Keynesianism’s Collapse
To fully vet my contention, let’s look at Keynes’s fundamental tenets as stated in a succinct adaptation from Commanding Heights, a highly complimentary 1998 book by Daniel A. Yergin and Joseph Stanislaw (bolds and numbered tags are mine):
… (Keynes) concluded that classical economics rested on a fundamental error. It assumed, mistakenly, that the balance between supply and demand would ensure full employment. On the contrary, in Keynes’s view, the economy was chronically unstable and subject to fluctuations, and supply and demand could well balance out at an equilibrium that did not deliver full employment. [1] The reasons were inadequate investment and over-saving, both rooted in the psychology of uncertainty.
… The solution to this conundrum was seemingly simple: Replace the missing private investment with public investment, financed by deliberate deficits. The government would borrow money to spend on such things as public works; and that deficit spending, in turn, would create jobs and increase purchasing power. [2] Striving to balance the government’s budget during a slump would make things worse, not better. … As a corollary, the government would cut back its spending during times of recovery and expansion. [3]
… 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. He talked about a “somewhat comprehensive socialization of investment” and the state’s taking “an ever greater responsibility for directly organizing investment.” 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. [4]
… Keynes provided both a specific rationale for government’s taking a bigger role in the economy and a more general confidence in the ability of government to intervene and manage effectively. Despite Keynes’s fascination with uncertainty and his speculative talents in the marketplace, Keynesians deemed “government knowledge” to be superior to that of the marketplace. [5]
… How far reaching its impact, or at least the perception of its impact, was demonstrated by a history of economic thought published in the mid-1960s: “In most Western economies Keynesian theory has laid the intellectual foundations for a managed and welfare-oriented form of capitalism. Indeed, the widespread absorption of the Keynesian message has in large measure been responsible for the generally high levels of employment achieved by most Western industrial countries since the second world war and for a significant reorientation in attitudes toward the role of the state in economic life.” [6]
… It was not until the 1970s [7] that evidence began to accumulate in many countries that Keynes’s theories, at least as implemented by Keynes’s advocates after his death, might not perpetually yield the favorable outcomes Keynes himself had predicted.
Notes:
- [1] — One wonders how humanity ever progressed to the point it did by the 1930s if Keynes was really right. Logically, throughout the course of history we should have seen market-oriented cultures around the world chronically underutilizing their resources and capabilities for extended periods of time, incapable of turning things around on their own. We didn’t. In fact, only a decade earlier, the U.S. recovered remarkably well from the very serious depression of 1920-21 despite the fact that the government of President Warren Harding did very little to intervene. The economy corrected itself, and fairly quickly, leading to the Roaring ’20s.
- [2] — There are two problems here. First, as President Obama himself admitted to the New York Times in 2010, “there’s no such thing as shovel-ready projects.” Although that was perhaps less true in the 1930s — ironically, because of today’s environmental red tape — it remains a fact that the government could not then as it cannot now hit the ground running with infrastructure spending. This leads to the second problem, which is that impatient, desperate politicians who want to pump money into the economy right now falsely invoke Keynes to justify throwing money at entitlement and other spending programs, demanding nothing of value in return. In the 1960s and 1970s, this outlook was expressed thusly: “It doesn’t matter what you spend it on, just spend it!” More recently, it has led to outrageous assertions by out-of-ideas politicians like former House Speaker Nancy Pelosi and Ohio Senator Sherrod Brown that money spent on unemployment benefits is one of the best forms of stimulus available.
- [3] — Perhaps the biggest weakness of Keynesian thought is the naive belief that any government which gets used to spending more money will voluntarily acquiesce to spending less. It doesn’t happen, not even, as seen in recent years, when economic calamity clearly looms.
- [4] — During the 1930s, which many history textbooks still regard as when “FDR saved us from the depression,” President Franklin Roosevelt “somehow” forgot about Keynes’s admonishment to avoid controls. In perhaps the most comprehensive program of status quo-protecting crony capitalism in history, FDR’s National Recovery Act required every major industry “to draw up a code setting production quotas, limiting hours of operation, or restricting construction of new factories.” In general, governments find it almost impossible to avoid exerting undue and almost invariably harmful influence over an economy as they abscond with an ever larger percentage of its fruits. Recent examples include actions too numerous to mention taken by the Obama administration’s ever-encroaching regulatory apparatus.
- [5] — This is yet another fatal Keynesian conceit. As many non-Keynesian economists and commentators have stated over the years, the idea that central planners can do a better job of managing an economy’s trillions of individual transactions and interactions better than the market’s everyday participants reflects the unbounded hubris of those who adhere to it, and has no support in the actual results of human history.
