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ETFsRule (99.94)

Let's Give Keynesian Economics a Try

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June 04, 2011 – Comments (49)

A lot of people have been trying to make the case that Keynesian Economics has failed, because of our slow recovery and high unemployment.

What is Keynesianism? Well, basically it is the idea that the government should increase its spending during a recession, to stimulate demand and get the economy back on track.

Is that what we did? Well, we had a stimulus program, but most Keynesian Economists agreed that it was much too small. Was this a true, "Keynesian" stimulus program? If it was, then during the recession we should expect to see a large, temporary increase in government spending.

But it didn't happen. There was no spike in spending. Government expenditures barely even stayed on their normal course, because the stimulus act was much too small, and it was largely offset by budget cuts in other areas of the government. Even on a non-log scale, the graph still tells the same story. There was no Keynesianism.

Jobs

A lot of people are frustrated that the unemployment rate has only dropped from 10% to 9%, and has basically been stuck at that level. Why has this happened?

This graph shows us that the private sector has added almost 2 million jobs compared to a year ago. That's pretty good! So, why isn't the unemployment rate dropping faster?

Because we're offsetting the private-sector gains by laying off all of our teachers and other public-sector workers. The government has shed almost a million jobs over the past year. That's the polar opposite of Keynesianism, which would call for an increase in government hiring when unemployment is high.

People love to blame the government, and say that we should downsize it. Well, that's what we've been doing, and it's not helping. I say it's time to put an end to the austerity measures and give Keynesianism a try.

49 Comments – Post Your Own

#1) On June 04, 2011 at 3:22 PM, buffalonate (94.84) wrote:

Most economist would argue that Keynesian stimulus is most effective at the beginning of a deep recession.  At this point it would be a waste of money, especially considering how much debt we have.  The only thing our economy needs to thrive is cheaper gasoline. 

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#2) On June 04, 2011 at 3:32 PM, wolfman225 (69.20) wrote:

 @ETFs Rule--".........we had a stimulus program, but most Keynesian Economists agreed that it was much too small. Was this a true, "Keynesian" stimulus program? If it was, then during the recession we should expect to see a large, temporary increase in government spending. 

But it didn't happen. There was no spike in spending......"

Huh?  Too small?  What do you make of an increase in gov't spending/borrowing of $5T in the last 3 years, with intentions of spending even more in the future?  We've seen nothing but an increase in government spending, borrowing, and control since the Dems took control of congress in 2007 and it only got turbo-charged with the election of Obama.

As for putting an end to "austerity measures", I fail to see where anything remotely resembling austerity has been proposed, much less enacted.  The left, rather than propose specific solutions that can then be debated on the merits, continues to sit back and demagogue any proposal by the right that might possibly call for fiscal restraint; labeling such as "extreme".

The only extreme will be the the results of doing nothing to change the current economic course.  All we need to do is to look to Greece, Spain, Italy, et al to see where we're headed.

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#3) On June 04, 2011 at 4:07 PM, ETFsRule (99.94) wrote:

"What do you make of an increase in gov't spending/borrowing of $5T in the last 3 years, with intentions of spending even more in the future?"

There was not an increase in spending of $5T over the past 5 years. If you read my blog post and look as some of the figures, I think it will help you understand what is really happening.

"As for putting an end to "austerity measures", I fail to see where anything remotely resembling austerity has been proposed, much less enacted."

If you take the time to read my blog post, I think you will understand the massive austerity measures that I was referring to. For instance: the layoffs of nearly 1 million government workers over the past year.

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#4) On June 04, 2011 at 4:33 PM, mm5525 (< 20) wrote:

What ever happened to those "shovel-ready" projects Obama promised? That "stimulus" package was a colossal waste of money (money we don't have and had to borrow from China, by the way), and we have very little to show for it (practically nothing). We should have rebuilt our crumbling infrastructure, i.e. repaired our interstates, bridges, tunnels, etc. Back in the Great Depression, we put people back to work by building the Hoover Dam. We have plenty to show for that stimulus package. Obama has made it abundantly clear he has never even managed a lemonade stand before, and it clearly shows he has no idea what he's doing. Plus, his lack of leadership on his "stimulus" package by just letting the terminal fools Harry Reid and Nancy Pelosi come up with it is just more evidence of his inability to lead. Sure, it was necessary to prop up state and local governments with federal funds, but to ignore the infrastructure (despite promising it) is just inexcusable. Had he put people to work immediately on our infrastructure, our unemployment rate would be far better today than it is. We would have saved millions on unemployment benefits, Obama would have taken less heat for the rate being well over the 8% that this stimulus package was promised to keep us under, and the US Dollar would be stronger, making gas prices and food prices far cheaper. Obama deserves all the grief he's getting for this colossal failure of a "stimulus" package

