So those are Keynes’ prescriptions for a successful economy: low interest rates, government investment, and redistribution to the poor. And, for a time — from around the 1940s to the 1970s — that’s kind of what we did. The results were magical: the economy grew strongly, inequality fell away, everyone had jobs.
Retribution and government investment may or may not be good ideas, but they are orthogonal to the problem of the business cycle.
For some reason, Keynes missed the entirely obvious fact that the fall in aggregate demand originates in collapsing credit bubbles. The credit bubbles happen for a very specific reason - a bug in the Anglo-American tradition of banking in which banks do not match their maturities. When the credit bubbles collapse, and people's bank accounts are wiped out, they stop spending. The supply/demand curve for luxuries and durables goes vertical as people cut expenses in a futile attempt to fix their balance sheets. When they stop buying cars, Detroit lays off workers.
The economy was more stable from the 40's through the 70's because the creation of FDIC insurance de facto turned banking into 100% reserve, maturity matched system (de facto, even though it still had a veneer of the old system). Effectively, with an FDIC insured bank, the individual deposits their money with the government, and then the government gives banks a separate license to print money to make loans. This broke down when the shadow banking sector grew up, and started maturity mismatching without the formal backing of the government.
In summary - the business cycle is really misnamed. It's the "banking cycle". To stop cyclical unemployment, fix the banks.
Well, the simple fact is that the above quote from the article is completely wrong.
The 80ies was one of the longest periods of sustained US GDP growth (and the 40ies&70ies weren’t that magical). During the 80ies the USA tacked on the equivalent of Germany’s GDP to itself.
The business cycle has since the 1970's has been a bit worse than the cycle from '45 to 75. Nothing like the current financial crisis happened during that time.
I don't know how the overall growth rates compare. GDP calculations are full of subjective assumptions. I think there is some truth to the statement that the rate of economic growth has slowed, but that's a much longer argument, and not relevant to my original point which was about the business cycle.
> The business cycle has since the 1970's has been a bit worse than the cycle from '45 to 75. Nothing like the current financial crisis happened during that time.
Nothing like the current financial crises happened since the 1930ies. Then again, the structure of the economy radically changed since that time (think globalisation).
> I don't know how the overall growth rates compare. GDP calculations are full of subjective assumptions.
The 80ies and the 90ies was one of the best and longest periods of economic growth for the USA. Since 1982 (before the current mess) there was only a small recession in 1990 and a quarter long one in 2001.
GDP is probably one of the least subjective measures that there is. I don’t know what other measure would be less objective. You also seem to ignore the extremely high inflation in the 1970ies.
Retribution and government investment may or may not be good ideas, but they are orthogonal to the problem of the business cycle.
For some reason, Keynes missed the entirely obvious fact that the fall in aggregate demand originates in collapsing credit bubbles. The credit bubbles happen for a very specific reason - a bug in the Anglo-American tradition of banking in which banks do not match their maturities. When the credit bubbles collapse, and people's bank accounts are wiped out, they stop spending. The supply/demand curve for luxuries and durables goes vertical as people cut expenses in a futile attempt to fix their balance sheets. When they stop buying cars, Detroit lays off workers.
The economy was more stable from the 40's through the 70's because the creation of FDIC insurance de facto turned banking into 100% reserve, maturity matched system (de facto, even though it still had a veneer of the old system). Effectively, with an FDIC insured bank, the individual deposits their money with the government, and then the government gives banks a separate license to print money to make loans. This broke down when the shadow banking sector grew up, and started maturity mismatching without the formal backing of the government.
In summary - the business cycle is really misnamed. It's the "banking cycle". To stop cyclical unemployment, fix the banks.