Keynesian Economics is Wrong or Right

Keynesian Economics is

  • Right
  • Mostly Right
  • Somewhat Right
  • I don’t know
  • Somewhat Wrong
  • Mostly Wrong
  • Wrong

0 voters

Something I want to investigate. I will quote from a conservative article.
spectator.org/archives/2011/07/2 … sian-econo

One thing I’ve been trying to find out is the percentage of economists that are Keynesian. I’ve done the Googling, but still haven’t found it. I would consider myself in the Keynesian camp.
I think the premise of the attached article is wrong. The stimulus worked, in that it prevented a major depression.

[quote=“Dr. McCoy”]Something I want to investigate. I will quote from a conservative article.
spectator.org/archives/2011/07/2 … sian-econo

One thing I’ve been trying to find out is the percentage of economists that are Keynesian. I’ve done the Googling, but still haven’t found it. I would consider myself in the Keynesian camp.
I think the premise of the attached article is wrong. The stimulus worked, in that it prevented a major depression.[/quote]

That’s the point the hard core conservatives fail to acknowledge. They point to limited success and call it a failure.

In response to how many economists are Keynesians, I think you need to qualify that: Do you mean deficit spending as SOP Keynsians or stimulus spending to respond to a collapse in demand Keynesians?

If you look at the latter, then that would be most of them, judging by popular support for stimulus spending after 2008.

It’s a Keynesian success if this is merely a cyclical problem. I don’t think it is though, as the U.S. simply can’t achieve the growth rates necessary (no developed economy could) to keep up with the growth in debt. Painful adjustments are going to have to be made, yet everyone seems to keep thinking those are things that can and will be done at some fuzzy point in the future. People have been doing this for decades in the U.S. Firstly, the money has to come from somewhere, and where it has come from is debt that will need to be paid back at some point, adding to the pain. Secondly, I don’t believe another depression has truly been avoided. Americans will still see their living standards eroded, it will just be done by stealth via the inflation that will follow debt. The other thing about this is that the decline won’t be gradual. At first, it will appear gradual, but there will be some sort of cliff beyond which the decline becomes precipitous. It’s always been this way in history, with one exception: The British Empire in the 19th century, though they managed that through 1) very careful economic management, 2) massive expansion of their political and economic power. Every other country that has gone down this path has never recovered, and has at some point defaulted on its debt in one form or another.

Let me state that again: only once in history has the path the U.S. is on not ended in calamity.

See Keynes/Liquidity Trap for an explanation why fiscal stimuli have failed to jumpstart real recovery in the U.S. economy as in the past:

Paul Krugman argues that the U.S. is currently mired in a liquidity trap which is why QE 1 and 2 achieved so little. If I understand his argument though it seems to be that the way out of a liquidity trap is more – much more – “quantitative easing” than the Fed has attempted so far. He’s gotten his wish now with the Feds latest plan to go into hyperdrive with what’s being called “perpetual quantitative easing” so we’ll see.

My guess is Keynes’ concept of a liquidity trap is roughly accurate theoretically but I don’t see how throwing more money at it will do anything than propel the U.S. down the same road Japan is two decades down and descending.

japan-Keysnian Poster Child

I think that if congress had passed Obama’s jobs bill, we would be a lot better off. More people would be working and tax revenues would be up. If we had not done the stimulus or had not bailed out the banks, things would be a lot worse still. I would rather save the banks and save the auto companies for real gains immediately than let everything go to hell just to avoid an imaginary problem that many think is completely avoidable.

The vast majority of people are in agreement, I think, that government stimulus and bailouts were necessary to avoid meltdown. Where people part ways is whether hyper fiscal stimulus will free the U.S. economy from the (Keynesian) liquidity trap it’s caught in or trap it in the same downward spiral Japan is trapped in now.

Is it logical to use the (Keynesian) liquidity trap to argue against the Keynesian model? I just wonder.
We’ve been close to zero intrest rates for a long time now. Bernanke keeps saying they have other means to stimulate the economy. But I agree that QE isn’t going to accomplish much. So all we have is to either raise taxes or go to deficit spending. Deficit spending, in the short term, is what we need in my opinion.

