It's All About Demand, Stupid!!

Back in September, I wrote about what I understand to be at the root of the financial crisis and the need for policy to address this problem. The problem is relative wage deflation and the need to stimulate demand via some type of tax/incentive policy. I am feeling rather prescient.

Robert Reich has been writing on these themes for a few days. Check out these tasty quotes:

From one of FDR's fireside chats in 1938: "We suffer primarily from a failure of consumer demand because of a lack of buying power."

and again from the America's Employment Act of 1946 — the year Keynes died — [ the US government] codified the new wisdom [of Keynes], making it "the continuing policy and responsibility of the Federal Government ...to promote maximum employment, production, and purchasing power."

Can you say stimulus package!!!!!

I am middle class, and I have an intimate knowledge of the problem of a lack of purchasing power. If all Americans are forced to spend (or not spend) like my family, then this downturn is going to be very, very, very steep indeed. No air travel, no clothing purchases, no new car, no new guitar for the kids. Burn down the credit. Go low risk all around.

Bottom line: It is about demand stupid. The death knell to supply side economics has been sounded loud and clear.