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Keynesian Economics Are Garbage

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May 29, 2009 – Comments (11)

Seems to me that an evaluation of economic history shows that Keynesian economics tends to always end with massive debt and a heap of hurting and bubbles.  This run has been one of the longer runs of this stupidity.  Austrian economics makes much more sense to me.

Keynesians please exit stage left.

11 Comments – Post Your Own

#1) On May 29, 2009 at 10:47 PM, ChrisGraley (30.21) wrote:

total agreement here.

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#2) On May 29, 2009 at 11:03 PM, JakilaTheHun (99.94) wrote:

I'd say the article is garbage.

Nothing advocated by Bush II or Obama has really been textbook Keynesian.  In fact, the prior five Presidents have advocated a bastardized conglomeration of Keynesian, supply-side economics, Liberalism, mercantilism, frequent hand outs to corporations, and random political pandering.  I don't think you can call Bush II or Obama "Keynesian" any more than you can call them "classical liberals." 

Keynes never advocated massively spending outside of our means.  Keynes main focus was on demand and how excessive savings caused in a deflationary spiral could cripple an economy indefinitely.  The main problem is that as the value of cash rises, no one wants to invest.  No investment means idle resources.  Idle resources means economic capacity is not being utilized.  When full economic capacity is not realized, people lose jobs and wages go down.

Keynes advocated spending with a slight deficit in order to enliven the economy where the private sector had shied away due to deflation.  He also wanted to get rid of some of the issues that had caused deflation --- namely, he wanted the static gold standard to be altered.  I don't think Keynes was against the idea of currency being backed, but the way the US had set up the gold standard (with the prices unchanging) promoted deflation in certain circumstances. 

There's really nothing wrong with Keynes' line of logic.  It's the past few Presidents application of it that has been bizarre.  Keynesian theory has basically been distorted to prop up failing corporations and give hand outs to special interests.  Of course, Liberalism has been distorted to achieve the exact same goals. 

The real problem in Washington is not economic theory.  The problem is that our government is run by special interests to begin with, so we get a $787 billion "stimulus package" that probably consists of no more than 15% of stuff that could reasonably be expected to "stimulate" the economy.  Sure, printing all this money may kill deflation (which is good), but we're also amassing a debt and taxpayers are earning a highly negative return of their investment. 

Until America frees itself from the shackles of special interests, we're going to keep redistributing wealth from the general taxpayers to special interests.

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#3) On May 29, 2009 at 11:42 PM, SkepticalOx (99.44) wrote:

Jakila is right. In fact, throughout modern history, the government in the U.S. never went full-fledged Keynesian:

From The New Republic Article:

All of which raises the question: If Keynes's economic analysis is applicable in both good times and bad, and if his related political philosophy was designed to take account of issues like fairness and justice that are always relevant, why did we ignore so many of his recommendations for so long? The answer has to do with American skepticism of government, reinforced by a powerful coalition in Washington of Republicans and business lobbyists. This coalition balked at carrying out anything but the most attenuated version of Keynes's policies--and Democrats bowed to its wishes. To remove any hint of socialism, Republican and Democratic administrations created an unwholesome stew of Keynesian liberalism and business conservatism. The result has been policies that temporarily lifted the country out of recession but left it more divided economically and prone to more serious downturns.

[...]

If you look at America's periodic experimentation with Keynesian policy, it has been guided from the beginning by a determination to avoid any measures that might be described as socialist. It began with what was later called "military Keynesianism"--defense spending being one kind of public investment that was politically safe. But it has increasingly centered on tax cuts. Kennedy's vaunted experiment with Keynesianism consisted of tax cuts. So did Ronald Reagan's and George W. Bush's. Whatever benefits these stimuli provided in the short term, over the long run, they have exacerbated the potential for chronic unemployment by widening income disparities and reducing the overall propensity to consume. A complete reading of Keynes would have counseled a very different approach. But that has never been the way Americans treated Keynes. Until, perhaps, now.

Rest of Article on TNR.com

And remember, laissez-faire capitalism also, has never been adopted fully. It didn't work before the Depression, and its measures during the past 8 years didn't help matters either. Alan Greenspan was a hardcore Rand follower.

Running a country then, seems to be more than just adoption of set of ideas or another. It's a constant balancing act between rivaling ideas, just like so many other things when it comes to running a country.

