Monday 18 October 2010

Alan Johnson's "Alternative"

Alan Johnson's first speech as shadow chancellor (full text here) was interesting. Sunny titled his preview 'Labour abandons Darling's plan, to focus on growth, not cuts'. If only that was the case.

It was necessary for Johnson to nail the lie of Labour's "profligacy", a myth the Coalition have spun to draw a veil over the culpability of the Tories' city mates for the crisis. And by prefacing the meat of his speech this way Johnson employed it to good effect. However just as Dave and co have conveniently forgotten their support for Labour's public spending up to the banking collapse, so the marketisation of the NHS, higher education and bit-part privatisations of the benefits system have disappeared into our leadership's memory hole. Labour's 13 years in government saw more investment in the public sector, but it went hand in hand with wasteful PFI projects and a never-ending procession of cuts.

But this is the new generation, right? Turn over a new leaf and all that? Unfortunately, while not as cut-happy as Darling's blood curdling "worse than Thatcher" comments before the election, the new Miliband/Johnson plan has the awful tendency to undermine itself. While the new 'alternative' doffs its cap to Ed Ball's recent adventures in Keynesianism it still accepts the need for cuts.

Johnson is absolutely right to say "without growth, attempts to cut the deficit will be self defeating. A rising dole queue means a bigger welfare bill. And less tax coming in" and "a spending cut hits growth twice as hard as a tax change – three times as hard when it’s capital spending." There are some good arguments here the anti-cuts movement can deploy against the Conservatives and their LibDem running dogs. At times the point is made so well, especially against the banks, that you could be forgiven for thinking you're reading Labour party policy
circa 1974 than a post-New Labour tract. But then neoliberal common sense (an oxymoron if there ever was one) spoils it all by rearing its ugly head.

Johnson informs us that "we can't oppose every cut". Cue continuity with the harrying of the disabled, the great welfare cheat witch-hunt, changes to housing benefit, "tough decisions" on public sector pensions and pay, and an endorsement of halving public borrowing over the next few years. Provided the Coalition cuts responsibly, Labour - or at least the leadership - will support it.

And they call this opposition.

If the need for cuts to bring down the deficit is accepted - and I do not - the new plan does at least make some sort of sense. A slower pace of public spending cuts would theoretically allow the private sector time to adapt to the new situation. It's a difference between cutting as part of an overall economic strategy vs chainsawing through the public sector without a care for the consequences.

But both depend on magical thinking. The Tories think quickly chopping up the social wage and amputating parts of the economy will let business fill the gap. Ed and Alan envisage a similar process, but on a more gradual time scale. None of it is based on solid evidence or previous experience. Freezing wages, chucking public sector workers out of their jobs, holding down benefits etc. have the same depressing effects on the economy whether one favours deficit reduction by a 70:30 or 50:50 cuts/tax ratio.

The Miliband/Johnson "plan" is an alternative in degree, not in kind. It is an awkward mish-mash of neoliberalism and Keynesianism. They want to cut, but accept the need to invest. They want to invest, but accept the cuts argument. Ultimately we're left with an incoherent approach that will neither satisfy the right wing press or the bulk of the labour movement. The party may have the "luxury" of opposition but events have an annoying habit of catching up with and throwing political programmes into sharp relief. And when they do, which way will the leadership jump?


Anonymous said...

Those that think Labour's deficit cutting plans are not in line with Keynesian principles do not know anything of Keynesian principles. For even Lord Keynes, as wrong as he was, at least had the common sense to oppose any kind of large or long-lasting structural deficit. Those that would like Labour to continue down the spending path, in the name of Keynes, are in fact doing the opposite of what he advocated.

And what about this "spend forever" neo-Keynesian approach? It's exactly the philosophy Obama in the White House and Bernanke at the Fed have taken. The result? And increasingly likely double-dip recession. Soaring unemployment. Loss of market confidence.

Unfortunately dogma isn't evidence. We all like to have principles but when the evidence is staring you in the face, it's time to wake up, take note and change course.

Anonymous said...

Come on those Tories in the city have red mark on their asses due to Blair sucking up to them, they have welts due to Brown joining the whipping clubs.

