Posted on | May 31, 2010 | 12 Comments
It’s kind of touching, really. Like watching an infant attempting to walk and falling down:
We right now have the capacity to produce more—much more—than has ever been produced before in the history of the planet. There are dozens of supply-side policies that could be improved in every country on earth, but that’s not a new fact about the world. What’s new is the lack of demand, the willingness of the key leaders in Tokyo, Frankfurt, Washington, Berlin, and now it seems London as well to tolerate stagnation and disinflation in the face of some of the most exciting fundamental new opportunities for human economic betterment ever.
Reading the Keynesian bloggers, one gets the feeling that it is only an inexplicable weakness, cowardice, stupidity, whatever, that stops policies to drive a more robust recovery. The Keynesians have no good theory of why their advice isn’t being followed, except perhaps that the Democrats are struck with some kind of “Republican stupidity” virus.
What Yglesias can’t seem to get through his head is that we are suffering from a capital shortage. There is no magic formula to restore the asset-value lost in the housing-bubble meltdown. Nor can any monetary or fiscal intervention magically restore the asset-value lost in the stock market slide.
The Dow Jones Industrial Average, still nearly 4,000 points (28%) below its October 2007 peak, has spent the past month trying without success to regain a plateau near 12,000. That 28% decline is real and, combined with the decline of home values, has had a severe impact on the net worth of many Baby Boomers nearing retirement.
Investors are resisting the conclusion that we may be entering the second phase of a double-dip recession, but the conclusion may soon prove irresistible. Most people didn’t notice this Friday, but the FDIC shut down five more banks Friday, bringing the 2010 bank failure total to 78. Five months into the year, we are on pace to substantially eclipse the 140 bank failures of 2009. The FDIC’s list of “troubled” banks is now at 775 — nearly 10% of all U.S. banks.
The official unemployment rate is still 9.9% and shows no prospect of significant decline before next year. The European debt crisis still isn’t over and the newest worry for investors is municipal default — Harrisburg, Pa., Detroit and Jefferson County (Birmingham), Ala., being the leading edge of that problem.
Yglesias wants government to stimulate demand, and he wants it stimulated now, and the warning signs be damned. Most Americans have reduced their debt, paying down their credit cards, but Yglesias thinks the government should increase its debt by engaging in yet more deficit spending.
When the only tool you’ve got is a hammer, every problem looks like a nail. And when the only economics you’ve got is Keynes, every problem looks like a shortage of aggregate demand.
UPDATE: Shockingly, Kevin Drum at Mother Jones (!) feels that cutting taxes might be an effective stimulus. But the type of cut he suggests — a payroll tax holiday — would be Keynesian in its purpose, aiming to stimulate consumer demand.
Demand is not the problem, and it was not by stimulating demand that the “supply-side revolution” of the 1980s succeeded. What the reduction of top marginal rates (and deregulation) accomplished was to encourage capital formation, and to make the U.S. a more attractive place for capital investment. It was the liberation of capital that created the long boom.
Extending the Bush tax cuts and eliminating the estate tax and the capital-gains surtax — that would be supply-side.
Nevertheless, it’s encouraging to see a liberal argue that tax cuts are a good thing. There may yet be hope.