Keith Hudson: > Ed and Harry, > > May I intervene in your exchange? I've also changed the name of the thread > for my own comment: > > (HP) > <<<< > The present campaign, asking us to spend our way out of recession is > nothing short of ludicrous - unless your controlled economy is coming apart > at the seams and you'll try anything - absolutely anything. > >>>> > > (EW) > <<<< > Why is it ludicrous? Roosevelt tried it during the 1930s. Wartime > spending ended the Great Depression. Post-war spending on reconstruction > accounted for the boom that lasted into the 1970s. The economy was pretty > active during the recent fibre optic and dot.com run-up. When money > circulates, goods move and production and employment rise. > >>>> > > But surely, Ed, the wartime and post-war reconstruction spending was an > enormous stimulus, far beyond anything that even a fanatical Keynesian > government could or would do in peacetime. And, of course, there was a > price to be paid for it all -- rampant inflation during in the 60s and 70s.
I agree, but only partly. World War II and post-WWII conditions represent something of a "paradigm shift" from normalcy. But then so did the Great Depression, the roaring twenties and WWI. Perhaps the error of Keynesians, and perhaps all modern economists and many other social thinkers, is the assumption that society, including the economy, proceeds along a steady, progressive, predictable trajectory, whereas the reality is a series of unexpected lurches that governments try, but often fail, to control. During the Great Depression, when politicians finally caught on to what Keynes was saying, government spending did help to get things moving a little, but it is doubtful that it could have had more than a moderate impact given the depth of what was being dealt with. Similarly, following the war, governments did their best to moderate the inflationary boom, but the boom had to peter out before inflation came under reasonable control. > I'm fascinated by how so many commentators (usually economists employed by > investment funds, mutual funds, stockbrokers, and the like who want to drum > up business) are now saying that, because the American consumer spending > went up by 7% last month, then we're now through the worst, and that all > will be booming again before too long. They may be right. We may be into an era of relatively short "boomlets" that satisfy a particular type of demand, like dot.com and fibre optics, make a particular group of people rich (temporarily), but leave the rest of the economy behind -- perhaps further and further behind. > They conveniently forget that significant numbers of American house-buyers > have been re-mortgaging theri homes at new, lower rates and thus gaining > extra spending power, taxpayers have been receiving large tax cuts and, in > the past month, car makers have launched cut-price and zero-interest > schemes in order to shift cars from their inventories. Defensive behaviour? > Steering the economy -- which is what governments have been trying to do > during the whole course of the last century since they nationalised their > currencies -- only really amounts to swinging between one long crisis and > another. Our parents suffered a long period of massive deflation in the 20s > and 30s (after which the poverty trend line didn't stabilise to low levels > until 1970) and then, after another intervening world war, a period of > massive inflation in the 60s and 70s. These changes are far more extreme > than the normal sorts of self-correcting trade cycles which characterised > the 19th century. My guess is that we're now heading towards another long > period of deflation. I don't disagree here. However, I would suggest that we take another look at the 19th Century. The latter half of it was undoubtedly more stable than the 20th Century. But stable in whose interest? And what made the lid blow off as violently as it did during the 20th Century? I suggest that the apparent stability masked a tremendous social seething and change. Marxism became a pervasive driving force for revolution. Vast numbers of peoples migrated from Europe to the New World. Ancient empires rotted and crumbled. All it took was the assassination of an archduke to touch off the bloodiest century in history. > Trying to control the economy by means of small changes in the interest > rate is quite unlike driving a car, whereby small movements of the steering > wheel produce immediate changes in direction. Interest rate changes > actually produce long-delayed changes rather like the effect of the tiller > in a slowly moving barge. Because of the apparent non-effect of a small > touch to the tiller, the novice helmsman usually makes a succession of > small changes -- and then finds, after a delay, that the barge changes > direction straight into the bank! I would suggest that the barge can be controled as long as the engine keeps going at a pretty constant rate. If it breaks down, or speeds up excessively, control is far more difficult, perhaps impossible. Ed Weick
