>I know this is controversial for
>some pkers to get, but in an economy operating with excess capacity
>and unemployment, BUDGET DEFICITS ARE A SOURCE OF AGGREGATE DEMAND. I'm
>sure I sound like a crank for taking such a view. Well, when
>you cut those deficits, and exports can't grow (which is only
>'beggar-thy-neighbor' anyway), and private investment can't grow. and
>consumption can't grow, well...Y = C + I + G + X - M. So when the bubble
>pops, or whatever sets it off, are we prepared to deal with the situation?
>Maybe we can all join militias, raiding each other for canned food, or we
>can blame some group (Blacks? Gays? Iraquis?) for the trouble and deal
>with a huge recession, debt-deflation, depression, that way.
Yet another abstract from the ERN working paper factory begs to differ:
> "Economic Expansions and Fiscal Contractions: International
> Evidence and the 1982 Danish Stabilization"
>
> BY: U. MICHAEL BERGMAN
> Lund University
> MICHAEL M. HUTCHISON
> University of California at Santa Cruz
>
> Paper ID: UCSC Dept. of Economics WP 386
> Date: October 1997
>
> Contact: Michael M. Hutchison
> E-Mail: MAILTO:hutch at cats.ucsc.edu
> Postal: University of California at Santa Cruz,
> Department of Economics, Social Sciences I,
> Santa Cruz, California 95064 USA
> Phone: (510) 459-2600
> Fax: (510) 459-5900
> Co-Auth: MAILTO:Michael.Bergman at nek.lu.se
>
> HARD COPY PAPER REQUESTS: Send a check for $6 payable to "UC
> Regents" to Ms. Marilyn Chapin, Department of Economics, 217
> Social Sciences I, University of California, Santa Cruz, CA
> 95064.
>
>
> We develop an alternative test of the "German view" that
> fiscal contractions may lead to immediate consumption booms
> derived from a form of an open-economy permanent income model
> where we add uncertainty over whether shocks are permanent or
> transitory. Using a time-series methodology, we distinguish
> between three shifts to "permanent" income--those arising
> from permanent shifts in government expenditure, terms-of-
> trade and "other" factors including cost and productivity
> shocks. We are also able to identify a composite transitory
> disturbance on consumption, which incorporates short-run
> aggregate demand considerations and business cycle effects.
> In our empirical study we find, in accordance with the
> "German view," that an anticipated permanent reduction of
> government expenditure is associated with a strong short-run
> (and permanent) increase in private consumption. However, the
> Danish experience following the fiscal contraction in 1982
> suggests that this was not a dominant factor behind the
> consumption boom at the time. Our evidence shows instead that
> other factors increasing permanent income, including a
> substantial term-of-trade improvement, were much more
> important.
Despite several tries, I never really got a satisfactory answer from the Post Keynesians to whom Mat's comments were addressed on how the U.S. has accomplished a 7-year expansion at the same time it was balancing its budget. The best candidate was Paul Davidson's nomination of exports. But the recent economic history of the U.S. - a consumption boom in accordance with the "German view" - suggests that maybe the orthodox have a better understanding than the Keynesians. Since the Keynesians couldn't explain the stagflation of the 1970s and now they seem unable to explain the U.S. in the 1990s, what is left of KeynesianisM
Doug