Unemployment Equilibrium: Keynesianism 103

By William Milberg, September 8th, 2011
John Maynard Keynes © Desconocido | Wikimedia Commons from Michael Holroyd, Lytton Strachey: A Critical Biography (1967), Volume 1

The failure of economics in the runup to and aftermath of the Great Recession has generated a lively debate about how to reform economics and more specifically about the renewed relevance of Keynesian economics, which had fallen out of favor since the 1970s. The Keynesian message, so important in this latest round of political wrangling over the increase in the US debt ceiling, is that cutting government spending in a slump will only worsen the unemployment problem. The role of expansionary fiscal policy, according to Keynesianism 101, is to provide demand for goods (and thus for employees to produce those goods) when the main sources of demand in a capitalist economy — households and businesses – are not providing a level of demand necessary to generate a socially acceptable level of unemployment.

Keynesianism 102 is about the multiplier effect of changes in spending. This is the notion that an increase in demand (from any source, not just government but certainly including government) will impact employment and incomes with a ripple effect. This includes a direct impact and then a secondary impact when the direct incomes are then spent (in some fraction) and an additional fraction of that is spent, etc.

There are two corollaries to the lesson of Keynesianism 102 that are worth mentioning because they have been raised in the current policy debate. The first is about the differential multiplier effect of a spending increase compared to a tax cut. Empirical studies show that the multiplier effect of the former is greater than the multiplier effect of the latter. The second is about the differential multiplier effect depending on the income of the recipients. Since the poor are more likely to spend a higher percentage of additional disposable income than the rich, a tax cut that benefits low-income people will have a bigger multiplier effect than a tax cut that benefits the rich.

These lessons have not been integrated into current economic policy in the US, where deficit spending and progressive tax reform and expanded benefits for . . .

Read more: Unemployment Equilibrium: Keynesianism 103

September 8th, 2011 | Tags: , , , , , , , , , , , , , ,

Bipartisanship’s Last Stand: What does the Debt Deal mean for Legislators?

By Casey Armstrong, August 3rd, 2011
US Capitol Building at night © 2006 Diliff | Wikimedia Commons

Like many, I have serious reservations about elements of the debt deal. But from a standpoint concerned only with the legislative process, the debate in Washington has not been “business as usual.” In recent months we have witnessed two primary, parallel attempts at compromise: The “Gang of 6” in the Senate, and the Obama-Boehner-Cantor talks at The White House. To me, the failure of the “Gang,” and the ultimate success of the White House talks, is a sign that our government is undergoing a significant shift in the way it legislates.

Change in the legislative paradigm is not a radical event – it has been the norm in our Congress’ history. Compromise, specifically over “perceived truths,” as Jeffrey Goldfarb notes, is the heart of the legislative process. Among the oldest approaches to compromise was John C. Calhoun’s “doctrine of the concurrent majority,” where the goal of legislation was to accommodate all ideas. During the “Golden Age,” Henry Clay championed the idea that “all legislation…is founded upon the principle of mutual concession.” Now, Obama’s inability to strike a “Grand Bargain” should not be seen as an unqualified failure; grand bargains can only be made within a legislative framework where both sides are willing to sacrifice equally, a point I will return to shortly.

Turning to the present day, we find two curious episodes in the Senate. First, we have an attempt by the Senate Republican leader Mitch McConnell to cede portions of the Senate’s power to the Democratic President. The Senate has always fiercely defended its own sovereignty with a ferocity that can only equal debates over world-shattering policy changes. William S. White, perhaps the most eminent scholar on Senate history, noted that it is “harder to change a [standing] rule than to vote to take a country to war.” For McConnell to suggest that the Democratic president takes the reigns is a clear act of desperation, a sign that the existing framework of compromise familiar to McConnell no longer applies.

Second, we have the “Gang of 6.” . . .

Read more: Bipartisanship’s Last Stand: What does the Debt Deal mean for Legislators?

August 3rd, 2011 | Tags: , , , , , , , , , , , ,