Krugman’s analysis is that in the case of a liquidity trap monetary easing will not work, because people don’t believe the central bank will allow it to continue. His argument is that the way out is, just as the Dr. (McCoy) ordered, massive deficit spending.

princeton.edu/~pkrugman/optimalg.pdf

[quote=“GuyInTaiwan”]It’s a Keynesian success if this is merely a cyclical problem. I don’t think it is though, as the U.S. simply can’t achieve the growth rates necessary (no developed economy could) to keep up with the growth in debt. Painful adjustments are going to have to be made, yet everyone seems to keep thinking those are things that can and will be done at some fuzzy point in the future. People have been doing this for decades in the U.S. Firstly, the money has to come from somewhere, and where it has come from is debt that will need to be paid back at some point, adding to the pain. Secondly, I don’t believe another depression has truly been avoided. Americans will still see their living standards eroded, it will just be done by stealth via the inflation that will follow debt. The other thing about this is that the decline won’t be gradual. At first, it will appear gradual, but there will be some sort of cliff beyond which the decline becomes precipitous. It’s always been this way in history, with one exception: The British Empire in the 19th century, though they managed that through 1) very careful economic management, 2) massive expansion of their political and economic power. Every other country that has gone down this path has never recovered, and has at some point defaulted on its debt in one form or another.

Let me state that again: only once in history has the path the U.S. is on not ended in calamity.[/quote]

Curious what you mean; can you give some examples?

[quote=“MikeN”][quote=“GuyInTaiwan”]It’s a Keynesian success if this is merely a cyclical problem. I don’t think it is though, as the U.S. simply can’t achieve the growth rates necessary (no developed economy could) to keep up with the growth in debt. Painful adjustments are going to have to be made, yet everyone seems to keep thinking those are things that can and will be done at some fuzzy point in the future. People have been doing this for decades in the U.S. Firstly, the money has to come from somewhere, and where it has come from is debt that will need to be paid back at some point, adding to the pain. Secondly, I don’t believe another depression has truly been avoided. Americans will still see their living standards eroded, it will just be done by stealth via the inflation that will follow debt. The other thing about this is that the decline won’t be gradual. At first, it will appear gradual, but there will be some sort of cliff beyond which the decline becomes precipitous. It’s always been this way in history, with one exception: The British Empire in the 19th century, though they managed that through 1) very careful economic management, 2) massive expansion of their political and economic power. Every other country that has gone down this path has never recovered, and has at some point defaulted on its debt in one form or another.

Let me state that again: only once in history has the path the U.S. is on not ended in calamity.[/quote]

Curious what you mean; can you give some examples?[/quote]

http://www.piie.com/events/event_detail.cfm?EventID=152&Media

That’s a long video, but it’s well worth watching. The data Niall Ferguson presents is, frankly, shocking, especially the trajectory the U.S. and U.K. were/are on. I was really taken aback when I watched it the first time. As for examples, he cites plenty. I can’t remember if he cites Ancient Rome, but I know he talks about the Spanish Empire, the French from the mid-eighteenth century onwards, the Ottoman Empire, plus several smaller nations such as Mexico and Greece at several times in their histories. One of his theses is that a large part of why the British were able to dominate the French from the mid-eighteenth century onwards was that they really got a hold on their public finances (and therefore, borrowing costs), whereas French finances were an absolute mess. The British were actually in some trouble after the American Revolution, but they were very careful to pay that (and the costs of the Napoleonic Wars) down throughout the 19th century. They also had other advantages though, namely their imperial expansion, as well as being at the forefront of the industrial revolution (which gave them a huge economic advantage). Of course, the British weren’t nearly so clever with money in the 20th century. As he points out in that video, inflation has been absolutely rampant since the second half of the 20th century.

Guy,

Putting aside broader structural issues for the moment, do you think the world’s governments were wrong to respond to the global recession with stimulus packages/tax cuts? Do you see a causal relationship between government/central bank initiatives and the recovery? If you were in charge, how would you have responded to the Great Recession?