Gary Elsby said...

Not long ago on my 48th birthday, we finally paid off our debt to the USA.
During those 48 years we 'never had it so good', had new cars, colour TVs, invaded everywhere, put 48% of all kids in University(ho ho)and have the best education facilities, ever and have wonderful weapons of mass destruction.
We never got to send a man to the moon though.

I've no doubt that defecit talk, walked the walk, all those years ago with just as much enthusiasm as it does today, but in those days, we sent Winston to America to ask for more. They initially refused as not wanting to fund dilluted Communists in Labour.At Winston's insistence, they granted our IOU.

I'm now a bit older and I blame Labour for copping out.

Boffy said...

Anonymous says that the Keynesian stimulus in the US is leading to a double-dip. Quite the contrary. The fiscal stimulus in the US led to a quick ending of the recession and some quite good growth figures. But, the reality is that in the US a lot of the actual spending is done at the level of the States. Many States under the influence of Republicans over the years have introduced laws which limit the amount of spending that can be done. Paul Mason Newsnight report from Gary, Indiana was a good example of that. The city was in dire need of spending - and those things directly funded by the federal government had happened - but the Republican controlled State government was demanding that Gary CUT spending and raised taxes.

It is this backwoods Republicanism - some of which is driven purely by electoral opportunism i.e. they think that if the economy tanks Obama and the democrats will take the blame - which has meant that only a small proprtion of the actual stimulus programme has fed through into spending.

In response to the general point I'd refer you to the recent book by Roubini - hardly a Keynesian - who says that obviously when the economy is tanking you have to adopt Keynesian stimulus, and you don't take it away until the recovery is soundly enough based that it can withstand it being withdrawn. Roubini is not alone amongst economists in believing that we have nowhere near reched that point. He points out that if Governments have to change course later they will have to intervene even more intensely and they may not have the resources to do it.

Not removing stimulus is not the same as adding to it by the way.

Anonymous said...

It's all too easy for you to blame the Republicans for not allowing a full scale neo-Keynesian approach to the US economic problems but unfortunately your response doesn't actually explain WHY that would prevente any full scale recovery. Just saying cuts = bad and people need to spend more isn't addressing the fundamentals.

It's this misunderstood Keynesianism that lead to the recession in the first place. The reason economists didn't see the recession coming is that all the signs were good. Consumption was up and interest rates were forced artificially low by the Fed for home buyers. But if Keynes was correct, all that borrowed money floating around in the economy would have a multiplier effect. Yet, when the housing market crashed, so did all those other sectors of the economy that had become wholly reliant on the free flowing credit from banks. Debt (private or public) given out or offered at artificially low interest rates creates a subsistent economy and prevents real investors borrowing to expand the economy properly.

So to suggest the solution is now more debt in the hands of government is just plain stupid. We need to stop borrowing + borrowing more to pay off interest rates because it prevents that money from being invested properly.

You only need to look at the recession of the early 20s and compare it to the Great Depression to see what an utter failure Keynes is. Before Keynes, recessions generally had to sort themselves out (as they should - mal investments need to be liquidated) and this is what happened in the 20s. The free-market adjusted and it was over quickly and painlessly. Then came the GD and a man with a plan. Keynes principles in his 'General Theory' were employed at great length across the world and the economies found themselves stuck in a depression that lasted until the war!

It's too easy for Keynesians to hide behind the micro/macro distinction. But in reality what is good for the goose is good for the gander and the macro is just the aggregate result of the micro constituent elements of an economy acting together. So, sorting out aggregate demand is no solution to the minutiae of the economy.

We need to expand the economy with investment from the top, not the bottom, and it can only be done if governments cut their spending!

Robert said...

There is a reason why governments should increase spending in a recession, explained by John Maynard Keynes from the 1920s onwards. When the economy sickens, businesses and consumers stop spending except on essentials. This causes demand to fall. If the government cuts back at the same time, then nobody is buying anything – and recession turns into depression. The only way out is for governments to pick up the slack and borrow money to spend on public projects and subsidies that get money running through the economy again. Then, once we are back to work, the government pays down the debt with the proceeds of growth.

