Thursday, November 18, 2010

Workers Are Also Consumers

That may be a summary of the Keynesian approach to macroeconomics. If you haven't noticed, the Keynesians have little power in this country.

Robert Reich discusses many of the issues in a Bloomberg article from last September. This is an important observation:

Our Great Recession boiled up, in Reich's view, from 30 years of growing income inequality that concentrated the nation's winnings in the hands of the wealthy few. By 2007, the richest 1 percent of Americans received more than 23 percent of U.S. income (up from some 9 percent in the 1970s). The last time U.S. wealth was so condensed was in 1928.

Reich's objection has less to do with morality than with practicality. When income clumps at the top, demand for goods and services shrinks, he says.

Take the almost $100 million in compensation that Kenneth D. Lewis was allocated as chief executive officer of Bank of America Corp. as it skidded toward disaster, according to Forbes' annual ranking of best-paid CEOs. To spend all that in a year, Lewis would have had to purchase $273,972.60 worth of goods and services each day, weekends included, Reich says.

"The sheer magnitude of the task of spending obscene amounts of money can be surprisingly challenging," Reich says.

If you spread the cash around, by contrast, it gets spent.
The second voice in that article, James Bressley, attacks Reich's arguments but doesn't refute them. For example:

Reich fails to grasp why a generation that came of age during the Great Inflation and the Vietnam War became more grateful to Volcker than to politicians. Nor does he articulate a vision for how America can create more high-value jobs. Consumer spending alone does not an economy make.
No, consumer spending alone does not an economy make. But neither does the savings and investments of the rich, and that is what the Republicans focus on. If nobody buys the products a firm makes, why invest in that firm? You need both consumption and investment, just like you need two to tango. And right now it's the consumption side which falters.