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#4) On May 29, 2009 at 11:50 PM, FleaBagger (29.19) wrote:

JakilaTheHun

Do you have any evidence that people will not invest money in distressed, cash-generating assets or capital expenditures when those are cheaper? A "deflationary spiral" would inherently be cut short when appreciating cash can be traded for assets that can generate ongoing appreciating cash flows at more attractive ratios.

Who wouldn't want to buy the S&P 500 if it were yielding 10% and dollars were appreciating? The dividend would buy you more and more every time it was paid. Stocks would be among many cash-generating assets that shrewd investors would want to acquire in a deflationary setting.

Above all, what gives anyone the right to print money and distort the value of the contracts and debt covenants of others? That is immoral, whether or not it's the government doing it.

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#5) On May 30, 2009 at 12:03 AM, devoish (99.10) wrote:

I'm with Jakila on this one. 

I do not think either Keynes or the Austrian School advocated spending the way the last four Presidents have. The whole idea that cutting taxes will increase tax revenues because of increased investment is wholly bogus unless there is someone to buy the products you invest in making. It completely ignores the expense of supporting those investments.

At some point the USA will make the decision to collect taxes and pay the bills or devolve into a third world economy, run by dictators in corporate castles.

The article completely ignores the possibility of simply collecting enough taxes to support spending programs.

Even the Austrians pay taxes.

There are no signifant changes in the 2009 tax rates compared to 2008.
The Austrian corporate tax rate for 2009 is 25%. Personal tax rtates are progressive, up to 50%.
The standard V.A.T. rate is 20%, There is also a reduced V.A.T. rate of 10%.

And, not surprisingly, they have Government run affordable healthcare, costing less than $4,000/capita, drug copays of $.45 Euro, and a Government pension system for retirement.

Much as I wish I could live in a progressive country without paying for it, but I don't think it exists.

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#6) On May 30, 2009 at 3:18 PM, Alex1963 (28.79) wrote:

No on ever talks about the potential for the US to increase it's exports. Maybe we're all so inured to being an import consumer economy we forget that at some point our exports could become viable again. I believe that is part of the scenario of the stimulus/Quant Easing. Which helps in either of the extreme scenarios most doom sayers propose. I believe we will travel the path of either deflation or inflation but then world economic conditions will be such that no apocolyptic scenario will become realized, IMO. There will be pain in every major and ascendant economy tho. The 3rd world may fare the best having no standard of living to lose. But then there wil be more parity IMO.

The issue I have with some of the really gloomy analyses I read is that if they are comprehensive enought to factor in the critical competing/partner economies against the US to illustrate why we're doomed, they then fail to postulate what might happen as parity with them approaches. You can't have it just go one way.

And I'm sorry but Austrian School is too simplistic IMO. They truly seem to look at every issue as an ecomnomic one exclusively as if politics and really every other human motivation were secondary and a distant second at that. As if people if faced with choices about a finacial gain or loss simply make an economic choice. If you lend Mom 10K and she doesn't pay you sue. Simple. She defaulted. LOL. Most people, and even institutions, companies and gov'ts don't work that way and never have or will. In fact, Behavioral Finance studies show that even if all you do is look at the way humans make finacial decisions in a vacuum that there is rarely logic or even consistently self beneficial behaviors, even from financial experts. So even if accountants ran the world as A.S. seems to presuppose they would still take actions which were consciously or subconsciously economically damaging. And accountants don't run the world. They are far more complex variables at work than the AS seems to consider. Schiff, Misch etc are particularly adept. They pay lip service to certain political/forces or realities but always default to the prediction which favors an economic solution/viewpoint. A.S. Econs by & large claim to enlarge every scenario so that every particpant is included but do so only economically and never all inclusively as claimed. Hazlitt in particular was terrically selective. Like his Baker and the Glazier scenario where he stops short of merely having the glazier buy the suit from the tailor. There are so many logical flaws it is frustrating.

I think A.S. theory happened to coincide with the particular events of late because they were primarily finance related. But the solutions will have to be political not just financial. S.A offers no insight there IMO. So to look to them to now offer solutions or predict further ramifications of the complex global political, economic and fiscal events and actions IMO will lead to predictive failure.

To be fair though, I believe we are in territory so unique and complex that past calamities are vague guidelines at best. ALL economic models and schools are both worthless and useful but only to forge a hybrid: The Supercollapse Extinction Level Economic Event Theory LOL

Chapter 1: How the world lost trillions of wealth,

Chapter 2: Tried to spend their way into recovery.

