> >By PAUL KRUGMAN >First comes the victory parade. Later we'll find out if we won. > >We won't have a serious recovery until what economists call "final demand" >shows substantial increases, and workers start being rehired. Where will >that recovery come from?
Krugman makes an astonishing logical lapse here. He assumes rather than proves that current investment is determined by either current or expected consumption. Marx refers to this as the stupid dogma that the aim of capitalist production is consumption. > > >This has not been a standard recession, in which nervous consumers pulled >back and will start spending again once they have been reassured. In fact, >consumers have continued to spend freely right through the slump. So the >surge in consumer demand that usually drives recovery seems unlikely. As Fred M has underlined. > > >What drove this recession was a plunge in business spending, as companies >realized that they had over invested in the bubble years. Which was not provoked by a decline in current consumption, as Fred noted. > >What that means is that most taxpayers, when they reach line 47 of their >1040's, will discover that they owe $300 more in taxes than they expected. >In other words, the one piece of the Bush tax cut that probably did help the >economy last year is about to be snatched away. The direct monetary impact >will be significant; the psychological impact, as taxpayers realize that >they've been misled, may be even greater. ok but as consumer demand then gives and final sales suffer, couldn't firms be forced to scrap old technologies and excess capacity and invest in those processes that lower costs faster than prices are falling? Moreover, for those investment projects that are meant to meet a long term trend couldn't a drop in immediate consumption be favorable as firms may decide that it's favorable to build on the trend and thus take advantage of lower depression prices in materials, wages and possibly interest rates? In short, Krugman does not show clearly why the drop off in final sales will compound rather than have little effect or even possibly ease the fundamental problem of weak investment demand. Rakesh
