11 February 2009

Change we can’t possibly believe in – 2

So, getting back to this posting, what should policymakers do in these sorts of situations in order to revive investment, employment and consumer demand? The answer, on a simplistic view of Keynesian economics, is fiscal stimulus by the government, in the form of tax cuts or deficit spending that will put more money in the hands of the public and thereby stimulate aggregate demand and investment.

That's what President Bush did, with his tax cuts and rebates; and – his critics said quite by accident – it turned out to be precisely the right policy, for Keynesians, anyway.

But Keynes's own formula in The General Theory was subtler, making Bush’s approach, Keynesianesque, if not Keynesian. The key to recovery, on Keynes’s view, lies in investor psychology. Investors are motivated "as a result of animal spirits—of a spontaneous urge to action rather than inaction." Investors overcome their fears "as a healthy man puts aside the expectation of death."

On such a view here is the central task for His Beatitude: He needs to reduce uncertainty and fear in the financial markets by promoting policies that are stable and predictable. When President Bush was Commander-in-Chief of the Economy (or, Chief Entrepreneur) some argued that this meant less ideological crusading about tax cutting and moral hazards overseas, less of the impulsiveness and unilateralism that had made the whole world nervous. It meant governing “sensibly” and “responsibly”, with less “partisanship” and “point-scoring”. In other words, it isn't enough just to put money in peoples' hands. They must be motivated to put that money to work, or at least to spend it. If investors are going to invest, they must have reason to believe that the future will be such as will likely yield a return on investment. The future must also be such as to allow entrepreneurs to make fairly accurate predictions about consumers future consumption. That's a tall order.

But,the future over which investors think they can plan has become shorter, as political uncertainty and instability have increased. Bush’s job as Entrepreneur-in-Chief was to employ the “right” policies to make the future grow longer again, to restore the climate for investment and growth. (Make the future grow longer; restore the climate for investment and growth -- you have to love the way these people talk; they are almost poetic. Why don't we just ask our leaders for another parting of the Red Sea, as long as they're making the future longer and restoring the investment climate?

Surely, Obama's task is the same: employ the “right” policies to make the future grow longer again, and restore the climate for investment and growth, so that investors will feel good about investing.

On a Keynesian view, apparently, the investor is phobia-ridden Adrian Monk, and the President is his psychiatrist, Doctor Kroger, whose job it is to help Monk deal with his phobias, one of which is investophobia. The President is supposed to be personally responsible for easing investors’ worries.

Short of a great big hug for investors, in the present circumstances there are two alternatives (if we are going to limit ourselves to Keynesian or Keynesianesque policies): tax cuts or deficit spending, or a combination of the two. Bush did tax cuts, with some deficit spending. Obama is going to do deficit spending with some tax cuts. The variation may be different, but the theme is the same; and the theme is Keynesian.

So, where exactly is the change?

Here’s how Cocco explains it :

We do not know if this giant stimulus plan will work -- if it is big enough and bold enough. But at least it marks an overdue abandonment of the approach we know has failed.


Well, there you have it sports fans. We do not know if this plan will work, despite its being treated as a sure thing. But she's confident we're getting change because, although we're still getting "trickle down", the recipients of the trickle have changed. And the method of trickle is different: rather than tax-cuts, the trickle is dependent upon deficit spending. Wow. That's deep. And what’s even deeper is that even though we don’t know whether it will work, we know it’s right because, if nothing else -- absolutely nothing else --it (i.e., Obama's Keynesianesque approach) “marks an overdue abandonment of the approach [i.e., Bush's Keynesianesque approach] we know has failed.” Deficit spending and a big hug for investors, instead of tax cuts and a big hug for investors.

Oh, it is change. But the change amounts to something like this: the change from the First to the Second movement of Beethoven's "Moonlight Sonata". They're still playing the "Moonlight Sonata".

Now, what if these Keynesian, or Keynesianesque, approaches are both based on a mistaken notion of the boom-bust cycle?

To be continued...

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James Frank Solís
Former soldier (USA). Graduate-level educated. Married 26 years. Texas ex-patriate. Ruling elder in the Presbyterian Church in America.
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