Skip to comments.Keynesian Economics: Valid Principles or Re-Election Tactics?
Posted on 08/12/2012 12:03:38 PM PDT by Jim Robinson
Does the employment of Keynesian economics actually spark the economy, or merely help those in office keep their jobs?
Low interest rates: check.
Tax breaks: check
Deficit spending to stimulate the economy: check.
Three primary tools in the Keynesian toolbox, used in significant doses in order to combat economic instability. For decades, they have been the central tenets utilized by various governments in numerous battles to stabilize the economy, up to and including the recent devastation wrought by the post-2008 financial crisis. In this latest iteration and via numerous efforts bookended by TARP and QE2, the United States has invested massive dollars into both the private sector and general economic stimulus, simultaneously attempting to snuff out a forest fire with one hand while lighting a match with the other.
According to the National Bureau of Economic Research, the U.S. emerged from the Great Recession in June, 2009, eighteen months after it started the longest continuous period of contraction and subnormal growth since the Depression of the 1930′s. And yet, despite over $4 trillion in deficit spending since the start of the financial crisis, numerous Gallup polls show fading public confidence in the prospects for economic improvement in the near term. In fact, as of sixteen months ago, 69% believed the U.S. was either in a depression, still in recession or heading toward one.
Does Keynesian economic theory work? First, a summary of its essential underpinnings...
(Excerpt) Read more at decodedscience.com ...
And Romney is on record saying he agreed with TARP and stimulus spending and says more may be necessary. Ryan also went along with this deficit spending. Even voted to increase the national debt limit so Obama could burn through even more. The Republican majority also made no attempt to defund ObamaCare. Keynesians are going to win this election either way and to hell with economic liberty. The government is all about control whether it's headed up by the democrats or the GOPe.
Keynesian economics is Ponzi scheme economics.
Part of the problem is that most Americans are completely ignorant about basic economics.
You can’t keep kicking the can down the road forever. Somebody eventually pays the piper.
In real terms, if there is a country that has completely failed at Keynesian economics, it is Japan.
It still hasn’t recovered from its real estate crash back in 1989, because it has pursued the intellectually bankrupt Paul Krugman/Keynes model of recovery.
Conversely, after the real estate crash in 1997 in Southeast Asia, they pursued the cut taxes and spending model, got their fiscal houses in order, and recovered fairly quickly.
Unfortunately that is the menu being offered.
You can't get fried fish at Pizza Hut.
Re-posted to FB. Should drive the ABO crowd nuts.
It’s not Keynesian economics about which we should be concerned; rather it is Kenyan economics which should greatly concern us.
It’s not Keynesian economics about which we should be concerned; rather it is Kenyan economics which should greatly concern us.
Keynesian economics is political economics. It doesn’t work, never has worked and never will work — as economics, that is. Works fine as a political tactic; just redistributionism by another name.
But then, evidence doesn’t matter to a liberal (see global warming). It feels good, so it’s obviously the right thing to do.
Well, I beg your pardon but it has been all about Keynesian economics. Ever since at least 1913 when the Declaration and Constitution were officially shredded by the gubmint. It’s no longer about God given unalienable rights. The pursuit of happiness no longer applies, much less life and liberty. The Dems and the GOPe have seen to that.
That Hoover was laissez-faire is one of the great myths of the Great Depression:
That so many people are ignorant of Hoover’s interventionism, is yet another indictment of our dismal public education system.
Deficit spending to hire government employees does nothing but take money from the most productive (future) employees to put in the pocket of the least productive employees. The demand multiplier is significantly < 1.0, meaning each dollar spent provides less than a dollar of stimulus.
There are a lot of studies that establish why even deficit spending to finance tax cuts is not going to work for the US anymore, because consumers are spending the money to grow the Chinese economy, not ours.
Estimates of aggregate demand multiplier for the current stimulus range from 0.30 to 0.60. That means we've borrowed a $1.00, which will be repaid as around $1.15 when all is said and done, and have received at most 1/2 of that back (and more likely even the low estimate is high.)
The only deficit spending that can actually yield aggregate demand over 1.0 appears to be spending on R&D. Unfortunately, the government has proved it can't figure out where to put that money (and never has been able to, except when it went to the Defense Dept, which isn't going to happen under Kenyan/Keynesian "economics.")
A very very good book to read is this one:
0bama's "economic" advisers had been telling him he would get demand multipliers of 2.0 - 2.5, based on their "analysis" of past deficit spending. Of course that's a crock. If politicians could get economic improvement by spending money they didn't have, no politician would ever lose his job, and all of us would be speaking Russian.
Hell yeah. If we could spend our way into economic prosperity, we’d all be rich by now.
Roosevelt praised Hoover effusively until the Democrat Congress decided to sandbag his lib/prog programs. The correct Laissez-faire predecessor of Roosevelt is Coolidge, not Hoover. Hoover was the prototypical RINO, who even considered switching parties in 1920, but made his decision not to on the basis of the fact that the only Democrat pol he'd ever known was a drunk. The Ben Stein school of "conservatism."
