To: MN DFLers
From: Mitch Berg, Uppity Peasant
Re: The Inevitable End Result Of Keynesianism
DFLers,
I know – most of you don’t know what “Keynesianism” is. It’s the economic theory that using government tax and monetary policy to “stimulate” the economy is the most effective way to ensure the economy grows steadily and doesn’t have ugly cyclical downturns.
Unfortunately – as we’ve seen in Japan – it doesn’t work. Hiking taxes, and turning (some of) them into “stimuli”, makes things worse, not better.
Yep, the Democrat party – and the DFL with it – is built on Keynesianism (too much of the GOP has reached an accomodation with it as well, but that’s something for us to root out and kill on our own).
Keynesianism’s inevitable end results gave us the malaise of the ’70’s. And it’s Keynesianism – delivered by its greatest, worst advocate in US history, Barack Obama, as well as locally by is oompa-loompas in the DFL – that are dragging the American economy down – and, if you’ve noticed by the fact that Minnesota’s tax revenues haven’t kept up with forecasts yet this year, Minnesota’s as well.
Just warning you.
That is all.
Raising taxes is not a keynesian stimulus. Obama’s economic policies do not follow any economic theory. It’s random, spending for the sake of spending, taxing for the sake of taxing.
Hmmm, increase sales tax by 60% and the economy contracts by 7.1%.
they are planning to increase the sales tax by another 2% Jan 1st to a total of 10%.
That should work.
If some is good, then more is better!
A keynesian stimulus has to come from borrowed money. Increasing taxes on the wealthy and giving the money to the poor won’t do it. The federal government can deficit spend. States can’t. States have to borrow the money for a stimulus by issuing bonds.
There is a problem with states issuing bonds that I do not see discussed much — if a state sells 30 year bonds, that obligates the state tax payers of 30 years in the future to pay the interest on those bonds.
The tax payers of 1984 would be dictating the spending of the tax dollars collected in 2014, without amending the state constitution. Don’t seem right.
It’s like somehow people don’t make the best decisions when they’re spending someone else’s money.
Which, of course, is something most of the sane among us knew back in high school from watching rich kids with daddy’s credit card. And it appears that the rich kid with daddy’s credit card–Mark Messinger of course–still hasn’t learned this lesson.
Taxing and Spending = Extortion and Bribery in todays politic.
It’s always been that way, Scott Hughes. The difference these days is you have a federal government that doesn’t care about deficit spending and which can reach into every part of the economy. Obamacare, in part, was an effort by the federal government to force states to spend the tax dollars collected by the states to further the goals of a less accountable federal government.
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PM is right. In a recession, when nominal interest rates have reached close to 0%, Keynesian economics calls for fiscal stimulus via government deficit spending. Anything that reduces the government deficit, whether spending cuts or tax increases, would not be Keynesian.
There may be other reasons for a tax increase in recession, especially when the government is barred from running deficits, but they are not especially Keynesian.
“There may be other reasons for a tax increase in recession, especially when the government is barred from running deficits, but they are not especially Keynesian.”
In a market economy, any tax increase during a recession will act as a negative stimulus by decreasing spending and investment.
“any tax increase during a recession will act as a negative stimulus by decreasing spending and investment”.
This assumes that every dollar in the hand of every tax payer is either spent or invested, which need not be the case. Imagine an economy with one tax payer who kept all of his extra funds stuffed in his/her mattress and other consumers who spend every extra cent they get. Increasing taxes and giving the money to consumer (in a deficit neutral way) would be positive stimulus and increase spending.
“This assumes that every dollar in the hand of every tax payer is either spent or invested, which need not be the case.”
This is, in fact, an assumption that economists make.
If you neither invest nor spend your dollars, you are receiving either no value or negative value for your dollar.
Contrary to what some people believe, market economics does not assume that we are all “rational actors”, market economics assumes that irrational behavior is not incentivized.
Economists do not assume away no interest checking accounts, cash, and any number of low/no return cash equivalents.
