John Maynard Keynes, Milton Friedman, and that Check from Uncle Sam

I keep reading references to a “tax rebate.”

That check you’re expecting is not a "tax rebate." It's cash from the government (congress and the administration) to make you feel good. They hope you’ll conclude that they are doing something about “the economy.”

The trouble is that this distribution of nearly $150 billion won't stimulate a damn thing if the government then cuts spending by the same amount, as they – particularly the congress – claim they will. They must be counting on the voters to be economically illiterate.

It’s simply Keynesian. (1) Here’s why. A net surplus disinvests in (takes funds out of ) the economy, slowing economic growth. It also deflates the currency, given neutral monetary policy. A deficit invests in the economy, (puts funds into) stimulating a higher rate of growth. Given neutral monetary policy, it inflates the currency. So, if the government mails out $150 billion, then “pays for it” by raising taxes or cutting spending elsewhere (it makes little difference which) the net effect is zero. $150 billion in, $150 billion out. In fact, if it takes the money from productive uses (repair of transportation infrastructure, for instance) in favor of Joe Schmoe buyng a new (Sony) television set at Walmart... Well, I suspect that nothing could be worse in the long run.

Monetary policy - owing much to Milton Friedman (2) - is what the Federal Reserve does, and its current policy is stimulating – to lower interest rates, and pump more liquidity into the domestic economy. To the extent that the lowered interest rates are below those available in other currencies, that weakens the dollar. A weaker dollar increases our price of crude oil (one example) and reduces its price for those using other currencies to buy energy (the Euro, and Asian currencies).

Most of the recent run-up in the price of crude in the US is not "real" but rather simply follows the drop in the value of the dollar.

Right now that formula is very simple. Interest rates down = dollar down = oil (and other fungible energy sources) up.

The trouble is, both party's candidates are busily promising more of exactly the same or worse. , What would be worse? Two simple policies, which together are exactly what Herbert Hoover and the Republican congress gave us in 1930.

Hoover’s big economic fix for the recession of 1929 (form which the country was already recovering in early 1930)? A budget in surplus. Of course that – as we have seen – pulled money out of the economy at a time when stimulus was required.

Then along came the congress, which in June passed the Smoot-Hawley Tariff Act. This greatest blunder in modern economic history prevented a recovery from the 1929 recession when many countries retaliated with their own increased tariffs on U.S. goods, American exports and imports plunged by more than half, and massive layoffs resulted.

Consider the most popular economic themes of the current presidential campaign: one, “fiscal responsibility” (a balanced budget), and two, protection from “unfair trade practices” (tariffs against imported manufactured goods).

Those who don't learn from history will repeat it. Which we're about to do.

(1) John Maynard Keynes (1883 – 1946) British economist who advocated government fiscal and monetary measures to mitigate the effects of economic cycles. Keynes is generally recognized as one of the fathers of modern macroeconomic thought.

(2) Milton Friedman (1912 –2006) American economist who made major contributions to macroeconomics, and in particular, monetary policy. In 1976, he was awarded the Nobel Prize in Economics. "Friedman's monetary framework has been so influential that in its broad outlines at least, it has nearly become identical with modern monetary theory," said Federal Reserve Chairman Ben S. Bernanke recently.

Dad, I did it!

I heard from daughter Courtney last night. She’s in Okinawa with her husband on spring break from her Master’s work at the University of North Carolina. (Suddenly she’s a basketball fan, but that’s another story.)

Anyway, she’s in her last term, graduation in May, then on to West Point to teach history to the cadets. So of course she’s finishing up her thesis.

The note last night read:

I did it! Dad, I did it!

There followed comments from the professor advising her in the completion of that all important thesis, who wrote in part:

"It's a terrific thesis--your writing is just excellent! It flows smoothly, expressively, and persuasively. Your research seems solid and persuasive. It's a model piece of work.
If you do this, (his suggested revisions) and at some future point condense the text to about 30 pages, you'll certainly have an article publishable in a first-rate journal. And that's what these MA theses are supposed to be. So, success!!!!
So, in sum, with some fixing and strengthening of the introduction and conclusion, you're there!! I'm sure my colleagues will have some useful suggestions, since each one of us reads things differently. But I'm delighted with this, and feel it's a skillful, thoughtful, important piece of work."

Here’s the opening of the draft of this 57 page work:

The Enemy of My Enemy is My Friend: Okinawan Identity and Military Government Policy in Occupied Okinawa, April 1945

On May 31, 1945, two American soldiers sat cross-legged on the floor of a small hut in the gutted village of Nodake on the island of Okinawa. Their hostess, a middle-aged Okinawan woman, stooped down over them as she poured hot tea into small round clay cups. Many families shared the hut with the woman and some of them crowded into the main room to join in the tea ceremony with the Americans. The bombings, begun in October, 1944, had destroyed numerous homes in the village. Under the direction of the United States Army, several families now lived together in the homes that survived.
Military Government Detachment B-5 had operated Camp Nodake for two months. Outside its perimeter, the Battle of Okinawa (Operation ICEBERG) that began with the invasion of the island on March 26, 1945 still raged as the Japanese prepared to fall back to their second line of defense and the Americans seized Shuri Castle, the headquarters of the Japanese 32nd Imperial Army.