QE was to prevent outright revolt among developed nations. QE puts the gas on commodities which effects the worlds poorest the most while QE benefits the upper middle and upper classes, those that have a lot of stocks or housing. End game is soaring commodity prices with not much to show for it -> revolt in poorer countries first. The U.S. is trying to destabilize China with QE however if China floats all that money will come back to the U.S. causing very high inflation.

Forgot to mention that it kept the parasitic banking system in the U.S. alive.

Keynesian Economics is Wrong or Right:

Self-evidently Correct.

[quote=“Gao Bohan”]Guy,

Putting aside broader structural issues for the moment, do you think the world’s governments were wrong to respond to the global recession with stimulus packages/tax cuts? Do you see a causal relationship between government/central bank initiatives and the recovery? If you were in charge, how would you have responded to the Great Recession?[/quote]

I think it was, in one sense, a right thing to do in the short term. I am certainly not saying it didn’t save a lot of pain. However, I think that in the long term, it’s a really bad idea. It’s kind of like that way of betting where if you lose, you double your bet on the next bet. Theoretically, you will eventually win, and win back all you have lost also. Practically though, there are limits. Either the house puts an upper limit on bets or you run out of money to bet. We can draw analogies between those two situations and the market providing credit. Chasing debt with more debt is a very dangerous game. If it doesn’t work, you’re in serious trouble. What may have been painful, but doable before, may be a lot more painful and undoable later.

How would I have responded? I would have taken the massive pain in the short term. It would have been ugly, really ugly, in fact. Yet the pain has simply been postponed and almost certainly magnified precisely because structural issues haven’t been addressed. Such crises are natural mechanisms of adjustment and occur in all systems, not just financial. Adjustment will come, whether people really think it will or should. It simply will.

The difference is though, and this is something Nassim Nicholas Taleb discusses frequently, is that human made systems are often extremely fragile. Biological systems --from the level of cells to organisms to species to ecosystems – often have a certain amount of resilience and redundancy built into them so that damage or removal of one component will not necessarily cause complete systemic collapse. Our financial systems are not nearly so robust, and this really needs to be addressed.

What’s amusing is Keynesian true believers like “Nobel Prize winner” Paul Krugman having to argue that circling the liquidity trap drain like Japan is currently doing is a desirable future for the U. S. economy.

[quote=“GuyInTaiwan”]
I think it was, in one sense, a right thing to do in the short term. I am certainly not saying it didn’t save a lot of pain. However, I think that in the long term, it’s a really bad idea. It’s kind of like that way of betting where if you lose, you double your bet on the next bet. Theoretically, you will eventually win, and win back all you have lost also. Practically though, there are limits. Either the house puts an upper limit on bets or you run out of money to bet. We can draw analogies between those two situations and the market providing credit. Chasing debt with more debt is a very dangerous game. If it doesn’t work, you’re in serious trouble. What may have been painful, but doable before, may be a lot more painful and undoable later.[/quote]

Why not spread the pain out over a longer period of time? Reduce government spending, increase taxes to the wealthy. Do enough of this and there should be some sort of recovery within a few years that will increase government revenues. The goal should be a balanced budget within ten years.

Why the need for dramatic solutions? These tend to attract dramatic minds, not the kind of steady hands that one wants guiding the ship of state.

[quote=“BigJohn”][quote=“GuyInTaiwan”]
I think it was, in one sense, a right thing to do in the short term. I am certainly not saying it didn’t save a lot of pain. However, I think that in the long term, it’s a really bad idea. It’s kind of like that way of betting where if you lose, you double your bet on the next bet. Theoretically, you will eventually win, and win back all you have lost also. Practically though, there are limits. Either the house puts an upper limit on bets or you run out of money to bet. We can draw analogies between those two situations and the market providing credit. Chasing debt with more debt is a very dangerous game. If it doesn’t work, you’re in serious trouble. What may have been painful, but doable before, may be a lot more painful and undoable later.[/quote]

Why not spread the pain out over a longer period of time? Reduce government spending, increase taxes to the wealthy. Do enough of this and there should be some sort of recovery within a few years that will increase government revenues. The goal should be a balanced budget within ten years.

