after the tide has been turned by the expenditures of public authority. It is, therefore, only from the third factor that we can expect the initial major impulse.

…

The set-back which American recovery experienced this autumn was the predictable consequence of the failure of your administration to organise any material increase in new loan expenditure during your first six months of office. The position six months hence will entirely depend on whether you have been laying the foundations for larger expenditures in the near future.

…

The other set of fallacies, of which I fear the influence, arises out of a crude economic doctrine commonly known as the quantity theory of money. Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor. …

If you were to ask me what I would suggest in concrete terms for the immediate future, I would reply thus.

In the field of domestic policy, I put in the forefront, for the reasons given above, a large volume of … expenditures under government auspices. It is beyond my province to choose particular objects of expenditure. But preference should be given to those which can be made to mature quickly on a large scale, as for example the rehabilitation of the physical condition of the railroads. The object is to start the ball rolling. The United States is ready to roll towards prosperity, if a good hard shove can be given in the next six months.

I put in the second place the maintenance of cheap and abundant credit and in particular the reduction of the long-term rates of interest. …

With these adaptations or enlargements of your existing policies, I should expect a successful outcome with great confidence. How much that would mean, not only to the material prosperity of the United States and the whole World, but in comfort to men’s minds through a restoration of their faith in the wisdom and the power of government!

With great respect, Your obedient servant

JM Keynes

And now, in honor of the National Bureau of Economic Research finally and officially declaring the beginning point of the current recession, we present portions of Demand Side podcasts aired in February.

December 31, 1933.  Sent seven months into the first year of the Roosevelt administration.

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