This has been demonstrated to work time and again. In a recession, it's irrational for you to rack up debt, but essential for the government to. Keynes called this "the paradox of thrift." Yet Cameron and Osborne deny these truths: Osborne actually claims public spending claimed no role in ending the Great Depression.

What happens if governments – in the middle of rising unemployment – panic about debt and stop stimulating the economy? We don't need to speculate. During the 1930s, Franklin Roosevelt launched a huge stimulus funded by debt, and the economy began to recover. Then, in 1935 and 1936, he was besieged by people offering the Cameron argument: the recovery will be stronger if we cut the debt now. The result was that the depression came back with a nasty slap, and it was only wiped out when the gigantic stimulus of the Second World War sent debt soaring to 119 per cent of GDP. This debt was easily repaid once this stimulus paved the way for the biggest boom in American history.

Indeed, Cameron's cuts set us up for failure twice over. Stimulus spending can – if it's done well – not only get the immediate economy running again, but set us up for future success. A recent detailed US study by Colombia Teachers' College found that cutting high-school dropout rates in half would generate $45bn in new tax revenues, by saving on welfare payments, imprisonment, and so on.

Anonymous said...

Robert, please read the above comments and rephrase your post accordingly.

I have nothing against your blind faith in failed Keynesian economic theory but it would be nice to have a rebuttal of the actual argument I put forward rather than a simple restating of basic Keynes. We all know what Keynes said, just not all of us agree with him. Similarly you have a lot of your dates wrong. Keynes published his 'General Theory' in 36, I believe.

Also, whilst I have only skimmed over your largely irrelevant comment, I note you have misunderstood Keynes concept of the 'paradox of thrift'. Which he applies to both government and consumer spending. But I wouldn't worry too much because he was wrong on that too.

Gary Elsby said...

Is anonymous giving us any credible proof that his reasoning is right?
Britain had huge debt in 1945 and threw good money into paying off the debt interest. At the same time, Britain borrowed even more debt to Nationalise everything in its path. The result was full employment and an economy that was almost second to none.The debt was then paid off.
beleive that anon is giving us a theory and not giving us facts. We know that debts and defecits in the home are a nightmare and can result in bankruptcy, but for Governments, it's just a bit troublesome for the duaration.
Demand must be created and those that produce must be able to afford what they produce. Spending on the economy via full time employment and job creation in itself stimulates demand.
For anonymous to suggest that the recession was not seen by economists is a falsehood and it depended on which economist you read. Many were saying soon after 2005 when Rover went bust that the economy was faltering.Stoke-on-Trent is the perfect example around 2005.

modernity said...

Good old LP, always count on them to concede the arguments to the Tories and make themselves even more unelectable...


Anonymous said...

I do like how you accuse me of making sweeping remarks without facts and then proceed to do the same thing yourself.

The post war period thrived initially because of personal savings and it was the unhelpful actions of government that set it up for the disaster that was the 70s economy. Keynesian policies lead to huge booms (booms that lead to such pronouncements as the abolition of "boom and bust"), but they are always followed by bigger and more painful busts.

The facts are, however, quite simple. The 1920 US recession is a great parallel to today. It was before Keynesian fiscal policies had been thought up and it was a good few years before the Fed engaged in any kind of active monetary policy.

Wilson was seriously ill and his wife was running the country for him when the economy tanked. Due to Wilson's health, government did not get involved (in anything really). The first year of this recession was worse than the first year of the Great Depression yet only lasted until the following year and was succeeded by a very healthy recovery. When Warren Harding took over, he cut spending and sought a similar economic policy to our current government. A massive private sector boom ensued.

If you compare this to the Great Depression in which government and the Fed got involved from the beginning, it lasted a great deal longer and recovery took forever to come to fruition. With a lot more pain and suffering along the way.

This is not theory - it's historical fact. Economists often avoid this example because it makes them obsolete. We don't need a fully "qualified" economist in order to allow the free-market to bring about a robust recovery. This is why free-market economists of any kind are few and far between today.

