Keynesian economics on display

[The Real Bingo]

Take, for instance, one of the most recognizable Keynesians - Paul Krugman.

9/11 was a horror, he says, but hey...it could be good for the economy because, after all, we now have to rebuild and pay firefighters and police and construction workers, right?

First, the driving force behind the economic slowdown has been a plunge in business investment. Now, all of a sudden, we need some new office buildings. As I've already indicated, the destruction isn't big compared with the economy, but rebuilding will generate at least some increase in business spending.

A veritable genius right there. By that logic, we should destroy the entire country and rebuild it so everyone has a job.

And from the Godfather himself - J.M. Keynes. (From Marxists.org...if that doesn't say something, I don't know what will.)

Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better...

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

So what seems to be the solution is waste money to employ people for useless tasks instead of hiring them for an economic purpose. It's easy to spend other people's money, I suppose.

[tony_j15]

Is there a thesis hiding in here amid the straw-men and cherrypicked quotes?

[The Real Bingo]

You tell me, Tony. I suppose your mind is already made up about the merits of Keynesian policies. You must think it would work, only if we'd do some more of it, right?

[MTAtech]

So what seems to be the solution is waste money to employ people for useless tasks instead of hiring them for an economic purpose. It's easy to spend other people's money, I suppose.

I'll let Dr. Krugman fill you in himself:

Economics, as I say often, is not a morality play. As far as creating aggregate demand is concerned, spending is spending – public spending is as good as but also no better than private spending, spending on bombs is as good as spending on public parks. As I pointed out not long ago, a perceived threat of alien invasion, by getting us to spend on anti-invasion measures, would quickly restore full employment, even though the spending would be on totally useless object.

and again:

One thought here is that a Keynesian is an Austrian whose campaign contributors are about to lose a lucrative contract. But it also harks back to Keynes’s point, when he suggested burying bottles full of cash in disused coalmines, so that private enterprise could dig them back up and create jobs in the process:

It is curious how common sense, wriggling for an escape from absurd conclusions, has been apt to reach a preference for wholly ‘wasteful’ forms of loan expenditure rather than for partly wasteful forms, which, because they are not wholly wasteful, tend to be judged on strict ‘business’ principles. For example, unemployment relief financed by loans is more readily accepted than the financing of improvements at a charge below the current rate of interest; whilst the form of digging holes in the ground known as gold-mining, which not only adds nothing whatever to the real wealth of the world but involves the disutility of labour, is the most acceptable of all solutions.

That’s it exactly. Propose some kind of public investment, say in green energy, and the right screams “Solyndra! Waste! Fraud!” But propose spending the same amount on weapons that we don’t need, and it’s all good.

Like this:

Republicans Cry Uncle On Spending … When Cuts Hit Home | TPMDC
It took months of fighting — the threat of a government shutdown, the graver threat of a default on the national debt, and now a new threat of major, automatic cuts to Medicare and defense programs — but Congress’ deficit obsession has finally exposed the rarest of all species: Republican Keynesians.
With just a under a month until the deficit Super Committee must recommend policies that cut the 10 year deficit by $1.2 trillion, members of the Republican party — the same party that’s been on the war path for deep spending cuts, and that decries President Obama’s “failed stimulus” — are making uncharacteristic arguments against slashing spending. Trim too much, too quickly, they warn, and people will lose their jobs!
...
Kyl went on, “And here, with defense, for example, you’ve got high unemployment of returning veterans to begin with. You have reduction in end strength. You’ve got more people potentially unemployed. You got people making radios and building ships and so on. And if those cuts, therefore, end up reducing the employment in those industries and the amount of money spent in those areas, obviously it could delay economic recovery.”

But the whole notion that Republicans and are now born-again anti-Keynesians is discredited just by listening to how the GOP spoke about it way, way, way back in 2005:

Do Deficits Matter? | The Weekly Standard

WHEN DICK CHENEY SAID, “Deficits don’t matter,” economists took that as proof of the economic illiteracy of the Bush administration. But it turns out there is a case to be made that Cheney was onto something.
On the deepest level, the vice president was echoing, in slightly exaggerated form, an idea put forward a few years ago by Irving Kristol, the Godfather of the neoconservatives who have had such a wide-ranging effect on Bush administration policy. Kristol wrote then, and still believes, that “We should figure out what we want before we calculate what we can afford, not the reverse.”
…
The deficits that Bush ran up in the years in which the country was teetering on the verge of a serious recession had the beneficial effect of righting the economy. In that sense, deficits not only didn’t matter, but were a force for economic good.

[The Real Bingo]

MTA, I'd like to thank you for living up to your reputation for always turning it into a partisan R v. D, Left v. Right debate instead of simply sticking with the meat and potatoes. You never fail to disappoint.

