[Adrien]

By Adrien.

Demand and through it production is the basis of a healthy economy, but the failure of capital has had consequences on production, and in turn demand, initiating a vicious cycle that put our societies in a slump. Beyond stagnation, it is cause and consequence of the drastic reduction of the workforce, though the lowest common denominator of economic activity, its only concrete form against the speculation that brought all of this. To prevent a catastrophic failure of our societies and massive unemployment, decisions must be made.

In this explanation we’ll use ‘stimulus plan’ as meaning either a stimulus check for people within a certain category of income, lower or middle classes that is, or an increase of wages, initiated by civil service, and spread to the rest of the economy through laws on the value of minimal wage, or financial packages directed at companies and specifically aimed at the increase of workers’ remuneration.

Direct stimulation through checks or global wage increases :

This is to me the one sensible solution. It will give the majority of people an increase in buying power, allowing them to restart demand and production, even more so on a very large, maybe worldwide scale. It will also curb the mortgage crisis, still going and lingering today, by giving households the extra step with which not to default on their payments, an extra step that the loss of jobs or hours makes unreachable otherwise. It will also be a decisive step against deflation, a terrible risk facing our economies and that can factually only be stopped by a return of demand.

Deflation is looming :

Deflation is when prices keep going down. It might seem like a good thing for a recovering economy, but it is not. In a slow economy, when prices can’t stop decreasing, there is a phenomenon of drop of demand, as people keep waiting for an even better price. Sales drop, and companies, wanting to maintain profits, play along to keep sales coming, while slashing the workforce to save on their costs and keep their margin. But the laid-off employees lose buying power, so they have no choice but to wait for prices to go down, and the cycle restarts, without any end in sight, as seen throughout History. It is a typical short-term suicidary behaviour in a capitalist society.

By stimulating demand, you make people buy right now, not later at an hypothetic better price, which stops the drop of prices and brings back mild and acceptable inflation. Deflation is avoided, and jobs are preserved. And workforce is the most important capital of all, for it is what needs and makes, and once lost cannot be won back all that easily. In addition to stimulus plans, another barrier against deflation is to build strong regulations around the workforce, to curb the capitalist tendency to jettison the employees to save funds, as, unlike dividendes and bonuses, they are necessary to society.

While partisans of loans and gifts to the banks, insurance companies and trading groups see them as the motors of our economies, and try to make us believe that it will trickle down to the rest of the population, we all know it does not happen that way. So far, alla round the world, these institutions have been bailed out, without any condition, in sums far greater than we can imagine. And yet the situation is still spinning out of control on the human scale.

How about, this time, we help the people, the actual workers in our economies ? People who have been taken as hostages of a happy few’s incompetence and greed, which as inherent to the capitalist system, is more than just a little over-enthusiasm?

In the next part of this series, we’ll see what conservatives oppose to stimulus plans, and the shortcomings of their arguments.

[HoniSoit]

I enjoy reading the article, Adrien. Nice to have a Keynesian perspective.

Direct stimulation through...global wage increases

I agree with the measure except I am wondering to what extent do you think this is politically feasible or possible.

[Adrien]

Glad you enjoy it Honi. I guess it'll also be better when the other parts come in, I decided to start with my 'thesis' and then analyze the arguments or solutions people oppose to it because it was logically easier that way, but it may make the first part seem cut in the middle of the reasonning.

I agree with the measure except I am wondering to what extent do you think this is politically feasible or possible.

I wasn't sure of the world global, to be fair. What I meant was global as in a measure concerning every sector of the economy, vertically from primary to tertiary, and horizontally from public as well as private sectors. Now, it does become global as in worldwide easily, the whole point of battling for a coordinated international Keynesian stimulus plan is that since every sector gets some materials, goods, or skills abroad, it'd automatically make sure the whole economic tissue is 'vascularized' and would keep the flow of new funds going smoothly. And it wouldn't even take a treaty or a long procedure, it'd be injected directly where the action is.

That was an aside on the different layers of the word 'global' here.

For the inter-sectorial wage increase, it is indeed tougher in some places than others. In France, the State could, through the Finance minister wearing the cap of a main shareholder and leader of many companies, pass binding decrees or amendments to the annual budget law, to increase the civil servants' wages. It could, given the important mass of civil servants, it creates an impulsion that reaches the private sector: out of mere pressure to keep private jobs competitive, and out of the public opinion's probable pressure too. Especially if the increase provokes visible results.

Also, and again I'm reasonning by France's situation, there is the question of minimal wage. It is fixed here by the government, and is revised annually to match the inflation, and, sometimes, to give a small stimulus actually. So, by giving it a significant increase instead of the microscopic one usually given, you would move, theoretically, the whole 'ladder of wages' in the private sector up a notch. Always good.

