[OPE-L:6116] Re: possible ways out of the 'crisis'?

From: Gerald_A_Levy (Gerald_A_Levy@email.msn.com)
Date: Wed Oct 31 2001 - 09:14:12 EST

I) Re Patrick's [6114]:

a) Thanks for correcting me on my (mistaken) comment that every
taxpayer was sent a tax rebate check.

b) Your claim that the real motivation for the tax cut was the 'libertarian
desire to reduce the size of government', rather than primarily to
stimulate investment, profitability and the growth of aggregate supply
(i.e. the supply-side argument), is difficult to determine. One thing that
you might want to consider more is how ideology comes to be embraced
and _believed in_ by advocates of policy rather they merely being a
rationalization for a 'desire to redistribute income to the wealthy'.

c) On whether cuts in interest rates can help the working class. Some
workers may re-finance their homes. However, not many workers
under the current [recessionary] conditions are going to purchase
[new or used] homes. Indeed, I think that this will also be the case with
all major consumer durables.  Perhaps some workers will take out bank
loans to pay-off credit card debt (something to consider so long as there
is a major difference between interest rates offered to consumers and
rates charged by credit card companies as 'penalties' and 'finance
charges').  Yet, what you have not noted is how interest rate
reductions affect working-class *savings* (especially important for the
elderly): i.e. it lowers their savings and total income (yet, this may have
been one of the reasons for the interest-rate decreases by the Fed since it
_forces_ working-class households to take their money out of 'safe'
savings accounts and use the money to buy stocks and bonds).

II) Re Allin's [6115]:
> I would credit the Fed with being smarter than that.  Surely the rate
> cuts are designed to increase aggregate _demand_.  Of course, if the
> general macroeconomic conditions are depressed enough the cuts may not
> be very effective (Keynes and "pushing on a piece of string".)

I think you are giving the Fed _too much_ credit.   The Fed wanted to
increase investment -- particularly *stock market*  investment.  Yet,
the stock market consistently didn't react in the manner anticipated by the
Fed -- indeed, each time there was a cut in short-term rates Wall Street
expected it in advance and didn't react favorably to the news.  Yet,
they continued the same policy even though it was evident that it was
not working. So, they (unlike the Fed in the early 1980's when they
reversed course away from monetarist monetary policies intended to
lower inflation) don't even have the advantage of being pragmatic and
haven't yet admitted that lowering interest rates *under current
circumstances* is futile.

As for whether this policy was intended to increase AS and/or AD,
I believe that the concentration on the stock markets showed that
they were focused on the former. Certainly, they didn't have a coherent
plan for how this would increase consumption spending or
disposable income (_unless_ it was through the assumption of
Say's Law: i.e. first investment is increased which increases corporate
profitability which -- it is assumed -- will lead to increases in aggregate
supply which will -- it is assumed -- lead to increases in employment,
income, consumption spending and AD).  To the extent that the Fed's
policy could be said to affect demand it had more to do with the
*composition* of demand than the level of AD.

You say 'if the general macroeconomic conditions are depressed
enough' ... well, surely they _were_ (and are) depressed enough
otherwise the Fed Chairman wouldn't have supported Bush's
tax cut plan.  As for Keynes, it is quite evident that Fed policy has
not been guided by Keynesianism for many years. Perhaps we
should call the failure of Fed policy  "The Curse of Lord Keynes"?

In solidarity, Jerry

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