http://www.tnr.com/blog/jonathan-chait/8...-keynesian

Do you agree with the premise of this article? My initial thoughts are that Keynes's theory on deficit spending to bring about a recovery is pretty sound. However, I would argue that the U.S. has been steadily using Keynesian stimulus for the past 25 years. We may have not been spending the deficits on tangible projects like infrastructure, but the amount of spending on entitlements have basically propped up a large number of American's for a generation. I know we have paid into SSI, but the medicare and medicaid programs are nowhere close to being fully funded. That coupled with the desire to insulate the lower income wage earners from taxes resulted in 40 - 50% of Americans paying zero on their income taxes has fueled a sustained Keynesian stimulus. If it wasn't for the productivity gains realized in the 90s through the first half of the 2000s, we would have long succumbed to an inflationary feedback loop.

I don't see how Keynes's fiscal policies can be useful anymore when you take into account the fact that so much debt has been amassed that the U.S. Gov't is crowding out private enterprise from access to money (although the demand for debt is not big at this time due to low demand and uncertainty in the economic rules).

Problem is that our fearless leaders have misapplied Keynes. Keynes says you run deficits to stimulate demand in bad times, but not all the time. When the economy is good, you reverse and run government surpluses, pay back the debt, and stimulate the supply side. You attain economic stability not just by filling in the valleys, but also by chopping down the peaks a bit. As you note, we haven't done the second part of that in probably 50 years, at least.

We have supply and demand way out of balance. We are the largest debtor nation and the largest importer nation, all to support our consumer-driven economy. It's not demand tyhat's broke, it's supply. This is why IMO the "stimulus" didn't work. Keynes assumes that supply and demand are in some reasonable equilibrium, and his fixes can have positive effects within that range. Where we are now, stimulating demand is more like giving crack to an addict.

What to do about it? Ross Perot had some pretty good ideas almost 20 years ago, but most of what he suggested has not happened. I don't agree with his opposition to NAFTA. But I don't think he was really opposed to free trade, I think it was more that he had spent a bunch of money and political capital to get Alliance Airport approved as a free trade zone (suggesting he favored free trade), and NAFTA threatened to undo the benefits of that.

We are in a worldwide competition for businesses. If we expect to get our fair share of new businesses, and the jobs that go with them, we have to compete for them. Right now, we are not well positioned to win.

(06-06-2011 05:01 PM)Owl 69/70/75 Wrote:  Problem is that our fearless leaders have misapplied Keynes. Keynes says you run deficits to stimulate demand in bad times, but not all the time. When the economy is good, you reverse and run government surpluses, pay back the debt, and stimulate the supply side. You attain economic stability not just by filling in the valleys, but also by chopping down the peaks a bit. As you note, we haven't done the second part of that in probably 50 years, at least.

We have supply and demand way out of balance. We are the largest debtor nation and the largest importer nation, all to support our consumer-driven economy. It's not demand tyhat's broke, it's supply. This is why IMO the "stimulus" didn't work. Keynes assumes that supply and demand are in some reasonable equilibrium, and his fixes can have positive effects within that range. Where we are now, stimulating demand is more like giving crack to an addict.

What to do about it? Ross Perot had some pretty good ideas almost 20 years ago, but most of what he suggested has not happened. I don't agree with his opposition to NAFTA. But I don't think he was really opposed to free trade, I think it was more that he had spent a bunch of money and political capital to get Alliance Airport approved as a free trade zone (suggesting he favored free trade), and NAFTA threatened to undo the benefits of that.

We are in a worldwide competition for businesses. If we expect to get our fair share of new businesses, and the jobs that go with them, we have to compete for them. Right now, we are not well positioned to win.

Would the good times have been good if we paid back the debt then? It seems like to stimulate demand during bad times you really have to go overboard in spending (like we were forced to do with WWII and not so much this time around). Can you get that back in the good times without short-circuiting the good time in the process?

Just thinking hypothetically.

(06-06-2011 05:01 PM)Owl 69/70/75 Wrote:  Problem is that our fearless leaders have misapplied Keynes. Keynes says you run deficits to stimulate demand in bad times, but not all the time. When the economy is good, you reverse and run government surpluses, pay back the debt, and stimulate the supply side. You attain economic stability not just by filling in the valleys, but also by chopping down the peaks a bit. As you note, we haven't done the second part of that in probably 50 years, at least.

