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PeakTrader:

India’s government should work with foreign businesses to build production plants and infrastructure.

However, India shouldn’t follow China’s economic model, which includes exchanging goods for foreign currencies (rather than for foreign goods), to further raise output and employment.

China’s “growth-at-any-cost” policy is most inefficient. It sells its goods too cheaply and lends its foreign currencies too cheaply to generate foreign demand and raise domestic output and employment.

Consequently, foreigners capture huge “gains-in-trade,” while China receives small gains-in-trade, particularly when negative externalities are included.

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In the link “The global crisis put an abrupt end to these imbalances,” there were at least three major factors that caused the financial crisis, recession, and current depression:

1. The massive moral hazard created by Congress in the housing market. It was a giant social program Congress believed it didn’t have to pay for. If lending standards in the housing market began to tighten when the Fed began the tightening cycle in 2004, the financial crisis may have been averted.

2. U.S. consumers bought foreign goods and foreigners bought U.S. Treasury bonds. The federal government didn’t “refund” enough dollars, in the form of tax cuts, to U.S. consumers to allow the spending to go on. Instead, the government spent those dollars, creating a mountain of federal debt to add to the mountain of household debt. A large tax cut, e.g. $5,000 per worker or $700 billion in 2009, rather than the small and slow tax cuts, would’ve reduced household debt substantially, strengthened the banking industry, raised discretionary income, generated a consumption-employment cycle, and created more employment and tax revenue.

3. Peak Oil is a constraint on U.S. and global growth, since oil prices began the rise to $150 a barrel in 2007 & 2008.

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A self-sustaining consumption-employment cycle (where consumption generates employment and employment generates consumption, etc.), which has failed to take hold over the past few years, would’ve raised tax revenue and reduced spending on the unemployed.

We not only added $5 trillion of additional federal debt to achieve this deep depression, we also destroyed substantial potential output (which is one way to close the output gap).

What’s sad is Americans were willing to work longer, and harder, to pay down debt, which would’ve added to future economic growth, including over the past few years, if they could find employment. Instead, they were forced into early retirement, collected (endless) unemployment benefits, collected disability, etc..

The economy continues to shrink and Americans are poorer.

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Ricardo, why would sellers build-up inventories, and hire workers, when there are no customers? The U.S. economy is underproducing by about $1 trillion a year. There are over 20 million unemployed and underemployed Americans, which adds to income inequality Chart:

http://www.advisorperspectives.com/dshort/charts/indicators/GDP-per-capita-overview.html?Real-GDP-per-capita-since-1960-log.gif

UCLA Anderson Forecast: U.S. economy falls short of true recovery
June 05, 2013

“U.S. real GDP is now 15.4 percent below the normal 3 percent trend. To get back to that 3 percent trend, we would need 4 percent growth for 15 years, 5 percent growth for eight years, or 6 percent growth for five years, not the disappointing twos and threes we have been racking up recently, which are moving us farther from trend, not closer to it. It’s not a recovery. It’s not even normal growth. It’s bad.”

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India shouldn’t follow China, because what the Chinese do best is corruption, crony capitalism, misallocate resources, cause negative externalities, prevent creativity, create inefficiency, and export much of its GDP.

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Ricardo, I don’t know what you’re talking about. Keynesian economics is supported mathematically and empirically.

You’re confusing Keynesian economics with the misuse of Keynesian economics by politicians.

From Commanding Heights:

“Keynes intended government to play a much larger role in the economy. His vision was one of reformed capitalism, managed capitalism — capitalism saved both from socialism and from itself.

Fiscal policy would enable wise managers to stabilize the economy without resorting to actual controls. The bulk of decision making would remain with the decentralized market rather than with the central planner.

…fiscal policy — spending, deficits, and tax. These tools could be used to manage aggregate demand and thus ensure full employment.

As a corollary, the government would cut back its spending during times of recovery and expansion. This last precept, however, was all too often forgotten or overlooked.”

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