apologies for the longish title.
apologies for the longish title.
When Lee Kuan Yew( LKY) is confronted with theory which did not work in practice, he chose the latter. LKY said- practice decided for him, in the implementation of policies. It was not the theory of capitalism, nor Milton Friedman that decided his policies. If there’s a golden thread in LKY’s approach, it is his constant striving to seek results, not in proving a theory right.
The other world leader that eschews theory and prefer practice was Deng Hsiao Peng. He is famous for the words- don’t care whether the cat is white or black, as long as it catches mice.
I know many writers have written on the blog saying, now is the age of Keynesianism. Alternatively its like saying, I told you, monetarism was wrong. We wouldn’t want to go into debates about the underlying rate of this and that. Or in the short run, the full effects of monetarism can only been known in the long run. Well, in the long run, we are all dead.
When we ask the government to spend, it does not matter whether to call that approach Keynesian approach. As long as it can get the economy going on. It does not mean that if the Keynesian approach doest work, we abandon it and adopt another. It is more important to constantly seek results.
Suppose we spend like mad, still the economy does not improve. That is perhaps due more to structural impediments. Labour and their skills don’t match. That’s structural unemployment. De Minimis has written an excellent introductory piece on that. Because of structural impediments, despite spending on them, labour productivity is not there. Our economy will still have much underutilized capacity as we have now, and are likely to have more in 2009 and 2010 . We will likely have over 8 percent of our workforce unemployed, 13 percent underemployed, millions of houses empty, factories idle, and office space unused). Government spending will bear fruits if the absorption capacity is there . whether government spending increases and enhances skills which make people have better income to apply .
Nor are supply-siders wrong in calling for say, 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. It depends where the money is released is applied to.
Whether Keynes is irrelevant now or whether supply side economics is voodoo economics, the debates on them are better suited in the various economic journals. For me, which one works on the economy?
If we study the economic growth of certain countries in the world, we will observe some interesting points. When the
Tax collections (percent GDP, 1991)
Country % GDP
53.2% Sweden 48.3 Denmark 47.1 Norway 47.0 Netherlands 39.2 Germany 37.7 Finland 37.3 Canada
29.8 United States
The countries with higher taxes were growing faster than the
Individual worker productivity, comparison of other nations to
= 100 percent) U.S.
U.S.individual worker productivity ( = 100%) U.S.
Country 1950s 1960s 1970s 1980s 1990
United States 100% 100 100 100 100
77.1 80.1 84.2 92.8 95.5 Canada 30.8 43.9 66.4 80.9 85.5 Italy 36.8 46.0 61.7 80.1 85.3 France 32.4 49.1 61.8 77.4 81.1 Germany 53.9 54.3 58.0 65.9 71.9 United Kingdom
Japan 15.2 23.2 45.7 62.6 70.7
Holding worker productivity in the
What all this shows is that growth is not absolutely correlated with tax cuts , and both liberals and conservatives have problems in trying to make a case. Far more serious factors affect growth, although, in truth, economists do know exactly what they are. Nobel laureate Robert Lucas, one of the world's most famous conservative economists, has spent over a decade looking for the secret to economic growth, and has not found it. Nobel-bound Paul Krugman, one of the world's most famous liberal economists, admits that the mystery of growth is "deep and poorly understood."
So what do we do? We spend to raise the aggregate demand yes. But we need to spend money more wisely. More on ways to enhance workers skills and raise productivity.