Walter McLaughlin’s article barely touches on the problem of Keynesian Economics. It is too bad that when one brings up this subject of such important economic impact on our nation, they would bring up so few economic facts.
Teaching the business deficit electorate the truth on Obamanomics and it’s Keynesian Economics addiction will be the challenge. It is obvious the Lame Stream Media, as Sarah Palin calls it, slept through their Econ 101 classes, and is not up to even the most modest of challenges. It is time the truth of Keynesian Economics as a failed economic theory—I emphasize theory—be put in the spotlight as the failed system it is.
Obama and his White House have been preaching the religion of Keynesian economics from the beginning. In fact, Big Government has had Keynesian economics in their blood since President Hoover. It is a method by which government inflates demand by putting money into peoples pockets to spend on products, thus, stimulating productive segments of the economy that would have otherwise remained idle, to produce wealth. They would argue that the poor are more likely to spend that money rather than keeping it from circulation by saving it. This behavior, Keynesians argue, guarantees even more generation of wealth. Eric Cantor comments that the theory is: government can be counted on to spend more wisely than the people.
The problem is demand does not generate wealth, capital, both human and material, does. Wealth is generated by the accumulation of income producing assets or what economists call capital formation. Keynesian economics fails because government mis-allocates resources, and because government cant create wealth. It can only move it around.
Paying someone not to work does not grow the economy. When someone spends all of their money instead of saving or investing it, they will never be wealthy. They become dependent on the system.
Keynesian economics fails because of an effect called Crowding Out. Simply put, for every dollar of government spending, private investment must be reduced by the same amount. Since the government does not have a surplus of money to spend, it must sell treasury bills to finance this spending. Thus, personal and corporate savings are used to buy these T-bills, and these funds are no longer available for private spending and private investment. Thus any increase in government spending is exactly offset by a reduction in private investment and private spending.
When Keynesian policy fails to stimulate, the chorus from the left will be that the government didnt do enough and didnt spend enough. This is the chorus of a population dumbed down by a government controlled education system. The government will rush out an even larger stimulus package, but this time our Asian benefactors might not be so quick to finance it. In fact, they may decide its time to cash in their chips. If that happens, hyperinflation will ensue decimating what is left of the consumers purchasing power.
It should be common sense to know that Keynesian economics is a failed economic theory. Economic stimulation only increases the national debt and passes that debt on to our future. Austrian economics is the way to go. It is the Austrian economic model, that Paul Ryan knows well, that is the quickest road to recovery.
After 70 years of unrelenting falsification of history by progressive university professors the truth effectively hidden in plain sight.
The simplest way to understand the essence of Keynesian “economics” is to imagine a personal situation and consider whether to resort to Keynesian policy to deal with it.
As an example:
You get a call from your bank that your bank account is overdrawn and all of your bills, mortgage, food, utilities and the bill for the kid next door mowing your lawn. Also, your wife wants to get a face lift and you want a new wide-screen HDTV.
The Keynes Fix: Take out the checkbook for the overdrawn account and write a check for the amount you are overdrawn plus the total of your bills, the new HDTV and your wife’s cosmetic surgery and then add a 100% “cushion” so that you won’t have to worry about it until “sometime down the road.”
Now, deposit big check into the overdrawn account on which it is drawn and SHAZAM - the problem is fixed!
But in the end that policy is sure to fail??
In John Maynard Keynes’ own words, “..In the end we will all be dead.”
In other words, we could care less, it is a problem for our grandkids......
The Democrats version is to always raise taxes and increase spending at the bottom and at the top. I call it pseudo-Keynesianism.
Staring with Bush Jr., Republicans have embraced the "stimulus" concept. They eschew the Keynesian label, but they buy the notion of "jump starting" a weak economy by the fiscal intervention of genius government poobahs.
As Nixon said, we're all Keynesians now. "Stimulus" has become Washington conventional wisdom.
Not only did Ronald Reagan never talk about "stimulating" or "jump starting" anything, he tried to forbid his staff from using the phrase "tax cuts". He stood for long term structural tax reform.
I'm nervous but hopeful about Romney/Ryan. Romney decries further "stimulus" (I truly hate that word) and Ryan is seriously trying for long term reforms. Neither are perfect, but they are running on a message of economic freedom.
Excellent post. Especially these 2 points:
“Deficit spending to hire government employees does nothing but take money from the most productive (future) employees to put in the pocket of the least productive employees. The demand multiplier is significantly < 1.0, meaning each dollar spent provides less than a dollar of stimulus.
There are a lot of studies that establish why even deficit spending to finance tax cuts is not going to work for the US anymore, because consumers are spending the money to grow the Chinese economy, not ours.”
Cash for Asian clunkers.