“you are receiving either no value or negative value for your dollar” Which may be preferable to the risk of losing most or all of you cash in a failed investment. In a severe recession many people may prefer the safety of cash to investing in a down economy. Keeping 95% of what you have is better than 0%.
“market economics assumes that irrational behavior is not incentivized”
That is some kind of Zen koan of ignorance. I have no idea what you mean.
Rick, there is a small amount of money that does not go through the financial system, but it’s negligible in comparison to the amount that does. Hence “a dollar saved is a dollar invested” is a good approximation.
And this is where Keynesianism falls apart. Every dollar earned goes into four basic categories; savings/capital formation, spending, taxes, and charity. It doesn’t matter who’s doing the spending, because it goes into the same categories. Hence there is no multiplier effect of government spending, but rather only the ROI that spending will generate.
Hence government ought confine its attentions to truly public goods, because bureaucrats are generally horrible with ROI, or they simply forget capital cost in estimating returns. “oopsie”. And this is why Japan is in such a pickle. Your eye is more on the ball when it’s your paycheck at risk.
BB: “Hence “a dollar saved is a dollar invested” is a good approximation.” Usually. But the time this is most likely to go wrong is during a severe recession. Recessions usually involve private consumers sharply increasing their holdings of cash and cash-equivalents. Keynesian anti-recession policies are designed to get this back to ‘normal’.
You are right about the superior ROI of private vs. public investment. That is why is normal times Keynesians call for budget surpluses. Ergo Paul Krugman attacking the Bush tax cuts. And post-Friedman, most Keynesians admit most recessions are better fought through lower interest rates not fiscal stimulus.
But in a recession when interest rates are near zero, monetary stimulus fails and we need fiscal stimulus.
RickDFL, a rational person invests in secure, 0% ROI instruments because they believe that they receive value from such an investment. The value of > 0% ROI is traded for the value of security. It can be a rational response to perceived risk.
Keynesian policies are designed to even out business cycle recessions. They don’t work when the economy has structural changes. You need something a little more dynamic, like a market response. Conservative and liberal politicians spend money to achieve their political goals, not to help “the economy”.
How’s that keynesian unsticking working out these days?
Bikebubba wrote:
“Rick, there is a small amount of money that does not go through the financial system, but it’s negligible in comparison to the amount that does. Hence “a dollar saved is a dollar invested” is a good approximation.”
This the consensus view. As I mentioned in an earlier comment, “market economics does not assume that we are all “rational actors”, market economics assumes that irrational behavior is not incentivized.”
If it is not rational to stuff money in the mattress rather than invest it, the mattress stuffer will lose value.
Currently, in the US economy, if you cannot make a reasonable guess at at ROI and inflation, putting your bucks in 0% T bills might seem like the best bet.
Government spending has no keynesian multiplier because government does not spend money to make money. Consumers spend a dollar because they believe that the value they expended to earn that dollar is less than the value of what they get for that spent dollar, e.g., at every voluntary, market exchange, value is added to the economy.
Where government can create wealth (rather than simply moving it around) mostly involves solving or overriding local jurisdictional issues, such as when government builds highways or railways to connect economic regions.
Rick, total money supply M2 is about ten trillion dollars, total currency in circulation (including bank reserves, etc..) is 1.29 trillion dollars. Or, Like.I.Said. Money under the mattress is in the noise.
Also, your comment about running surpluses in good times still assumes that running deficits in bad times is good policy. As we’ve established and agreed, no such thing holds. It’s chasing bad ROI. Moreover, running a surplus means you’re still taking capital out of the economy, which is a net negative. Again, it’s chasing bad ROI.
Again, it comes down to “do we acknowledge the folly of Keynes and return to the doctrine of what is, and is not, a public good?”
BB: Noise compared to what? GNP is 17 trillion and the total stock market value is 21 trillion. Changes in M2 can have huge impact on economy.
Deficits in recession with real interest rates at zero are good. Whatever to ROI on public spending, it beats the 0 ROI of unemployed labor.
PM. A hodgepodge of buzzwords and vague generalizations is not an effective way to make a point.
