The drawbacks of the "cut spending" option are predicated on textbook Keynesian analysis. Cut spending, you get an anti-stimulus, and a contraction.
But it's important to recognize the assumptions that go into Keynesian analysis, sticky nominal wages in particular. Sticky nominal wages prevent the necessary cuts in real aggregate wages, leading to unemployment (another way of cutting real aggregate wages). Keynesian analysis typically treats sticky nominal wages as given.
But is it? In the time of Keynes, government employment was a fairly small sector of the economy. This is no longer true - I've heard estimates that the public sector makes up 20-40% of Greece's economy. Further, even in the private sector (particularly in Europe), a lot of wage stickiness is caused by union contracts, minimum wages, and mandated benefits. Wage stickiness is also created by welfare/unemployment/etc - why get a job paying less than your old job if it only pays marginally more than unemployment?
So why not make use of this and impose wage flexibility by fiat? Cut the pay of government workers, force renegotiation of union contracts, reduce benefits and make welfare/unemployment/etc as unpleasant as possible?
I truly don't understand why Keynesians don't push for these policies.
(Note: I'm aware of the problem of nominal debts, these could be mitigated by making it easier to settle debts. I.e., make foreclosure/debt collection faster and easier.)
[edit: just curious, will those who are downmodding explain where my analysis fails?]
There's not much point in basing an analysis of what's wrong with the world's economy on the economic (pseudo-?)principles that got us into this mess.
It would also be good to note that the US is pretty much just as insolvent as Europe. Individual states are going bankrupt, but no one seems to care, at least as long as there's something else to talk about.
The real problem is too much greed & corruption. That sounds simplistic and vague, but that's what it all boils down to.
Good luck getting unions to renegotiate. Sounds like a long winded legal battle & asking for large scale strikes.
Unemployment Insurance is insurance setup to help you transition to a job at similar wage, that is it's purpose. Some tiers in the US are subsided but do have stricter job acceptance & search requirements already in place.
Cut welfare for the disabled, elderly & impoverished? Talk about winning the hearts & minds!
I think you'll also find it hard to get prosperously employed workers to take a pay cut, especially a massive one meant to rebalance the entire economy. If you do start to see it happening you'll probably have imbalances where companies keep prices high to milk profit while worker compensation goes down. You may also see certain sectors impacted more than others, causing an exodus of talent in certain areas. This might just further destabilize the economy.
Also as far debts go, if people don't have the money to pay, they don't have the money to pay. If the banks foreclose on property but people don't eventually buy that property, that's not very helpful. Also banks have already been foreclosing on properties too quickly & got in trouble for it.
I think you'll also find it hard to get prosperously employed workers to take a pay cut, especially a massive one meant to rebalance the entire economy.
The goal is not to impose a pay cut on currently employed workers, the goal is to convince currently unemployed workers to take a job at a lower wage. Since unemployment benefits provide a disincentive for finding work, reducing unemployment would reduce this disincentive.
If you do start to see it happening you'll probably have imbalances where companies keep prices high to milk profit while worker compensation goes down.
This is exactly what Keynesian stimulus is designed to accomplish: a reduction in real wages. I'm glad you agree that if wage flexibility could be engineered, then this would make Keynesian stimulus unnecessary.
If the banks foreclose on property but people don't eventually buy that property, that's not very helpful. Also banks have already been foreclosing on properties too quickly & got in trouble for it.
Homeowners and home-mortgagers seem to be the driving force in sticky house prices, not banks. Banks tend to sell foreclosed properties at, well, foreclosure sale prices.
As for foreclosing too quickly, that's why I would (assuming I believed in Keynesian economics) advocate changing the law to make foreclosure faster and easier.
Since unemployment benefits provide a disincentive for finding work, reducing unemployment would reduce this disincentive.
Sounds like blaming the unemployed for being unemployed. There are many factors regarding people who are unemployed long term. Most often it has nothing to do with the minimum wage, people being lazy or feeling entitled.
>I'm glad you agree that if wage flexibility could be engineered, then this would make Keynesian stimulus unnecessary.
Sounds like it's inviting companies to continue to profit while not hiring or rehiring their workforce a lower wage. That or you get disparity between old workers & new workers. Cost of living I doubt would adjust very quickly. Those who would pay the biggest price are those coming back into the workforce who will be making less, but probably paying the same living expenses.
>Banks tend to sell foreclosed properties at, well, foreclosure sale prices.
You assume they are selling. The housing market is flooded with foreclosed properties going nowhere. If the idea here is to reducing wages for those who are able to find a job.
(Note: I only read the first paper in detail, but the second is quite popular.)
Sounds like it's inviting companies to continue to profit while not hiring or rehiring their workforce a lower wage...making less, but probably paying the same living expenses.
A monetary or fiscal stimulus does the same thing - the only difference is that instead of making 10% less dollars, workers earn the same number of dollars but prices go up 10%.
The housing market is flooded with foreclosed properties going nowhere.
This is because regulations allow banks to mark properties to a model, rather than to market. This is also why banks are not foreclosing on a lot of deadbeats - they don't have to admit to shareholders that they took a loss until after they foreclose.
This is basically just a way for banks to cook the books, but for some reason politicians and regulators don't seem to care. Strange.
I'm guessing that the silent downvoters are reacting to the "wage flexibility by fiat" paragraph which might be construed as a political viewpoint rather than an economic one. The widely-accepted narrative at the moment is that the bankers caused the crisis, and the rest of us are victims, so why should we be subjected to more pain to fix the mess they made?
It would at least be polite for people to say why they don't like your opinion, rather than just bitch-slapping you into silence.
It seems that what you are proposing is extremely difficult to actually pull off. Increasing the money supply accomplishes the same thing but is easier to actually do. Plus inflation encourages spending and investment instead of hoarding money, which tends to happend in recessions. I think Keynesians like the approach better, not that they have never thought of any alternatives.
But it's important to recognize the assumptions that go into Keynesian analysis, sticky nominal wages in particular. Sticky nominal wages prevent the necessary cuts in real aggregate wages, leading to unemployment (another way of cutting real aggregate wages). Keynesian analysis typically treats sticky nominal wages as given.
But is it? In the time of Keynes, government employment was a fairly small sector of the economy. This is no longer true - I've heard estimates that the public sector makes up 20-40% of Greece's economy. Further, even in the private sector (particularly in Europe), a lot of wage stickiness is caused by union contracts, minimum wages, and mandated benefits. Wage stickiness is also created by welfare/unemployment/etc - why get a job paying less than your old job if it only pays marginally more than unemployment?
So why not make use of this and impose wage flexibility by fiat? Cut the pay of government workers, force renegotiation of union contracts, reduce benefits and make welfare/unemployment/etc as unpleasant as possible?
I truly don't understand why Keynesians don't push for these policies.
(Note: I'm aware of the problem of nominal debts, these could be mitigated by making it easier to settle debts. I.e., make foreclosure/debt collection faster and easier.)
[edit: just curious, will those who are downmodding explain where my analysis fails?]