We have supply and demand way out of balance. We are the largest debtor nation and the largest importer nation, all to support our consumer-driven economy. It's not demand tyhat's broke, it's supply. This is why IMO the "stimulus" didn't work. Keynes assumes that supply and demand are in some reasonable equilibrium, and his fixes can have positive effects within that range. Where we are now, stimulating demand is more like giving crack to an addict.

What to do about it? Ross Perot had some pretty good ideas almost 20 years ago, but most of what he suggested has not happened. I don't agree with his opposition to NAFTA. But I don't think he was really opposed to free trade, I think it was more that he had spent a bunch of money and political capital to get Alliance Airport approved as a free trade zone (suggesting he favored free trade), and NAFTA threatened to undo the benefits of that.

We are in a worldwide competition for businesses. If we expect to get our fair share of new businesses, and the jobs that go with them, we have to compete for them. Right now, we are not well positioned to win.

So let me see if I understand you....

Our good times were actually being stimulated to be better than they should have been. Then when things turned bad, we over stimulated the economy which pushed us to prematurely blow our wad in an effort to keep things going. The downside to the blowing our wad is that our economy will be pretty soft/limp for quite a while untile we can get it properly stimulated again?

(06-06-2011 05:09 PM)NIU007 Wrote:  Would the good times have been good if we paid back the debt then? It seems like to stimulate demand during bad times you really have to go overboard in spending (like we were forced to do with WWII and not so much this time around). Can you get that back in the good times without short-circuiting the good time in the process?
Just thinking hypothetically.

Ah, therein lies the rub. Keep in mind, I'm not advocating Keynes (I am more of a Friedman/Hayek guy), I'm just telling you what Keynesian really means.

Keynes says you accept the good times being less good in order for the bad times to be less bad. Problem is that no incumbent politician sitting on a growing and prosperous economy is going to like the idea of ratcheting back short-term growth and prosperity in order to maintain long-term soundness. But if you don't do that, at some point the long term gets here and you are structurally unsound, so nothing works.

I think that's where we are now. Full disclosure requires me to admit that a lot of economists disagree with me. I hope they're right and I'm wrong. But I don't think so.

I see what you did there GB.

(06-06-2011 05:14 PM)GrayBeard Wrote:  So let me see if I understand you....
Our good times were actually being stimulated to be better than they should have been. Then when things turned bad, we over stimulated the economy which pushed us to prematurely blow our wad in an effort to keep things going. The downside to the blowing our wad is that our economy will be pretty soft/limp for quite a while until we can get it properly stimulated again?

That's about the size of it.

(06-06-2011 05:14 PM)GrayBeard Wrote:  

(06-06-2011 05:01 PM)Owl 69/70/75 Wrote:  Problem is that our fearless leaders have misapplied Keynes. Keynes says you run deficits to stimulate demand in bad times, but not all the time. When the economy is good, you reverse and run government surpluses, pay back the debt, and stimulate the supply side. You attain economic stability not just by filling in the valleys, but also by chopping down the peaks a bit. As you note, we haven't done the second part of that in probably 50 years, at least.

We have supply and demand way out of balance. We are the largest debtor nation and the largest importer nation, all to support our consumer-driven economy. It's not demand tyhat's broke, it's supply. This is why IMO the "stimulus" didn't work. Keynes assumes that supply and demand are in some reasonable equilibrium, and his fixes can have positive effects within that range. Where we are now, stimulating demand is more like giving crack to an addict.

What to do about it? Ross Perot had some pretty good ideas almost 20 years ago, but most of what he suggested has not happened. I don't agree with his opposition to NAFTA. But I don't think he was really opposed to free trade, I think it was more that he had spent a bunch of money and political capital to get Alliance Airport approved as a free trade zone (suggesting he favored free trade), and NAFTA threatened to undo the benefits of that.

We are in a worldwide competition for businesses. If we expect to get our fair share of new businesses, and the jobs that go with them, we have to compete for them. Right now, we are not well positioned to win.

So let me see if I understand you....

Our good times were actually being stimulated to be better than they should have been. Then when things turned bad, we over stimulated the economy which pushed us to prematurely blow our wad in an effort to keep things going. The downside to the blowing our wad is that our economy will be pretty soft/limp for quite a while untile we can get it properly stimulated again?

