Brad Delong doesn't mention the dreadful "Keynesian" word, but he's implying that the Bush administration are actively avoiding policies of trying to increase demand because they don't want to be labelled as such. I think that's unlikely. Bush has told so many fibs so far over his decision to invade Iraq that carrying out Keynesian policies and at the same time denying that he's doing so is a relatively trivial thing for him to do.
I wonder . . . I wonder whether Mankiw thinks the same as I do -- that even if potential spending power were expanded, then it's possible that the American consumer (already burdened with high credit card debts) will now start to do what the Japanese have been doing for the past ten years. That is -- and despite low levels of interest rates -- start saving their money instead of spending it. (After a decade, the Japanese have only just started spending again instead of saving so hard, but this is mainly due to the growing contingent of old and retired people who have hitherto saved precisely in order to spend in their declining years.)
In the last few months, the American economy is supposed to be growing again -- at about one per cent per annum. But I wonder. This might be disguised by inflation. Due to constantly changing customer spending patterns, inflation cannot be measured sufficiently accurately within about a 3 per cent band. Until the growth rate is of the order of 2 per cent or more, no possible credence can be given to any official figures. (During the 1990-2000 boom, the American economy was supposed to be growing at about 3-4 per cent, but that turned out to be mythical.) But whether there is real economic growth or not, what is really significant is that unemployment continues to rise. That can only mean one thing -- that productivity and efficiency is growing within American business even though there is still great undercapacity. It suggests that managers now have enough time during their working day to bring off efficiency strategies that they didn't have time to carry out during the boom.
But it could also mean another thing. The increasing unemployment means that there is no new growth sector taking off right now. No brilliant new status goods are in the offing -- the sort of goods that have high profit margins and which can start a powerful investment cycle again. It looks as though there's nothing available except embellishments on existing consumer goods and pastimes -- SAVs instead of cars, DVDs instead of video tapes and CDs, sports fans going to soccer matches instead of baseball -- and all these with savagely competitive low profit margins nwhich cannot even repair badly dented pensions funds, never mind creat new investment.
For my part, I am reasonably convinced that the next status good that will come in at a very high price initially and then successively work its way down through all the socio-economic strata will be replacement body organs, grown from one's own stem cells so that they can't be rejected. To live longer is an even stronger instinct than keeping up with the Joneses. In due course, as with all status goods, all consumers will be in the market for these, as the price become successively lower.
How far away is this new status good? Ten years? Twenty years? Probably within that timescale for the very rich to start with. Such a technology will unleash investment on an unprecedented scale, even greater than the car or TV industries of the last century.
In the coming economic recession, a large number of corrections will have to take place-- reduction of the American trade deficit (on which the rest of the developed world depends), reducing government budgetary deficits (which are growing at present in all developed countries), improving regulation of big business, reducing corporate and consumer debts (which have never been higher in all developed countries), restoring confidence of the ordinary person in shares and pension funds, etc. But on top of all this there will have to be a powerful revival of consumer spending again. And if this is going to be organ replacement, then it's still a long way away yet. I think it's going to be the 1920/30s all over again.
KH
<<<< A PRESIDENTG HAPPY TO WATCH THE ECONOMIC CYCLE GO BY
If there is a single phrase that comes to mind when looking at the Bush administration's pattern of business cycle management, it is 'blithe unconcern'
Brad Delong
"I want you, every morning, to wake up, look in the mirror and ask yourself: 'What can I do today to increase the money supply?'"
Thus did John Ehrlichman, Richard Nixon's chief domestic policy adviser, apocryphally speak to Charles Pardee, Federal Reserve governor, at the start of the 1970s. Thus do White House officials perennially regard the levers of economic policy.
They know full well that a healthy economy - low unemployment, rapid output and productivity growth, low inflation - may not guarantee the re-election of their presidential principal but that an economy perceived to be unhealthy is a prime trigger of electoral defeat, which will give them all the opportunity to spend more time with their families.