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#5) On June 04, 2011 at 4:40 PM, wolfman225 (69.20) wrote:

I believe that I do, in fact, have an understanding of what's "really happening".  It is a fact that Federal debt has increased $5T since Obama took office.  It is also a fact that most of the TARP/bailout funds were spent to preserve government jobs, either federal or state, and to help states fund continuing benefits for UI.  These are the same funds that we were told were going to purchase the toxic assets that were encumbering the balance sheets of the banks to help free up capital for "investment" and to avoid a global meltdown; these toxic assets (mostly sub-prime loans and CDOs) are still on the books.  A large number of the government layoffs in the last year are also a reflection of the ending of TEMPORARY census workers. 

 I'd hardly call the loss of government workers "austerity". Government, as it is presently constituted, is largely a bloated, inefficient entity that impedes innovation and private sector job growth, preferring instead to confiscate ever-larger amounts from the private sector to  fund it's agendas.  It is the private sector, after all, that is largely responsible for economic and job growth and for the broad based prosperity we've all become accustomed to; at least, up until the latest crisis.  In order for the government to continue to hand out "incentives" it first needs to take that money out of the private economy (or create it out of thin air, ala QE and QE2).

 True austerity is not when some over-paid time servers lose their positions.  True austerity is when the rest of the country gets handed the bill for past mistakes and false ideologies.  It's a bill that we will not be able to pay.

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#6) On June 04, 2011 at 4:53 PM, wolfman225 (69.20) wrote:

Also, let us not forget that in addition to the $5T in new Obama debt and obligations, there is the not-so-small problem of the administration's own projected deficits of more than $1T per year for the forseable future.  Of course, that's taking their projections as 100% accurate; we all know just how good Washington has been at cost/budget overrun predictions in the past, don't we?

The best thing that could have happened to the US economy would've been the adoption of the Ryan proposal as a first step.  Unfortunately, it seems as if "bread and circuses" are going to win the day.

I've got to go back to work.  No rest for us wicked conservatives, but someone has to contribute; we can't all ride in the cart ( unless it's careening downhill, of course).

Have a great weekend.

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#7) On June 04, 2011 at 5:09 PM, JakilaTheHun (99.93) wrote:

What is Keynesianism? Well, basically it is the idea that the government should increase its spending during a recession, to stimulate demand and get the economy back on track.

I think this has become the populist definition of Keynesianism, but I don't think it really describes Keynes philosophy all that well. 

I also tend to disagree with Keynes on the details of this. Keynes was right that in a balance sheet recession (i.e. a banking crisis), fiscal policy is more effective than monetary policy.  But I would argue that tax cuts are more likely to push money into the economy efficiently than government spending. 

My issue with government spending is that the US government is too big and inefficient and utilizes resources in poor ways, so that any benefit from pumping more money into the economy is erased by the negative act of wasting money in inefficient ways. 

US government money is spent primarily on entitlement programs, defense, and transportation.  Of those three, only transportation could reasonably be considered stimulative or economically justified, in my view.  (We do need some defense spending, but nowhere near what we currently spend.)

Only problem is that the US Federal government spends transportations in disastrous ways, as well.  It mostly goes to subsidize and expand an uneconomical highway system.  If anything we should reorient the highway system to have user fees in busy areas (e.g. smart tolls).  But we do the opposite --- we create free resources and people use them over more economical alternatives (e.g. mass transit rail). 

 

So even though I agree with Keynes' basic reasoning that fiscal policy is more effective to deal with this type of crisis, I think the only real beneficial way to implement this is through tax cuts.  

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#8) On June 04, 2011 at 6:30 PM, L0RDZ (82.47) wrote:

I say we need to shed  more gov.... more bs gov jobs....  Why do we need all those  multi levels  of   managers who do nothing but look for ways to spend tax payers money...

Fire  or  let go 25%  of all public sector employee let them  look for those jobs  in the private sector like all the rest or have them  create their own businesses..

I'm so sick and tired  of  BULLLLLLLLLLLL   LIES  and  hey  I'm gonna reach into your pockets  and decide who wins  and loses based upon  tax dollars  and  gov  spending...

Stop paying illegals  disability and social security,  people who have never paid a dime can  come stake a claim and get  benefits ?