Make sure we've got protection this time.

I agree with Owl. If Keynes' ideas were used in a limited way, they would most likely be fine....they aren't. The problem with Keynesianism is that it give politicians on both sides the opportunity to use expansion of the money supply to favor their cronies and those that support them. I would rather us just leave the economy alone and let it rid itself of malinvestments naturally as Hayek proposed. Either way...it has to happen. One way simply postpones that correction and leads to a very HARD fall...the other way lets the marketplace naturally take care of these problems and rids the economy quickly and lets it rebound quickly.

I am NOT for governmental interventionism. There are ALWAYS unintended consequences of government meddling. Those consequences are usually bad.

(06-06-2011 05:01 PM)Owl 69/70/75 Wrote:  Problem is that our fearless leaders have misapplied Keynes. Keynes says you run deficits to stimulate demand in bad times, but not all the time. When the economy is good, you reverse and run government surpluses, pay back the debt, and stimulate the supply side. You attain economic stability not just by filling in the valleys, but also by chopping down the peaks a bit. As you note, we haven't done the second part of that in probably 50 years, at least.

We have supply and demand way out of balance. We are the largest debtor nation and the largest importer nation, all to support our consumer-driven economy. It's not demand tyhat's broke, it's supply. This is why IMO the "stimulus" didn't work. Keynes assumes that supply and demand are in some reasonable equilibrium, and his fixes can have positive effects within that range. Where we are now, stimulating demand is more like giving crack to an addict.

What to do about it? Ross Perot had some pretty good ideas almost 20 years ago, but most of what he suggested has not happened. I don't agree with his opposition to NAFTA. But I don't think he was really opposed to free trade, I think it was more that he had spent a bunch of money and political capital to get Alliance Airport approved as a free trade zone (suggesting he favored free trade), and NAFTA threatened to undo the benefits of that.

We are in a worldwide competition for businesses. If we expect to get our fair share of new businesses, and the jobs that go with them, we have to compete for them. Right now, we are not well positioned to win.

The theory is to bridge the gap during the recession because the the amount of lost productivity would be greater than the deficit incurred by the gov't during recession, so the government should always try to prop up the economy no matter what. I'm not so sure that Keynes advocated chopping the peaks per se, but I suppose that may happen when the debts come due and the gov't reduces spending since it is no longer needed for the economy. However, I'd argue that Friedman, Hayek and Von Mises were much stronger advocates of reigning in a strong economy than Keynes. The monetarists always held inflation as the predominant controlling mechanism, and whenever the P rises much more quickly than Q (Demand = Price * Quantity), that P must be brought in line by removing money from the money supply.

I think Keynes focused exclusively on demand only, and it was this very reason that stagflation developed in the 70s as a result of Keynesian stimulus to combat an exogenous supply shock. Volcker applied the monetarist theories to remove inflation from the system in order to allow the economy to naturally recover. However, I don't think stimulus is even the big driver in the problems we have now. I think what we are seeing is monetarist policy running amok due to Greenspan overexpansion of the money supply and Bernanke continuing these policies. This is what caused the real estate bubble - loose and easy credit, or an excess supply of money. The real solution is to do nothing to allow real estate to hit its bottom, and flush out all of the excess cash in the the system (the bad debts).

But back to this article and additional stimulus, I can't see how the gov't could apply Keynesian theory moving forward because of QE and QE2. The money supply is so bloated that stimulating demand would likely, as you put it, be analogous to giving crack to an addict. The Q would not rise, but the P would most definitely sky rocket.

(06-06-2011 05:01 PM)Owl 69/70/75 Wrote:  Problem is that our fearless leaders have misapplied Keynes. Keynes says you run deficits to stimulate demand in bad times, but not all the time. When the economy is good, you reverse and run government surpluses, pay back the debt, and stimulate the supply side. You attain economic stability not just by filling in the valleys, but also by chopping down the peaks a bit. As you note, we haven't done the second part of that in probably 50 years, at least.

We have supply and demand way out of balance. We are the largest debtor nation and the largest importer nation, all to support our consumer-driven economy. It's not demand tyhat's broke, it's supply. This is why IMO the "stimulus" didn't work. Keynes assumes that supply and demand are in some reasonable equilibrium, and his fixes can have positive effects within that range. Where we are now, stimulating demand is more like giving crack to an addict.