However, the Bush administration has been different. Since George W. Bush's inauguration, pressure on the Fed to cut interest rates faster than, or below, the levels with which the central bank would have been comfortable has been very light. Spending policy has virtually been on autopilot - with the exception of the limited post-September 11 2001 military build-up. And tax policy has been focused on cutting the taxes that the relatively well-off will pay late in this decade and into following decades, not on rapidly getting money into the hands of those who will quickly spend it and so boost demand and employment.
If there is a single phrase that comes to mind when looking at the Bush administration's pattern of business cycle management, it is "blithe un- concern".
Of course, press secretaries - even, in occasional speeches, the president - will say different. They will talk about how all administration economic policy is aimed at providing more jobs for Americans. They will talk about the president's jobs-and-growth strategy. But the disconnection between the kinds of tax and spending policies that would boost growth and employment in the short run (say, before the president runs for re-election in November 2004) and the policies pursued by the administration yawns much wider than is typically the case, even in Washington.
This is one of the great mysteries of the Bush administration. In any other administration, the assistant to the president for economic policy and the assistant to the president for political affairs would have been in the Oval Office a week or so after September 11 2001. They would have pointed out that the terrorist attack on the World Trade Center and the callous murder of 3,000 people would have effects on the economy that were much less important than the national security implications but that were still worth a little attention.
They would have laid out three scenarios for future developments: a rapid bounce-back of private investment, as businesses shook off fear and uncertainty; a prolonged pause in investment that could be remedied by Fed interest rate cuts to make borrowing cheaper and building new factories and installing new machines more attractive; and a long-lasting wave of uncertainty that would lead businesses to reduce investment for years, even if the Fed pushed interest rates as far down as it could.
In the first and second scenarios, they would have said, large budget deficits in 2002, 2003 and 2004 would not be necessary to keep the economy near full employment. But in the third scenario, only large budget deficits and lots of fiscal stimulus could keep the economy near full employment. Since we do not know which scenario will come to pass, they would have said, we should at least be prepared to propose substantial increases in public investment and cuts in taxes on those with high propensities to spend; it would be a way of taking out insurance against the possibility that this third, un-favourable economic scenario might come to pass.
However, it appears that this conversation never took place. And so the fiscal insurance policy against the situation in which the US economy now finds itself - an extremely slow recovery accompanied by rising unemployment and sluggish investment, coupled with a Federal Reserve that has little power to provide additional boosts to aggregate demand - was never issued.
Opportunities to reassure investors by moving aggressively to deal with the corporate accounting scandals that Alan Greenspan, Fed chairman, (and others) think have discouraged investment have been fumbled. Rather than advancing the ball on free trade, the administration has shown itself eager to violate its World Trade Organisation obligations by slapping on tariffs that it thinks are politically advantageous. The tax cuts pushed by the administration are not tax cuts designed to boost demand in the short term of a year or two as much as tax cuts designed to reduce the share of the tax burden paid by the relatively wealthy over a decade or more.
Wherever the administration has had a chance to take steps to improve the short-term business cycle outlook, it has seemed eager to do something else. Among many in Washington today it is conventional to deride the Bush administration as one in which cynical, short-term political calculation is all. Policies are supposedly made by political tacticians, not by cabinet secretaries. But that does not explain what is going on. The most short-term and cynical of political operatives is at least as depressed as any economist at the thought of starting a presidential re-election year with US employment 2m workers below its previous peak.
Instead, the strange inaction of the Bush administration seems to be driven by something else. To this outsider, at least, it looks as though those working in the White House share a common background assumption: they fear the domestic side of the government and desperately wish for the domestic side of the government to do as little as possible. Tax cuts, yes (especially because they believe tax cuts will ultimately cause the shrinkage of the government). Tactical moves for political advantage, yes. But the idea that the domestic-side government can be a force for human betterment - by boosting aggregate demand in recession, opening up markets through free trade agreements, or whatever - appears to be a strange and unfamiliar one and thus suggestions that the domestic government do something, anything, face a hard uphill climb.
The writer is professor of economics at the University of California at Berkeley
Financial Times; Jul 30, 2003
Keith Hudson, 6 Upper Camden Place, Bath, England
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