Keynes Is On the Way

TW: Paul Krugman and Robert Reich are old veteran economists who have been around for quite awhile. But it is almost as if they have come out of hibernation. Now that Keynes is the new Friedman (i.e. economic flavor of the day), the Friedman acolytes are nursing their wounds while the Keynesian adherents are forefront. At some point things will change again but for now they are to be heard. Because until and unless this demand side weakness is corrected this economy is going nowhere.

What happens after that (i.e. inflation, taxation, budget deficits) will generate a whole separate round of controversies but those are issues many months if not a few years into the future.

From Robert Reich:
"The economy has just about come to a standstill – not so much because credit markets are clogged as because there’s not enough demand in the economy to keep it going. Consumer spending has fallen off a cliff. Investment is drying up. And exports are dropping because the recession has now spread around the world. So are we about to return to Keynesianism? Hopefully. Government is the spender of last resort...

Conservative supply-siders, meanwhile, will call for income-tax cuts rather than government spending, claiming that people with more money in their pockets will get the economy moving again more readily than can government. They're wrong, too. Income-tax cuts go mainly to upper-income people, and they tend to save rather than spend.Even if a rebate could be fashioned for the middle class, it wouldn't do much good because, as we saw from the last set of rebate checks, people tend to use extra cash to pay off debts rather than buy goods and services...

So the government has to spend big time. The real challenge will be for government to spend it wisely -- avoiding special-interest pleadings and pork projects such as bridges to nowhere. We’ll need a true capital budget that lays out the nation’s priorities rather than the priorities of powerful Washington lobbies. How exactly to achieve this? That's the debate we should be having between now and January 20 or 21st."
http://robertreich.blogspot.com/2008/11/rebirth-of-keynes-and-debate-to-come.html