What to do about it? Ross Perot had some pretty good ideas almost 20 years ago, but most of what he suggested has not happened. I don't agree with his opposition to NAFTA. But I don't think he was really opposed to free trade, I think it was more that he had spent a bunch of money and political capital to get Alliance Airport approved as a free trade zone (suggesting he favored free trade), and NAFTA threatened to undo the benefits of that.

We are in a worldwide competition for businesses. If we expect to get our fair share of new businesses, and the jobs that go with them, we have to compete for them. Right now, we are not well positioned to win.

+1

Well put

(06-06-2011 06:24 PM)miko33 Wrote:  

(06-06-2011 05:01 PM)Owl 69/70/75 Wrote:  Problem is that our fearless leaders have misapplied Keynes. Keynes says you run deficits to stimulate demand in bad times, but not all the time. When the economy is good, you reverse and run government surpluses, pay back the debt, and stimulate the supply side. You attain economic stability not just by filling in the valleys, but also by chopping down the peaks a bit. As you note, we haven't done the second part of that in probably 50 years, at least.
We have supply and demand way out of balance. We are the largest debtor nation and the largest importer nation, all to support our consumer-driven economy. It's not demand tyhat's broke, it's supply. This is why IMO the "stimulus" didn't work. Keynes assumes that supply and demand are in some reasonable equilibrium, and his fixes can have positive effects within that range. Where we are now, stimulating demand is more like giving crack to an addict.
What to do about it? Ross Perot had some pretty good ideas almost 20 years ago, but most of what he suggested has not happened. I don't agree with his opposition to NAFTA. But I don't think he was really opposed to free trade, I think it was more that he had spent a bunch of money and political capital to get Alliance Airport approved as a free trade zone (suggesting he favored free trade), and NAFTA threatened to undo the benefits of that.
We are in a worldwide competition for businesses. If we expect to get our fair share of new businesses, and the jobs that go with them, we have to compete for them. Right now, we are not well positioned to win.

The theory is to bridge the gap during the recession because the the amount of lost productivity would be greater than the deficit incurred by the gov't during recession, so the government should always try to prop up the economy no matter what. I'm not so sure that Keynes advocated chopping the peaks per se, but I suppose that may happen when the debts come due and the gov't reduces spending since it is no longer needed for the economy. However, I'd argue that Friedman, Hayek and Von Mises were much stronger advocates of reigning in a strong economy than Keynes. The monetarists always held inflation as the predominant controlling mechanism, and whenever the P rises much more quickly than Q (Demand = Price * Quantity), that P must be brought in line by removing money from the money supply.
I think Keynes focused exclusively on demand only, and it was this very reason that stagflation developed in the 70s as a result of Keynesian stimulus to combat an exogenous supply shock. Volcker applied the monetarist theories to remove inflation from the system in order to allow the economy to naturally recover. However, I don't think stimulus is even the big driver in the problems we have now. I think what we are seeing is monetarist policy running amok due to Greenspan overexpansion of the money supply and Bernanke continuing these policies. This is what caused the real estate bubble - loose and easy credit, or an excess supply of money. The real solution is to do nothing to allow real estate to hit its bottom, and flush out all of the excess cash in the the system (the bad debts).
But back to this article and additional stimulus, I can't see how the gov't could apply Keynesian theory moving forward because of QE and QE2. The money supply is so bloated that stimulating demand would likely, as you put it, be analogous to giving crack to an addict. The Q would not rise, but the P would most definitely sky rocket.

Keynes definitely advocated chopping the peaks. I don't have the cites handy, but if you read him thoroughly it's definitely there. He believed that government should smooth things out, and that means both filling the valleys and chopping the peaks. Two problems with this:
1. The "invisible hand" seems to do a better job of figuring out whether we are in a valley that needs filling or a peak that needs chopping, or
2. Maybe it's just that the "invisible hand" is not so obsessed with scoring political points.

As for demand, Keynes was excessively focused on demand, and the parts of Keynes that get widely discussed even more focused on that side than Keynes in general. Ignoring the supply side is how we got into 70s stagflation. The situation is worse now. Reagan moved us back toward the supply side, and Clinton balanced the budget which at least in theory always helps the supply side. But with Shrub and even more so Obama, we've pretty much given that all back,and more. We're still at the point where we have to fix the supply side, and we're unfortunately now at the point where it's going to be a lot more painful to fix supply than it was for Reagan/Clinton. The only thing more painful than fixing the supply side is going to be not fixing it. Because we really are down for the count if we don't fix it.