But since you want to take it in that direction, I can oblige by noting that the Democrats want to waste money on useless public works projects and welfare (money for nothing) while the Republicans want to perpetuate the military industrial complex by forcing the Army to buy tanks it doesn't need and involve us in wars that will never be finished. It serves each party's purposes, but in the end, we all lose thanks to this ruinous economic and political policy.

As I pointed out not long ago, a perceived threat of alien invasion, by getting us to spend on anti-invasion measures, would quickly restore full employment, even though the spending would be on totally useless object.

And that quote right there shows the idiocy of Keynesian policy. First, there are perfectly useful things to spend money on. Secondly, a business does not decide to invest/spend money based on the general welfare of its employees. The shareholders would have none of that, and as taxpayers, we are the nation's shareholders...and we should have none of this wasteful spending that has been going on for decades and giving us nothing to show for it, except for more debt. Debt is slavery, and we're all subjects of our king.

[Whir]

But since you want to take it in that direction, I can oblige by noting that the Democrats want to waste money on useless public works projects and welfare (money for nothing) while the Republicans want to perpetuate the military industrial complex by forcing the Army to buy tanks it doesn't need and involve us in wars that will never be finished. It serves each party's purposes, but in the end, we all lose thanks to this ruinous economic and political policy.

This may be the most brilliant part of post you've ever made, TRB. I may reference it in the future!

[MTAtech]

MTA, I'd like to thank you for living up to your reputation for always turning it into a partisan R v. D, Left v. Right debate instead of simply sticking with the meat and potatoes. You never fail to disappoint.

But since you want to take it in that direction, I can oblige by noting that the Democrats want to waste money on useless public works projects and welfare (money for nothing) while the Republicans want to perpetuate the military industrial complex by forcing the Army to buy tanks it doesn't need and involve us in wars that will never be finished. It serves each party's purposes, but in the end, we all lose thanks to this ruinous economic and political policy.



And that quote right there shows the idiocy of Keynesian policy. First, there are perfectly useful things to spend money on. Secondly, a business does not decide to invest/spend money based on the general welfare of its employees. The shareholders would have none of that, and as taxpayers, we are the nation's shareholders...and we should have none of this wasteful spending that has been going on for decades and giving us nothing to show for it, except for more debt. Debt is slavery, and we're all subjects of our king.

The difference between what a business does and a nation does is the difference between micro economics and macro economics. Individual companies are only interested in their sales and their profits. Thus, a company is successful if it can lure customers away from competitors and its "created jobs" comes at the expense of competitor's lost jobs. Or, it just fires employees and reduces its expenses, becoming more profitable. Companies don't and shouldn't care about the economy as a whole.

Macro economics does look at the economy as a whole and recognizes that your employees are my customers and public workers are my customers and all are taxpayers. When employees and public workers are cut, my customers just lost an income and can't spend in my store -- forcing me to slash workers too, spiraling more upheaval. The government also lost a source of tax money.

So, when there is a situation, such as today's liquidity trap, where businesses are only at 80% of capacity causing high unemployment, the main economic issue is lack of demand (not deficits, not debt, not inflation, not any of that.) So how do we increase demand? Not by slashing government workers and programs to lower budgets. That just reduces demand further, making the situation worse. No, we increase government spending, just like Maynard said in 1936. These are undeniable prepositions with decades of historical proof behind them.

Now, is it better to build productive ventures like fixing bridges; increasing mass transit; job training for the poor; and improving the power grid instead of paying people to dig holes and others to fill them? Absolutely -- but either way, it's getting money into consumer hands that raises GDP.

Krugman recognizes the political reality that politicians are cheap when it comes to butter but generous when it comes to guns. That's why he demonstrated the idea of a fake alien invasion to reverse this depression.

Now, you accuse me of being partisan but this is partisan. The left wants expansionary policies while the right wants austerity. When Republicans renounce basic freshman economics, as Mitt Romney did the other day when he said we shouldn't be using federal money to avoid firing school teachers and firemen, he was demonstrating his macro economic illiteracy. For a former head of capital, who claims to have so much expertise in finance, business and economics that we should make him president, this was an eyebrow raising moment.

[sharder8]

The difference between what a business does and a nation does is the difference between micro economics and macro economics. Individual companies are only interested in their sales and their profits. Thus, a company is successful if it can lure customers away from competitors and its "created jobs" comes at the expense of competitor's lost jobs. Or, it just fires employees and reduces its expenses, becoming more profitable. Companies don't and shouldn't care about the economy as a whole.

Macro economics does look at the economy as a whole and recognizes that your employees are my customers and public workers are my customers and all are taxpayers. When employees and public workers are cut, my customers just lost an income and can't spend in my store -- forcing me to slash workers too, spiraling more upheaval. The government also lost a source of tax money.