Noise compared to the overall money supply. You need about 100 billion dollars hidden under the mattress, $300 for every man, woman, and child, to even get to 1% of M2, let alone M3. I’m not buying it.
Regarding ROI of government vs. that of unemployed labor, I think you’ve got it wrong. Your alternatives are not government ROI vs unemployed ROI, but government ROI plus unemployed ROI (how many ways can we write “0”?) vs. the ROI of the money remaining in the private sector.
After all, unemployment never dropped below about 15% during the Depression. At least not until Hitler marched into the Sudetenland. And the second “Raw Deal” of Obama’s has more or less resulted in employment scaling….at best along with population growth. We are not talking about a sterling record for Keynesian stimulus here, to put it mildly.
I would think “a dollar saved” would include most of M2 not just dollars under the mattress. In a low demand recession those are the dollars that are not spent or invested.
“At least not until Hitler marched into the Sudetenland.” That is the tell. It is sort of like saying ‘your plan didn’t work until we actually tried it’. From a Keynesian point of view, deficit spending for rearmament is still deficit spending. During the New Deal the bigger deficits got, the lower unemployment got. Modest deficit increases in 1932-37 cut unemployment in half. New Deal spending cuts and the nearly balanced 1938 budget led to growing unemployment in 1938-39. Then rearmament and really huge deficits eliminated unemployment.
“Deficits in recession with real interest rates at zero are good. Whatever to ROI on public spending, it beats the 0 ROI of unemployed labor.”
0% short term, and its almost all short term debt these days. We have to turn it over regularly. If interest rates increased to their historical average, service on the debt would increase dramatically.
People tend to be either backward looking or forward looking. If they believe that deficit spending will mean future tax increases or a decrease in future government benefits, they will be future looking and reduce spending and increase investment. Keynes struggled with this. He never really found a solution.
These aren’t buzzwords, they are core concepts in a standard, college-level economics course. That’s where I learned them. Generalizations are necessary (“all else being equal . . . “, aka “ceteris parabus”) because you need to be able to reduce the number of variables to say anything at all about a complex economic system.
Rick, the trick is that the portion of M2 that is within the financial/banking system(that would be 99.9% or so) can be borrowed. Therefore it is part of credit formation. And if it’s not being lent out or withdrawn, then that is the sign that interest rates need to be lowered, or returns need to increase. There is no problem with it, and Hoover and FDR’s failure to realize this changed what should have been a two year recession into the Depression.
And the Depression? Keep in mind that in previous recessions, unemployment rates dropped within a year or so to around 4-5%. FDR is not exactly one who has bragging rights. And WWII? Yes, there was higher demand, but keep in mind (a) we sent all the able bodied young men ages 18-35 off to war, opening up a job or two for others and (b) the ROI now included “getting your husband, son, father, uncle, or nephew back alive.”
Per Bastiat and the fallacy of the broken window, no thanks to a renewal of that one.
Bikebubba, You sometimes hear in the popular press that corporations are “sitting on” huge cash reserves. I think that it is correct that corporations are holding onto liquid assets more than they were a decade ago. They aren’t sticking it into a vault somewhere, of course. They are vested in what they hope are low return, high security investments. I found this article informative about what companies do with the cash that they are “sitting on”:http://247wallst.com/special-report/2012/03/06/how-americas-richest-companies-invest-their-cash/
BB: “And if it’s not being lent out or withdrawn, then that is the sign that interest rates need to be lowered,”
Exactly! But what do you do when you are in a recession and up against 0% nominal interest rates? While there is some theoretical work on negative interest rates, as a practical/legal matter no one advocates that, so you can’t lower interest rates past zero. In a recession, when monetary stimulus hits up against zero and you can’t cut interest rates more, fiscal stimulus via public deficit spending is the only card left to play.
Basically Keynesians accept the Friedman monetary solution for ‘normal’ recessions, but the original Keynesian fiscal story still holds for recessions when interest rates are at/near 0%. Just like now.