The study of economics is almost soley devoted to the teaching of Keynesianism (at the macro level) and therefore those that subscribe to a different view point are neither raised under this system or employed to teach it. It is this absurd system that has lead the Republican Party of the USA to engage in centrally planned socialist economic maneuvers despite what should be a fundamental aversion to it.

"Demand must be created". Luckily we don't need to spur demand at the expense of government debt. Demand will come if the economy expands through investment and more people find themselves in employment. This is the way an economy is supposed to operate. Constantly blowing money on consumption does not work and has never worked. Borrowing from China so that we can all buy Chinese goods does a lot of good for the Chinese economy, but not a lot for ours. Then borrowing to pay off the interest payments...well you can see where this is going.

Keynesianism has failed time and again and if you watch some reruns of old economics shows (especially on US telly), prior to the housing market crash, the top economists did NOT see the crash coming. They ridiculed the free-market economists that swore it was on its way. To suggest that they could have forseen it is to suggest they didn't believe in their own philosophy!

Boffy said...


Its easy to blame the Republicans for the failure of States to spend money because its true, just as its true that the actual fiscal stimulus HAS prevented the US from going into a Depression, and has resulted in fairly decent rates of growth including in one quarter 5%. The reason failure to actually spend the money IS the explanation as to WHY the recovery has not been as strong and sustained as it might be, is simply the opposite of WHY the extent of the stimulus HAS prevented a Depression. Whatever orthodox Neo-Classical or Austrian Economic dogma says, the reality is that markets do not clear automatically, and, however, low input prices sink, there is no automatic reason why employers will buy labour or other inputs. That is particularly true if those employers see demand for their products falling. On the contrary, they are likely to retrench, because they are interested in actual realised profits, not the theoretical profit derived from deducting costs from an as yet unrealised income.

Your argument about Keynesianism being the cause of recessions is nonsense. The first industrial recession occurred in 1825, almost a century before Keynes was born! Moreover, in the period from the early 1980's onwards, Keynesianism had been abandoned by all States. The reason for Central Banks pumping liquidity into the system had nothing to do with Keynesianism, but was an application of Friedmanite Monetarism! Friedman argued that the cause of the 1930's Depression was a tightening of Money Supply by the Fed, at a time when it should have been printing money to stimulate economic activity. The other aspect of that was the adoption of Supply Side economics by Reagan and Thatcher in the 1980's, and the deregulation of Financial markets which they introduced at the time – once consequence of which was a rapid asset price bubble, and the Crash of 1987.

The example of the popping of the housing bubble shows the opposite of what you are arguing. Keynes argued that the kind of solution that Friedman suggests couldn't work, precisely because in a recession simply printing money is like pushing on a string. It can only work if there is demand from consumers, and from businesses for that money. It is this which creates a multiplier effect. If no such demand exists, then the velocity of circulation is simply reduced, the additional money sits as cash balances in accounts. The fact, is that during the 1980's and 90's, western Government's were able to stimulate aggregate demand from consumers, as a result of increased liquidity, and rising asset prices along with financial deregulation, which encouraged consumers to spend from borrowing against those assets to make up for falls in their incomes. This is the “Wealth Effect” described by Pigou. There WAS a multiplier effect during the 1980's and 90's. That is one reason that the recessions of the 1980's/90's did not descend into a 1930's style Depression. It was precisely, the reversing of the “Wealth Effect” with the house price crash, which took consumer spending out of the economy and led to a similar multiplier in the opposite direction!

Boffy said...

You are not right to say that no Economists saw the crash coming. I am not alone amongst Marxist economists in analysing the unsustainable nature of an economy based on credit, and the inevitable consequence of that. Actually, I tend to agree with your comments about the consequences of that debt being that sectors of the economy were sustained and developed that created a disproportion. But, it is the consequence of Monetarist not Keynesian policy. However, your argument that because of that it is “plain stupid” to continue borrowing does not at all follow. A firms that borrows money at a low rate of interest, and makes a bad decision that threatens the viability of the firm does not say, “borrowing led to this situation so I must not borrow to get out of it.” If it needs to borrow to stay in business it does so, to pay its workers and suppliers. It tries to borrow to sustain its business, and if possible to grow the business so that it can undo the mistake, and pay off the debt incurred. It makes even more sense for a country, which cannot just go bust to follow that course.