Heck stop paying bogus  citizen disability,  at the gym I work out this 20 something  who decided to become too fat who previously worked as  a  cat  programmer  but lost his job, is on permanent disability because hes too fat and now surprise has  Diabetes  because hes too fat.....

Why should I work so this fat  FOOK  can keep stuffing his face, at the gym his entire exercise routine is  taking a shower and siting in the whirlpool and  pool and talk to old  men,  why is he on disability ???  he had programming skills ??? he choose to eat his way into his condition ?

Instead of  natural selection we have gov selection keeping  fools like him  in pizza entire pizzas  as snacks before eating an entire family bucket of  KFC  just by himself...

I say screw  Keynes  and that bs... you want to spend,.. go and earn that money and spend it,,,, if you can't earn well looks like you shouldn't spend it like drunken sailors  making it  rain in some brothel.

 

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#9) On June 04, 2011 at 6:33 PM, L0RDZ (82.47) wrote:

Let fat gov.... die... or starve......  

I want model thin  good looking  actually do something efficiently  government.

Like when you take a girl out and she eats her entire plate  and is all excited and ready to do something for you, grateful for your company.

 

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#10) On June 04, 2011 at 6:49 PM, Riskysam (82.18) wrote:

So even though I agree with Keynes' basic reasoning that fiscal policy is more effective to deal with this type of crisis, I think the only real beneficial way to implement this is through tax cuts.

Jakilla,

1.How has tax cuts helped this current recession? Please help me understand.

2. Why not shift money into the private sector through direct government investment (ex. help grow solar sector jobs or other emerging industries) ?

Wouldn't  Keynes assumptions be more effectively carried out by the public sector?

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#11) On June 04, 2011 at 6:57 PM, buffalonate (94.84) wrote:

I think the problem with stimulus program is that the Republicans forced there to be 200 billion dollars of tax cuts in it.  Anyone who has taken a macroeconomics economics class knows that tax cuts are the least effective way to stimulate the economy because that money is not guaranteed to be spend.  Behavioral economists have researched this and found that more than half of tax cuts are just used to pay off credit card bills and not used to purchase anything.  That 200 billion should have been used on infrastructure projects. 

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#12) On June 04, 2011 at 11:56 PM, whereaminow (30.26) wrote:

1. This graph shows us that the private sector has added almost 2 million jobs compared to a year ago. That's pretty good! So, why isn't the unemployment rate dropping faster?

If you back that graph out to a longer time frame, you'll see that the only other period that shows a 10 year stagnation in private sector employment like today is The Great Depression.  So, congratulations.

There has been almost zero private sector job growth from 2001-2011.  Considering that there has been population growth, that means that the private sector has shrunk in relation.  I would not high five any economist or politician over adding 2 million jobs.  

2.  You speak out of both sides of your mouth. You congratulate Keynesians for adding jobs (when no net jobs were added) and then you say that the government shrunk (which is supposed to be a joke, right?) and that would not be Keynesianism.

3. If  buffalonate could get through one thread without breaking everything down into the tired and fake Left/Right paradigm, I'd be impressed.

David in Qatar

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#13) On June 05, 2011 at 12:31 AM, mm5525 (< 20) wrote:

Giving money to prop up state and local governments does not guarantee they'll use it for anything other than pay off debt either, so for you to argue putting more money in the hands of millions of everyday consumers via a tax cut as being "the least effective way to stimulate the economy" is a tad on the bewildering side. The tax cut was one of the only good things about the "stimulus" package compared to how the rest of it was largely squandered.   

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#14) On June 05, 2011 at 12:48 AM, ChrisGraley (29.97) wrote:

Please! I see more wrong responses in this thread than right ones. 

Keynesian flaw #1

You are counting on politicians to not rob you in the process! Stimulus packages that create tea-pot museums and golf courses named after senators are not big job creators. Money given out to banks to invest in the stock market istead of making loans isn't going to do it either.

Keynesian flaw #2

Simply throwing money at a problem is never a solution. The people that pretend to care about seniors on fixed incomes are the first to throw them into the fire when the SHTF.  All that money that you are throwing at the problem causes their expenses to exceed their income. You don't care about them now, because they are not potential productivity machines. You need to save your own ass, so let them starve or force their kids to take on the burden that you've placed on them. Later the surviving seniors will  vote for you because you will solve the problem that you created by throwing more money at the seniors lucky enough to survive your spending spree later by siphoning off that money windfall productivity that you just created and creating the next recession.

