Tags: fiscal policy
Tags: fiscal policy
November 3, 2008
I would rather write about the Phillies (at last, hurray!) or bicycling in the City and the region. There is a lot to report, and much of it is good news. I happen to think that such positive news bodes well for the region as a whole, not just because they're our Phils or because I like to ride my bike, but because these items makes Greater Philadelphia a more livable place while also contributing to the economy:
Example benefits of bicycling[1]
Of course, we have also heard the news (good? bad?) that Americans are driving less in response to rising fuel prices. Then the price of oil turns dramatically south, although it seems so far that consumers are reluctant to resume their old gas-guzzling ways. Why the reluctance when gasoline prices have fallen so quickly and by so much-back to the levels of March 2006?
One word: economy.
October
2008 is not like March 2006, not for the region, not for the nation,
not the world.
Wall
Street's woes have spilled over to Main Street.
We have also seen dramatic
market shocks around the world, an unintended consequence of globalization.
The questions: Recession?
Depression? How deep? How long? are on everybody's minds.
The roller
coaster ride of the stock market, sudden sharp declines in the value of
personal assets, including homes and portfolio wealth such as retirement
savings, and what seems like an endless stream of bad news have compounded real
economic misery with bad karma to affect personal
psyches like never
before. When -- and how -- will it end?
No one knows. For the moment, no amount of erudition or inside information will eliminate the uncertainty as economists, central bankers, and policy experts around the world try to stabilize the global financial system and address the very significant, very real "collateral damage."
We live in fast times. Often enough, it seems the pace of the world is still accelerating. We have already lived through the end of history, demise of the business cycle, the New Economy, Web 2.0 (followed by Web 3.0), Reaganomics, Clintonomics...What else? I can't keep track.
I do know that the theories of an individual once highly regarded around the world for his contribution to economics, but later adjudged outdated, have returned to fashion with a vengeance in recent weeks. John Maynard Keynes was a first order polymath. He was born in 1883 to intellectual parents and educated in Cambridge, England. His contributions to economic theory and application are many. In 1926, he published a brief essay, The End of Laissez-Faire. His greatest work, The General Theory of Employment, Interest and Money, was published in 1936 in the midst of the Great Depression. Keynes recognized that not every downturn in the economy was self-correcting, and so there could be the need for governments to intervene in the economy to restore markets to operation and return nations to the path of growth.
While many basic economic truths were already known before Keynes (Adam Smith was born in Scotland in 1723, and published An Inquiry into the Nature and Causes of The Wealth of Nations in 1776), as a product of the times in which he lived, Keynes realized that national economies could enter nearly irreversible tailspins from which recovery would be slow and painful, with steep rises in unemployment, tremendous human suffering, and economic contraction rather than growth. That may not seem like a remarkable insight, but until Keynes, there was widespread belief that economic downturns would always right themselves in a reasonable period of time via the mechanism of the free market, without government intervention-while unemployment was a pernicious blight with no easy solution.
Keynes showed that growth could be restored and unemployment reversed by sufficiently stimulating aggregate demand--as through a fiscal stimulus--a relatively easy technical fix, however until then not something considered relevant for market economies. The way out was for the government to bump up demand through spending; public works projects fit the bill particularly well at the time because they also addressed the miasma of high unemployment.
As they say, "The more things change..." It may be the case that the world is not such a different place from what it was in the past. That, at least, appears to be the case with respect to the economy. Apparently we have not seen the last of the business cycle, the end of financial risk, or the Zero Gravity economy, yet hubris and folly led a great many to believe all three fallacies. Instead, we are living through a period that has evoked frightening comparisons to the Great Depression of the 1930s. I never imagined that a "liquidity trap" would be any more than an interesting textbook discussion with perhaps a reference or two to foreign crises thrown in-certainly not an event made real on local shores, when the Federal Reserve's best efforts may amount to not much more impact than "pushing on a string." Alas, here we are.
The immediate moral of this story? Not much. Take your vitamins. Eat your vegetables. Listen to your mother. This week, don't forget to vote. It's all simple, yet good advice. Don't believe anybody who says that what goes up doesn't have to come down. We have a big mess on our hands because a lot of people forgot that if it sounds too good to be true...well, it probably isn't. Don't believe anybody who says the government's fiscal bailout is the first step on the slippery slope to socialism-if anything, hope that it's enough to work.
Lord Keynes did not mean to bury capitalism through his arguments for government intervention, but to strengthen and improve it:
...devotees of capitalism...often...reject reforms in its technique, which might really strengthen and preserve it, for fear that they may prove to be first steps away from capitalism itself... For my part I think that capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight...[2]
Let's hope that Phillies championships occur more often than global financial meltdowns and seismic order recessions. There's reason to be optimistic, yet!
--Rich Stein, Director of Research
[1] The chart is from: Krizek, Kevin J.; "Estimating the Economic Benefits of Bicycling and Bicycle Facilities: An Interpretive Review and Proposed Methods." The paper was originally submitted to the Transportation Research Board 2004 Annual Meeting.
[2] John Maynard Keynes, The End of Laissez-Faire (London: Hogarth, 1926).
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