Chap 3: Massive worldwide Quant easing creates debt.

Chapter 4: Defaltion/Inflation- Everyone's in the same boat so how badly can any one economy get hurt? (or helped too, maybe?)

Chapter 5: ....No one knows...to be continued :) But the more cetain anyone claims to be the more I personally tend to dismiss them. But tell me you're pretty sure and here's why THEN you have my respectful attention.

DWOT obviously, I hope, no offense. Anyone with your long histrory of top scoring at Caps must have some economic acumen or model which works for you deserves credit.

Respectfully

Alex 

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#7) On May 31, 2009 at 1:01 AM, dwot (97.29) wrote:

Good comments.  I have never formally studied economic theory, only picked up from my readings.

From what I have read, I don't like Kenysian economics and I do like Austrian economics. 

Alex,

You might enjoy Edward Chancellor's stuff.  Excellent reading.

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#8) On May 31, 2009 at 1:34 AM, dibble905 (83.40) wrote:

Having studied business (oxymoron) in university, all I can say for certain is this: What they teach may be nothing more than propaganda for how the world 'should' work and how such theories 'should' control our expectations. By effectively training our minds to think in the way the theories show they should, various government actions can effectively control our expectations and our economy.

What I just wrote could be all mumbo-jumbo given that it was typed up at 1:30am - but perhaps I am on to something?

Expectations are a huge driver for the economy. In fact, it's the one thing that is the most difficult to control and predict despite all of the theories out there. It also has the power to be self-fulfilling (for anyone who has studied all those inflation theories).

Essentially, if the government could control our expectations via economic theory, they could actually stabilize the economy through their actions -- for better or worse? We shall see.

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#9) On May 31, 2009 at 9:22 AM, dwot (97.29) wrote:

dibble905, one thing that has occurred to me is that without the formal training I am not thinking in the same box as those who have the formal training.  I do have a business minor, but what you learn there is quite limited, some economic history, accounting, finance, a bit or organizational behavior, some theory around micro and macro economics...  Actually, now that I think about it, I did lose some marks because I wouldn't buy into what the professor was teaching as truth in economics, and I remember correcting the math of another professor, the actual equation he was using...  Of course I have no recollection of what economic drivel theory was about.

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#10) On May 31, 2009 at 4:23 PM, Alex1963 (28.79) wrote:

I did check out your previous posts on Chancellor and dug around on the web, too. Thanks for the rec. I'm always looking for fresh perspective. I read a lot on econ and he seems to have similar views to many critics of Quant Easing, The Fed & Greenspan. In fact I have to agree with those who posit that the Fed's responsibility for the mortgage crisis is vastly overtstated. That they can only affect long term rates indirectly. Yes their is a relationship but not nearly as directly or insidiously as some would propose, tho there is some blame to lay at their feetl, IMO. 

Best

Alex 

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#11) On June 01, 2009 at 9:41 AM, Pureunderperform (41.20) wrote:

  Keynes helped attack the depression when the free market basically became totally incompetant. People coasted on his theories until the 70's and inflation seemed to require a decrease in the money supply. By the 80's monetarianism and supply side was the theory.  

  Keynes was right because in the 30's unregulated deflationary enviroment every error that could be made seemingly had been. Spending, regulation, and debt were good for a while. They were repaid after WWII.

  Monetarianism under Volcker was good because it brought down inflation but it quickly morphed into supply side deregulation trash. Bringing down taxes on the upper brackets too much and creating budget deficits, taking down tarriffs and quotas to wage class warfare against the unions and cause trade deficits while buying the populace with cheap products, and deregulating the whole finance industry.

  The problem the austrian school faces is that they are often in favor of extreme deregulation which is our current problem. They also don't like taxes which means they can't attack deficits and are often frustrated supply side reaganites in disguise.

 The problem is what to do about now. 

Solution 1: Herbert Hoover economics, raise tarriffs and taxes now to cover all deficits, let all bankrupt companies go under.

Solution 2: Keynesianism, deficits are fine for now, the government must spend.

Solution 3: Republicanism: It doesn't matter if deficits increase, new tax cuts should become permanent, regulation is wrong, bailouts are wrong.

  The austrian school has never been in power but seem more like 1 and 3 which are discredited. The austrian school doesn't have any way to deal with deflation or systemic problems. I find it limited. I find Krugman often very convincing. It's good to avoid debt but we just had an incredible blow last quarter which clearly required major backstopping of the whole economy.

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