Implications for Future use of Keynesian Policy

Increased debt has been a major factor that has helped improve the performance of the American economy since World War II. Debt in the United States mushroomed from 8.5% of disposable income in the 1920s to about 17% in 1974 (Dowd, 1975). Debt as a percentage of personal income rose from 58 percent in 1973 to 76 percent in 1989 to an estimated 85 percent in 1997 (Collins, Wright, & Sklar, 1999, p. 45). Another source affirmed that outstanding consumer debt as a percent of disposable income rose from 68 percent in 1980 to 97.4 percent in 1999 and that the long-term expansion of the 1990s was literally propelled by consumer debt, not through investment in computer technology (see Monthly Review Foundation, 2000). In fact, this massive increase of debt occurred not only in the United States but all over the world. Resultantly, debt has literally financed increases of demand and helped sustain economic expansion by compensating or offsetting any savings leakage problems. There a several problems with this, however: (1) keeping up with growing interest charges will ultimately divert funds away from economic growth producing investment; (2) if one borrower defaults after borrowing to lend to another, a chain reaction could set in and disrupt the whole economy; and (3) once consumers stop borrowing and spending due to high debt ratios, bankruptcies, mortgage foreclosures, etceteras, (a leakage from the economy rather than an injection), government might have to increasingly rely on warfare economics to prevent or get out of another recession.

Of course tax cuts (to get more income into people's hands) and the use of monetary policy by the fed to reduce interest rates as additional Keynesian approaches could also be relied upon to resolve future economic downturn. However, just as Keynes's noted, if income inequality became a big problem, lowering the interest rate might not have much of an effect at full employment of savings and investment conditions. It might not matter how low the interest rate became because low income people would not have extra disposable income to invest or save anyway, and wealthy people would literally fear investment since inventories would continue to build up due to inadequate consumer demand. In other words, the more real wages lagged the growth of the real economy, the less impact the lowering of interest rates would be able to have. Interestingly, if this were the case, then it is quite possible that the only tools remaining to help the economy to return to a state of expansion would be to either raise real wages or by increasing government expenditures, especially in the area of military spending. Massive deficit spending such as this, however, would only be possibly setting the economy up for even greater problems in the future.

Due to the high correlation between changes in military spending and the cyclical instability of capitalism, war or some form of military related spending would seem to be one of the only remaining viable solutions to maintaining sustained economic growth and stability. A growing body of literature, for instance, has amassed considerable evidence that the Cold War was deliberate. To capitalists, militarism is the way to go because it has advantages over other forms of government spending, and it also is easy to justify as a result of its long tradition of playing a significant role in the structure of the American economy. Militarism is advantageous because it stimulates aggregate demand without having to redistribute income from the rich to the poor (as advocated by Hobson), there is always need for improved weaponry for survival, and it also helps the manufacturing sector or capital goods industry to remain a full productive capacity. Militarism is also advantageous for large corporations because military production is more profitable than free production, and it helps maintain favorable terms of trade and more global political influence. Also, through sentiments of patriotism and nationalism (Veblen), militarism helps keep workers docile and believing that their interests are in harmony with the interests of the capitalists.