Thought you might find this article interesting:

Quote :

"The Keynesian era ran into trouble when it could not figure out how to shift wages into investment, rather than consumption. The F-M economy had a simple solution - cut taxes on rich people, raise them on everyone else. That is exactly what happened. Income taxes, particularly capital gains taxes, which fall more heavily on the wealthy, were slashed - while payroll taxes, which fall more heavily on hourly wage earners, were raised. Less money in people's pockets meant less demand for basic consumption, including oil. The money flowing to rich people meant they could keep pace with Saudi royals and bid up the price of developed world assets with the richest of the oil archs. There, problem solved. But a new problem created. That new problem is that the people who voted for conservative government were people out in the hinterlands - that is, the people who flattening of the tax system and increases in payroll taxes didn't help much, in fact, it hurt them. This is because the hinterlands are involved in commodities production - oil, wheat, iron, copper. What financial types call "stuff". This contradiction played itself out in a Republican Party that had low taxes, and high spending. At first there was enough built up US savings to keep this going for alot of people - Reagan and then Bush won two of the most overwhelming landslides in US history. From coast to coast, suburban voters voted against cities, black people, and higher wages. Since America was aging, a coalition of those who stood to lose more from the inflation tax than to gain from higher wages was politically viable. However, in 1987 the catch showed up. Namely that in a true monetarist disinflationary monetary policy, there isn't enough money to float the top of the economy. The solution, for such it was, has led to Greenspan being called "the Maestro" and the mess that Greenspan made. Both are right. What the generation of conservative leadership, economic and political, had realized was that it was time to be conservative inflationists. This may sound like a contradiction - but only because we are used to conservatives from the post-gold standard world, where were deflationists. Get ahead in the money game, and squeeze. Unfortunately in the late 1920's and early 1930's, the conservatives grabbed themselves by the balls and squeezed. The wave of conservatives in power now were determined to avoid that fate. It's not a coinicidence that Bernanke's academic work on the Great Depression involves finding a scenario by which Hoover could have kept monetary policy loose enough to avoid the worst of the downturn. No bank collapse, the reasoning on the right goes, no FDR. Conservative inflationists have a simple policy game, keep the money from "trickling down". Basically, declare that inflation that isn't in wages, goods and services, isn't "really" inflation. This works as long as the people holding dollars will agree. Since the people holding dollars right now are Asian central banks, oil barrons and the wealthy who have banked dollars in the NASDAQ and New York Stock exchange, you might think that they would worry about asset inflation. But they are selling asset inflation - if what they own goes up in value, so much the better for them. However, sooner or later, all bets on investment have to be paid by consumers. Since consumers haven't seen real wage increases in 30 years, the money to pay off the every increasing pile of bets on the future has to come from someplace. Now if there were an unlimited amount of oil bandwidth and other basic materials, and there were no downsides to pumping carbon dioxide into the atmosphere, this would work. Eventually people who are poor now will be rich later, and they will buy more and more. Consumers in the developed world wouldn't have their standard of living go up much in real terms, but there are billions of people to sell cars, toasters, computers and so on too. But, unfortunately for simply pumping ever more money into the system, there are resources whose bandwidth doesn't go up with the amount of money, and which upper class investment doesn't have much incentive to get around. Namely, oil and atmosphere. They aren't making any more of either in any quantity that matters. At first the paradox of flat wages and ever greater appetite for profits was paid for by having wives go to work. Families that had put 40 hours of work in a week and 5 hours of commuting, started putting in 80 hours of work and 20 hours of commuting. However, that began to top off long ago, and has reverse itself. The second wave was to have the savings of the working class - that's everyone who makes most of their money from a paycheck, however, large - slashed. One way to slash it is to lower pensions and retirement health benefits. Social Security was cut twice - once by Reagan, once by Clinton. But even this is no longer enough - formal savings is also negative for bottom 99%, and has been for some time. This is the weight of money - there is more and more money placed on the casino of what consumers are going to buy, and a limited amount of prosperity that can be generated in the current oil based economy. The reason gasoline went up so much wasn't supply disruption - but the money that was sitting on the "

http://www.tpmcafe.com/blog/coffeehouse/2006/oct/11/the_weight_of_money

10/12/2006 1:23:40 AM

This is simply the classic debate between the supply-side theorists and the demand-side theorists. One can pick a side and make a convincing argument either way. By the way, I happen to support supply-side economics and the Laffer curve, which are at odds with the Keynesians.