So, when there is a situation, such as today's liquidity trap, where businesses are only at 80% of capacity causing high unemployment, the main economic issue is lack of demand (not deficits, not debt, not inflation, not any of that.) So how do we increase demand? Not by slashing government workers and programs to lower budgets. That just reduces demand further, making the situation worse. No, we increase government spending, just like Maynard said in 1936. These are undeniable prepositions with decades of historical proof behind them.

Now, is it better to build productive ventures like fixing bridges; increasing mass transit; job training for the poor; and improving the power grid instead of paying people to dig holes and others to fill them? Absolutely -- but either way, it's getting money into consumer hands that raises GDP.

Krugman recognizes the political reality that politicians are cheap when it comes to butter but generous when it comes to guns. That's why he demonstrated the idea of a fake alien invasion to reverse this depression.

Now, you accuse me of being partisan but this is partisan. The left wants expansionary policies while the right wants austerity. When Republicans renounce basic freshman economics, as Mitt Romney did the other day when he said we shouldn't be using federal money to avoid firing school teachers and firemen, he was demonstrating his macro economic illiteracy. For a former head of capital, who claims to have so much expertise in finance, business and economics that we should make him president, this was an eyebrow raising moment.

Tell that to my former Boss and his former employee's . . . in the last 3 years, he's gone from 3 successful stores . . . to one barely hanging on and from 14 employee's to 2. The company was running at a consistent 5-7 day turn around, to a 2 day turnaround and often no work.


Harder

[Chuckiechan]

MTA, you have missed the entire concept of productivity. Productivity is what creates the gap between cost and selling price, that gap makes room for a tax burden.

These taxes then go to governments. The governments are in the spending business, not the productivity business.

The more the government takes from the private sector, the less available for investment.

100% of tax money originates in the private sector.

[tony_j15]

You tell me, Tony. I suppose your mind is already made up about the merits of Keynesian policies. You must think it would work, only if we'd do some more of it, right?

Well, we know it works. Just the other day we were having a discussion about the merits of the GM bailout and you, well, bailed out.
So it seems from my perspective your thesis only works in the abstract, because as soon as we start speaking about actual factual real situations, you don't have much to say.
So do Keynesian policies work? Yes, absolutely. The only real argument to be made is on what we spend the money. IMO, government spending should be focused on infrastructure and the welfare of the people.

The more the government takes from the private sector, the less available for investment.

100% of tax money originates in the private sector.

Not true. When we are dealing with deficit spending policies meant to stimulate growth, we borrow the money and inject it into the economy. So the money doesn't come from the private sector. Rather, they benefit because there is more demand, meaning more profits, meaning more investment opportunities.

[Theophylact]

Tell that to my former Boss and his former employee's . . . in the last 3 years, he's gone from 3 successful stores . . . to one barely hanging on and from 14 employee's to 2. The company was running at a consistent 5-7 day turn around, to a 2 day turnaround and often no work.


Harder

That's because there's no demand, because people who are out of work and don't have money don't buy things. Which is exactly Krugman's point: get money to people, they'll buy things, and the economy will expand. It's best if they get the money by being employed doing useful things, but even dropping cash on them from helicopters would help. As he (and Keynes before him) said repeatedly, the time for austerity is during a boom, not a bust. (And if you're going to borrow money to prime the pump, do it when the interest rate is practically zero, as it is now.)

[The Real Bingo]

I guess my issue is that with the record amount of money spent (wasted) on trying to boost the economy, we still don't see any marked improvement.

You're all probably not cynical enough, but an economic crisis like this is just an excuse to funnel money in certain directions - mainly to pay back political backers and to fund sectors that jive with the ideology of the congress and the president, regardless of their economic merit. When you base the disbursement of money on political expediency and ideology, you can plainly see how actual economic improvement doesn't come to fruition.

Well, we know it works. Just the other day we were having a discussion about the merits of the GM bailout and you, well, bailed out.
So it seems from my perspective your thesis only works in the abstract, because as soon as we start speaking about actual factual real situations, you don't have much to say.
So do Keynesian policies work? Yes, absolutely. The only real argument to be made is on what we spend the money. IMO, government spending should be focused on infrastructure and the welfare of the people.

Well, they don't work. You're gonna spew off how many jobs were "saved" when that can't even be quantified. It's based on assumptions that may or may not be correct. I guess you could say unemployment would be 20% without the bailouts, but I can just as easily say it'd be the same as it is now. But bailouts are not fundamentally Keynesian...that's known as corporatism and crony capitalism.

Keynesian economics assumes a small group of elites can plan an economy better than the aggregate. As it tries to predict booms and busts and to mitigate them, it actually causes them by incorrectly expanding and contracting the money supply.

[brandon184]

I guess my issue is that with the record amount of money spent (wasted) on trying to boost the economy, we still don't see any marked improvement.

