demandside

A demand side answer does not mean the resurrection of Shoe Pavilion

Is it really so difficult?

We could have pushed this on into Wednesday, but the growing evidence is that the Keynesian stimulus now in prospect with the advent of the Obama administration is still out of the reach of the understanding of the mainstream business media.

Schooled so long on premise that the market is infallible or  that business creates value or that government is always an unwelcome intrusion or that the oracle of enlightenment resides in the Federal Reserve, perhaps by reason of proximity to money, all too many media representatives are at sea when confronted by the reality of unintelligent and destructive markets.  They imagined an Invisible Hand not too far removed from that of the Almighty.

In shorter sentences:  The Fed continues to get kudos for good effort by the media.  Fed policy is wholly ineffective.  Here we have a couple of excerpts from people who should know better:  Businessweek’s JIm Cooper and the New York Times Louis Uchitelle.

First audio from a recent Businessweek podcast, featuring Businessweek’s Jim Ellis and that magazine’s Business Outlook columnist Jim Cooper.

BUSINESSWEEK

In order, the Fed cut its overnight federal funds rate to near zero and began buying mortgage backed securities in an effort to … well, create inflation, or avoid deflation.

Point One:  the rate cut is meaningless, since rates were already too low and were having no effect.  Ellis describes the Fed as “determined.”  I think the operative adjective is “desperate.”

I am reminded of a story involving the redoubtable Mullah Nasrudin, perhaps the oldest and best-loved comic figure in the world, the subject of innumerable stories throughout Central Asia and the Mid-East.

The mullah had a donkey and times were hard, so he conceived the idea of training his donkey to do with less.  Each day he would reduce the feed allowed to his principle assistant in life, and the beast each day grew thinner.  One day, sure enough, the donkey died.  Nasrudin was nonplussed.  “Too bad,” he said.  “I almost had him down to living on air.”

In a similar way, the economic authorities have watched the economy grow ever weaker and finally begin to die, all the while feeding it ever more of nothing.  One might imagine if Ben Bernanke were Nasrudin, he would be buying a bigger harness for his donkey, in hopes of making him fat.

Point Two:  Buying mortgage backed securities is not the radical new program that will avoid deflation.  It is more of the same.  It has two parts, it seems to me:  Pushing money into the economy by the purchases and creating demand for these securities in order to generate lower interest rates and some spark to the housing market.  More money is just more air.  The economy needs effective demand, not more money.  Trying to restart the housing boom by meddling in the middle of what was a half-baked market to begin with is not going to work.  As we’ve said, the only floor to housing has to be found with each mortgage and the time-consuming labor of unwinding the great innovations of securitized debt one case at a time.

MORE BUSINESSWEEK

Now Jim Cooper describes exactly the situation we face:  An accelerating downturn.  How much sense does this make.  The Fed and Treasury have spent all their time on the Financial Sector.  The financial sector is frozen.  Whatever they have done has not worked.  The institutions may — some of them — still be extant, but the flow of credit is not happening.

Keynesian prescriptions are often greeted these days with an arched brow and a tone of doubt, but they are in fact of a much stronger economic tradition than the mix of monetarism and ad hoc market manipulation now being employed by the Fed.

The weak Keynesian stimulus of jobs programs turned the crash in employment around during the Depression, no matter what any of the historical revisionists says.  Under Roosevelt, after he took office in 1933, only the year 1938 saw a higher unemployment rate than the previous year.  Of course the great public works project of the Second World War ratified Keynesianism in the minds of the economists of the time.

And I’d like to point out that economics had attracted the best minds of the generation.  The calamity of the Great Depression was the global warming of the time, and drew in the intelligent and dedicated.  These people were a cut above the economics practitioners of this era.

But Keynesianism flowered most prominently in the postwar period.  And there were no Republican economists.  Even Eisenhower, when he looked around for somebody to staff his Council of Economic Advisers, had to appoint the Democrat Arthur Burns.  After two decades of unparalleled prosperity and growth, in the 1960s economists were held in high opinion by everyone.

That Keynesianism was a kind of specialized and limited Keynesianism, however, and its practitioners were not up to the task of explaining or solving the stagflation of the 1970s, particularly since they were not in positions of power with regard to policy.  The Nixon wage-price freeze and the oil-induced inflation of the 70s led into the Supply Side nonsense of the Reagan era.  At the same time, Monetarism arose from the work of Milton Friedman and Anna Schwartz.  These two were the first great historical revisionists.  Alan Greenspan brought deregulation into the mix, and Ben Bernanke is in a direct line from them.

But the flood of money only pumped up the bubbles and now there are no more bubbles to pump up.  The authorities in the Bush Administration and at the Fed really have no internally consistent strategy.  It is monetary expansion and save the banks.  This is being proven day by day to be futile.

Expansion of aggregate demand by government spending is the Keynesian principle.  Raising the consumption function by strong social insurance is the New Deal principle.  The combination of these two is what we call Demand Side economics.  We look forward to a concerted effort by the new Obama administration to employ these methods.

Meanwhile we need to ask for better from the media.  Here, for example, is Louis Uchitelle, writing in the New York Times on Saturday.

Maybe It Can’t: A Trap in Obama’s Spending Plan

By LOUIS UCHITELLE Published: December 20, 2008

I am not sure which public investment projects he is referring to here.  The primary ones were the Interstate Highway System begun under Eisenhower.  Parenthesis which was sold as a national defense project end of parenthesis, the Korean War, the Viet Nam War and the defense build-up under Reagan.

This is just wrong, if he is referring to private investment.  The whole road lined with strip malls metaphor is just wrong.  This is not the mechanism.  It is the jobs created which echo through the economy by demand for public and private goods, tax payments and spending on the range of economic activity.

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