Keynesian flaw #3

You can't borrow your way to prosperity. We did borrow $5 trillion even though we wasted most of it. We are responsible for the interest on that debt. The interest on that debt taxes future productivity. It causes the next downturn.

Throwing money at a problem works a little better when you didn't have to borrow the money that you are throwing in the first place. Just a little better though. Fixing the root cause of the problem works much better and we've seemed to have just given a wink and a nod to the bankers to create the next debt problem.

When the Keynesians say that $5 trillion is not enough, it's a sign that the process has worked itself into a ponzi scheme. The downturn that they are creating for the next recession will take $10 trillion and even though we can't afford it, it won't be enough either.

 

 

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#15) On June 05, 2011 at 1:37 AM, ChrisGraley (29.97) wrote:

Let's Give Keynesian Economics a Try

???

seriously?

Lets give it a try?

It's the only thing that we have tried since I've been born and it's failed over and over again.

How about this?

How about we admit that the medicine is helping to cause the disease.

How about we admit that trying to live off of borrowed money is as bad an idea for a government as it is for an individual and will end with the same results.

How about we pick responsibility over tricks?

Keynesianism is one of those things that sounds like it's too good to be true. What does your heart tell you about things that sound too good to be true? 

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#16) On June 05, 2011 at 2:56 AM, JakilaTheHun (99.93) wrote:

Jakilla,

1.How has tax cuts helped this current recession? Please help me understand.

2. Why not shift money into the private sector through direct government investment (ex. help grow solar sector jobs or other emerging industries) ?

Wouldn't  Keynes assumptions be more effectively carried out by the public sector?

 

(1) I'd argue that tax cuts have helped during the current recession. In fact, most of the "stimulus package" was tax cuts.  Tax cuts and government spending basically accomplish the exact same goal by pumping more money back into the economy.  Keynes tended to prefer the latter, but supported both in a balance sheet recession.  I prefer the former, because, even though it's more likely that private sector money will be held back, it's utilized much more efficiently.

(2) Because the government is very bad at picking winners and losers and it often distorts the markets in detrimental ways.  This is precisely how we got into the crisis to begin with.  The government decided that it needed to actively support home ownership, which created market distortions, that led to a housing bubble, and subsequent crash. 

 

I think Keynesian fiscal policy is better carried out by the private sector.  Why should the government subsidize solar if it's uneconomical.  Even it's environmental benefits are dramatically overstated (we have to ignore the costs associated with using up so much land to install solar panels, which is environmentally destructive and uneconomical.)

I'd rather let the markets choose the winners and losers.  If we want to pump more money into the economy, let the private sector be the driver, so the results are more desirable. 

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#17) On June 05, 2011 at 3:07 AM, whereaminow (30.26) wrote:

This settles all debate.  Thomas Woods.

David in Qatar

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#18) On June 05, 2011 at 3:48 AM, AvianFlu (35.71) wrote:

In the words of Milton Friedman:

 "There is no shortage of ideas about how to spend OTHER people's money."

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#19) On June 05, 2011 at 4:06 AM, JakilaTheHun (99.93) wrote:

I think the problem with stimulus program is that the Republicans forced there to be 200 billion dollars of tax cuts in it.  Anyone who has taken a macroeconomics economics class knows that tax cuts are the least effective way to stimulate the economy because that money is not guaranteed to be spend.  Behavioral economists have researched this and found that more than half of tax cuts are just used to pay off credit card bills and not used to purchase anything.  That 200 billion should have been used on infrastructure projects. 

 

This is flawed reasoning.  

Paying off credit card bills allow the private sector to de-lever and get back into healthier shape, which expedites recovery. It also means that the creditors are in better shape and able to lend out more money.  

The idea that you need infrastructure projects to stimulate the economy is pure crap.  Yes, infrastructure can be vital and useful to the economy, but simply building for the sake of building is a waste of resources. 

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#20) On June 05, 2011 at 4:21 AM, stef333 (< 20) wrote:

Enough with this brough ahah, too many kakkalakken talking like they know better, losers that barely make 15K /year out in the streets protesting tax increases for the top 1% percent.

I am smarter than most of you, so put me in charge and shut up! :) 

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#21) On June 05, 2011 at 11:24 AM, ETFsRule (99.94) wrote:

 mm5525: I agree 100%. There was no stimulus or infrastructure spending. Obama broke his promises. And the "stimulus" bill was mainly tax cuts anyway - not spending.

wolfman225 (78.30) wrote:

I believe that I do, in fact, have an understanding of what's "really happening".

