A couple of months ago I posted that the problem with today’s slumping economy “ain’t inadequate aggregate demand.” My reason?
Inflation-adjusted personal consumption expenditures in the U.S. today are higher than they were in the third quarter of 2007 (the quarter before the recession began).
In a comment on this earlier post, Daniel Kuehn offered that I misunderstand Keynes – that Keynes and serious Keynesian economists do not, in fact, fret about underconsumption but, rather, about weak investment.
I have no time to do an exegesis of Keynes and the Keynesians in order to distinguish the nuances of serious Keynesianism from the vulgar Keynesianism that has been around for at least as long as mercantilism; that has never died out; that thrives today; and that, I’m confident, will continue into the distant future to be the bedrock economic ‘theory’ of the man-in-the-street who, because he spends money or runs a business or grasps simple accounting identities, is sure that he understands economics. But I do insist that even serious Keynesians cannot so easily discount the fact that personal-consumption expenditures have recovered as being evidence of deep flaws in serious Keynesian theory.
Exhibit A: Alan Blinder’s remarks in this NPR report today on Keynes, especially these:
Princeton economist Alan Blinder says Keynes put his finger on a key economic problem – namely, that insufficient demand leads to growing unemployment.
“It’s very simple, that if there aren’t enough buyers, the sellers won’t produce,” Blinder says. “And if they don’t produce, they don’t hire workers. And if they don’t hire workers, the workers don’t have income – and if the workers don’t have income, they can’t buy stuff.”
Now I get that someone might say that what Blinder means here by “buyers” are people buying investment goods, and that these “buyers” – spooked by animal spirits – care not that personal consumption expenditures are high: these spooked “buyers” remain mired in the belief that demand for whatever outputs their investments are designed to produce will be too low tomorrow to justify making these investments today.
A more-straightforward explanation of Blinder’s remark, however, is that he’s referring to consumption spending; that, when trying to justify Keynesian theory, appeal is inevitably made to the popular, man-in-the-street belief that high consumer spending is the key to a healthy, booming economy.
In the countless convolutions Lord Keynes had to commit to make his “new economics” appear to professional economists to be something genuinely new, rather than simply a restatement of the simple-minded underconsumptionist notions that preceded The General Theory, he did try to elevate investment demand into an unusually prominent initiating factor. But at the end of the day, neither he nor his disciples – and certainly not the politicians, business people, and ‘men-in-the-street’ who find wisdom in Keynesianism – avoid appeals to the importance of consumer demand as the alleged ultimate ‘driver’ of the economy.