It is not ultimately, the low cost of borrowing which leads firms to mal-invest. It is the chaotic nature of Capitalism, which as a decentralised decision making-system, is always led on the basis of profit maximisation to mal-invest, to over accumulate capital, and to suffer repeated crises.

Your comments on the Great Depression are quite honestly economically, and historically illiterate. Firstly, your claim that markets were previously allowed to self-correct, and that they quickly did so, is simply untrue. In the 1840's Britain, even with the advantage of being virtually unopposed in world markets suffered what was termed the “Hungry Forties”. The newly introduced steam engines and mechanisation in the textile mills led to such an expansion of production, that global textile markets were flooded to an extent that it took almost three years for them to clear. In the meantime thousands of textile workers in Lancashire and Yorkshire were thrown on to the streets, thousands starved to death, and the consequent rioting led to the State having to station dragoons in every major centre to suppress it. There was also a Great Depression in the 1870's that dragged on, until the new Long Wave Boom began in the late 1880's. Moreover, your comments about the 1920's and 30's are also wildly out. Europe had a brief post-war boom after 1918, but sank into recession in 1920/21, and the European economy stagnated for the rest of the 1920's. That was despite the implementation of the kinds of policies you suggest. It was those policies, which led to the violent class struggles such as the General Strike in Britain of 1926, the German Revolution of 1923, and so on, and ultimately, led to the response of Capital through Fascism.

Boffy said...

The United States, which at that time occupied a position similar to China today, was able to continue growing rapidly throughout the 1920's because of its global competitiveness, developed on the back of mass production, and because – not Keynesianism but – the development of Commercial Credit by large US firms faciliated the development of a huge domestic market. When we get to the 1930's, the policies you propose were implemented in the US by Hoover, and it was during that period from 1930-1933 that the Depression was at its height. Similarly, in Britain the Government had the same approach you propose of a Balanced Budget. It cut Unemployment Benefit, and so on, and the consequence was that the depression dragged. The only countries, which avoided that were. The USSR, which was growing extremely quickly having scrapped Capitalism and benefiting from nationalised property, and planned production, Nazi Germany, which DID implement Keynesian policies in relation to building its autobahns and so on, and which also benefitted from elements of economic planning through its Corporatist State under the direction of Big capitalists such as Krupp and Thyssen, and the Big Banks, the United States after the election of FDR, which also engaged in Keynesian stimulus, and Norway, whose Social-Democratic government also used Keynesian stimulus.

But, in a way you are right that Keynesianism is NOT a solution for the problems of Capitalism. In the 1930's, even in the US, it was running out of steam by 1937. It depends on the historical conjuncture – whether we are in a Long Wave Boom or downturn. In the post-war Boom, repeated recessions during the 1950's were cut short by Keynesian intervention. It was possible then as now, because of the Boom, and because of the existence of sufficient Surplus Value, and the potential for further growth, to pay for it. In the 1930's and 1980's that was not the case, which is why it could not be a solution, and why generally Capital did not use it. You are right neither Keynesian nor Monetarist intervention can overcome the innate irrationality of Capitalism, that is why we need to scrap it, and establish a Co-operative economy.

SamG said...

I have looked over Anonymous’s comments and have seen little in the way of actual facts, Boffy on the other hand..........

Does anonymous think that the Dickensian era was some lost golden age of capitalism??

Anonymous makes one cardinal error in my opinion and that is to assume that Keynes invented something call Keynesianism. Long before Keynes governments intervened in the economy with public works, debt financing etc.

Socialists should treat ‘Keynesians’ and ‘free marketeers’ as the same thing – apologists for the capitalist system.

Anonymous said...

You must have misread my comments regarding the self-correcting nature of the free-market, especially the USA in the 1920s. You seem to think I was referring to Britain - which I definitely wasn't (hence the speil about US President Wilson!)