Sorry, but it doesn't seem that way to me. Earlier you said that the cause of the additional $5T in debt was increased gov't spending. That is not the case, because gov't spending has not increased by anything close to $5T since Obama took office.

 JakilaTheHun (99.93) wrote:

"I think this has become the populist definition of Keynesianism, but I don't think it really describes Keynes philosophy all that well."

You're probably right. Keynesianism is hard to define, and people have viewed it differently over various decades. I'm just referring to counter-cyclical measures to stimulate the economy.

"US government money is spent primarily on entitlement programs, defense, and transportation."

There are other ways they can spend money, especially on a temporary basis. Let's not forget about green energy projects, and improving the energy grid itself. These are things Obama promised that he would work on.

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#22) On June 05, 2011 at 11:47 AM, ETFsRule (99.94) wrote:

whereaminow (88.78) wrote:

"If you back that graph out to a longer time frame, you'll see that the only other period that shows a 10 year stagnation in private sector employment like today is The Great Depression.  So, congratulations."

You're congratulating me? I don't understand your point... what does that have to do with our recovery from the current recession?

"There has been almost zero private sector job growth from 2001-2011.  Considering that there has been population growth, that means that the private sector has shrunk in relation.  I would not high five any economist or politician over adding 2 million jobs."

Adding 2 million private-sector jobs in 1 year is a very good sign, actually. I don't understand the relevance of the slow job growth from 2001-2010, with regards to the current discussion.

"You speak out of both sides of your mouth."

No I didn't, you are just trying to oversimplify everything and twist the discussion into a rhetoric-based, political argument, instead of a fact-based economic discussion. As usual.

You congratulate Keynesians for adding jobs

I never congratulated Keynesians for adding the 2 million private-sector jobs. Keynesianism had nothing to do with it, because Keynesianism was never used.

(when no net jobs were added)

I was referring to the pace of the recovery over the past year, that's all.

and then you say that the government shrunk (which is supposed to be a joke, right?) and that would not be Keynesianism."

In many ways the gov't has shrunk since Obama took office. Federal spending has grown by a total of about 6% over Obama's first 2.5 years in office. This is an annual increase of about 2.4% per year, which is significantly below-average, by historical standards. And most of these increases were already in place before he took office. At the same time, there has been massive public sector layoffs since he took office.

It seems that the people characterising Obama as a big spender have not bothered to look at the facts.

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#23) On June 05, 2011 at 12:04 PM, whereaminow (30.26) wrote:

Adding 2 million private-sector jobs in 1 year is a very good sign, actually. I don't understand the relevance of the slow job growth from 2001-2010, with regards to the current discussion.

6-7 million jobs were lost in the bust.  The bust was a predictable consequence of easy credit policies advocated by Keynesians.  So after losing 6-7 million jobs, we are supposed to be thankful that 2 million have come back, a year after Keynesian economists said the recession was over???

So yeah, lol, congratulations Keynesians.

Here's the broader chart

In many ways the gov't has shrunk since Obama took office. Federal spending has grown by a total of about 6% over Obama's first 2.5 years in office. This is an annual increase of about 2.4% per year, which is significantly below-average, by historical standards.

Government shrunk by getting bigger more slowly?  Best. Logic. Ever.  Here is total government expenditures and receipts.

The rest of this is so corny, I am going to have to come back when I stop laughing.

David in Qatar

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#24) On June 05, 2011 at 12:21 PM, ETFsRule (99.94) wrote:

"Why should the government subsidize solar if it's uneconomical."

Jakila, you make a lot of good points. I agree that we shouldn't subsidize the production of solar cells as long as they are uneconomical.

But, the thing with solar is that it is increasing in efficiency at such an incredible rate, that solar seems destined to be a big part of our energy production in the future. So, I think it's a good idea for the gov't to help American companies develop the technology faster. We can at least help them with their R&D expenses.

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#25) On June 05, 2011 at 12:45 PM, ETFsRule (99.94) wrote:

"6-7 million jobs were lost in the bust.  The bust was a predictable consequence of easy credit policies advocated by Keynesians."

Wait, what? You mean the easy credit from 2001-2008? How is that a Keynesian policy? Your fellow conservative, Mr. Bush, was in office at that time.

So after losing 6-7 million jobs, we are supposed to be thankful that 2 million have come back, a year after Keynesian economists said the recession was over???

So yeah, lol, congratulations Keynesians.

