The View From 1776

Recessions And Basic Economics

How are we to end Obama’s Great Recession?  Keynesian economic theory has completely failed to do the job.

Posted by .(JavaScript must be enabled to view this email address) on 11/21 at 06:04 PM
  1. Thomas,

    Thank you for a thoughtful exposition of your economic analysis. I think we are probably in close agreement on many points. On others, we part ways, including, the following:

    It is not quite accurate to say that I believe that only government spending can produce an increase in consumer spending. To economists, it does not matter who increases spending (government, the private sector, the military, foreign purchasers), the point is that to “prime the pump” there must be a sizable injection of money into the economy. In fact, usually only the government has enough economic power to make an immediate impact, so in that sense, you are correct. But the point is not that “government funds” are somehow magical and only they can do the trick.

    I think you would agree on this subtlety. I think you would agree that if a spaceship from Mars arrived with huge bags of money, wanting to purchase American goods and services, that the economy would take off with that injection of funds, and, I dare say, you would be perfectly happy for the Martians to make the investment in our economy.

    So, I think we agree on the mechanism of what can make the economy blossom. We just disagree on who should provide the money to make it happen.

    I also suspect that you see the picture as more of a steady state question. Liberal economists will explain that the economy is never steady. It is either heating up or cooling down. We Keynesians favor, that to the extent possible, keeping the economy on an even keel is a legitimate function of the Fed and other parts of the government.

    (I believe you think there should be no intervention at all by the government and that the magic market will always self-correct if left alone. And that even if we are in a depression, that is no reason to tamper with the economy because eventually things "will get better.")

    When the economy is overheating, we Keynesians instead favor tamping down the influx of money by cutting government spending - less money for the military, infrastructure, and tax increases. That puts a damper on things. But when the economy is dying, the only big dog on the block is the government, who can decide to pump in some cash in the form of new roads, bridges, mass transit, aid to education, etc. This influx of dollars, you will agree, will indeed get things going again (even if you do not approve of the method!)

    The fear of government intervention seems to be based in large part on a fear that inflation will always accompany any stimulus. If you are honest you will admit that although conservatives have been predicting run away inflation for as long as you have been writing this blog, inflation is lower now than it has been historically.
    Posted by .(JavaScript must be enabled to view this email address)  on  11/21  at  08:11 PM
  2. There are no aggregate people. There is no "aggregate demand" nor "aggregate supply".

    Spending does not end a recession. The ending of mal-production does, which is to say. Once the mal-invested resources and the mal-production has been re-valued, then rational economic calculation is restored, and we have recovery.

    Yes, inflation and mal-investment and distortion of supply, demand and prices have always accompanied Keynesian "stimulus".
    Posted by .(JavaScript must be enabled to view this email address)  on  11/22  at  10:04 AM
  3. Jay, Perhaps "it does not matter who increases spending," but it does matter where that money comes from and where it goes. "Priming the pump" with fiat currency borrowed from investors that tax payers must repay is of dubious value--it creates an expensive burden on the future. If done in moderation that might be excusable--IF it really helped stimulate productive business activity. But in the excess we have seen in recent years it just frightens business into cutting back--the opposite of what is intended.

    However, the real problem is how the money is spent. If the governments actually spent the money on essential infrastructure it would create some productive activity with long-term value. Unfortunately, a lot goes to pork projects that are wasteful, or to favored special interest groups to line their coffers. And the rest ends by being spent on consumables--If everyone spends a little more on soft drinks or twinkies, how doea that help? It may raise the monthly statistics of consumer spending, but it will not help the economy. Further, to the extent the money is spent on imports from China, et al., aren't we stimulating the foreign nations economies instead of our own?
    Posted by bill greene  on  11/22  at  07:48 PM
  4. Bill,

    You are quite right that designating how "stimulus" funds are allocated is subject to parochial demands by the legislators who vote on the bills. In this, Republicans are just as (if not more so) guilty than the Democrats in carving out their piece of the pie for their district. We call that demand "pork" when it is for somebody else's district. We call it skilful legislating and "bringing home the bacon" when it is for the new school in our district!