- [6] — This is an especially odd belief in light of what really happened after World War II. For some reason, the 1950s is still idealized as a period of exceptional countrywide Keynesian prosperity. In reality, average annual real GDP growth from 1951-1960, an era also characterized by Big Labor and Big Business dominance of the private sector and extraordinarily high marginal income tax rates, was just above 3.5%. Given that America was still the only major power left standing, it should have greatly exceeded that. But during the five years following the John F. Kennedy-inspired income tax cuts of 1964 — a decidedly non-Keynesian action — the economy grew by an annual average of over 5%. The decade of the 1970s and its reversion to Keynesianism, during which Richard Nixon actually said, “I am now a Keynesian in economics,” was extraordinarily unimpressive, and marked in its later years by ruinous double-digit inflation and interest rates. In the 1980s, Ronald Reagan’s anti-Keynesian tax cuts, driven by a classical economist’s faith in the people, gave us The Seven Fat Years. More recently, capital gains tax cuts in 1997 led to that decade’s final-years boom, and George W. Bush’s relatively modest but supply side-oriented cuts in 2003 led to 34 consecutive months where the seasonally adjusted unemployment rate was 5% or lower (July 2005 through April 2008).
- [7] — The evidence of suboptimal results was really there in the 1930s, but the elites who controlled the political establishment and had a virtual stranglehold on the media consciously chose to ignore it.
Though it may not be fair to assign all of its results to Keynes and his theories, the ascension of Keynesianism as applied in the real world, its brief 2008-2009 return, and its still-present dominance of hidebound thought in academia and government were and still are products of an elitist class which feels that it alone possesses the intelligence and ideas which will make the world genuinely better. It has always been accompanied by a profound disregard for the wishes, dreams, and plans of others who will not conform to their supposedly enlightened vision. In the past three years, its application and misapplication have led the greatest economy ever seen on earth swiftly and dangerously down the path towards bankruptcy.
Thanks for a great article. Three other things could be added. Nixon dis-connected our money from any semblance of gold’s proven stability, and allowed uncontrolled printing of dollars. His idea of controlling the (expected) inflation was to install price controls and other statist measures. That didn’t work out either.
Second, Hayek in “The Fatal Conceit”, quotes Keyenes’s response to the question, “What about the long run effects?”, as “In the long run, we are all dead.” Keynes is long dead, and now we get to see what happens after years of statism with its central planning.
Third, wasn’t Krugman Enron’s advisor? We all know about Enron’s end, as well as its role in Al Gore’s push to use fear of the future climate to make trillions in carbon trading.
The notion that “In the long run, we are all dead” is a perfect excuse to “kick the can down the road”, to the time one is out of office, or dead, and it becomes a problem for one’s children and grandchildren.
“Though it may not be fair to assign all of its results to Keynes and his theories, the ascension of Keynesianism as applied in the real world, its brief 2008-2009 return, and its still-present dominance of hidebound thought in academia and government were and still are products of an elitist class which feels that it alone possesses the intelligence and ideas which will make the world genuinely better. ”
Then again, they may simply be driven by power lust and an addiction to other people’s money.
The basic flaw of Keynesianism is that the money spent is intentionally a deficit. This is politician-speak for “money that does not actually exist”. The depth of delusion that Keynes and his followers descend to is well illustrated by Ben Bernanke & Co.’s idea that all they have to do to “solve” the deficit problem is print more money. The more dollar bills, fives, tens, twenties and fifties out there, they argue, the richer we are.
Funny thing. Germany’s Weimar Republic tried that, after first borrowing money from anybody who would lend it to them (including the United States), and running up (at the time) record-breaking deficits. It didn’t work very well; they ended up with a pfennig (penny) postage stamp selling for 10 billion Deutschmarks. And that was the least of their problems. (Their biggest one turned out to be a short guy with a toothbrush mustache.)
The more money you print, the less each unit is worth in real terms. Reality cannot be suspended. These are facts that Keynesians, real or degraded, either do not understand or simply refuse to accept.
I’d suggest each one of them be instructed in the nature of reality by holding a brick at shoulder height, directly over their own bare toes, then releasing it while telling it not to fall.
Then again, they might decide that the solution would be to remove their own toes, on the principle of “if you don’t like the news, whack the messenger.”
clear ether
eon
“The more money you print, the less each unit is worth in real terms. Reality cannot be suspended. These are facts that Keynesians, real or degraded, either do not understand or simply refuse to accept.”
Not so.
Krugman is not only aware of it, he wants to see that happen.
Having failed to find enough “shovel ready” projects, the new liberal justification for massive fiscal stimulus is that it will increase inflation and devalue the dollar. Yes, Krugman thinks that’s a good thing.
Krugman and his pals argue that a devalued dollar will make our exports more attractive, make imports less attractive (thus improving our balance of trade), and make American workers more attractive to hire relative to foreign workers.
That more Americans will be employed while America grows poorer as a whole doesn’t bother liberals. They’re just desperate to cut that unemployment rate number by any gimmick possible before the 2012 election. Because they know that Obama’s toast otherwise.
You’re missing the big “benefit” of inflation: it robs from creditors (who they mistake for “the rich”), and gives to debtors (who they mistake for the “deserving poor”).
IOW, it’s straight-up redistribution. Not income redistribution, but net worth redistribution.