David, don't be a cretin. I understand that you're just ignoring everything that I'm saying in an effort to be a pain in the ass. I've already explained that Keynesianism has nothing to do with any of this. We have never tried to use any Keynesian policies in the face of this recession.

If you're going to try to blame this mess on Keynesians, then please, refute some of my earlier points and explain how Obama's approach can possibly be described as Keynesian.

Government shrunk by getting bigger more slowly?  Best. Logic. Ever.

Again, a mindless criticism. 2.4% per year is extremely slow. And, it was couple with massive public-sector layoffs. Also, as I explained earlier, most of this was already in the budget before he took office. Obama has done nothing to significantly increase gov't spending.

It's a shame that you have to resort to snark instead of substantive arguments, especially when you have criticized others for using that approach.

"The rest of this is so corny, I am going to have to come back when I stop laughing."

More snark. You have nothing to offer.

"Here is total government expenditures and receipts."

Yes, falling receipts have been responsible for the increasing deficit. What's your point?

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#26) On June 05, 2011 at 1:56 PM, Riskysam (82.18) wrote:

@ Jakilla,

Wouldn't  Keynes assumptions be more effectively carriedout by the public sector? I meant private sector here.

@ ETFsRule

Clearly the austerity measures by the states are needed if they have to balance their budgets somehow. Something has to give. Sure let's spend our way out of this recession by accumulating more deficits without considering future spendings in entitlement programs.

1. Keynes is not the answer here. Tax policy is the best for this problem and that of the future. Instead of a temporary tax cut, I think one geared mostly towards improving investments and growing innovative industries in this country would be more beneficial.

2.Why not move  entirely in the direction of a consumption tax vs income based taxation?

3.  Why not improve national and private savings?

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#27) On June 05, 2011 at 7:51 PM, ChrisGraley (29.97) wrote:

Wait, what? You mean the easy credit from 2001-2008? How is that a Keynesian policy? Your fellow conservative, Mr. Bush, was in office at that time.

Keynesianism is not party based.

Both liberals and conservatives have been throwing money at the problem for quite some time.

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#28) On June 05, 2011 at 8:28 PM, ETFsRule (99.94) wrote:

Chris: Please explain to me how the easy credit & budget deficits from 2001-2008 are consistant with Keynesian economic theory.

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#29) On June 05, 2011 at 10:35 PM, TMFAleph1 (95.17) wrote:

Hey ETFsRule,

Send me your e-mail at alex.dumortier@gmail.com, so that I can PM you.

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#30) On June 06, 2011 at 12:46 AM, JakilaTheHun (99.93) wrote:

Keynesianism is not party based.

Both liberals and conservatives have been throwing money at the problem for quite some time.

 

It's quite a stretch to call Bush a Keynesian.  He violated the most basic principle of Keynesian economics.  He "stimulated" the economy during a housing boom, with tax cuts and massive military spending. 

Keynesian economic policy advises just the opposite during a boom.  Spending should have been dramatically cut and/or taxes increased under Keynesian logic.

The idea that Keynesian economics always proscribes government spending is a bit of a myth.  Keynes only supported higher levels of government spending during times of economic distress.  He supported just the opposite in boom times, since money supply and debt tend to increase too rapidly, so cutting back govt spending will cut back money supply and cool off a boom. 

 

People get overly simplistic with economic policies. 

Bush wasn't a Keynesian.  He wasn't a Monetarist.  He wasn't an Austrian.  He wasn't an economic liberal.  

Bush was a politician who was empowered by an impotent Congress and an increasing tendency in American government to allow the Executive total control over foreign policy and military matters.  So he spent like crazy and invaded Iraq, with little accountability.  That's all there is to it.  

His policies went against most of the major economic schools of thoughts.  But as with most debt-fueled booms, people convince themselves that what they see in front of them is not based on temporary distortions that will eventually collapse. 

So I guess I see this idea that our current economic crisis was caused by Keynesian policies as a bit of a cop-out.  Keynes' policies go almost completely against the economic policies of the US from 2001 - 2008. 

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#31) On June 06, 2011 at 9:20 AM, MoneyWorksforMe (< 20) wrote:

I think several people may find this blog post I wrote nearly a year ago, particularly relevant. I argued that the U.S. national debt was the main reason Keynesianism was doomed to fail this time around...

 

http://caps.fool.com/Blogs/why-keynesian-economics-is/421302

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#32) On June 06, 2011 at 10:55 AM, Melaschasm (52.15) wrote:

Government spending almost doubled douring the recession.  The graphs posted above ignore the several trillion printed and spent by the Federal Reserve (which is a part of the government).

