All Terrain Thinking

A Compendium of things I think are Important

Economics: It's not just whats' in your wallet

1930s: The Keynesian view

The Setting

"And then the dispossessed were drawn west - from Kansas, Oklahoma, Texas, New Mexico: from Nevada and Arkansas families, tribes, dusted out, tractored out. Carloads, caravans, homeless and hungry; twenty thousand and fifty thousand and two hundred thousand. They streamed over the mountains, hungry and restless... The kids are hungry. We got no place to live. Like ants scurrying for work, for food, and most of all for land... and the dispossessed, the migrants, flowed into California, two hundred and fifty thousand, and three hundred thousand. Behind them ... [other] tenants were being forced off [their lands]. And new waves were on the way, new waves of the dispossessed and the homeless, hardened, intent, and dangerous." Steinbeck The Grapes of Wrath

"The place is …a collection of shanty hamlets. …from 150 to 200 men live in the shanties. The place is called by its inhabitants – Hooverville. … the inhabitants were not, as one might expect, outcasts or ‘untouchables,’ or even hoboes. …They were men without jobs. This pitiable village would be of little significance if it existed only in Youngstown, but nearly every town in the United states had its shanty town for the unemployed, and the same instinct has named them all ‘Hooverville.’"Charles Walker, journalist describing Youngstown, OH 1932

"We must act, and act quickly... If we are to go forward we must move as a trained and loyal army willing to sacrifice for the good of a common discipline, because, without such discipline, no progress is made, no leadership becomes effective... I am prepared under my constitutional duty to recommend the measures that a stricken nation in the midst of a stricken world may require.... I shall... wage war against the emergency as great as the power that should be given to me if we were in fact invaded by a foreign foe." Roosevelt - inaugural speech

"government, like any family, can for a year spend a little more than it earns. But you and I know that a continuance of that habit means the poorhouse." FDR July 30, 1932

"We can never insure one hundred percent of the population against one hundred percent of the hazards … of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty ridden old-age." FDR presidential statement on signing into law the Social Security Act Aug 14, 1935

"We [the Republican opposition] propose instead leadership and authority in government within the moral and economic framework of the economic system... We propose to demobilize and decentralize all this spending upon which vast personal power is being built... The New Dealers say that all this that we propose is a worn-out system; that this machine age requires new measures for which we must sacrifice some part of the freedom of men. Men have lost their way with a confused idea that governments should run machines"Hoover election campaign in 1936 in support of Alf Landon

"Now 'in the long run' this is probably true.... But this **long run** is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again." _{John Maynard Keynes,  The General Theory of Employment Interest and Money.}

"I must not encumber this letter with technical suggestions for reviving the capital market.  This is important.  But not so important as the revival of sources of demand." _{Keynes letter to FDR in 1938}

"...the Spend-Your-Way-Out theory is only superficially plausible.  Its fallacy lies in its failure to recognize two important facts. ... The second is that savings do not represent sterile, locked-up funds, but funds which go into immediate circulation through some medium of investment." _{Lewis Douglas Atlantic Monthly 1935}

"..can further deficits, which may prove disastrous, now be avoided? The experience of other nations indicates that it will require more fortitude and determination than politicians usually have.  There are few instances in which government activities, once started, are relinquished.  The whole tendency of government is to grow bigger and cost more.  _{Lewis Douglas Atlantic Monthly 1935}

"When the panic of 1929 suddenly wiped out the whole value of many stocks and sharply reduced the values of others, a great number of people who had though themselves rich, or at least well-off, found themselves with much less than they had thought they had, or with nothing at all. By [the] millions they quit buying anything except what they had to save to stay alive. This drop in spending threw the stores into trouble, and they quit ordering [new products] and discharged clerks. When orders stopped the factories shut down, and factory workers had no jobs" Historian Gerald Johnson

"Japan's experience shows not only that advanced modern economies can get into a liquidity trap, but that the easy assumption that fiscal policy can get an economy out of that trap is far too optimistic" _{Paul Krugman. The return of depression}

"In short, the reason Depression economics has now reemerged as a real concern is not that governments did not do the right thing, but that they did.  Truly, no good deed goes unpunished." _{Paul Krugman. The return of depression}

Some of you... may have decided that, this year, you're going to celebrate it the old-fashioned way, with your family sitting around stringing cranberries and exchanging humble, handmade gifts, like on "The Waltons".  Well, you can forget it. If everybody pulled that king of subversive stunt, the economy would collapse overnight. The government would have to intervene: it would form a cabinet-level Department of Holiday Gift-Giving, which would spend billions and billions of tax dollars to buy Barbie dolls and electronic games, which it would drop on the populace from Air Force jets, killing and maiming thousands. So, for the good of the nation, you should go along with the Holiday Program. This means you should get a la rge sum of money and go to a mall. -- _{Dave Barry, "Christmas Shopping: A Survivor's Guide"}

"Construction teams still work around the clock in China's largest city...In a telling shift, however, construction workers are putting up fewer of the office and apartment buildings that had sprouted like weeds in the boom years...Instead they are working on municipal projects...part of China's enormous spending program aimed at preventing the economy from weakening too seriously." -- _{NYT April 3, 1999 pB3}

Questions of the day

• 1. What is Roosevelt referring to in his inaugural speech when he says:  "I shall... wage war against the emergency as great as the power that should be given to me if we were in fact invaded by a foreign foe."
• 2. What is a Hooverville and what is the relationship between it and Keynes' statement: "In the long run we are all dead?"
• 3.  What is the relationship between the concepts of the multiplier and crowding out?
• 4. Most states are actively involved in attracting firms to create jobs through the multiplier effect.  In the late 1990s Rhode Island was successful in convincing Fidelity, a large, successful financial company, to locate one of their facilities in the state.  How would the multiplier differ if the firm located its plant in Texas.  Would the multiplier be bigger in Texas or Rhode island? 
• 5. What would you do if you were an advisor to the President and the economy took a nose-dive with unemployment running at 25 percent of the labor force, investment spending down over fifty percent, and people moving away from the cities to try to make a go of it by moving back to the farms. Would you attempt to balance the government budget?

The outline

• The problem

• The analysis

  • Labor market

  • Output market I (S, I)

  • Output market II (C)

• Conclusions / policy implications

  • AS - AD model

  • Fiscal policy

An Introduction to the Keynesian Model

• labor market

Diagram 1
Keynesian Labor Market

• output market: part1

Diagram 2
Saving and Investment Balance

• output market: part2

Conclusions - implications

• Keynesian AS-AD model

Diagram 3
The Keynesian AS - AD Model

• The Policies

Diagram 4
Fiscal Policy in the Keynesian Model

­ G Þ ­ AD Þ ­ Y Þ­ C Þ ­ AD Þ ­ Y

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