    We would, of course, rather see stimulus funds spent on durable infrastructure (bridges, roads, rails) that has the added benefit of making commerce work better. But even the purchase of Twinkies will increase the output of a bakery and put more money into the pockets of the bakery workers, who can then go out and buy a new car, a more durable good. So, even purchases of consumables has some multiplier effect.

    And, yes, "Buying American" has a much greater impact on the economy than purchasing Chinese goods, for which Americans get only the mark-up on the wholesale price.
    Posted by .(JavaScript must be enabled to view this email address)  on  11/23  at  11:39 AM
  5. Jay!! We agree that 2/3 of the stimulus expenditures are counterproductive--the other 1/3, the twinkies, colas, donuts, are not much better. You say they will create more profits or jobs for Dunkin Donuts but at what cost? If the national debt was increased, witrh consequent future interest and principal payment obligations, was the small benefit worth while?

    And there is 4th place the money goes--many people, concerned about the recession that the stimulus is supposed to cure, will pay down debt or add the funds to savings. Again, the impact on the economy--Nada- and debt is increased.

    How can anyone, understanding the above, support cash for clunkers, 1st time home buyers credits, and other such boondoggles??
    Posted by bill greene  on  11/23  at  02:04 PM
  6. This info is very useful for me! Thanks for sharing.
    Posted by write essay for me  on  11/26  at  04:26 AM
  7. Jay's philosophy of government, as stated above, reveals the basic flaw in most liberal thinking:
    "We Keynesians favor, that to the extent possible, keeping the economy on an even keel is a legitimate function of the Fed and other parts of the government."

    First, they state an obvious and virtuous truism as a worthy objective. Keeping the economy on an even keel, eliminating poverty and hunger, controlling climate change, and negotiating world peace, are among such worthy goals.

    Second, they concede that the process will be successful only "to the extent possible," thereby indicating that any partial success will be worth whatever the cost may be, while ignoring to what extent, if any, there will be any success, and avoiding the comparison of how "success" is measured compared to doing nothing.

    Third, they baldly assert that such efforts, whatever they may be, "are a legitimate function of the. . . government," This ignores Constitutional limits and assumes that, in this case, the Federal Reserve, as a consortium from Wall Street and banks, is an appropriate clique to attempt to keep things on an even keel--even though in its almost 100 years of existence it is arguable that it has exacerbated cycles.

    Fourth, they argue theoretically: Because growing successful economies usually display vigorous consumer spending, they assume that if they can somehow make the monthly consumer speinding numbers increase, that will create a growing successful economy. Quite differently, a concrete thinker realizes that if John Doe somehow can balloon his credit card limits, and buy his family a host of goodies, that increased consumption will not put his family on a solid financial footing!

    Fifth, the liberals, once enamored of a theory, will cling to it regardless of its proven flaws, because, for them, the "idea," the "beautiful concept," is an intellectual end in itself. Thus in spite of the four flaws I mentioned in posts #3&5 above that render stimulus spending ineffective, and probably harmful, a true liberal will persist in supporting broad shot-gun attempts at perking up the economy.

    Sixth, they will pursue their dreams with increasing zeal, ignoring the implications of astronomical numbers, such as trillions of dollars of deficits, skyrocketing debt, and incredible unfunded liabilities.

    That is why Liberalism is often described as a form of insanity.

    Posted by bill greene  on  11/26  at  08:18 AM
  8. The idea behind this article is excellent, and for me the first item is the real gem here: most of the people spend their entire lives only consuming what is created by others, and creating nothing themselves--or never sharing what they create, which is better than not creating at all, though not the best they could do.
    Posted by research paper  on  11/27  at  01:12 PM
  9. J Jay,

    First, I must congratulate you on the new civility. That said, I am still going to debunk nonsense as I find it (though I will match civility-for-civility).