And btw, the Chinese have every right on earth to be upset about this, since they belong to the creditor class in this scheme of things. Mostly though, this is going to come out of working-class 401k’s.
The biggest debtor of all is the Federal Government–$14 trillion worth.
And Krugman has said explicitly that the benefit of inflation would be to wipe much of this debt away, since it could be paid off with depreciated dollars.
Worked so well for the Weimar Republic.
Keynes was absolutely against debasing the currency. He advocated fiscal stimulus only as long as demand doesn’t increase so much that inflation is re-ignited.
But liberals ignore those parts of Keynes’ teachings they find inconvenient.
Krugman, et al, do not worry about burgeoning deficits because they intend and expect that the deficits will be wiped out by inflation as we expand the money supply to cover ever-larger stimulus spending. At the time of FDR, a billion-dollar deficit was the same as a trllion-dollar defciit is today. Actually, probably uqite a bit more. Inflation has devalued the ciurrency to the point that the deficits of yesteryear are quite small, but the deficits required to keep the carousel going are that much larger in turn.
You cannot keep it up forever. Sooner or later, borrowers get wise and build an expectation of devaluation into the interest rates. When the U.S. is paying 20% interestt on $20 trillion in debt, we will be in serious trouble.
Hell, we could afford what we are spending today if it were not for the national debt. We are paying hundreds of billion in interest on our debt. But for that line item, the budget would almost be in balance today.
I’m not Keynesianism – neither is Krugman or the current Democrats.
“…the government would cut back its spending during times of recovery and expansion.” Keynes believed that governments should cut back spending and run a surplus during good times – so they have the ability to spend and borrow during recessions.
Current Democrat economic policy seems to be borrowing hundreds of billions during the good times and $trillions during the bad times.
The fatal error is in the first bullet point: Keynes’ error is attempting to get “full employment”. What does “full employment” and is it really in the interest of an economy to achieve it? Can everyone really work and wouldn’t that mean that some of our capital is overextended? The prescription is completely wrong: If you cannot define “full employment” how is it possible that the government can go about achieving when it must first subtract from the overall economy through taxation and pass the money through a meat grinder of lobbyists, politicians’ pockets and interest groups before putting the money back into the economy?
After graduating with a BS (heh) in Economics in 2004, I finally tossed out all of my economics textbooks and homework. Yes, I am a packrat, thinking that I might go back and examine these documents for more insight into economics, but I came to the realization that economists and politicians make it up as they go along; Keynes willingly or unwillingly gave the greatest license for idiot pols to spend other people’s money. I tossed all of it out and concluded that most economists today still have not improved upon what Adam Smith said over three hundred years ago.
ok, i am a pharmacist not an economist, i will have to look up Adam Smith, unless you wanted to be kind of enough to give me Adam Smith for dummies. thanks
Adam Smith was a Scottish philosopher and father of modern economic thought and capitalism who, with the publication of The Wealth of Nations in 1776, banished mercantilism as an economic model. Mercantilism was the idea that countries shoudl seek to acquire wealth through acquisition (theft) of gold and promotion of exports.
Melissa, here’s a good resource for you:
http://www.tsowell.com/
http://www.tsowell.com/basicecon_4new.html
Adam Smith is excellent, but Thomas Sowell is contemporary, and also excellent.
Here’s a free version of Adam Smiths
“An Inquiry into the Nature and Causes of the Wealth of Nations”
http://www.econlib.org/library/Smith/smWN.html
The podcasts from Econ Talk are quite interesting as well.
Keynesian economics is the broken window fallacy writ large.
Cronic deficit spending is economic pedophilia. It is screwing our children’s future for political benefit today.
It’s a little more complicated than that. Deficit spending robs from junior as long as inflation stays under control. But it will eventually cause inflation to start up, in which case, now junior ends up robbing from grampa. Eventually, when this all plays out, it’s isn’t the debt handed to the kids that matters (which can be paid off in relatively worthless future dollars), it’s grampa eating cat foot, when a loaf of bread costs $5.
The problem is this:
1)You can’t try to kill capitalism and save at the same time.
2)You can’t viscerally despise a country and its people…and lead it at the same time.
3)You can’t intentionally divide a people by class, race and religion…and then unite them behind a cause.
4)You can’t build a system that relies on “government” by having all the people support its massive weight on their shoulders, and then relieve over half of them from any of the burden, while giving them all of the benefits.
5)You can’t build a system relying on laws, rules, regulations…and then intentionally subvert those very laws, rules and regulations for crass crony clout and ward heeler political patronage.
6)No economic system works by demonizing the very people upon whom it is entirely dependent. Its very genesis is an act of revolution seeking counter-revolution.
7)Lastly, Keynes was an imbecile. There is no government, nor has there ever been….that did not exceed and overread its mandate of serving the people. It is the WORST vehicle upon which to build an economic model. That would be akin to trying to guard a sack of fleas and train them not to bite. The notion is preposterous and only leads to more loss of blood, disease and death, not less.
Keynes: the most destructive economics thinker since Marx.
But you can see where pols and “progressives” would gobble it up: It puts them in the driver’s seat and flatters their “father knows best” vanity.
Maybe the next Tea Party Congress will outlaw it.
@cfbleachers — you rock! Your problem definition is spot on. Would you please run against Obama for the Dem nomination?
Well said.
This administration has tried Keynesian theory and it cost us our AAA credit rating within two and a half years, a very expensive failure.
Since we know what doesn’t work, shouldn’t we get serious about doing what does work? We’re seeing the effects of a mushrooming federal government that is removing vast amounts of formerly private sector money, where it gets automatically reduced in value by around forty percent. At the same time, said government goes on a regulatory spree, severely restricting the ability of private companies to conduct business (think Boeing and Gibson Guitars).
This must be stopped immediately.
Very well done, bleachers.
I must save that for attributed use.
The problem with Keynesianism and Socialism itself, is that both rely on the government and individuals to do “the right thing”. That is, to ignore human nature. Capitalism is driven by man’s innate selfishness. There will never be a need for outside stimulis, as the driving force is always present. While not perfect, it works well, and does not require planning. A little oversight and tweaking to rein in the excesses are all that’s needed.
I second your comment, Tom. However the ‘..rein in excesses..’ is PRECISELY what ‘reform Capitalism’ the author had spoken of in his piece.
The same, ‘Reining in excess’ is precisely what the recent Dodd-Frank bill and this administration’s actions have set out to do. Destroying Capitalism though selling it as ‘Regulation’.
There is NO government action/intention that is done carefully or diligently. For the government uses broad strokes in all it does.
The road to hell is indeed paved with good intentions. The amoeba-like pols and their useful idiots are the paving crew.
Paul and Eric,
I was having trouble articulating my thoughts on that point. Quite right. “Rein in excesses” has been the justification to eliminate freedoms all too often. What I was trying to state, somehow, is that pure laissez faire capitalism needs to be tempered as well.
I prefer to use selfishness as the motive because it is baser driving force. IMO self-interest is making sure that I don’t get a bad deal. Selfishness is making sure I get the best deal.
It’s because of this selfishness, as opposed to self-interest, that some control is needed. But as the old proverbs says, “one should govern as one would cook a small fish.”
Nah, don’t rein in anything. Those huge booms and huge busts make life more exciting.
Hell, more than half of the “growth” supposedly supplied by GWB’s tax cuts and now held up by residents here as exhibit A for tax cuts working was also part and parcel of the bubble of all the new precriously leveraged housing coming from the devil’s cauldron of lefties and righties just a-bilin’ away. Didn’t it feel good (at least compared to now) while it lasted? We all love bubbles.
People are more willing to let big banks and businesses fail AFTER the fact, especially when a new bubble has not yet started, but you cannot get 40% of the American people to take that risk at the time the decision has to be made. It is now an integral part of the human condition in 2011.
I’m not sure I understand what you are talking about here. Not sure you do either. Bush’s tax cuts did lead to economic growth, and had nothing to do with the “precriously leveraged housing” bubble.
When the housing market goes crazy with all sorts of new building, (a fair amount of which is now in foreclosure,) the GNP rises. You are aware, aren’t you that the housing market pushes (or pulls down) many aspects of our economy. When you have housing BOOMING, generally good times are rolling. Whatever GWB’s GNP/growth numbers were, they were significantly bolstered by the boom/bubble. This is not a breakthrough insight on my part, just common sense.
I would paraphrase Milton Friedman here and say that it isn’t “selfishness” but self interest that guides our choices.
I’m a died-in-the-wool believer in capitalism and understand that taxing the “rich” to support ever-growing legions of “poor” (many of whom have smartphones and $300 headphones) is a path to nowhere. BUT… if we’re honest, we have to acknowledge that the ever-increasing share of wealth controlled by 1% of the population is also not sustainable. The answer is not to “take it away” from them though… it’s to change the incentives in the economy away from rewarding non-productive passing around of paper for massive gain.
Warren Buffet, in the least-quoted part of his recent NYTimes editorial, referred to “taxing gains on assets held for 10 minutes (really today it’s more like nano-seconds) at a low rate like they were long-term investments”. I think he’s on to something here…financial services used to be 11% of the economy 20 years ago… now it’s 20%. A major purpose of accumulating capital used to be so that it could be deployed to productive purposes…like building things (which led to hiring people). Now it’s about creating paper profits – Roger McNamee recently referred to Wall Street as a “giant centrifuge sucking all the cash out of the economy”.
A corollary of this is that great wealth used to accrue to brilliant/bold people who invested in growing businesses, and thus, the economy. On Wall Street today, exceptional wealth is accruing to a large cadre of mainly unexceptional people who just happen to have landed in the right club, usually through the right connections. Forty years ago, a bright aspiring professional could enter medicine, law or banking and expect to earn relatively high (5x average or so) income…and all three were about equal. Today, you choose banking because you’ll earn 200x..and what do we have to show for it? I am not an economist but this unproductive financial services industry increasingly seems to me to be very close to the root of the problem (along with our broken education system which in turn is really a function of the breakdown of the family unit). I do not believe in class warfare and penalizing success as the solution however… what I think we need to do is restructure incentives in the economy to more productive purposes via the tax code and other means.
I wish a politician/leader would emerge to tackle this but it’s probably not sexy enough, and too many vested interests now oppose, to see it happen.
Excellent points, Rocker.
A large part of our current problem is this nonsense of creating extremely large profits (but not WEALTH) by activity which is completely non-productive. When billions can be made simply by trading ownership of fictional economic entities (derivatives, futures), something is seriously wrong, and there WILL be negative consequences.
I don’t know what the solution is, as I’m leery of letting the Fed.Gov outlaw such nonsense, but it’s a problem that must be solved.
I don’t like outlawing things either… I think more in terms of disincentivizing them, or creating greater incentives for economic behaviors that are desired. I feel the same way about “clean energy solutions”… create some incentives (tax breaks say) rather than over-taxing the solutions we are currently dependent on.
No one can go into law or banking “expecting” to make 200x the national average income. Sure, there are lawyers, bankers and hedge fund traders who make $10,000,000 a year, but you have to work your way to the top before you make that kind of money.
Keynes never considered New Deal fiscal stimulus to be anything more than a temporary aid for an economy that had stumbled.
But the left-wing Dems like Henry Wallace saw the New Deal as a down payment on socialism. Permanent socialism.
The next time a liberal Democrat advocates massive fiscal stimulus, ask him how long the stimulus should last–and what will happen to the economy after the stimulus ends. See if you get an answer.
Krugman and his followers don’t want this “stimulus” to ever end. They see it as a wedge to get the Government more heavily involved in economic planning. Just like Henry Wallace did.
Hayek on Keynes
http://www.youtube.com/watch?v=VqU-AZh-wqU&feature=related
Great Article that really poiints out the weaknesses of Keynes.
One of your points bears repeating:
•[3] — Perhaps the biggest weakness of Keynesian thought is the naive belief that any government which gets used to spending more money will voluntarily acquiesce to spending less. It doesn’t happen, not even, as seen in recent years, when economic calamity clearly looms
One observation that goes along with this – if Politicians and even the Supreme Courts will not go along with the Constitution that supposedly governs the Country =- what makes anyone believe that they will adhere to the supposed principles of 1 economist.
Progressives seem to still be looking for a god while advocating that god does not exist.
The term, “Pink Slip President” has to be stuck to the Obama legacy beginning now! This turd gets a free pass from the media. If you watch mainstream media outlets you would think conservatives are losing, but we are not.
If George Bush’s daddy owns “Read my lips, no new taxes”, then this POTUS owns “Pink Slip POTUS”!
Tha major problem with Keynesianism is that while it’s quite good for analysis, prescriptions using it mistake the indicator (the flow of money) for the reality (economic health). It’s like fighting a fever by icing the thermometer – the thermometer is a great indicator of how the fever is doing, but changing it does not change the fever.
It is never wise to quote Colin Powell’s jewels of wisdom as most of them are gleaned from his many years studying military theory. In this case “No battle plan survives contact with the enemy” was actually first stated by von Moltke the elder.
Actually there is one aspect of Keynesianism that scares the bejesus of those who call themselves Keynesians. The bancosur, as written about by Ambrose Evans-Pritchard, amongst others, is well worth looking at, because it restricts the money supply, instead of it being expanded by those who are overly politicized.
Bad ideas of this sort never collapse. They go quiet for a short time and come back in a slightly different form. As Burke would say–with a fresh shot of youthful vigor.
While it is still fair to characterize Keynsian economics as mainstream it lost its dominant position 30 years ago when Paul Volcker demonstrated conslusively that indeed MV = PT and the bankruptcy of the economic policy based on the Philips Curve trade-off. Since then the concept of full employment has been replaced with the concept of a natural rate of unemployment. The natural rate is not fixed number. It is generated by the interaction of the aggragate supply function (a function of the cost of doing business and the expected rate return on capital) and the aggragate demand function. (based not upon current income but expected or “permanent” income) The Obama administration’s policies have cut the expected rate return on capital, raised the regulatory cost of operations and increased direct business costs while at the same time lowering permanent income through increases in future medical costs and the taxes required to support a larger government. The 9% measured unemployment is about as low as it can get with the current aggragate cost structure.
Non-Keynsian economic remain the dominant school of economic thought outside of the rarified atmosphere of the Democratic Party. These economics use the language of Keynes to promote the economic policies of Frederich Engles. They are evolutionary Marxists who have expropriated Keynes name and macroeconomic theories.
The natural rate of unemployment also considers the fact of creative destruction and the ensuing frictional unemployment, that is, the unemployment created by the lag time between losing one job and starting a new one, which will occur even in a healthy economy simply because of logistics- one company lays you off, and another hires you, but it takes weeks to apply, go through the interview process, receive and accept the offer, relocate if necessary, and then actually start the new job.
The Keynesians like to reference WWII spending as the cause of America getting out of the Great Depression; Ignoring the fact that American didn’t come out of the Great Depression until after WWII when that accumulated Debt was quickly being paid off, and flooding the Pool of job creating capital.
There’s a reason it’s called Capitalism; it’s because Capital is what fuels it.
The Government Monopoly is sucking $2 Trillion a year, at the Federal, State, and Local levels, from the Pool of job creating Capital. Had that money been left in the economy, it would have created 5 million $40k a year jobs, 5 MILLION JOBS!
The Keynesian belief that money Supply isn’t going to be used productively unless the Government borrows and spends it is ridiculous, as Supply and Demand clearly states that price will adjust to balance the Demand. This means that interest rates would drop until all of the Capital is put to work.
What would interest rates be now if the pool of job creating Capital was $2 Trillion larger? 1%?
Would lower interest rates help our struggling economy?
Would lower interest rates put a floor under our crashing Real Estate market?
Depressions are created by only one thing, Government Monopoly borrowing which crowds out the productive job creating use of Capital. Between 1929 and 1933 the Government borrowed 25% of GDP sinking us into the Great Depression 1.0, between 2008 (the first Democrat budget after their takeover of Congress in 2007) and now, the Government has borrowed 35% of GDP and the borrowing continues. Welcome to Great Depression 2.0, we won’t get out of it until the Government Monopoly starts paying off the accumulated debt and flooding the pool of job creating Capital.
Liberals reference the massive spending on World War II as a stimulus that restored full employment. But they omit a few things:
1. That stimulus was so inflationary that FDR instituted mandatory wage-and-price controls. No way that would be accepted today.
2. Those wage-and-price controls soon led to shortages of consumer goods, exactly as predicted by the law of supply and demand. So FDR instituted rationing of said goods. You couldn’t buy meat without a ration coupon. You couldn’t buy gasoline for your car without a ration coupon. You couldn’t buy tires for your car. You couldn’t buy most consumer goods without ration coupons. No way that would be accepted today.
3. FDR promised that these privations would end as soon as the war was over. And that promise was kept by his successor, Truman. But today, liberals steadfastly refuse to explain how they would sunset these stimulus packages without fearmongering a “double-dip recession”–followed by calls for yet more “stimulus.”
One gets the distinct impression that they intend for this massive Federal spending to be permanent. Especially when they trot out their laundry list of “investments”: Education, infrastructure, health care. Will we ever reach a point in America where we won’t need education, roads, or doctors? If not, then these “investments” will be permanent–as will the inflationary effect of this spending.
Continuing on with some of the comments of #18 Jacksonian Libertarian – Keynesianism is, in my view, a ‘magical’ or ‘mystical’ theory of economics.
That is, it utterly ignores that an economy is triadic: Investment, Production, Consumption. Instead, Keynes focuses only on a dyad: Production and Consumption.
So – where does his Investment or Capital come from? Here’s the magical element; it comes from ‘animal spirits’. Whew. Are we supposed to take that seriously? Yes – according to Keynes.
I call this similar to the Magic Cauldron theory, which views wealth as emerging, in infinite amounts, from some magic cauldron. We humans don’t have to produce wealth; it’s always ‘there’. As Obama, a firm believer in the Magic Cauldron, says: ‘the rich’. They are the Magic Cauldron.
The incredible stupidity and utopian unrealism of such a view..well, it’s beyond words.
No economy operates only within production and consumption, and the Keynesian focus on consumption is naive. An economy must invest in order to produce. What is investment? In the plant realm, it’s the seeds…which must be surplus to those eaten by birds..to produce more plants. The Keynesian economic world sees only that the seeds produced = seeds consumed. That’s his equilibrium.
But that’s not how the real world operates. Keynes is ignoring Investment, which is ‘wealth’; it’s surplus above what is consumed. It is used to produce more plants/goods/services. Without that investment – in new equipment, new factories, new roads, more jobs…the economy can’t produce a thing.
Obama is depriving the US economy of its Investment capacity. His energy policies, which deny oil drilling in the US, which are closing coal mines, which are putting in unworkable regulations, are depriving the economy of its energy capacity.
His attacks on small businesses, most of which file taxes at the 200,000 level (which Obama defines as ‘a millionaire’) are depriving the private sector economy of its investment capital.
Remember, govts don’t produce wealth; they consume wealth. Obama’s relentless sucking up of the wealth of the private sector – to give to those who do not produce wealth (public sector civil service, entitlements, welfare etc)..is reducing the INVESTMENT capacity of the US economy to a standstill…as reflected in its GDP.
His massive debt accumulation is depriving the economy of its INVESTMENT capital, for wealth produced by the private sector must now go to service the interest on the debt…rather than being put into investment in the economy.
His increase in the number and scope of the population dependent on govt funding, along with is other policies, means that the private sector is unable to support this dependency.
And, his spread of federalist control over the US economy is weakening state and local controls…which means that the economy loses its capacity for plasticity and flexible adaptations. Instead, as centralist, it becomes rigid, trapped in regulations, unable to change and adapt..and smothers the economy.
That’s Obama’s Keynsian Economy…
Aaah, but marxism itself is consumptive. It consumes the wealth a country had created prior to the parasitic latching onto the host. The host and new hosts are investment for marxism.
This is why all communist countries must be expansionist to survive. Russia had to take over Eastern Europe. When Reagen finally said absolutely no more, then Russia, without new hosts to leech, crumbled. North Korea had to conquer South Korea. It couldn’t, and has turned into an empty vessel. China had to take over Hong Kong and Taiwan was on the list before the leaders there realized that the only countries large enough to make a difference were the US and the European parasites protected by its military, a bigger bite that the Chinese were ready to attemp; so they changed direction.
But for the Boy King the wealth of the US is infinite…that is, he will not be able to drain the country’s wealth during his lifetime and the lifetime of his allies. After that, hey, why should they care? Pelosi has effectively said as much.
Just a quick couple of questions following yours and ETAB deep enconomic wealth of information.
How much U.S. currency is printed and minted in circualtion? Who determines how much currency will be printed and minted for circulation…the nations monetary wealth?
Oh, and if you two want the top 20% who hold and control 80% of the nations wealth to have more money to “invest” in building roads and the like, where do you propose they get it from? The 80% who hold and control only 20% of the nations wealth? Maybe keep running back to the states and federal goverments for taxpayer handsouts far in excess of what they pay in taxes?
Maybe take a good look look at the first column of:
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=205
(Feel free to refute the data)
Want to complain about Democrats regulatory costs? Maybe take a good look at the first graph on:
http://reason.com/archives/2008/12/10/bushs-regulatory-kiss-off
(Feel free to refute the data)
Maybe it would help to understand how monetary wealth in the U.S. works given that only so much currency is in circulation and the top 20% of wealth holders control 80% of the wealth. Then maybe you’d understand what drives and controls poverty and a huge chunk of the federal costs to serve such poverty.
Colin Powell may have said, “No battle plan survives contact with the enemy” but he was quoting von Moltke the Elder.
Keysesianism is an under consumption theory at its base. For the past 40 years or so we have been consuming our way to prosperity. Did it work? Yes. Until it stopped working. As we look around we see that we have consumed the industrial plant of the United States and are up to our ears in debt. We are now confronted with the situation that we either continue consuming everything in sight or come face to face with a mountain of debt. According to David Stockman besides the l4.5 trillion of U.S. debt there is housing debt, consumer debt, state and city debt, corporate debt and some debts that I forgot but it comes to 52 trillion dollars.
When Gulliver visited Laputa, the land of the philosophers, he complained of “cholick”. He was introduced to “a great physician who was famous for curing that disease by contrary operations of the same instrument, a pair of bellows with a slender muzzle of ivory; this he conveyed 8 inches up the anus, and drawing in the wind, he affirmed he could make the guts as lank as a dried bladder. But when the disease was more stubborn and violent, he let in the muzzle while the bellows was full of wind, which he discharged into the body of the patient…
“I saw him try both experiments upon a dog; but could not discern any effect from the former. After the latter, the animal was ready to burst, and made so violent a discharge as was very offensive to me and my companions. The dog died on the spot, and we left the doctor trying to recover him by the same operation.”
Thus Dean Swift’s eighteenth century view of stimulus and other remedies for financial cholick.
The utter silliness and failure of Keynesianism has little to do with Obama, except that, as a Marxist-Leninist, trained by mother, father, and friends of the family, and by teachers in American colleges and universities, Obama has used it brilliantly to destroy America’s political and econmomic infrastructure. It’s a job he will complete, too, unless enough genuine Americans put him–and the people he has brought into his regime–out of office and out of American politics for all time. Even another year of Obama’s Leninist regime is unthinkable to me, but perhaps will be sufferable to all of us if we can put him out of power for the future. (Anyone want to bet whether, if we do, his likeness won’t appear on t-shirts for all time like Che Gueverra?)
Want some evidence beyond what he has done to the economy? See how his [in-]Justice Department operates. Look at what he has attempted to do by attacking the Gibson Guitar Company. (Don’t know? well, it’s to establish a precedent to follow laws of other nations.) Look how his [in-]Justice department prosecutes only capitalist businesses and Caucasian offenses. See how he has nationalized two car companies and turned them over to unions, ignoring their investors (oops, that was economic again!). See how he encourages the illegal flood of illegal aliens. What’s the point? To overwhelm the capitalist economic system and republican political system. To fill the vacuum with Leninism.
There’s an error in the calculation.
If gubamint spending was SUBTRACTED from GDP instead of added, it would all become clear.
And of course, it should be, since the “keynesian multiplier” is actually a divider. Everything gubamint does is less efficient that the private sector and consumes the resources necessary to make the economy grow. Moreover, every gubamint expens is a drag on the economy because it must either be supported through taxes, monetary inflation, or borrowing, each of which reduces private capital.