Why the need for dramatic solutions? These tend to attract dramatic minds, not the kind of steady hands that one wants guiding the ship of state.[/quote]

That won’t work because of the following. Government spending needs to be cut by some insane amount (Winston Smith has shown a report suggesting 35%, with simultaneous tax increases of 35%). Tax increases to the wealthy won’t raise enough money. Kyle Bass has pointed out that the entire net worth for the Forbes 400 would balance the budget for one year. Then what? Tax increases, were they to occur, would have to increase for everyone, yet that would be wildly unpopular and difficult to implement. Again though, you’re assuming that all of these things will necessarily increase growth at sufficient levels. Developed economies grow at a few percent per year. It’s just not enough. The U.S. is simply not going to pull off a 5%+ or 8%+ growth rate, regardless of who is in power.

As for balancing the budget within ten years, the current debt is in the order of 16 trillion USD. The current deficit is in the order of one trillion USD per year. That means that in ten years, the debt should be something like 26 trillion USD, though that wouldn’t account for the compounding of the debt. Even if, over the next ten years, deficits were reduced to half what they are now, that would still make the debt 21 trillion USD. That’s almost one third more than what it is now. What that means is that before the debt itself could be tackled, a larger portion of revenue itself would go to financing that debt (i.e. the interest on it). People keep skirting around this issue hoping that there is some magic bullet. There simply isn’t. There is going to be major pain ahead, and a general decline in living standards for many Americans (many Europeans, Japanese, and others also). The way they will deal with the debt (at least in America) is by inflating it away. That’s going to cause massive pain in itself. Ask anyone who lived through the 70s what that was like. There simply is no magic bullet here.

Winston is cherry picking his IMF reports, if he isn’t just getting quotes from right wing blogs. Read the latest IMF report on debt and you’ll see they suggest that generally an easy monetary policy combined with inflation should help most countries to deal with their massive debts.

It’s not like we don’t have examples of countries lowering debt levels over 100% and without stellar economic growth.

Exactly as you said, the only way they can deal with the snowballing debt (because they simply cannot raise taxes enough due to the current political system there) is by inflating it away. Which is what they are doing now. It’s hard to see this though because there are so many other ‘big economic things’ happening at the same time.

Europe has a debt and austerity crisis which is depressing demand. The US housing market and consumer market is also depressed. Even Asia has it’s foot off the boil. This seems to be depressing the effects of the expected inflation. But there is inflation occuring in the oil and gold market (oil again is tricky as demand and supply struggle to stay even…and being priced in USD primarily). Other commodities like iron ore and copper are getting steamrolled due to Chinese games and huge speculative investment that has already occurred.
Then you’ve got changes in the labour market that depresses employment and reduces inflationary wage pressure (compared to the 1970s for example). It’s a real mess!

Inflation is starting to rear it’s head in Taiwan but again Taiwan is pretty strange, while almost everywhere else was booming Taiwan pretty much stagnated for the last 10 years and that also prevented inflation that would have occurred previously.

Is anybody or anything safe :slight_smile: . I would say invest some money into forward looking companies like google or diversified companies which will take you along the rocky ride to come. The farm land isn’t a bad idea in the context I guess.

I just can’t see anyway out from inflation speeding up in the next couple of years…but it feels weird because it’s not very strong at the moment…and there are strong deflationary pressures in areas like housing bubbles and labour and over capacity in mining and factories.

EDIT- There have been examples of countries cutting debt and spending through tough measures and pulling through. Ireland in the late 80s, Canada in the 90s. But I don’t see that being possible in the US political system now. And that means they are going to export their inflation to the rest of us.

Winston is cherry picking his IMF reports, if he isn’t just getting quotes from right wing blogs. Read the latest IMF report on debt and you’ll see they suggest that generally an easy monetary policy combined with inflation should help most countries to deal with their massive debts.

It’s not like we don’t have examples of countries lowering debt levels over 100% and without stellar economic growth.[/quote]

Can you please provide a link, so I can read it? I’m not sure which report you mean.