LARRY SUMMERS OUTLINE OF CLASSICAL KEYNESIAN ECONOMICS 101 TODAY WAS INTERESTING...
BUT PROBABLY WRONG.... CONSIDER:
KEYNES NEVER ANTICIPATED THE TYPE OF ECONOMY THAT THE US HAS TODAY...
THE AMERICAN ECONOMY HAS ESSENTIALLY "FARMED OUT" MOST OF IT'S PRODUCTION TO CHINA AND OTHER LOW WAGE NATIONS...
THIS HAS RESULTED IN "STRUCTURAL" TRADE DEFICITS...THAT KEYNES WOULD NEVER HAVE THOUGHT POSSIBLE...
CLASSICAL KEYNESIANISM ASSUMES A "SEALED ECONOMY"....OR AT LEAST AN ECONOMY WHERE THE TRADE DEFICIT WAS RATIONALLY ACCOUNTED FOR...AND ULTIMATELY IN SOME KIND OF BALANCE.
WHERE PRODUCTION AND CONSUMPTION AND LABOR AND WAGES ARE IN SOME KIND OF "SEALED" EQUILIBRIUM...
TRUE, KEYNES TALKED ABOUT FOREIGN TRADE...BUT BACK THEN, HE ASSUMED THAT THE US WOULD BE A TRADE "SUPER-POWER" WITH MASSIVE EXCESS TRADE SURPLUSES...
AND THAT, GENTLE READER, IS WHY KEYNES "BLESSED" THE DOLLAR AT BRETTON WOODS!
THE PROBLEM IS THAT THE MASSIVE CHINA TRADE DEFICIT FOR MANUFACTURED GOODS BLOWS A HOLE IN THAT EQUILIBRIUM...AND KEYNES COULD NEVER HAVE "ALLOWED" FOR THAT!!
CONSIDER:
WHAT IF THE AMERICAN CONSUMER "STARTS SPENDING AGAIN" FOR WHATEVER REASON...
WHAT WOULD HAPPEN... THE AMERICAN FACTORIES WOULD REOPEN...?! NO!
ALL THOSE FACTORIES ARE IN CHINA NOW... SO THE CHINESE FACTORIES WOULD RAMP UP...AND EMPLOYMENT WOULD INCREASE IN CHINA...NOT NECESSARILY IN THE US...
THE POINT IS THIS...
THE OLD KEYNESIAN MODEL IS GONE! IT IS NO MORE...
THE AMERICAN RELATIONSHIP WITH CHINA AND OTHER LOW WAGE NATIONS...MAKES CLASSICAL KEYNESIAN ECONOMICS MOOT...
IT IS SIMPLY THE WRONG MODEL FOR WHAT IS REALLY HAPPENING TODAY...
SO WILL THIS OBAMA PLAN WORK...? PROBABLY NOT...
IT'S LIKE TRYING TO FILL A BUCKET THAT HAS A HOLE IN IT... MERELY ADDING MORE WATER...TEMPORARILY MAKES THE BUCKET LOOK FULLER...
BUT THEN THERE IS THAT "CHINA HOLE" IN THE BOTTOM...
KEYNES NEVER ACCOUNTED FOR THAT...
AND THAT IS WHAT I CALL "THE SUMMERS FALLACY" IN KEYNESIAN ECONOMICS...