At no point did I suggest recessions had not occured before the 1900s (in fact they were likely from much of the governmental protectionism of the time as well as other restrictions on international trade).

You cannot give credit to the stimulus for preventing a depression. My example of the US recession in the 20s, which started off far worse than the Great Depression, is proof of this. The non-interventionist approach of both Wilson and then Harding, and the robust recovery enjoyed under them, go hand in hand. No stimulus, no Q.E. No government intervention of any kind.

The only way for an economy to recover is through savings. You compared something to the current state of China (I can't remember what it was you said) but it is quite apt considering a comment made today during PMQs. Even Mao believes the key to prosperity lies in governmental and personal prudence! This coupled with the embrassing admissions of Castro is doing more than enough to dispel these myths peddled by neo-Keynesians and left-wingers.

Your argument is put forward as a justification for some kind of Co-operative/government mandated economy. Wherever this is tested, it fails. Savings and top heavy investment (not demand management) are the only truly tried and tested methods for sustaining an economy.

You can't prevent busts (although try telling Keynes) but you can mitigate their consequences if you leave them be.

Anonymous said...

But you simply cannot say the global recession was because of capitalism!

The housing crash and the resulting credit crunch has neo-Keynesianism written all over it. It is a text book example of the Austrian credit/business cycle.

Fannie Mae + Freddie Mac. GSAs, which even when "privatised" enjoyed a special relationship with the fed. Specialist, low interest mortgages to home-buyers. George Bush's centrally planned economy. Encouraging and even backstopping reckless lending should boost demand. There's no getting around it. And it did! But debt is always sucked back in (private/government) and if centrally funneled into one project, it diverts it from flowing into profitable areas of the economy.

But the point I have been making all along is that demand management is bad for the economy. Demand will always exist, it's just untapped. The only safe way to encourage it is for it to happen naturally through a productive and prosperous economy. Production will spur demand better than giving people money and it is sustainable too.

Robert said...

Boffy has already explained why your account of the Twenties and Great Depression is false. Hoover applied your methods and it didn't work.

If the free market had been allowed to work its magic without government intervention back in 2008 the entire banking system would have collapsed and there would have been social anarchy. The deficit is a temporary problem caused by greedy and reckless morons in Wall Street and the City. Fannie Mae's stupidity by itself would have caused a regular housing bust not a total meltdown of the economy. It was the derivatives and the securitization process that transformed the mortgage debt into a systemic threat. Neither was caused by government. By the way I hope you know that the Federal Reserve is a private banking cartel and not a government institution either.

Supply does not create its own demand, that's another myth. And what we face right now is a shortage of aggregate demand – the demand for goods and services that generates jobs. Cutbacks in government spending will mean lower output and higher unemployment, unless something else fills the gap. Monetary policy won't. Short-term interest rates can't go any lower, and quantitative easing is not likely to substantially reduce the long-term interest rates government pays – and is even less likely to lead to substantial increases either in consumption or investment.

Lower aggregate demand will mean lower tax revenues. But cutbacks in investments in education, technology and infrastructure will be even more costly in future. For they will spell lower growth – and lower revenues. Indeed, higher unemployment itself, especially if it is persistent, will result in a deterioration of skills, in effect the destruction of human capital, a phenomena which Europe experienced in the eighties and which is called hysteresis. Lower tax revenues now and in the future combined with lower growth imply a higher national debt, and an even higher debt-to-GDP ratio.

Advocates of austerity believe that mystically, as the deficits come down, confidence in the economy will be restored and investment will boom. For 75 years there has been a contest between this theory and Keynesian theory, which has argued that spending more now, especially on public investments (or tax cuts designed to encourage private investment) was more likely to restore growth, even though it increased the deficit.

Thanks to the IMF, multiple experiments have been conducted – for instance, in east Asia in 1997-98 and a little later in Argentina – and almost all come to the same conclusion: the Keynesian prescription works. Austerity converts downturns into recessions, recessions into depressions. The confidence fairy that the austerity advocates claim will appear never does, partly perhaps because the downturns mean that the deficit reductions are always smaller than was hoped.