    In comment #1 above you protest “It is not quite accurate to say that I believe that only government spending can produce an increase in consumer spending.” However, that is precisely what you argued by your comment #3 to “Numbers Confirm It. Ours is a Socialist State” (see http://www.thomasbrewton.com/index.php/weblog/comments/2989); and, it was to that which Thomas here refers and responds in “Recessions and Basic Economics”. There you wrote “If you maintain that during a recession that it is best to reduce spending by all parties, how does that get the economic engine going again? ... The only way for demand for his product to increase is for more customers to have enough money in their pockets to buy! “, and then characterized this ‘assigned approach’ as nonsensical. Therefore, in virtually the same breath you complain of an imputed position to you, you impute another to Thomas that is not remotely his. Is “not quite accurate” the same as ‘fairly accurate’? How, then, does that not imply you strongly believe in spending our way out of recessions? And, if true that you advocate spending our way out, why quibble Thomas [maybe] got some minor detail wrong that you never identify and which in no way alters the imputed premise ‘inaccurate’? The fact remains you do believe government is the proper instrument for spending ourselves out of recessions, and you have absolutely no confidence (zero, none, nada) in the business community achieving that objective on its own (despite it has done so for centuries). More than that, your Marxist hostility toward business (aka, Capital) practically oozes from your every comment and defenses of socialist positions from Abortion-on-demand to Zero-CO2 (including fiscal policy); thus rendering your complaint of misrepresentation rather comical.

    In your own defense (and as usual), you invoke the authority of experts. You never provide any citations to these supposed experts, and yet persist in speaking for them as though you are some kind of authority-on-authorities or spirit-channel. The particular experts you invoked this time around (economists), with minor exceptions say few of the things you ascribe to them; or, at least, certainly not the way you say them. This not surprising because (as I wrote in the earlier post), you clearly have never studied economics (even as to basic theory) as demonstrated by your garbled presentation of the subject. I seriously doubt you can even name a single contemporary economist (without some serious research – not your forte) – who’d then agree with your mangled assessment of their ideas (and, please don’t cite Bernanke because he’d be aghast at your nonsense). You even go so far as to conflate yourself with lefty economists by referring to yourself in the plural as “we Keynesians”, despite you are horribly misinformed regarding Keynes and modern so-called Keynesians. Despite there are significant numbers of self-labeled ‘Keynesians’, the theories they espouse have devolved to the point that, properly, they should be called ‘post-Keynesians’. For example, Keynes opposed the very sort of large structural deficits that Keynesians extol and are features of modern federal budgets and fiscal policy (Democrat or Republican). Keynes himself early on discarded that which modern Keynesians (and you) persist in believing about his ‘pump-priming’ proposal (i.e., that it can revive a flagging economy), yet pump-priming is an essential proposition distinguishing Keynesians from non-Keynesians. Keynes principal object in pump-priming (as in other proposals) was to reduce unemployment; and only obliquely considered productivity and/or stoking failed economies as byproducts. Keynesians deem this proposal (and others) ‘successful’ simply because it was shown to reduce unemployment (which it does at least briefly). However, reducing unemployment (according to Keynes prescription) is not synonymous with increased prosperity, and pushed too far/long invariably results in an asymptotically falling prosperity of the kind typical of pure socialism (Soviet model). He emphasized employment (even to the burden of prosperity) because runaway employment was the overriding issue of his day. What Keynes failed to anticipate (yet later acknowledged) was his stimuli and other measures did not produce the results expected of them (at best). At worst, they increase unemployment other than in the very short term – and drive up debt.

