[OPE] Chris Harman on the spectre of Keynesianism

From: Jurriaan Bendien (adsl675281@telfort.nl)
Date: Wed May 07 2008 - 08:11:27 EDT

Although he does not explain why, Chris Harman notes in his latest ISJ article that the "global savings glut" is at least partly due to excess liquidity among the corporates - he says:

(...) In other words, "Instead of spending their past profits, [US] businesses are now accumulating them as cash". Such an excess of saving has an effect noted by John Maynard Keynes in the 1930s-and by Karl Marx 60 years earlier."

Harman then argues:

"It creates recessionary pressures. The capitalist economy can only function normally if everything produced is sold. This will only happen if people spend all the income from producing goods-the wages of workers, the profits of the capitalists-on buying those goods. But if the capitalists do not spend all their profits (either on their own consumption or, more importantly, on investment) then a general crisis of overproduction can spread through the system. Firms that cannot sell their goods react by sacking workers and cancelling orders, and this in turn causes further contractions in the market. What begins as an excess of saving over investment ends up as a recession that can turn into a slump."

This then according to Harman gives the rationale for Keynesian intervention:

"Keynes and his followers argued that there was a way to stop this happening. The government could intervene to encourage capitalists to spend their savings-by changing tax and interest rates to make it more profitable for firms to invest, by borrowing to undertake investment of its own, or by giving handouts to consumers to encourage them to spend. On occasion such methods have worked in the short term. Government investment or handouts have provided an immediate market for unsold goods, encouraging firms to increase their output and, as a by-product, increasing tax revenues sufficiently to pay for the extra government spending. But there are inbuilt limits to the long term effectiveness of such methods when faced with a serious recession. Government borrowing must eventually be paid for. Otherwise the value of the currency will decline and inflation will result. If the spending is repaid by taxing profits it reduces the incentive to invest; if it is repaid by taxing consumers, it cuts into their buying power. http://www.isj.org.uk/index.php4?id=421&issue=118
This is roughly the level of understanding the Marxists are at. 

The drawback of this story is, that it is vague - it ignores the quantities involved, and leaves out everything that is specific about contemporary capital finance and the world conjuncture. It also fails to explain why Keynesian pump-priming of the domestic economy in truth does not have much effect anymore. And it ignores the accumulation of capital external to production. So it is not clear why precisely "excess saving over investment" would cause recession (after all, all financial experts agree a "global savings glut" has existed through upturns and downturns at least since the mid-1990s, i.e. for at least 13 years now).

The point about Mr Bush's Economic Stimulus Act 2008 is that ordinary workers are likely to use at least half the rebate money simply to pay off debts (benefiting the financial institutions), and insofar as many of the consumer goods they buy are foreign-made goods, this does not benefit US production either. The additional US goods & services domestically purchased as result of the Act might be only about $50 billion, equal to about 1/13th of the value of the annual increase in US GDP. This is more a symbolic, confidence-raising gesture, than any substantive economic policy.

More importantly than the consumer rebate, the Economic Stimulus Act 2008 provided a massive one-off tax incentive for fixed investment equal to half the cost of new fixed assets, which can be written off either in the first year or with advantageous depreciation rates. My prediction however is that overall real gross fixed capital formation in the US productive sector will not increase proportionally, because of a perceived lack of longer-term financial stability, and that one effect of the "incentive" is rather that finance companies can now raise even bigger property loans than they did before. 

Effectively, this new US tax incentive for fixed investment is an admission that even the "the most liquid capital markets ever seen in the world" fail to deliver sustained growth of the real economy.


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