And even if the 'trickling up' doesn't really happen, it would act upon a lot of workers, paid bare minimal wage or minimal wage with a little bonus. And since these happen to be the workers that have been really badly hit by the crisis, it'd be a pretty precisely aimed response.

Beyond that.. the State can always try to get unions of both bosses and employees around the table to discuss a wage increase. What I don't recommend is to suppress a professional kind of tax, hoping the surplus created for the company will be turned into a wage increase. It has really never worked; just like what I tried to explain for deflation, they'll turn it into more profit.

[HoniSoit]

Thanks for the detailed reply, Adrien.

I basically agree with you and think there is definitely a role of Keynesian policy. Though I remain a little skeptical regarding the ability of Keynesian stimulus to get us out of the recession. I am not saying it's not possible, but if we are comparing this economic crisis with the Great Depression, it seems we need a far more thorough Keynesian policy than it was under the New Deal which didn't sufficiently help the economy out of recession until the Second World War.

In other words, we need a radical Keynesian policy that may not be tolerated by the established financial and economic interests. We've seen how the financial interests react to slightly unsatisfactory (read: not privileging them enough) state policies. Unless a far more assertive state could at least temporarily act independent of the vested interests, I doubt such sensible policies as you have outlined would be carried out.

[Adrien]

Though I remain a little skeptical regarding the ability of Keynesian stimulus to get us out of the recession. I am not saying it's not possible, but if we are comparing this economic crisis with the Great Depression, it seems we need a far more thorough Keynesian policy than it was under the New Deal which didn't sufficiently help the economy out of recession until the Second World War.

It can appear, by default, and in its most encountered form, quite superficial yes. But the advantage of the Keynesian approach is that it is a method that can easily be made more or less thorough. What I mean is that it is easier to advocate in a worldwide situation for a worldwide plan because governments from all horizons can pick and choose the kind and depth of the measures they want, knowing that the result will always be positive, as I am trying to show with this series of article, the next of which I will probably publish tonight when I get home.

For some it might be considered a weakness of such a plan, to allow governments to do less than what would be best, but at the same time, as the G20 has shown, any kind of stimulus is difficult to push on some. So I see it as a stength, to make governments concede more than they would have otherwise.

As such, the relative superficiality of such a plan that you point out can be compensated by its wide acceptance and implementation.

In other words, we need a radical Keynesian policy that may not be tolerated by the established financial and economic interests. We've seen how the financial interests react to slightly unsatisfactory (read: not privileging them enough) state policies. Unless a far more assertive state could at least temporarily act independent of the vested interests, I doubt such sensible policies as you have outlined would be carried out.

The more radical, the better, that is for sure. The sad state of affairs is that the lightest of Keynesian plans is today quite revolutionnary, and already an outrage for 'social-liberals'. In passing, the Monde diplomatique last week described social liberalism as a "knife without blade", I found it very clever. But yes, the more thoroughly it is applied, the better. Which makes it, also in passing, very important to have a strong and large public sector, a strong minimal wage legislation, and a control on your budget and currency. Once you have the prerogatives, it's easy to make it radical.

And yes too, financial interests are the ennemy to watch, always. I would count on them to block or raise shields at any stimulus plan, if they weren't in a disastrous situation right now. In the best of worlds, right now would be the best of times to advance on that field, as banks and other financial institutions are either extremely weak or actually owned by the State. That would make the government's voice be assertive and unchallenged on that level (of course the WTO and EU would get a heart attack but at this point, I would count on the sentiment of emergency in the public opinion to kind of keep them quiet).

But that's not happening, I know.. In a normal situation, I would expect them, financial interests, to be very hostile yes. If the sheer size and value of the public sector was there their responses would be limited, but now yes they could undermine every formerly public service they have a share in, as well through their position of creditors vis-a-vis the State, as well as by redirecting capital and investments to another country if they start being haunted by the ghost of socialism..

It requires a lot of strength and broad shoulders on the part of the State yes, but I would be confident. Because in times of crisis like now, when immediate and deep action is required, the banks are too week so you can be less strong. And when times are more quiet, you can slowly build up, by agregating public companies, passing laws, consolidating public funds, etc.

So yes, when it comes down to it it's only one step in the bigger picture of what needs to be done. But, since we are all dedicated socialists/leftists, that went without saying.

[Mazhi]

I am not saying it's not possible, but if we are comparing this economic crisis with the Great Depression, it seems we need a far more thorough Keynesian policy than it was under the New Deal which didn't sufficiently help the economy out of recession until the Second World War.

Maybe World War 3 would help.

So my two questions:

Didn't Japan have some major problems with deflation years ago? And, how exactly would you go about giving people these checks you write about, where would the upper income limit be for someone to be granted them?