[OPE-L:7281] Re: Re: NYTimes.com Article: Where's the Boom?

From: Rakesh Bhandari (rakeshb@stanford.edu)
Date: Wed May 29 2002 - 12:59:40 EDT

I take it that in your 7276 you agree with Krugman that there is no 
Keynesian led expansion now underway? Unlike the post-Keynesian Paul 
Davidson, Krugman seems to think that the Reagan deficits themselves 
did little to power an expansion which he attributes mainly to the 
housing boom after interest rate reductions. Well, I do think tax 
breaks and govt deficits will have to do the lion's share of the 
stimulus this time around.

  Krugman however did forget the one factor which Bush has over 
Reagan. The latter had to break labor (roll back unionization, 
contain pensions, and slash the social wage); the former already 
inherits a labor movement on its back. This has allowed for 
considerable rationalization in the downswing--because of ruthless 
layoffs productivity has increased even during this 
recession!--there'll be a  higher rate of exploitation in the 
upswing. Even newly hired skilled workers will be relatively cheap 
once the economy picks up again.

But Fred, here is where I am a bit confused by both your recent 
Monthly Review piece and your post here:

You seem to emphasize the negative underconsumption effects from 
rationalization and intensified exploitation over the positive 
stimulus effects on the rate of profit and therewith capital 

>Rakesh, I pretty much agree with Krugman here.  I especially agree that a
>dangerous new factor for the US economy is its "fall from grace" in the
>eyes of foreign investors, as we have discussed in recent posts.  If
>foreign investors cease to provide the US with $1.2 billion every day, as
>they seem to have in recent months, then the effect could be very nasty
>for the US economy.  My comparison would not be with 1983, but with the
>late 1990s, the heady years of record capital inflows. 
>The main factor which Krugman leaves out, characteristically for
>mainstream economists, is PROFIT.  As we have discussed, the share and the
>rate of profit declined precipitously from 1997 to 2001.  Profit has now
>stopped declining, and has even increased a little, but still has a long
>way to go to recover the 1997 peak.  I think this is the main reason why
>investment spending will remain weak in the months ahead. 
>Furthermore, I think low profits will also have additional negative
>effects on the economy.  In order to increase their profits, businesses
>continue to try to cut costs aggressively, mainly by laying off workers or
>reducing hours,.  Sooner or later (and I think pretty soon), these
>reductions in workers' income will cause consumer spending to decline
>(consumer spending cannot be propped up by debt forever).  And when that
>happens, we will be back in a recession, which is likely to be worse this
>time, because it will be compounded by more business bankruptcies, more
>personal bankruptcies, and a reduction of capital inflows.  If the capital
>inflows turn into outflows, then we will be in really serious trouble.

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