First off, the term “Supply Side” economics did not exist until Keynes hoodwinked several generations of American economists and politicians that you could spend you way into prosperity. Obviously, it doesn’t work, but academics and pol’s have always been quite content simply to have a scape-goat for their failures.
I want to look at this in a bit more detail, though. The stupidity will shine through–or darken the room, as you prefer–soon enough.
Here is the argument: a recession is called by the systemic glut caused when people save rather than spend their money. Companies have made something–say cars–expecting to sell them, and horror of horrors no one wants to buy them, at least at the price they are charging. How exactly this happens, I don’t think he’s quite clear. Let’s say it is a “loss of confidence”.
If the companies can’t sell the cars, then they can’t maintain their current levels of employment. If they don’t do that, then they law people off, such that the ability of the overall public to consume is reduced, causing the glut to be even worse. Money is needed to eliminate the glut, keep those people employed, and keep the economy moving.
Keynes offers two solutions. First in the long term he wants direct State control of personal and corporate savings, such that it can be allocated in a “rational” way by smart people like him, what he termed a Salariat, modelled on that found in the Soviet Union.
Phrased alternatively, he wants a Command economy, at least when it comes to private capital. He wants to be able to control not just the rate of savings, but the ability of people to move their (own) money in and out of the country. He wants a hermetically sealed system, of precisely the Fascist sort, which is why Mussollini thought so highly of him, in the only almost honest exposition of his real objectives, in his piece “The End of Laissez Faire”.
Secondly, if the private sector lacks the will or ability to spend, then the government has to take up the “slack”. Since by definition the economy is in a slow down, the government will have to use deficit spending to inject cash into the system. Tax revenues will be down, and any surpluses already spent. This money is spent. It really doesn’t matter what it is spent on–with his “multiplier” effect, it will sooner or later eliminate the glut.
What has happened, then? Our government has taken the money of the taxpayers, and in effect paid off the debts of a particular industry–say cars–with borrowed money we will now owe interest payments on.
Reasonable Questions: How is it that we have not made our situation worse? What is to prevent that same industry from again running up a glut?
Ponder what was done: the taxpayers still owe, in reality, all that money to the automotive industry. We didn’t really pay them back. The situation at Point A (pre-loan) remains, on the books, the same. No final solution has been achieved. And not only has the problem not been solved, we now have to pay back MORE than we otherwise would have had to, since we have to pay interest on our national debt. And as anyone with credit card debt knows, you can make the minimum payment literally FOREVER, and never touch the principle. And in point of fact, some part of our current debt dates back to the 1930’s. Our net national debt has never reached zero. The Treasury Bonds, when they reach maturity, are just rolled over. It is precisely equal to paying credit card debt YOUR ENTIRE LIFE. In so doing, you eventually pay back 3-4-5 or more times whatever the initial principle was.
And to the point, if there was a glut initially, it was due to failing to adhere to business fundamentals. Price–as any competent, sincere economist (in short supply, admittedly)–is an informational signalling system which indicates the current demand for whatever supply you intend to make. Within a free market, no long term misallocation of production resources is possible. As sales decline–say everyone owns a car already–then production will decline. As sales increase, production will increase.
Quite obviously, it is sheer lunacy to say that the health of our economy depends entirely on consumer spending. It depends on job creation, which is the result of people perceiving business opportunities, and having the available capital to take advantage of them.
Capitalism is a system for converting innovation into wealth. It is a system for developing new markets, new products, new distribution systems, and improved efficiency. When it works properly EVERYONE saves money, such that in the long run EVERYONE becomes a Capitalist. The lifeblood of economic health and freedom is small business.
What disrupts this process is not savings, but the theft of savings as a result of monetary policy. Keynes–socialist bastard that he was–well understood this. Consider this quote, from 1920:
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.
Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become “profiteers,” who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
Let me be clear: I don’t think Keynes was so stupid that he encouraged governments to intentionally, overtly engage in inflationary spending. He was quite clever and always thought a few moves ahead. This trait–and the culturally congenital stupidity and moral cowardice of most modern economics–is what has enabled his patent nonsense to continue being preached as gospel.