I like how you criticize Tony over the number of jobs saved (actually, you were preemptively criticizing him for something he hadn't said) by saying that he has no way to quantify it, yet you are doing the exact same thing here by presuming to know where the economy would be without the stimulus. What's the word for this, Bingo?

In regard to the rest of your tantrum post, can you point me toward a few examples of where austerity has resulted in economic growth and prosperity?

[MTAtech]

I guess my issue is that with the record amount of money spent (wasted) on trying to boost the economy, we still don't see any marked improvement.

You are also guessing that you know better than the CBO and many independent private economists that have concluded that the stimulus increase GDP and reduced unemployment.

Also, Krugman warned that the stimulus was too small AT THE TIME and also predicted the claim that with a too small stimulus critics will claim that it failed. See: Arithmetic Has A Well-Known Keynesian Bias - NYTimes.com

Oh, that "reader" that reminded Dr. K.? That was me.

[The Real Bingo]

End This Nonsense Now! - David Gordon - Mises Daily

Krugman does not so much as mention the pioneering work of Robert Higgs, Depression, War, and Cold War, which decisively challenges the contention that World War II ended the Great Depression. Higgs convincingly shows that prosperity returned only after the war ended. But let us, very much contrary to fact, suppose that Krugman is correct about the effects of government spending in the years after 1940. His defense of Keynes would still be grossly deficient.

What he is in effect saying is this: "Instances that appear to confirm the claim that government spending ends depressions count in favor of Keynes. But cases that go against Keynes do not count, because we cannot rule out the possibility that greater spending would have worked."

What Keynes's friend Piero Sraffa, who cannot be suspected of bias in favor of the Austrian School, wrote in his copy of Keynes's General Theory applies to Krugman as well: "as usual, heads I win, tails you lose."

[MTAtech]

End This Nonsense Now! - David Gordon - Mises Daily

Before, the revisionists were (falsely) denying that the New Deal rose the economy out of the depths of the Depression -- and instead it was WWII. Now the revisionists are even denying that WWII ended the Depression.

It reminds me of the Groucho Marx line, "who are you going to believe, me, or your own eyes?"

As the US began its military buildup and demand increased as a result, employment rose by 20 percent -- the equivalent of adding 26 million jobs today.

[Theophylact]

Spending didn't increase, because it was held down deliberately by rationing and price controls. But pent-up consumer demand went through the roof in the first few years after the war when these controls came off, fueling the post-war boom.

[tony_j15]

Well, they don't work. You're gonna spew off how many jobs were "saved" when that can't even be quantified.

It is quantifiable. I gave you the data before, which apparently didn't stick. Here it is again:

"Had General Motors and Chrysler gone down, it's reasonable to say that a good part of the supply chain would have collapsed. The manufacturers, the supply-chain folks like BorgWarner, Delphi, Visteon, and others, plus the dealerships employ 8 million people. That represents $500 billion a year in payroll and $70 billion in taxes that would have been at risk. And the social destruction - people losing their homes, children not being able to go to college - every once in a while you have to do something for your citizens. Two administrations had the courage and the leadership to stand up."

-- GM CEO Dan Akerson in Fortune Magazine, June 11, 2012, page 96.

[Epidemic]

That's because there's no demand, because people who are out of work and don't have money don't buy things. Which is exactly Krugman's point: get money to people, they'll buy things, and the economy will expand. It's best if they get the money by being employed doing useful things, but even dropping cash on them from helicopters would help. As he (and Keynes before him) said repeatedly, the time for austerity is during a boom, not a bust. (And if you're going to borrow money to prime the pump, do it when the interest rate is practically zero, as it is now.)

When does the model break down? Can the government spend 30 trillion dollars and get back 35 trillion in taxes?

What happens when debt payments exceed ability to pay? We have spent 5 trillion in 3 years 40% of our budjet is deficit spending. how much more is required to start realizing the boom of government spending, the boom that will make government cash flow positive?

[Theophylact]

When does the model break down? Can the government spend 30 trillion dollars and get back 35 trillion in taxes?

Yes, of course. Depends entirely on the rate of circulation of money.

If the Government gives me a hundred bucks, and I pay it to you to wire my house, you've made a hundred bucks. If you then pay me a hundred bucks to write you a will, I've made a hundred bucks. Another nine such mutual transactions and we've each made a thousand, and got a lot of work done in the bargain.

Say there's a flat tax of 10% on income. The Government gets back $200 for its initial $100.

This is Econ 101, which I never even took.

By the same token, money can disappear in a depression; if no one has the money to buy anything, demand disappears; the value of houses, cars and so on drops, because no one can pay the price they used to. Businesses can't sell their stock, they lay off workers who now have no money to buy stuff with, and the vicious cycle continues as tax revenue plunges, the (foolish) government cuts spending and roads and schools don't get built, construction workers get laid of, et patati et patata.

This should sound very familiar, but the European governments seem not to understand, and the Replicants pretend not to either.