The ‘80s were great years for students of economics. It was a fun and prosperous period, too.

http://www.nationalreview.com/arsenal/arsenal.shtml

This article reminds me of my economics courses and the dreaded Keynesian cross. (Shiver.)

http://internationalecon.com/v1.0/Finance/ch50/F50-7.html

[Edited on October 12, 2006 at 3:53 AM. Reason : .]

10/12/2006 3:52:32 AM

Jsut so we're clear...you're bringing that in here as if THAT guy isn't a wannabe economist?

Also, its not like we don't know Keynesian economics has its problems. Shit, we should all be bowing to Hayek anyway.

And this guy is hardly talking economics in this blog. He takes a pop shot at positive economics and then he moves directly into normative economics (if you can even call it that)

Quote :

"From coast to coast, suburban voters voted against cities, black people, and higher wages."

10/12/2006 7:24:07 AM

I don't have time right now, but the fella that wrote that is oversimplifying and then mistaking cause and effect. I'll be back this evening to comment further.

10/12/2006 12:01:09 PM

Oh shit pryderi, you're going to get an econ lesson now son.

I don't even know econ like Loneshark knows econ and I graduated with a 4.0 in econ.

10/12/2006 12:06:27 PM

Lonesnark doesn't know econ

Lonesnark knows crazy

10/12/2006 7:14:55 PM

Lonesnark knows

words words words words

10/12/2006 7:48:27 PM

eh I've taken two classes in my applied math masters that were basically Theory of Economics I and II.. based on what I've learned there I've always agreed with Loneshark. Except when he showed to me I was mistaken about something and backed it up with evidence I could understand and relate to my mathematical knowledge.

10/12/2006 9:22:23 PM

Lavim, you're correct.
Loneshark knows his stuff far better than I do, even though I studied it for 4 years. I don't know where he gets his stuff from, but I'd say he's taken a good deal of econ at high levels.

10/13/2006 7:15:43 AM

I'm not sure I should respond as it seems expectations are exceeding, but I will try. As most of these points have been covered by me before I will only respond to those in-which I feel more should be said. Of course, a lot of this has been copied and pasted from my other writings, so it may not flow properly.

Quote :

"The Keynesian era ran into trouble when it could not figure out how to shift wages into investment"

My first complaint with the article is that none of the historical statements seem to be true. "The Keynesian era", to the best of my knowledge, would be from the late 30s to the 70s. However, during this era taxes on the wealthy were reduced very rarely and usually not by very much (JFK was the biggest tax cutter in this era, reducing the top rate from 91% to a paltry 70%). However, as a percentage of income the tax burden on lower income individuals did not increase markedly during this time as the percentage of federal revenues from those earning less than $100,000 a year was already in excess of 69% by 1940, (from a low of 34% in 1928) primarily paid in the form of federal consumption taxes which have since been abolished.

Therefore, in my opinion it doesn't make sense to argue the rich were spared and the poor taxed because the government wanted to increase investment. Far from it, tax policy proceeded this way because the lower classes were the only individuals unable to avoid paying the tax, so their tax burden was increased to satisfy the desired level of government spending. Meanwhile, at a tax rate of 91% the "rich" were only paying an effective tax rate (the percentage of income actually paid in taxes) of around 10 percent thanks to clever accounting and tax shelters. The reason the top rate was lowered to 70% was because 91% was not collecting any money; and it worked, the effective rate increased to just below 15%.