But take the case of the Great Depression. Irrefutable are the following facts: the Federal Reserve consciously pursued inflationary policies in the early 1920’s, and deflationary policies from about 1928 to 1933. Inflation, to be clear, cannot happen unless someone gets something for nothing. As Keynes admits, it “enriches some”.
Also irrefutable is that there was a run on our gold, by parties unknown, which led to a devaluation crisis that in turn led to the closure of some one half of American banks. In essence, our currenty was theoretically backed by some percentage of gold. The amount doesn’t matter. Let us say that we had agreed to only print $100 per ounce of gold. People back then had the choice of taking money and redeeming it for gold. They wouldn’t do it, unless they thought the gold was worth more than the cash. In other words, unless the government had inflated the money supply.
In that case, you could get $200 face value of gold for $100 dollars.
This sort of thing is what causes runs on currency. All currency trading is, is trying to figure out which nations are inflating the most. You keep the lower inflation currencies, and sell the higher inflation currencies. In a highly revealing detail, Keynes–privy to much inside information around the world–made millions off of daily currency speculation. He understood currency manipulation like the back of his hand. He engaged in it daily for most of his adult life.
How does Keynes, then, get private savings into the hands of the government? How does he force inflation which favors a few at the expense of the many, without making his intention (the above quote was from a best selling book he wrote, and quite public) obvious?
Let’s look at a foreign example, then a domestic one. Watch the movie “Life and Debt”. Jamaica, following England freeing her from direct control, was in an economic mess. They needed money for development. The IMF came in with loans, but required all sorts of stipulations, including the prevention of any trade barriers, State support of any industries, and a demand that their currency be devalued.
We always see this infernal demand for currency devaluation. What is happening, is that whoever and spends that money–usually the government–and whoever gets that money–usually a power elite–benefits. Everyone else suffers. The reason that is always offered for the loans is that it “enables exports.”
Reading most of the jackasses posing as serious thinkers and wearing the suits of economists, one would think that no self sufficient economy could ever be possible. Jamaica was always destined, from Day One, to being an economic subordinate and dependent. Yet, they had many indigenous industries–farming, dairy and the like–that were absolutely wrecked, moving them from self production to importation. Now, most everything they consume comes from other countries.
Their money won’t buy hardly anything. Theoretically, when you devalue your currency through inflation, you make your exports cheaper. For example. China seems to have done this. The problem, though, is that life for the ordinary citizen gets much harder, since inflation prevents true entrepreneurialism from taking root. It prevents the emergence of private capital. China as a whole–once you get past the top tier of their Class System–is facing hard working conditions, with increasingly little to show for it. They are being used, in effect by their own government acting as an imperialist power, to make a very few very rich.
This is the flip side of inflation/currency devaluation: it also makes it easier for people holding other currencies to buy up your country. Remember, the IMF forced you to allow this as part of the agreement.
And remember too that loans come due. The loans dont’ work. They peter out. And yet you have to repay them. What do most countries do? Another round of inflation, combined with another deal with the devil.
Let’s look at a so-called “Keynesian Stimulus” here in the US. Money is printed and spent. It is spent, say, on green jobs, whose intrinsic value is a matter of utter indifference. As such, in “stimulus” conditions, normal pricing signals are completely absent. While the money is flowing, you do well. You take that money and invest further in infrastructure and head counts. Then at some point the money runs out. If you’re lucky, you might have a viable business. Much more likely, though, you are grotesquely overvalued, and what you have built will wither on the vine and die. The system eliminated the normal fail-safe mechanism from the equation, resulting in nothing but waste. Money is now owed, but it is now gone, and over time a multiple of what was owed will be paid, since the debt will never to ended.
How is this money paid? In the end, with inflation. With a truly stable currency, there would be NO inflation. On the contrary, unless stolen by the State and a power elite, the purchasing power of our money should–would–be steadily increasing. I make this full case on my other web page, here: http://www.goodnessmovement.com/Page14.html
In the end, Keynes wanted all private capital to disappear, for all wealth to be dependent on the ability of the government to outlast everyone, in that it could create money, and with that power destroy any and all other money and wealth–and power–that could stand against it.
People need to grasp these realities. Moral midgets like Paul Krugman continue to hawk this salt water as the one and only solution for thirst.