First off, these Keynesian theories have long been discarded in the halls of Economic theory. Even back in the 80’s we were taught Keynesian theories as a lesson of what does NOT work.
Because we are considering the moment, and immediate future, it does justice to use a short run analysis where aggregate demand determines output (GDP). Due to the fact that prices in the short run are sticky, we are witnessing a discrepancy in what the market wants (falling demand leading to falling supply), and what reality dictates (people do not want their wages, assets, etc... to fall to equilibrium).
This is patently false and only looking at things in the short run is one of the fallacies of Keynesian theory and Government intervention which causes such bubbles to occur in markets in the first place.
No amount of BORROWING and SPENDING by Governments who are already technically bankrupt can force consumers back into the market.
The discrepancy we are currently witnessing is that in the private markets there is a shedding of the workforce in order to remain profitable with the corresponding effect of consumers fearing for their wellbeing not spending what little they have left.
When you combine this with the awareness that at some point in time the Government will have to RAISE taxes dramatically in order to pay for all the deficit spending, and to pay for the increased DEBT, confidence continues to go down.
The other effect that is occurring in states like California is that these State Governments are also witnessing a dramatic decline in tax revenue and in order to balance their bloated programs are raising fees and taxes giving the consumers even LESS to spend.
The farce that is being offered up by Liberal Obama Economists is this notion that recessions can be “managed” by intelligent Government interventionism; this is an oxymoron as no such entity exists.
Therefore, the BEST thing Government could have done when it had a chance was to reverse the poorly thought out legislation that helped create the financial mortgage bubble that collapsed, balance its spending and budget and cut as much as possible while allowing businesses and individuals to keep more of their hard earned wealth.
So we have a couple options. The first is that we allow prices to fall and the market to self correct. Sounds good, but what does that encompass exactly? High unemployment (not 10%, more like 20%-30%) where firms downsize, capital investment diminishes (high savings and interest rates), assets devalue (to attract buyers); which will cause the dollar to appreciate leading to greater purchasing power (it cost less dollars to purchase the same goods).
I am amused by these farcical exaggerations also coming from Liberal Obama economists that if they do nothing, unemployment MIGHT reach 20 – 30%. Are these the same morons who claimed that by passing an almost trillion dollar pork laden bill we would keep unemployment from exceeding 8%.
The FACT is, and it is well known to anyone not wallowing in denial, that by allowing the markets to do what they need to do and correct, and getting their own political house and budget in order, the pain we would feel would be dramatically shortened.
The ONLY thing that can happen now is that the pain will be stretched over a far greater period of time resulting in even higher double digit unemployment rates.
All this will result in lower tax revenue which ends in a self destructing cycle where politicians who are economically challenged then attempt to squeeze more revenue from the taxpayers.
If you do not believe me, just look at the pathetic state Michigan is in and their programs and history. Instead of encouraging investment and job growth, their policies chased it away with the end result of double digit unemployment, declining tax revenues and a cycle of poverty that will not end until the citizens of that state get smart and vote the Democrat morons ruining their state out of office.
California is following the model of Michigan with the identical disastrous results.
To put it simply, everyone will suffer.
Everyone will suffer far more from this Keynesian disaster than they would if Government did the right thing.
The alternative? The government runs deficits and begins to apply policies that will positively shift demand (stimulus, specifically government spending not tax rebates).
Government policies will do NOTHING to shift the demand curve; what they are doing is moving the curve even further out into the future.
The FACT is that attempts to “manage” recessions lead to greater recessionary pressures that extend the recession, not shorten them. At some point, the American people will have to pay down the deficit and the national debt. The current cost to do that; $13.5 trillion dollars and growing by millions every minute.
If you want to see an extreme example of this type of Government intervention, take a look at Zimbabwe. That is where we are headed.
In accordance, central banks go against market sentiment and begin flooding the financial system with liquidity thereby lowering interest rates and preventing a race to the bottom in asset prices (money is not scarce now). Inflation (higher prices) is sought as a way to cure falling asset prices (deflation) because costs in the short term are "fixed". As the psychology of markets leans towards optimism, prices will begin to rise (a signal of naturally improving demand) and these higher prices will attract producers to hire more workers which is necessary to increase production, in accordance with increasing capital spending (business investment) which is interest rate sensitive.
This is amusing in that there is currently little or zero demand for liquidity as no one whishes to risk capital building stores or businesses where there IS NO DEMAND for products. Interest rates have never been lower and yet the money is not readily available and there is little or no demand for such liquidity in a market where there are fewer consumers.
Once we see consecutive quarters of positive GDP growth, higher employment, greater lending, more monetary velocity; central banks will begin the necessary steps in draining excess liquidity, thereby raising rates (carefully). In accordance, the federal government (with careful timing and consideration) begins raising taxes on in a temporary fashion (to ensure the Ricardian equivalence holds).
As debated here, the future suggests that there will be little to NO GDP growth for the next few years; especially if the Government keeps borrowing, taxing and printing money to spend it on partisan programs intended to make the citizens of the State dependent wards.
In order to declare a recession over, you have to have job creating, currently non-existent, you have to have consumer demand, currently non-existent, and you have to have at least three quarters of positive GDP growth.
Now I know this threads premise is that the recession is over; but anyone with a brain and their eyes open know what a farcical effort that is.
The only thing more laughable about Obama supporters attempts to argue that what has happened so far is good, is the irony of how they claimed it was so bad the last 8 years.
All in the short run. We are now beginning to see real signs of improvement. There might be some more bumps in the road, but that is to be expected when "animal spirits" are released.
One can only make such a claim in a vacuum of any reality or the facts; or, through the willful suspension of disbelief.
However in the long run, real growth is primarily a function of increased productivity via technological progress. In the long run, it is aggregate supply that determines real output (GDP).
This is patently wrong; it is DEMAND that determines real output NOT supply. I am not sure which university you attended that taught such upside down economics; where did you attend college again?
SUPPLY has never driven an economy; it is always demand and consumers spending their hard earned wealth will determine what products and services will be produced. Supply can only attempt to keep up with demand and balance their inventories with that demand.
Carry on. Here’s a great economist you may wish to read so that you can become better informed:
Walter Williams Home Page
A few great articles written by this BLACK Conservative economics professor who is one of the most brilliant minds of our day:
Hillsdale College - Imprimis Issue
The Geography of Recession | STRATFOR
