Tuesday, January 20, 2009

Demand for Aggregate Demand, pt II

Like I mentioned before, I have a gut feeling that the political foundations of the American welfare state are the weakest that it's been in my adult lifetime, therefore there is a compensating increase in interest in the nuts and bolts of Keynesian economics. But, one aspect that's gotten relatively little attention, especially with respect to it's political implications, is that the Keynesian theories of fiscal stimulus are very business cycle dependent. For now, everything's kosher because we're in a business cycle trough so aggregate demand is weak so government fiscal policy will supposedly stimulate it. But of course that hasn't always been the case in recent memory and hopefully won't be the case again sometime reasonably soon.

Furthermore, whereas the ability to finance the stimulus used to be an academic triviality, is reasonably likely to be in jeapordy before before we are clearly in a recovery. It is not going to go without notice, either by our current creditors or our prospective ones, that Iceland has already defaulted on its government debt and several other European countries including the UK are on the verge of it. Whatever happens, voters are not likely to forget soon, just as the political impact of the Great Depression took forty years or so to dissipate. Whoever can propose credible cuts in formerly sacred cows of government spending might get a more respectful hearing now than ever before.

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