THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Monday, January 3, 2011

It Ain't Rocket Surgery, Part I: The Economic Dilemma

We suppose it's starting the year off right. Daniel Kurland over at "Poetic License" waxed, uh, poetic over the mounting problem of mountainous debt that is afflicting consumers and, increasingly, our perpetually purblind politicians. The fact is, the problem is not going away by ignoring it, although the economists predicting a "great 2011" don't seem to realize that simple fact. (If we understood the headline, employment will surge while unemployment stays the same. If you can figure that out, you, too, can be a highly paid economist in a growing and competitive field.)

Evidently, it's time for a reality check — and what better time than the New Year? Academic economists might want to take a second look at their assumptions, most particularly the idea that new capital formation can only be financed out of existing accumulations of savings. (Not so, as any reader of this blog should be able to tell you.)

With respect to consumer debt, the reliance on past savings has one very powerful, and extremely damaging effect. As Harold Moulton pointed out in The Formation of Capital (1935), the presumed Keynesian "economic dilemma" (which he proved does not, in fact, exist) consists of the paradox that new capital will not be financed until and unless consumer demand justifies it. (Well . . . consumer demand or delusional government and academic predictions of huge increases in consumer demand coming from who-knows-where.) Unfortunately, consumer demand will not exist at a level sufficient to justify new capital formation due to the fact that income was diverted from consumption to finance the new capital . . . thereby making it less likely that the new capital will pay for itself!

The Keynesian solution is 1) have the government print money and spend it to stimulate effective demand, thereby redistributing wealth through inflation and creating "forced savings" to finance new capital at the same time, 2) tax "excess" wealth (i.e., wealth not essential to finance new capital) and redistribute it through the tax system, and 3) encourage consumer borrowing to stimulate demand, thereby creating jobs that will generate the wage income to repay the consumer debt.

Unfortunately, while Moulton agreed that employment was a critical factor in a recovery, it was equally critical that the new jobs not be created in response to anything other than a real increase in demand for new production — the other critical factor in a recovery. Creating jobs by inflating the currency, redistributing existing wealth, or direct subsidy ignores the necessity of producing marketable goods and services.

It also doesn't work. Consumers are currently borrowed up to the hilt. Companies are producing — at least some of them are — but the average consumer still isn't buying. The much-touted "recovery" is an illusion, one that will come home to roost as soon as the credit card bills from Christmas start arriving in the mail.

We should probably explore this at greater length, but the weeping and gnashing of teeth from all the debtors is too distracting.