    One factor Keynes neglected to consider (as well as a great many armchair economists either side of the divide) is whether all people are actually employable. There is a collective resistance to the idea not everyone is employable, want to work, resists working and/or are incapable of holding a steady job. In this category I place the severely mentally-unstable, some (though not all) drug-addicts and alcoholics, the perennially lazy (aka, bums & moochers), work-capable disabled ‘may-I-be-excusers’, the too-rich-to-bother, subsidized professional-students, and other descriptions. Already, BLS excludes children, homemakers, the legitimately-disabled, retired-persons, and others from its calculations; so why not exclude the ‘work-impervious’? Keynes and his successors at BLS have been reporting for six decades we have reduced yet never quite eliminated unemployment. That is most likely because we did briefly eliminate all practical unemployment (at least as far as practical without abandoning the welfare-state model), but then failed to take any note of that because it wasn’t ‘politically-useful’ to declare victory over it. Unemployment sat at a nanny-state low from 1998 to 2007. What remained were the ‘unemployable’; who ought not to be counted as if they might join the ranks of productive citizens no matter how hard we try to shift tem into the ‘employed’ column. They do need to be counted for purposes of data reconciliation, but not as ‘unemployed’ as though they want or can be compelled to work. Rather, they should be counted as ‘unemployables’. Doing it that way, we would be honest regarding the failure and its causes, and stop the demagoguery that insists mean old Republicans are to blame. If any object to this characterization, do speak up.

    In your comment to “Numbers Confirm It ...” you misrepresented Thomas’s points far more than you here accuse Thomas of misrepresenting yours. The difference being Thomas pegged your position without much in the way of distortion, whereas you distort the views of others (not just his) extremely and rather brazenly. You can also read, there, my comments illustrating the extremeness of your misrepresentations while debunking your other points. You are welcome to ‘take me to task’ for having ‘misrepresented you’ however much and often as you wish as I relish the opportunity of unmasking humbug as each instance becomes a ‘teachable moment’.

    Background Links

    http://cameroneconomics.com/fiscal_policy.pdf - I disagree with some this opinion piece, but writer makes a valid point regarding stimuli becoming permanent budget fixtures, and that that makes them still more costly than if they were quickly recognized as a failure and abandoned before doing serious damage. Liberal demagogues being what they are, however, loathe admitting any failure or harm.

    http://www.volconvo.com/forums/specials-invitations/42888-what-keynes-really-prescribed-fiscal-policy.html - debunks Keynesianism’s key features by explaining Keynes

    Posted by .(JavaScript must be enabled to view this email address)  on  11/28  at  05:53 AM
  10. One thing I just want to say is that your Blog is so perfect
    Posted by masterpapers.com  on  11/28  at  07:07 AM
  11. Bob,

    If your paragraphs #2 & #3 are examples of your best "civility," I shudder to think what you write when you feel a mood of "incivility" coming over you!

    My point about getting a stalled economy moving, which I appear not to have successfully made, was that austerity is counterproductive and taking money out of the economy tends to reduce economic activity. The converse, putting money into the economy heats up economic activity. The subtlety I was reaching for was to say that who injects the money into the economy does not alter the effect of the injection. So, there is nothing magic or special about "government" money doing this job. The source of the funds does not alter the effect of the injection.
    Posted by .(JavaScript must be enabled to view this email address)  on  11/30  at  11:24 AM
  12. J. Jay,

    I said it would be civil, and that I would match your level of civility; and that I have done (you may want to review some of your own incivility going back many months before casting aspersions). That does not mean I choose to be gushingly polite. I congratulated you on being more civil than heretofore, but I did not say or imply your performance in this respect was perfect or even close. We have seen you briefly clean up your act, only to revert at the first instance of discord. You still have a way to go, and you still snuck in a jibe or two you thought none would notice (or, perhaps, you are unaware of an automatic tartness in your ripostes). Regardless the civility, I will not sugarcoat the nonsense you regularly dispense as though reasonable (it isn’t). I refrained from mocking you at several points in my rebuttal where you overstepped; choosing, instead, to expose the hubris only. Had I deposed your nonsense without this much civility or served you the kind of intense incivility of which you are both guilty and notorious, your cheeks would surely be burning by now. They aren’t because I kept it, in all respects civil in proportion to your own (or better); and refrained from making stinging personal remarks as might have discouraged your progress. All I did in my last post (#8) was to unmask fantasies, distortions and outright inventions you routinely engage in with which you routinely defended nonsense while mocking others (or worse). That you still employ such comments (however much toned down) along with your history, suggests the civility masks a hostility that invites disbelief. It was unvarnished truth, therefore, and not the slap of an unwarranted incivility you felt on your cheek.