Critics say government won't spend the money well. To be sure, there will be waste – though not on the scale that the private sector in the US and Europe wasted money in the years before 2008. But even if money is not spent perfectly, if experience of the past is a guide to the future, the returns on government investments in education, technology and infrastructure are far higher than the government's cost of capital. Besides, the choices facing the country are bleak. If the government doesn't spend this money there will be massive waste of resources as its capital and human resources are under-utilised.

Boffy said...


Perhaps its me, but your writing style and method of argument remind me strongly of another poster who was recently arguing from the other side of the class barricades. You remind me of someone who has picked a side of an argument to put forward, and who is scanning the Interweb for background to use. I say that because, in the past, I have spent considerable time arguing against Libertarians/Austrians, and they generally have a much better grasp of history and economic theory than you put forward here.

Its surprising that you talk about Governmental protection in Britain in the 19th Century, for instance, because it is that period that Miseans usually refer to as their model, and is certainly the model referred to by Hayek in his writings. Indeed, Britain at that period was marked by its commitment to Free Trade. It was the US that developed its economy rapidly behind high Protective Tariffs, alongside Germany. Worse, if you read what the Austrians themselves have to say about Wilson they contradict you flatly. They place most of the US's subsequent problems at his door, for the involvement in WWI, and for the establishment of the Federal Reserve in 1913. They also disagree with you about the 1920's. They argue that the Depression was the result of a crack-up boom, promoted precisely by a loose money programme by the Fed during the 1920's.

You say there was no QE in the US in the 1920's, but again that is historically inaccurate once again. You must be reading the wrong Internet sites. In the 1920's the world operated on the Gold Standard. For the reasons I have previously outlined, the US was growing rapidly on the back of huge export growth. The Gold Standard meant that the US Trade Surplus was paid for with Gold transferred from European Central Banks. But, under the rules of the Gold Standard the influx of Gold into the US meant that it had to increase its money supply accordingly, with a consequent reduction in interest rates – in other words Q.E. That was precisely the mechanism under the Gold Standard by which trade imbalances were supposed to be corrected. The lower interest rates and increased money supply would stimulate the US economy, which it did, and should then have resulted in higher US imports, and higher inflation reducing US competitiveness. The opposite should then have operated on the deficit economies. It didn't. The US was able to increase output and benefit from increased economies of scale and become even more competitive.

I have argued the very opposite to a Government mandated economy. Co-operatives wherever they have been formed have demonstrated their greater efficiency, which is why the number of Co-operatives globally continues to rise, and why they now employ more people than do the multinationals. Its why, the Mondragon Co-op can provide its workers with an average pension of around £13,000, and yet its revenues are double its benefit payments, whilst both State and private Capitalist Pension schemes are unable to provide workers with pensions of even a fraction of that.

Boffy said...

The credit crunch was due to Friedmanite Monetary Policy not Keynesian Fiscal stimulus. But, having said I can't blame the global crisis on Capitalism you talk of it as being part of the normal Business Cycle! That cycle cannot be divorced from the working of the Capitalist system. Moreover, the Monetary Stimulus was itself the work of Capitalist Governments who used it during the 1980's and 90's to avoid their economies going into a 1930's style Depression. Even then the best they could achieve was to maintain a low level of growth amidst repeated recessions and crises.

Some demand will always exist in the economy, but the point is how much? You say production will spur demand, but without demand what will spur Capitalist to produce? A Co-operative economy would produce to meet needs, but a Capitalist will only produce to make a profit. A look back at history shows how ludicrous that is, and how it is unrelated to interest rates or loose money. The massive investment in Railways in the UK in the 19th Century was not driven by loose money, but by the perception that large profits could be made. But, that production did not create its own demand, and the investors lost their shirts, and huge resources had been wasted in the process.

Chris said...

Boffy said,

"Perhaps its me"

Yes it's you you loony.

Though good work to shoot down Anon.

Boffy said...

There's nothing Loony about identifying that Anon like you is a troll who simply argues a case for the sake of it, and who as a result is always liable to make glaring mistakes that people with real knowledge of that set of ideas would not make.