The stock market crash and its effects on elite consumption and, through the multiplier, potentially on overall consumption. We don't live in a Joan Robinson inequality-creates-underconsumption world: the rich have been spending their stock market gains at an impressive rate in the past few years.
That plus the fact that the Federal Reserve misjudged how much of an effect its year-2000 interest rate increases would have on investment demand...
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>So there seems to be quite a bit of debate among you Keynesians
>about how to characterize and explain deficient demand.
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>Rakesh
I'm not sure what you mean. There are those of us who instinctively want to cure a crisis of deficient demand by raising working-class and middle-class consumption. There are those of us who instinctively want to cure a crisis of deficient demand by lowering the real interest rate and boosting investment. In a well-run society both would have their place, depending on the human needs of the working class and the social benefits from higher investment.
Or, as John Maynard Keynes wrote seventy years ago:
While some part of the investment which was going on in the world at large was doubtless ill judged and unfruitful, there can, I think, be no doubt that the world was enormously enriched by the constructions of the quinquennium from 1925 to 1929; its wealth increased in these five years by as much as in any other ten or twenty years of its history.... Doubtless, as was inevitable in a period of such rapid changes, the rate of growth of some individual commodities [over 1924-1929] could not always be in just the appropriate relation to that of others. But, on the whole, I see little sign of any serious want of balance such as is alleged by some authorities. The rates of growth [of different sectors]seem to me, looking back, to have been in as good a balance as one could have expected them to be. A few more quinquennia of equal activity might, indeed, have brought us near to the economic Eldorado where all our reasonable economic needs would be satisfied....
It seems an extraordinary imbecility that this wonderful outburst of productive energy [over 1924-1929] should be the prelude to impoverishment and depression. Some austere and puritanical souls regard it both as an inevitable and a desirable nemesis on so much overexpansion, as they call it; a nemesis on man's speculative spirit. It would, they feel, be a victory for the mammon of unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy. We need, they say, what they politely call a 'prolonged liquidation' to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again.
I do not take this view. I find the explanation of the current business losses, of the reduction in output, and of the unemployment which necessarily ensues on this not in the high level of investment which was proceeding up to the spring of 1929, but in the subsequent cessation of this investment. I see no hope of a recovery except in a revival of the high level of investment. And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity...