Keynes Is Dead

[Conan71]

The meme of, "that's from a right wing publication" or "That's just those right wingers at Heritage" is wearing thin on economic issues.  The President's most important tools regarding the economy aren't money supply or government spending, it's the ability to create confidence in the economy via a favorable regulatory environment, espousing whatever paradigms business owners and operators see as "pro-business".  Health care reform right now is a long, dark, creepy hallway with unknown benefits or repercussions deep in the future.  Things like this don't inspire those who hire.

It doesn't matter as a liberal if you think tax cuts for the wealthy are wrong or don't work.  If that's what corporations and small businesses want as a stimulus to hire, then give it to them.  It's this psychological aspect which is ignored when preaching Kenesian economics.

Europe appears to be going away from the Keynesian model and it appears to be having good effects so far.

"Obamanomics has done more than just keep unemployment high during a modest recovery. It may also be keeping high joblessness permanent by raising the costs to businesses of hiring new workers.

July's 9.5% unemployment level was bad enough. But the real problem is that the private-sector jobs machine, which is usually going full tilt at this point in a recovery, now seems to be broken.

To many, it's becoming clear that if President Obama's radical job-killing agenda stays in place, job growth will be nonexistent.

One of America's great advantages has always been its flexible, private-sector labor markets. From 1985 to 2008, U.S. unemployment averaged 5.6%. For the six largest economies in the European Union, the average rate was 34% higher, at about 7.5%.

Yet many of those countries now have jobless rates lower than ours. Why? They've been dropping Keynesian stimulus as a strategy and moving more toward cutting spending and, in some cases, cutting taxes.

Not Obama. He and Congress remain wedded to an outdated economic model that replaces the private sector's animal spirit and dynamism with the dead hand of government bureaucrats and their unions as the main economic forces in our country."

"Businesses today face rising burdens — from ObamaCare, the financial overhaul, the expiration of tax cuts for entrepreneurs, the threat of new energy taxes or the surge in growth strangling regulations on business — that discourage hiring.

"The real threat to a robust recovery on the labor side," Gary Becker, a Nobel Prize-winning economist, warned recently, "has come from employer and entrepreneurial fears that once the economic environment improves, a Democratic Congress and administration will pass pro-union and other pro-worker legislation that will raise the cost of doing business and cut profits."

It's never been costlier to hire and keep a worker employed. And as ObamaCare kicks in and Bush's tax cuts expire — not to mention the huge tax hikes that will be needed to make Social Security and Medicare solvent — businesses will simply quit hiring."

"This Keynes-on-steroids model has been tried before, in Europe. It didn't work. It led to permanently high levels of joblessness — what economists call structural unemployment.

A recent peer-reviewed study in Sweden found that for every 100 new jobs government creates, 114 are destroyed in the private sector. Similarly, a French study of data from OECD countries from 1960 to 2000 discovered, on average, "creation of 100 public jobs may have eliminated about 150 private sector jobs."

http://www.investors.com/NewsAndAnalysis/ArticlePrint/543800/201008131907/Jobbed-In-America.aspx

[Conan71]

Rather than crowd the first post with another article... read on.  From the birthplace of Keynesian thought.  It's not worked in England either.  Interesting to note that the meme of "It wasn't a big enough stimulus" is being use there.

"Budget Blowout

And just as the Keynesians were wrong three decades ago, they are wrong now.

The U.K. has been in Keynes overdrive for the past 18 months. The budget deficit is already more than 12 percent of gross domestic product, on a par with Greece. And while the Greeks are cutting spending, the British deficit is widening. Figures for January showed another fiscal blowout. At the same time, interest rates have been slashed to 0.5 percent. And the pound has slumped in value, which is supposed to boost demand for British goods, and help close the trade gap.

Just about everything possible has been done to encourage consumption. The results have been miserable.

Retail sales excluding gasoline in January fell 1.2 percent from the previous month, twice as much as economists forecast. The number of people receiving unemployment benefits jumped to 1.64 million in January, the highest level since April 1997. The yield on U.K. government debt is now higher than on Spanish or Italian bonds, a sure sign that investors are losing faith in the country's ability to pay its debts. The inflation rate has also accelerated to 3.5 percent.

Triple Whammy

In reality, Britain has the worst of all possible worlds: a stagnant economy, a crippling budget deficit and rising prices.

The Keynesian consensus is that things would have been far worse without the stimulus provided by government. And if the economy isn't pumped up with inflated demand, it will collapse back into recession. If it's not working, that just proves the stimulus should be even larger.

It is the argument quacks always push: If the medicine isn't working, increase the dosage.

And yet, reality has to intrude into this debate at some point. The deficit can't get much bigger, interest rates can't be cut much lower, and sterling can't lose much more value.

Stimulating the economy isn't working.

In fact, it's only making it worse. Consumers and businesses don't want rising taxes. A falling currency pushes up the cost of everything the U.K. imports, stoking inflation. Savers get decimated, and yet the banks remain reluctant to lend because they rightly believe the economy is in the doldrums.

Recipe for Recovery

What's needed is a total change of direction. Get the deficit under control. Raise interest rates to restore confidence in the pound, and reward saving. Cut taxes to stimulate enterprise and investment.

And yet the real lesson of the U.K. in 2010 will be of wider significance. A country can't spend its way out of a recession. And it can't fix what was at root a problem of too much debt by just borrowing more and more.

In the country of its birth, Keynesian economics is being tested. If the economy isn't growing at a healthy clip again by the end of 2010, its failure will be obvious to everyone."

http://www.bloomberg.com/news/2010-02-22/deathbed-of-keynesian-economics-will-be-in-u-k-matthew-lynn.html

[Gaspar]

There are only two ways of coordinating the economic activities. One is central direction or coercion. The other is voluntary cooperation or the free market.  Only one produces permanent economic growth.

This has been tested again and again, and our tendency to ignore history means that we will someday attempt to test it once more.  For now it may be dieing, but it is sure to raise it's head in the future to be lopped off once more.

Socialism, Communism and Keynsian economics all rely on the premise that that their is a fixed amount of assets available.  They completely ignore the human drive towards innovation and invention.  Workers are workers, like ants in a colony.  These models go against human nature.  This is why they fail.

Most economic fallacies derive ... from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.– Milton Friedman

[nathanm]

Those articles exhibit a fundamental misunderstanding of our economic situation.

Despite all our stimulus here in the states and the vast federal budget deficit, there has been very little growth in overall government spending, thanks to severe cutbacks on the state level. The problem we are having is 1937 all over again, but God forbid we let history inform decisions made today.

[Gaspar]

Those articles exhibit a fundamental misunderstanding of our economic situation.

Despite all our stimulus . . . and the vast federal budget deficit, there has been very little growth in overall government spending.

Quote of the year!

. . .and despite the huge rise in unemployment there has been very little unemployment!

[nathanm]

Quote of the year!

. . .and despite the huge rise in unemployment there has been very little unemployment!

I take it you don't understand that states also have budgets? Budgets which have been reduced as much as the federal budget has expanded? That the primary cause of the oversize deficit at the federal level is the significant reduction in tax receipts?

[Gaspar]

I take it you don't understand that states also have budgets? Budgets which have been reduced as much as the federal budget has expanded? That the primary cause of the oversize deficit at the federal level is the significant reduction in tax receipts?

Yeah. . .wrong!

As a % of GDP it has risen around 7% since this administration took office.  Historically it has been higher, but not since WWII when it approached 50%.  At the rate we are climbing we will exceed that unless we start to cut spending after the elections in November.

50% of our labors burn't through government spending is not sustainable.  Heck 30% sucks.  We got below 18% under Clinton.  Again, history shows that we are best off as when govmt spending is falling vs GDP, than when it is climbing.

[nathanm]

Yeah. . .wrong!

Yeah, no. Once again, you missed the part about including states.



That's not counting entitlements, which would be silly, since of course those are going to go up drastically when unemployment is hovering near 10% overall and many subgroups are at 15% and over. It makes more sense to look at what the government buys and spends on itself and what it spends on infrastructure.

Let's look at federal employment. Is that where the money is going?



Nope, not really any higher than when Obama took office if you exclude temporary employment for the Constitutionally-mandated census. I'm still trying to find the huge government expansion.

One more for you:

[Conan71]

Here's a dynamic I'd not considered until now as far as the difference in strategy in the Great Depression vs. now.  Supposedly large corporations, small businesses, and wealthy individuals are hoarding cash, waiting for the right signs it's time to start back into an expansion phase, start hiring and start buying new equipment.

In the 1930's it was a far different story, the economy was less globalized (but was becoming moreso with the advent of WWII and the selling of armaments to our allies), corporations were going bust one after another, as were wealthy individuals.  We were also a much more labor-oriented workforce back then.

Since those with money are apparently hoarding the idea is now to confiscate the money so the government can spend it.  We actually needed the government to spend money on infrastructure projects back then to put people to work in the areas where they lived.  I'm not so sure we need the government spending now.  What it appears we really need is more consumer and b to b transactions.

[Gaspar]

Nathan,
Where is this going? 
Krugman's gov't consumption vs spending?

Some San Diego Professor's graph that attempts to display government spending by illustrating it AS A SHARE of NOMONAL (not corrected for inflation) GDP rather than a comparison of actual GDP.

That won't get a passing grade on a curve (there's a joke there).

[Conan71]

No Gaspar, I think it's the old goal posts on skids trick.

[Gaspar]

Well, it's quickly derailing into a discussion of what the definition of "is" is.

I'm sure there are a thousand academics attempting to validate why things aren't working the way they'd hoped, and I suppose the best way to do that is simply to redefine the terms.

I'm too simple minded for that kind of economic theory.

[nathanm]

You're right. I did move the goalpost to exclude entitlement spending, which I had not previously specifically conditioned my statement on. I explained why I think that's far more sensible than including entitlement programs in the number.

Also, inflation has nothing to do with the difference. The difference is in a) including changes in the state budgets and b) correcting for the change in GDP, which only serves to obscure the lack in change of overall government spending

As with entitlements, it is plainly obvious that government spending as a percentage of GDP will rise when GDP declines due to a recession. Looking at the raw numbers is far more illustrative in this particular situation. In others, percentage of actual GDP is more appropriate. Which is best depends on the information you are looking to find, as they mean different things.

Gaspar, you really should read Krugman's blog. He explains quite clearly exactly what he got right and wrong, and that the situation we find ourselves in is the one he expected given what the government actually ended up doing. This as opposed to the economists in the Administration who made stupid claims that have since been proven false and the economists the right is relying on who have also made stupid claims that have since been proven false.

He's definitely not the be all and end all of economics, but he's gotten a lot of things right and should be included in any reading list on macroeconomics.

[Gaspar]

Gaspar, you really should read Krugman's blog. He explains quite clearly exactly what he got right and wrong, and that the situation we find ourselves in is the one he expected given what the government actually ended up doing. This as opposed to the economists in the Administration who made stupid claims that have since been proven false and the economists the right is relying on who have also made stupid claims that have since been proven false.

He's definitely not the be all and end all of economics, but he's gotten a lot of things right and should be included in any reading list on macroeconomics.

I have nothing against Krugman.  I like him.  He posts quite a bit on many of the libertarian related sites, has written great articles! For the most part is an excellent economist.  My point was that the consumption vs spending graph had nothing to do with your attempt to refute what I said.

I was trying to figure out where we were going with this.  Don't mind thread shift, but at least point us in the right direction. 

(corrected to remove my mention of Krugman leaning toward the Mises tradition.  That was pushing it)

[Gaspar]

I correct myself further.  On closer inspection (Googly) of Krugman articles.  I can find very little I'd like to hang my hat on with him.   

I had him SERIOUSLY confused with someone else.