It’s obvious. Little Paulie certainly knows it. Iit’s just that his love of marxism and his lust to be the progressives paid-for economist easily overcomes his integrity.
I have to agree that government spending is always a cost to the economy, whether in the form of taxes or higher interest rates. And the leftist talk of a government spending multiplier, or government investing in the future is just lies, and if your BS Detector isn’t flashing and screaming when some leftist is saying it, it’s broken and you better fix it. I recommend the Scientific Method for proper calibration of both your Truthdar, and BS Detector. If the model isn’t predictive, it’s wrong and you need to find a new model.
Keynsianism is the last resort of a politician bribing the electorate with there own money.
What is always missing when dicussing Keysian economics is that it had two parts.
When at the bottom of a cycle you decrease taxes, lower interest rates, and deficit spend to increase consumption.
But, the other part to Keynes that the politians never liked is the other half to the equation.
As the economy starts heating up, you raise taxes and the interest rates and cut stimulas spending to slow down the overheating economy and repay the national dept.
What politician in his right mind would run on “we have to raise taxes and the interest rates to create surpluses so it slows down the economy to prevent a bust and to repay the national debt.”
What Keynes said was Say’s Law of the Markets turned upside down. Say, a contemporary of Pres. Jefferson, read Wealth of Nations published the same year as Jefferson’s Declaration of Independence and took to heart Adam Smith’s view that money was not wealth, and gold as money was not wealth (the mercantalist view). Rather, according to Smith, the market production of the national economy was the “Wealth of Nations.” Concentrate on that and the supply of money (or what Smith called “capital”) would follow as sunlight on the meadow follows the rising of the sun. Where “Demand” is money, then, according to Say, Supply creates its own demand. The supply of market goods in the market creates its own demand (i.e., the money needed to buy that which is produced).
Government then screws it up with interference.
So at the top of the natural and unavoidable business cycle in 1929-30 the US government imposed the Smoot-Hawley Tariff Act to protect us from foreign competition (Hoover being an anti-market bureaucrat). As a result the markets collapsed or froze, unemployment became rampant and the money supply (demand) followed the setting of the Capitalist Sun and went to ground. Keynes was an elitist and ran with a small circle of English bureaucrat types (the public managerial class) and instead of trumpeting Say’s lesson learned from Smith, Keynes fought off Marx by telling the Government, essentially, that “All Demand (money) creates its own supply (market goods and services).” Churchill’s 1925 return to the Gold Standard, a reactionary conservative move that did not sit well with a progressive liberal like Keynes, could be countered with a simple use of the government bond printing machine, combined with a complacent Central Bank to buy those bonds with bank-created money (fractional reserves) to create new money. This demand would then create its own supply (which is of course true since the Law of the Markets works both ways) but THERE IS ONE BIG CONDITION! The new money not tied to the gold standard to give it value has to be used to make an investment, not for anything else: meaning, it has to be used to create market wealth, worth more than the cost of producing it with that new money (profit), which you can then sell in the market to absorb and give value to the new money (all new money being essentially nothing else than past profit now congealed in physical form, i.e., market surplus which is all that money is).
As long as the market wealth supply actually grows faster than the newly printed money supply then there is no limit to the amount of new money you can create as all the new demand is giving birth to all that new supply (Keysianism) and then all than new supply is giving birth to all that new demand (Smith-Sayism). By using the new money for production and exchange of new market wealth for the new money, you maximize the multiplier and reduce leakages to the multiplier. By having the government use the new money for pure consumption, waste, fraud and the promotion of crime only, which in the immediate term reduces the available supply of market wealth, which then causes prices to shoot up to rebalance the supply of money and market wealth, which the law of markets requires to always remain in balance (because money offered for exchange has only one purpose, to buy things in the market place that are for sale) then the multiplier is reduced as leakages from the multiplier (caused by consumption, waste, fraud, taxes, inflation, etc.) are increased.
The answer then is easy. In a recession, print new money and go into debt as much as necessary to hit full employment defined as working to make a profit. Laissez fair being stupid and assuredly unreliable, the government should finance new factories (true capital) to employ and be owned by the poor to make profits by glutting the market with new quality and low cost product that has no labor cost built into it, since the workers are advanced money to be paid back from their profits — they are not paid wages which for a profit-motivated worker is a conflict of interest. At best they should be lent money for living expenses to be paid back from the future profits they own (not finance which is cut out of the equation by government which can own no profits which are reserved for living breathing humans). Taxes are reduced as well and when the economy overheats start paying down the debts with the accumulated profits. That is what Keynes really said, or meant, and it would work if you got rid of the entitlements and made the people receiving the new money actually produce something with the sweat of their brow applied to the capital they can now afford. It would make them better more productive people and leave them little time to go out and vandalize their neighbors’ property and steal their market goods out of envy. And best yet, it would make them Republicans, very wary of higher taxes to finance the lazy with ready access, if they worked, to new capital like them, to be paid for after they die with the accumulated fruits (profits) of their labor. If this is what Keynes really meant, and I think it is, I am all for it.
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