    As it is you who is the interloper in [what was an otherwise agreeable] fraternity of opinion, who first tore into us, who entered into these discussions with an intent to disrupt and to be as obnoxious as possible, whose initial posting mocked conservatives cruelly and without first engaging us in any discussion, who kept up a steady stream of slurs and invective over many months against any who dared contradict you, regardless we returned or withheld your fire, and who has been largely indifferent to both reason and pleas to restore order; it is also you (and not we) who needs to mend these particular fences. Typical of those who argue against truth or from deeply flawed convictions, you early and routinely resorted to making your attacks personal and derailed every argument with nonsense and falsehoods as you could find nothing else with which to disarm reason. The measure of our civility is not, therefore, one of perfect cordiality but, rather, is measured by our restraint in not taking revenge upon you in this singular moment of temperance.

    [Sidebar: Having said that, and to be perfectly honest, I enjoy your posts immensely and would not for a moment seek your removal from these lists, because having a liberal/socialist in our midst makes our discussions much livelier than they would be without you (too much self-affirmation gets awfully dull and limits discourse to only that which is on the table). So, don’t for a moment think you are unappreciated. However, that does not mean you are any less enjoyable for being civil. I heartily believe civil-debate the best, because that frees us to attack each other’s ideas without attacking each other (and, I do so relish a lively debate!)]

    It takes more than a single instance of civility (or two or three) to reestablish goodwill. Think of goodwill and trust as a savings-account against which we can draw in moments of stress. As with reputation, we begin life handed trust and goodwill that is not yet earned. That is our starting credit or initial-balance, entrusted to us by a generous society of which we are to become members. At that point, it is more a question of retaining and increasing this balance sheet than it is ours as a matter of virtue or effort. These are easy things to squander through indifference and carelessness; and, once gone, can only be retrieved through great effort against a reserve of distrust, disbelief and antipathy. You cannot expect others, therefore, to instantly yield that which you never gave or saved, and took delight in squandering. It is for you, therefore, to endure whatever lingering animosity animates those you so long abused. Criticizing is a key element in determining the reform is genuine, indifferent or pretended, and is necessary to your rehabilitation; for, without that, there can be no judging the depth of your sincerity. You must expect there will be some repetition of your several flaws until satisfied you mean it, and can take your proper place among us (however much you still believe in nonsense).

    Even more critical to rehabilitation, is openly admitting the abuse you steadily and unfairly heaped on others. Until you do that, you can never be free of it or of the intemperate person you became long before you met us. This needs to be both public (to those abused and the wider community) and to yourself. You can’t change how you interact with others while pretending all you did was fine. That says ‘I can resume my abusive ways any time I feel threatened’, or simply because you no longer think there’s an advantage to remaining civil. The failure to admit abuse is the same as defending it as though it never happened (or that you are justified in abusing). And, be forewarned, admitting to faults is not a onetime deal, but a habit that must be repeated with each new offense or slip; or, at least until you have established sufficient credit against which you can draw in moments of stress or lapse. Whether you realize it or not, you have always been treated with far more decency in this place than you gave, and should be grateful we never sank to that level along with you.