BB: ” but keep in mind (a) we sent all the able bodied young men ages 18-35 off to war, opening up a job or two for others and (b) the ROI now included “getting your husband, son, father, uncle, or nephew back alive.””
So what. From a macroeconomic point of view, a) is the largest expansion of public sector employment in U.S. history. If it worked then why not now? and b) getting soldiers back in the same condition is a ROI of 0 (and more like negative b/c of the opportunity cost of 1-4 years of lost labor). If hardly takes any faith in the ability of the current government to imagine they could find something more productive for unemployed workers to do than ‘not get killed’. Simple unemployment does that.
Rick, regarding interest rates, it’s worth noting that prior to the Fed, and prior to FDR’s detachment of the dollar from gold for all practical purposes, there was a phenomenon called “deflation’ that cleared out bad debt and gave an incentive for people to spend their money. Contrary to Keynesian orthodoxy, it’s a good thing.
And regarding the war, I seem to remember that while all countries involved had this huge “make-work” program of making corpses, but almost all of them ended up in crap city economically. So you want to argue that, fine, but the statistics are against you. WWII helped the US mostly because it finally made FDR’s other policies irrelevant, and even so, consumer spending only recovered to 1920s levels in the late 1940s. We are not talking about some huge economic revival here, rather just full employment and 300,000 corpses.
Yay? You’re really sick, man.
BB: That is a lot of ducking and weaving to pack into two paragraphs. You dodge the central issue of how to end a recession when interest rates are zero. In fact you seem to back off your earlier claim that recessions should be fought with lower interest rates at all. You seem to embrace tight money and deflation.
As for WWII, if you concede that public deficit spending solved the unemployment issue, I am happy to accept the position that those public funds could have been spent in more socially useful ways than blowing up half the world.
You are simply making things up, RickDFL.
The usual pro-deficit spending argument comes from Krugman: No monetary adjustment can be made with 0% interest, so a fiscal solution must be used.
As I’ve mentioned earlier in this thread, the fiscal solution has been going on for years. Trillions of dollars worth. How’s that working?
Maybe if Obama hadn’t raised taxes it would have been more effective. Redistributing income is not a stimulus. Read your Keynes.
“Maybe if Obama hadn’t raised taxes it would have been more effective.”
He didn’t in 2009-10. The ARA (aka the Obama Stimulus) contained a wide variety of tax cuts to increase the deficit and improve consumer spending power.
http://www.taxpolicycenter.org/briefing-book/background/stimulus/ARRA_individual.cfm
As I said at the start of this thread, in a recession with interest rates at zero, tax cuts, especially when targeted at those with the least income, are good sound Keynesian doctrine. Anything that increases the deficit, either tax cuts or spending increases, will reduce unemployment. For the same reason austerity measures, both tax increases and spending cuts, increase unemployment.
“the fiscal solution has been going on for years” Fell free to argue budget deficits in non-zero bound recessions are bad thing. But just because X has bad effects under conditions Y, does not mean X can not have good effects under conditions Z. A steady diet of syrup of ipecac could be lethal, but it can be quite helpful if you swallowed some poison.
Finally, it was BB, not Krugman, who said if private actors were piling up cash instruments in a recession, then interest rates needed to be cut to end the recession. On this, every non-Austrian economist from Keynes to Friedman agrees. He has yet to explain how to do this when interest rates are already at zero? His silence speaks volumes.
“tax cuts, especially when targeted at those with the least income, are good sound Keynesian doctrine.”
Taxes, at all income levels, reduce both spending and savings. If you are going to use Keynes as an authority, read your Keynes, RickDFL.
PM: Just because any tax cut in a recession would be good, it does not follow that all tax cuts in a recession would be equally good.
More importantly, “Taxes, at all income levels, reduce both spending and savings” is not very accurate. First, you should say ‘tax increases’ because Keynes does not have much to say on the effect of taxes generally, but more on the impact of changes in the level of taxes. Second, while taxes will reduce private sector spending and savings, their overall effect on spending and savings (public plus private) depends on what the government does with the revenue. Taxes to fund a budget surplus during an expansion may increase the overall savings rate.