Keynesian's Supply Side Economy updated.
I. Background:
As Peter Drucker mentioned in his book, managing a time of great change, such that the failure of Keynesian economics became more and more apparent,
I totally agree with Peter Drucker's statement and I will try to explain it in my own way as follows:
1. Basic Assumptions have been changed:
Please read use instructions for economic theory very carefully.
Due mainly to globalization, basic assumptions of almost all economic theories have been already violated.
A. Wealth of A Nation:
As Adam Smith wrote a book titled, Wealth of a Nation, almost all economic theory is based on the assumption of closed environment, or very simplified nutshell environment such as one nation or a pond but not for globally connected economies of many nations such as nowadays.
In other words, if a global government, which is non-existent yet, uses Keynesian’s supply side economy, it should work.
However, when one nation or U.S. government uses Keynesian’s supply side economy independently, it will not work well since it is ending up dealing with demands of all nations on earth.
Due mainly to emergence of internet, for example, economy has become global as everyone is aware of it.
In other words, ponds have been strongly connected with wide canals now, which is similar to internet web connections.
Therefore, we should expect dilution when using Keynesian’s supply side economy.
B. Keynesian’s supply side economy:
According to Barron’s dictionary," in order to avoid depression, Keynes advocated increased government spending and easy money, resulting in more investment, higher employment, and increased consumer spending."
OK, this is perfect and I have no objection about it as long as the basic assumptions are secured such as a nutshell environment or a pond environment.
Based on my understanding, in economic theory, there are only two major players such as Supply and Demand, right?
In my opinion, Keynes only talks about which is first. Supply first, or Demand first?
I have no doubt that Supply stimulates Demand.
In other words, in theory or at Keynes’ era, Supply by U.S. government stimulates Demand in U.S. by 100%.
This is not true anymore because of globalization of economic activities nowadays.
My question is that Supply of one country stimulates demand of which country under the web like connected global economic situation?
In my opinion, supply of U.S. government not only stimulates demand in U.S. but also eventually and inevitably stimulates demand of China because of the following reasons:
a. The U.S.‘s number one importer is China, $299 billion in Jan. – Oct., 2010 and has lost $227 billion in balance in the same period ( import 299 – export 72 = 227.) (FTD statistics)
b. China’s Exchange Rate Manipulation:(violation of fundamental economic premises)
Money eventually goes into a lucrative pond, where exchange rate is lucrative, which is China.
c. China’s manipulation or controlling of free money flow: (violation of fundamental economic premises)
Taking out money over 20,000 Gen from China is restricted by Chinese government.
Put it simply, I will explain it as follows:
U.S. government release bunch of fish in U.S. pond expecting to catch all fish in the end or in theory in the U.S. pond,
The U.S. pond is connected with many ponds by canals and China pond is located in very low sea level ( favorable exchange rate) and thus 20% of fish go down to China pond in every six months or so, for example.
In two years, 40% of fish stay in U.S. pond and 60% of fish went out to China pond and captured (restriction of money flow). 0.8x0.8x0.8x0.8=0.4
1=100% 0.8(in 6 months), 0.64(in a year), 0.512(in 18 months), 0.4096(in 2 years)
Similar kinds of things are happening in real world right now.
In the above example, in two years China benefitted from U.S. Supply side economy by 60% and U.S. economy by 40%.
Aha, no wonder that China is getting richer and U.S. is getting worse off.
Therefore, I would say that Keynesian’s supply side economy needs to be updated but how?
II. Keynesian's supply side economy updated.
Actually Keynesian’s supply side economy indirectly stimulates demand through supply.
Since this indirect way of economic stimulation has become less effective, only effective way left is more direct stimulation of demand, which I call it demand side economy.
In other words, U.S. government needs to more directly stimulate demands in U.S. through such as the following methods:
a. Place Anti-dumping tax on all Chinese goods such as 20% for the time-being.
I tend to believe that Chinese GEN should be at least appreciated by 20% but most likely Chinese government will not do it.
Since intentionally setting low exchange rate is regarded as dumping of whole Chinese products, anti-dumping tax on all Chinese goods should be charged until China adjust its exchange rate at appropriate rating.
This is not protectionism since it is only temporally adjustment.
This will lower demands for Chinese products and create more demands for American products.
Since current economic system is not working well because of system failure (mixture of two incompatible systems; namely, the Free Market system and China’s government control system), it will never work unless the system is modified.
I know that U.S. Congress already has passed the law but it have not yet been implemented as far as I know.
b. Free flow of labor force:
In economic theory, as everyone knows, fundamental assumptions are as follows:
- Perfect information flow.
- Free flow of money, goods, and labor force, etc.
As you can notice, right now in global economy, free flow of labor force is not secured.
People used to move from west coast to east coast when plants are relocated.
Right now lots of plants have moved out from the U.S. to developing countries such as China, Brazil, etc. while workers keep staying in the U.S.
This is why unemployment rate goes up in the U.S. and Japan.
In theory, this is not acceptable although I do not like it and you may not like it either.
Global job placement is necessary and governments should try to provide necessary environments such as follows:
1. Language training:
2. Pension plan:
3. Job training:
4. Trust worthy institution:
I will not go into details here but main issues are physical part as well as unavailability of those back-up systems for global job placement.
2. Inflation and Deflation should cancel out each other in theory:
China is suffering from inflation and Japan is suffering from deflation at the same time even though two economies are tightly connected.
In theory of the Free Market, this will never happen.
A. Violation of fundamental economic premises by China or uncompatible China's economic system.
Current mixed economic systems are not working well and these will never work unless current system gets modified as follows:
Right now, free market system and China's market controlling system are co-existing and China is winning because of power of manipulation.
1. We asked China to comply with our free market system.
As far as I know, there is no improvement so far.
Chinese Gen’s exchange rate is almost the same.
Actually China is violating almost all fundamental premises of economic theory, which is why our economic theory is not working well.
B. Fundamental premises of economic theory.
- Perfect information flow.
- Free flow of money, goods, and labor force, etc.
China is controlling money out flow, exchange-rate, etc.
Movement of labor force is severely restricted in global sense.
How can we expect that global economy should work well while using economic theory whose majority premises are violated by China mostly such as the above stated?
All I am saying that we have to secure fundamental premises of economic theory including China ASAP, otherwise, we all lose and China wins.
III. Conclusion
In conclusion, we have three options when dealing with current situation:
1. Force China to comply with our Free Market System.
2. Stay away from China or stay away from Keynesian’s supply side economy.
3. Treat China as the same way it treat us.
1. Force China to comply with our Free Market System.
We already tried this option and it will not work since I don’t think that China will give up its advantage unless it is absolutely necessary or forced.
2. Stay away from China or stay away from Keynesian’s supply side economy.
It is neither possible to Stay away from China nor stay away from Keynesian’s supply side economy and thus we should minimize it.
TPP (Trans-Pacific Strategic Economic Partnership Agreement) should be a good way to go on this matter.
3. Treat China as the same way it treat us.
Since it is obvious that China keeps winning unless we do something, we may have to place anti-dumping taxes for Chinese products on necessary basis.
I honor freedom and concept of free market and thus I never wish to be governed by Chinese government.
I will fight for it with all of my energy and spirits as long as I live.
Thank you for reading this far and A Merry Christmas to you!
Hiroshi Morita
updated on March 11th, 2024.
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