    I will be the first to admit I have not always responded to your abuse with perfect civility. I give all credit to Thomas as the better man for that. I regard nonsense, itself, an affront; especially when it is excessive, careless or deliberate. But, unlike some, I have always distinguished between nonsense and its dispenser; responding to each according to its or his abuse of reason or persons. If the nonsense is an article of faith offered without rancor or personal attack, I tear the nonsense down to atoms, building a more reasoned edifice upon the rubble; and leaving the confessor of said nonsense unscathed. However, when the dispenser of nonsense makes his attacks personal (as you have done amply) or deceives in a deliberate effort to force others to swallow tripe, I oppose any and all such as though personal, and will return fire in equal or greater portion until truth and reason prevail. At least, that has ever been my standard for debate. I, too, am feeling my way forward toward a more affable engagement with you. When and if I err or overstep the bounds of decency, will admit as much and beg forgiveness as appropriate. That I do not do so now (or yet) is for the reasons stated above. I would love nothing better than to offer my sincere apology to a reformed colleague. Regardless, I have always enjoyed debating you, and regard you a friend despite the testiness of our words and crossed swords; and will go on debating you the more enjoyably should it be civil.

    Posted by .(JavaScript must be enabled to view this email address)  on  12/02  at  11:54 AM
  13. J. Jay,

    With regard to “My point about getting a stalled economy moving, which I appear not to have successfully made, was that austerity is counterproductive and taking money out of the economy tends to reduce economic activity. The converse, putting money into the economy heats up economic activity. The subtlety I was reaching for was to say that who injects the money into the economy does not alter the effect of the injection. So, there is nothing magic or special about "government" money doing this job. The source of the funds does not alter the effect of the injection”, you are correct you did not make these points successfully, nor have you here made them any better. You provide no evidence of them, only bald statements to the effect they are truisms; whereas economic history suggests the opposite of what you argue.

    There is little evidence governmental stimuli (injecting money into the economy) does more than provide a temporary shift (stealing from Peter to pay Paul) that gives an appearance of energizing. Once the stimulus is removed or can no longer be provided without harmful side-effects (debt, devaluation, trade suffers, market unfairness, hording, &c) the temporary increase collapses resulting in an even deeper malaise and loss of confidence. Mainly, such profligacy increases debt that, sooner or later, must be paid off, and results in widespread pain than justifies the assist given to a handful of favorites. Austerity is neither productive nor counter-productive. It is simply a fact of life we sometimes have to stop the profligacy, else ruin ourselves financially.

    Do not think what you ‘reached for’ is all that subtle. We long ago got this point of socialist anti-economics, and rejected it for the lunacy it is. Some even embrace it for a time, before ultimately rejecting it as the mirage it is. There is logic to it, but it isn’t economic logic; it is about furthering the redistributionist agenda. Socialists (at best) kid themselves they can both serve the anti-capitalist ideal and maintain a robust economy despite every attempt at this ending in discord, malaise and/or collapse. At worst, they are openly hostile to a robust economy because that means the hated ‘enemy of all that is holy’ (aka, capital) is thriving. Some both kid themselves they can aid the economy all the while opposing it, and this borders on insanity. They oppose it in one venue or guise while, concurrently, opposing it in some other (usually more necessary and/or plentiful) sector or guise. In so doing, they flog themselves and everyone else [mercilessly, I might add] in alternating attempts at first striking down business and then reactively rebuilding an economy they, themselves, disrupted; and, never succeeding at either, and never quite get why that happens. No, I take back what I said before – that is the very definition of insanity. It is a collective rather than an individual insanity (as only a collective mind can both envision such a state of affairs and perpetuate such a horrendous fraud indefinitely), but insanity nonetheless. Thus, it is an insanity even the most sanguine can embrace intellectually, even as they pursue and endorse capitalism privately.
    Posted by .(JavaScript must be enabled to view this email address)  on  12/02  at  12:56 PM
  14. I can only repeat the simple observation that from 1620-1920 America experienced economic growth unrivalled in the history of the the earth and during that period no governmental agency sought to put massive amounts of money into or out of the economy.

    This need not be an exercize in theoretical debate. The historical facts demonstrate the truth--
    Posted by bill greene  on  12/04  at  08:51 AM
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