As a side note, today the situation is completely reversed: the top marginal tax rate has been reduced to 35% (starting at 70% at the end of the Keynesian Era in 1980) yet the top-income effective tax rate has increased to almost 30%, more than twice the percentage collected in previous eras.

Quote :

"At first the paradox of flat wages and ever greater appetite for profits was paid for by having wives go to work"

cause-and-effect are misplaced in this thought. There was no act or bill of congress which put the female population to work. Also, there was no economic reason to do so. The average family in-which the female spouse went to work was not under threat of starvation, usually the entire second income was dedicated towards luxury purchases (bigger house, second car, a TV, appliances, etc). In reality, the social stigma of working was reduced due to progressive thinking and therefore women went to work because they wanted to, not because President Kennedy asked them to.

Quote :

"The second wave was to have the savings of the working class...slashed"

And how was this done, would anyone suppose? I don't remember being asked by President Bush to save less, I just did because there is so much cool stuff to buy nowadays and very little economic instability about to convince me that my income is unreliable (see a prior thread on the low savings rate).

Quote :

"Since consumers haven't seen real wage increases in 30 years"

I have covered the historical response to this statement before, so I'm not going to do so. Instead, I am going to update TWW audience on the recent changes in the productive composition of the World.

As we all know, there has been a run up in input prices over the past few years. While the author kind-of has a point that some of this has been due to the Federal Reserve boosting the money supply and the resultant boost in speculative investments, it is not the whole story. If it were, the recent drops in input prices would have been a complete collapse, not the slow drop we have experienced. Therefore, the monetary bubble has merely exaggerated the shortage (and thus prices), not caused it. The shortages being experienced are very real: China is attempting to build infrastructure at an unprecedented pace and that requires a lot of steel, concrete, petroleum, and copper. It is only recently that the world's resource producers have demonstrated their ability to meet this demand, hence why prices are falling to still high yet more reasonable levels.

Quote :

"ever greater appetite for profits"

Finally, we come to corporate profits. As this graph shows, the share of productivity going to the holders of capital has increased markedly since the negative reading in 2001. The reason for this growth is not simple. Not because it is difficult to explain, it is quite simple, but because people were unaware it was possible. Some say it is a shortage of capital, but this is not the case because interest rates are historically low so cash (which can be used to buy capital) is very plentiful. Others think, well, the price of capital (plant, machinery, etc) has increased in recent years, maybe it is a speculative problem because businesses are holding off the purchase of capital because they expect the price to fall soon. This is plausible, but not likely, as China should not be expected to reduce capital consumption any time soon.

No, it is far more sinister than that, and Ayn Rand would be disturbingly proud. We do not have a shortage of cash, of available capital, of labor, of anything we usually run out of. What we are out of is talent. The world is running a shortage of competent businessmen and the technical expertise necessary to operate in today's fast moving world. In other words, multi-billion dollar businesses are making record profits because we do not have enough multi-billion dollar businesses. And just as an oil well owner can claim rents (profits above nominal returns) during a shortage of oil wells, the world's businesses are claiming rents from their customers in today's business climate. Thankfully, as most market mechanisms are, this one is self correcting. Business failures are at a low while new start-ups are setting records (especially in China). After all is said and done the average level of competence will fall (some businesses will grow too large, some that are poorly run will not close, etc), the shortage is being filled with new product, and all the new entrants are finally slowing productivity growth, reducing unemployment (especially in Europe and Asia), and bidding up wages. Bravo

http://www.slate.com/id/2093947
http://www.truthandpolitics.org/top-rates.php
http://www.economist.com/ "The Search for Talent"
http://www.federalreserve.gov/boarddocs/speeches/2006/20060927/default.htm

[Edited on October 13, 2006 at 12:01 PM. Reason : .,.]

10/13/2006 11:57:53 AM

now that ladies and gents is soapbox pwnage...

10/13/2006 12:07:56 PM