Agree regarding the monetary aspects.

(06-06-2011 06:24 PM)miko33 Wrote:  

(06-06-2011 05:01 PM)Owl 69/70/75 Wrote:  Problem is that our fearless leaders have misapplied Keynes. Keynes says you run deficits to stimulate demand in bad times, but not all the time. When the economy is good, you reverse and run government surpluses, pay back the debt, and stimulate the supply side. You attain economic stability not just by filling in the valleys, but also by chopping down the peaks a bit. As you note, we haven't done the second part of that in probably 50 years, at least.

We have supply and demand way out of balance. We are the largest debtor nation and the largest importer nation, all to support our consumer-driven economy. It's not demand tyhat's broke, it's supply. This is why IMO the "stimulus" didn't work. Keynes assumes that supply and demand are in some reasonable equilibrium, and his fixes can have positive effects within that range. Where we are now, stimulating demand is more like giving crack to an addict.

What to do about it? Ross Perot had some pretty good ideas almost 20 years ago, but most of what he suggested has not happened. I don't agree with his opposition to NAFTA. But I don't think he was really opposed to free trade, I think it was more that he had spent a bunch of money and political capital to get Alliance Airport approved as a free trade zone (suggesting he favored free trade), and NAFTA threatened to undo the benefits of that.

We are in a worldwide competition for businesses. If we expect to get our fair share of new businesses, and the jobs that go with them, we have to compete for them. Right now, we are not well positioned to win.

The theory is to bridge the gap during the recession because the the amount of lost productivity would be greater than the deficit incurred by the gov't during recession, so the government should always try to prop up the economy no matter what. I'm not so sure that Keynes advocated chopping the peaks per se, but I suppose that may happen when the debts come due and the gov't reduces spending since it is no longer needed for the economy. However, I'd argue that Friedman, Hayek and Von Mises were much stronger advocates of reigning in a strong economy than Keynes. The monetarists always held inflation as the predominant controlling mechanism, and whenever the P rises much more quickly than Q (Demand = Price * Quantity), that P must be brought in line by removing money from the money supply.

I think Keynes focused exclusively on demand only, and it was this very reason that stagflation developed in the 70s as a result of Keynesian stimulus to combat an exogenous supply shock. Volcker applied the monetarist theories to remove inflation from the system in order to allow the economy to naturally recover. However, I don't think stimulus is even the big driver in the problems we have now. I think what we are seeing is monetarist policy running amok due to Greenspan overexpansion of the money supply and Bernanke continuing these policies. This is what caused the real estate bubble - loose and easy credit, or an excess supply of money. The real solution is to do nothing to allow real estate to hit its bottom, and flush out all of the excess cash in the the system (the bad debts).

But back to this article and additional stimulus, I can't see how the gov't could apply Keynesian theory moving forward because of QE and QE2. The money supply is so bloated that stimulating demand would likely, as you put it, be analogous to giving crack to an addict. The Q would not rise, but the P would most definitely sky rocket.

Yes...The addiction analogy is correct...but..I would add that it is the people in power that really have the addiction. The power to simply produce money out of thin air is most likely the most powerful drug known to man.

Austrian Economics is correct. Read about the Austrian Business Cycle and you'll be a believer too. Keynes doesn't work.

Here's an article about our state of affairs:
Von MIses Institute

(06-06-2011 08:52 PM)Jugnaut Wrote:  Austrian Economics is correct. Read about the Austrian Business Cycle and you'll be a believer too. Keynes doesn't work.

Here's an article about our state of affairs:
Von MIses Institute

I agree....but....the reason is because Keynesian economic theory involves government interventionism. The second the government gets involved in the free market...sh!t goes south. If the government could use keynesian economic theory in quick...short doses...then fine. It simply can't because of the politics involved.