In a free society,what is necessary for restoration of full employment after a recession or depression is a fall in average money wage rates that is more than any fall in the demand for labor.The formula is:
average money wage rates = demand for labor/supply of labor
1) Keynesianism with its budget deficits financed by increased increased government borrowing or higher taxes is an assault on savings and private investment which decreases demand for labor which decreases the supply of labor employed.
2) Deficits financed by increases in the money supply leads to inflation which can increase the demand for labor and supply of labor employed, but when the newly employed workers are employed by the government they tend to be worthless, useless,wasteful,and parasitic to producers.
The destructive effects of budget deficits, confiscatory taxes,government borrowing, and inflation are harmful to the economy as a whole in the long run and causes new and additional problems that are worse than the original problem.
The best we could hope for would be for them to appoint Ron Paul as Sec'y. of the Treasury or, even better yet, Chairman of the Fed. He may be a flake on foreign policy, but he believes in a stable, strong dollar and would benefit the country in one of those positions.
Sigh. Won't happen.
Sadly agree with you. The simple math of almost 50% of this nation not paying income taxes is the ultimate Keynesian success.
I'm not a happy camper and starting to think there is no way back. So what if Repubs take the WH, Senate, and House? I no longer believe there will be a strategic means of restoring our Republic simply because most don't want it for various reasons.
Do you not see the fallacy in those two sentences? Here, let some simple past owner of 3 small companies explain it to you:
First point: Wrong, while spending "can" increase demand there is no guarantee, depending on your product/service/marketing and size/sector of the enterprise. So many small company owners would dispute your claim. So many fail almost every day. Why has not all the unemployment insurance recipients not made the economy better according to Nancy Pelosi? After all, it pumped billions into the unemployed and what did they do? Why is our economy not better?
Second point: "Where the money should be spent once you decide to borrow it". Small business owners (dry-cleaners, print shops, small restaurants et al at your local strip mall) rarely borrow money other than from their families and friends and mostly use their own capital for their start-ups.
Your premise is flawed and contradicting. Sorry, but once again, I've owned and operated a large film warehouse; a print shop; and a niteclub. None of those companies borrowed money from any institutional lender, and all were built on the capital from private and private investors for the niteclub.
In the case of the print shop, I helped build a divising wall between the customer service area and the productions area, painted the walls, attached the floorboards, bought and set up the printing equipment, bought and assembled the shelves for the paper, and much more. It was an empty space before I and my relatives made it a business. I won't bother with the warehouse or niteclub - too much to include.
Maybe I misunderstand your point, but my point is clear as day. Other than the warehouse that I took over and made profitable, I built my other companies from ground up! I retired at 47 due to 11 years hard work in Aviation Navy and hard work after I got out. Bambi can kiss my ever-loving ass when he says, "you didn't do it".
in 1929 depression FDR stuck his nose in it and stretched it out for 12 years.
Obama is doing the same thing now.
The Austrian viewpoint -- and the correct one -- is that since no one person or group of people is smart enough to figure out how to optimally spend money, we must all do it, through trillions of individual transactions each and every day. Markets are effectively a computer program moving timesteps in the direction of steepest descent in a phase space with beyond astronomical numbers of dimensions. When agents try to move them according to some "plan" the result is invariably less than optimal. That doesn't mean spending doesn't work; it means that spending by government is far less efficient than spending by millions of individual free actors.
As a small business owner myself, I appreciate your anecdotes, but they aren't germane to the economic theory or practice of aggregate demand. You have seized on "borrowing" as being existential to my argument, but it is merely circumstantial. In the current stimulus, and in Keynesian economics in general the spending is (mostly) being done with borrowed money. But spending from whatever source increases economic activity. That doesn't mean that taking $5 trillion from future taxpayers is the best way to do that; in fact, it's just about the worst. The best way to do it is by having the current and future taxpayers save and invest, putting their capital at risk to advance new startups, new ideas, and new energy. That's were the crux of the debate is, and why Keynes is so terribly, tragically wrong.
Really? So then you also believe that the more people on unemployment insurance can generate economic growth as Pelosi has stated? I don't believe you're thinking clearly, because you go on to say...
"That doesn't mean that taking $5 trillion from future taxpayers is the best way to do that; in fact, it's just about the worst. The best way to do it is by having the current and future taxpayers save and invest, putting their capital at risk to advance new startups, new ideas, and new energy. That's were the crux of the debate is, and why Keynes is so terribly, tragically wrong."
With due respect, you're all over the macro-economical map. Keynesian theory is just wrong and always has been. Supply-side economics had made us a rich nation until it was curtailed by socialists. Restrictions on growth through whatever means (taxes, regulations, Executive Orders, uncontrolled agencies like the EPA, DOI, HHS, et al, Fedgov interference in companies like GM, I could go on) will always result in the negative.
You should probably rethink your statement to choose a side.
For other people who might be reading and are interested in actually learning something: spending increases economic activity. Keynes and ALL OTHER economists agree on this point. That isn't the question. The question is WHAT kind of spending BEST increases economic activity. Government spending actually is the WORST way to increase economic activity. That's where Keynes is wrong.