If doubling government spending was not stimulative enough, what would be?

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#33) On June 06, 2011 at 11:05 AM, ChrisGraley (29.97) wrote:

@ETFS and Jakila

We have had 2 FED Chairmen since about 1987 and both of those guys are very Keynesian.

The 2001 recession was Bush's excuse to flood liquidity into the market.

You are right that pumping the market when we should be tightening is against Keynesian principles, but that is one of the problems with the theory.

Nobody ever tightens.

 

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#34) On June 06, 2011 at 12:22 PM, ETFsRule (99.94) wrote:

"Nobody ever tightens."

Chris, based on recent history I can understand why you would say that. But, historically when a Keynesian president is in office they have tightened. Let me give you some background & my view of Keynesianism.

Keynesianism was in favor mainly from the early 1940's until the early 1970's. Deficits and debt were not a major problem during this time, because the gov't maintained a surplus during economic booms. It was a huge success.

Keynesianism fell out of favor in the 1970's, with the rise of Reagan and the neo-conservative movement. Since then, we have frequently had high deficits (especially when republicans are in office).

For an example of tightening & saving, just look at the Clinton years.

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#35) On June 06, 2011 at 12:38 PM, ETFsRule (99.94) wrote:

MoneyWorksforMe: It looks like you called it.

The thing is, the debt accumulated during the Bush years was no accident. It was part of a neo-con policy called starve the beast, which was intended all along to strangle Keynesianism.

Melaschasm (78.41) wrote: Government spending almost doubled douring the recession.  The graphs posted above ignore the several trillion printed and spent by the Federal Reserve (which is a part of the government).

I'm not sure what you're referring to. If you mean the M2 money supply, that is not government spending.

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#36) On June 06, 2011 at 4:34 PM, JakilaTheHun (99.93) wrote:

We have had 2 FED Chairmen since about 1987 and both of those guys are very Keynesian.

I'd strongly disagree with this.  

Greenspan was an Austrian. 

Bernanke is a Monetarist.

There's no evidence that either is a Keynesian, and there's significant evidence that would contradict this with Greenspan. In fact, Greenspan was obsessed with Ayn Rand and Objectivism, and generally was opposed to anything associated with Keynesian policies. 

 

This is one reason why I get frustrated by worship and/or demonization of these sorts of terms.  One could call their self a Keynesian, Austrian, or Monetarist, but if they have their head stuck up their @$$, and ignore reality, it's really all quite irrelevant, isn't it? 

I'd say Greenspan's biggest sin was ignoring reality.  Who cares which economic philosophy he followed, if he was ignoring the economic realities in front of him?  

The Fed's CPI index was showing low inflation during the beginning of the housing boom, which was a flaw of their methodology.  Many economists argued that there was in fact a housing boom and that Fed policy was misguided.  In spite of this, Greenspan actually *LOWERED* rates.

So Greenspan's problem wasn't his economic philosophy, but his inability to understand the economic realities in front of him. 

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#37) On June 06, 2011 at 4:47 PM, Riskysam (82.18) wrote:

The Fed's CPI index was showing low inflation during the beginning of the housing boom, which was a flaw of their methodology.

@Jakila

That being said... how do we get out of this recession? 

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#38) On June 06, 2011 at 6:17 PM, JakilaTheHun (99.93) wrote:

@Jakila

That being said... how do we get out of this recession?

 

There's no simple solution, unfortunately.  We overspent during a boom (precisely when we should've been cutting back debt), so now we're in a position where it's more difficult to keep government spending constant. 

If you want to know my solutions, I would try to find ways to improve the economy by unlocking hidden value in the economy.  Or in other words, eliminating things that are causing inefficiencies in both the economy and in government revenues. 

Some ideas:

(1) Legalize, regulate, and tax marijuana.  Marijuana is actually one of America's biggest cash crops and by pushing it into the black market, we're creating a double whammy where the government is unable to collect tax revenues, and the government also needs to spend more on law enforcement and prisons.  Legalizing marijuana will actually improve the drug problem in America, improve America's economy,and improve government finances by lowering costs and improving revenues. 

(2) Simplify the American tax code.  We spend billions in unnecessary tax compliance fees as a result of our overly complex tax system.  Simplifying the tax code could unlock a lot of economic value. 

Those are just two ideas, but I think there's a lot of ways we're creating inefficiencies and changing policies in regards to that would at least create more economic growth and improve the government fiscal situation. 