I think Keynes' theory is a valuable tool for use in helping to shorten a recession. However, the monetary policy level is so much more powerful that when it is not used properly, there is little in the terms of fiscal policy that can be done to help the economy. IMO, the most effective thing the gov't can do is to ensure that the money supply is very tightly controlled in order to ensure that inflation is held in check. The business cycle will always be a part of the free market, and no matter how efficient the invisible hand is at correctly allocating resources, inevitably the market will over value a portion of the economy which in turn causes the overall economy to be affected. I believe that since the 90s the gov't has allowed the boom/bust cycle to become even more exaggerated due to undisciplined monetary policy. Milton Friedman suggested that the Fed should be done away with and that the money supply should be expanded at a constant rate - around 2%/year - in order to ensure that the economy can grow at a reasonable rate without overheating. The Fed set the table for the crippling inflation of the 70s when Nixon twisted Arthur Burns arm to pursue low interest rates instead of low inflation. Politics reared its head in this regard in an attempt to reduce the unemployment rate. Greenspan helped to cause 2 bubbles: 1) the Tech Stock bubble in the late 90s and 2) the real estate bubble in the 2000s.

I think this is the point to take away from all the talk about Keynesians vs. Classicals vs. Monetarists, etc. The truth is that Monetary Policy and Fiscal Policy are different tools. Monetary Policy should be the bedrock of the free market, and this should not be used as a tool to affect the economy. It needs to be strictly guarded to ensure that maintaining the target of low inflation must always be the overriding goal with no exceptions. Fiscal Policies, on the other hand, should be in the realm of the political culture to use as tools to stimulate or cool off an economy. We have gotten into serious trouble every time the Fed elects to take an expansionary view of the money supply. To me, it is very difficult to craft any actual fiscal policy while the monetary policy is out of whack. Monetary policy is simply much too powerful to overcome, and it needs to be taken out of the hands of political actors. The Fed Reserve is too political, but they at least are a little better than if the congress had direct control over the money supply. Could you imagine that?

(06-06-2011 09:59 PM)miko33 Wrote:  I think Keynes' theory is a valuable tool for use in helping to shorten a recession. However, the monetary policy level is so much more powerful that when it is not used properly, there is little in the terms of fiscal policy that can be done to help the economy. IMO, the most effective thing the gov't can do is to ensure that the money supply is very tightly controlled in order to ensure that inflation is held in check. The business cycle will always be a part of the free market, and no matter how efficient the invisible hand is at correctly allocating resources, inevitably the market will over value a portion of the economy which in turn causes the overall economy to be affected. I believe that since the 90s the gov't has allowed the boom/bust cycle to become even more exaggerated due to undisciplined monetary policy. Milton Friedman suggested that the Fed should be done away with and that the money supply should be expanded at a constant rate - around 2%/year - in order to ensure that the economy can grow at a reasonable rate without overheating. The Fed set the table for the crippling inflation of the 70s when Nixon twisted Arthur Burns arm to pursue low interest rates instead of low inflation. Politics reared its head in this regard in an attempt to reduce the unemployment rate. Greenspan helped to cause 2 bubbles: 1) the Tech Stock bubble in the late 90s and 2) the real estate bubble in the 2000s.
I think this is the point to take away from all the talk about Keynesians vs. Classicals vs. Monetarists, etc. The truth is that Monetary Policy and Fiscal Policy are different tools. Monetary Policy should be the bedrock of the free market, and this should not be used as a tool to affect the economy. It needs to be strictly guarded to ensure that maintaining the target of low inflation must always be the overriding goal with no exceptions. Fiscal Policies, on the other hand, should be in the realm of the political culture to use as tools to stimulate or cool off an economy. We have gotten into serious trouble every time the Fed elects to take an expansionary view of the money supply. To me, it is very difficult to craft any actual fiscal policy while the monetary policy is out of whack. Monetary policy is simply much too powerful to overcome, and it needs to be taken out of the hands of political actors. The Fed Reserve is too political, but they at least are a little better than if the congress had direct control over the money supply. Could you imagine that?

Generally agree.

I like Friedman's concept of a flat 2% annual expansion of the money supply. Then again, I like pretty much every one of Friedman's ideas ever. I break ranks somewhat with Ron Paul here in that I think an independent or quasi-independent Fed is more able to do that than a political congress. But Fed should be given that mission and that mission alone, particularly given the complexity that arises with M1, M2, etc., with more oversight and accountability than now.

You can manage things somewhat with fiscal policy once the monetary policy is in place and working.