But I don't think there's a real magical cure. 

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#39) On June 06, 2011 at 10:08 PM, ChrisGraley (29.97) wrote:

 @ETFs

Reagan didn't take office until 1981 after the stagflation created by the monetarist policies of the 70's. You ommitted that it was a liberal president employing those monetarist policies.

@jakila

Greenspan wasn't anything close to being an Austrian despite his friendship with Ayn Rand. He was expected to be a monetarist like Volker but micro-managed the rate mechanism and flooded the housing market with liquidity to create an artificial boom. He's a Keynesian.

Bernanke (who got his nickname by throwing money out of helicopters) is a classic Keynesian. He recommended the stimulus plan back in January of 2008.  He recommended QE2 as well. He'll recommend QE3 here shortly. He was adamately against tax cuts proposed by the republicans along with QE. He's trying and failing to employ aggregate demand as a tactic for job creation. Hell, he even quoted Keynes last year when he was asked when he'll admit that his policies are wrong. If he isn't Keynesian I don't know what is.

Here's your cure.

Stop screwing with the economy.

I know it sounds hard to believe, but  an artificially lifted economy has farther to fall than one that's been left alone.

 

Oh and I almost forgot. Let's talk about those belt tightening Clinton years. 

Name one year in the Clinton era where the National Debt went down.

(clue: you can't because it went up every single year of his term)

Nor did Clinton acheive a surplus, though he did come close one year with an accounting trick.

What he did do was change public debt into inter-governmental holdings by taking advantage of the dot com boom and the excess social security funds that they created.

No belt tightening on his watch either. 

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#40) On June 06, 2011 at 10:50 PM, ETFsRule (99.94) wrote:

Chris:

The fact is, there was a huge deficit when Clinton took office, and he reduced the deficit every single year. He also greatly reduced the debt as a % of GDP, which is what really matters.

Consider this graph again. Look at it this way: the slope of this graph is what really matters, not the starting position or the ending position. The slope of the graph indicates the directional change in deficit spending, which are a direct result of the president's policies. This is what tells us whether or not he was "tightening".

Regarding stagflation: the majority of 70's stagflation occured while Nixon was in office. I don't consider him to be very liberal.

"He was expected to be a monetarist like Volker but micro-managed the rate mechanism and flooded the housing market with liquidity to create an artificial boom. He's a Keynesian."

Chris. He flooded the market with liquidity during a housing boom. This is the exact, polar opposite of Keynesianism. We explained that already.

Bernanke (who got his nickname by throwing money out of helicopters) is a classic Keynesian. He recommended the stimulus plan back in January of 2008.

That's true, but it was mainly just rhetoric. I have shown that the % change in gov't spending was extremely small.

"He was adamately against tax cuts proposed by the republicans along with QE."

2 points:

1. The vast majority of the "stimulus bill" was actually tax cuts. Look at the bill sometime. It should have been called the Obama Tax Cut Bill.

2. If Ben later opposed tax cuts, that doesn't make him a Keynesian. Keynesian economy theory tells us that we should implement tax cuts during a recession, not oppose them.

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#41) On June 07, 2011 at 8:21 AM, ChrisGraley (29.97) wrote:

@ETFs

The debt GREW every single year that he was in office. The accounting trick of shifting that debt burden on social security looks good on paper but does nothing to help the economy. There was no tightening.

I'll agree about Nixon's role in the stagflation and would also say that Ford contributed as well. But you start to have credibility issues when you try to blame the 70's on Reagan and cherry pick the conservative presidents for your blame.

A housing boom and an economic boom are 2 different things.

2 points

1) total BS. Taxes have gone up not down. Most of that bill was not tax cuts. Most of that bill was pork sold as economic relief. That's one reason why it didn't work. 

2) Monetarists would want tax cuts, not Keynesians. Keynesians would prefer to print money and hand it out.

 

 

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#42) On June 07, 2011 at 1:08 PM, ETFsRule (99.94) wrote:

"The debt GREW every single year that he was in office."

Chris, clearly you must have read this article, which explains that Clinton did not actually have a surplus. The author makes some valid points. From that article:

The bottom line is that the national debt going down as adjusted for inflation or as a percentage of GDP is a valid metric for evaluating the debt load of the government but it says nothing about whether or not there was a surplus. If the total national debt went up, there was a deficit. Those that think a decrease in the debt load of the federal government as a percentage of GDP or adjusted for inflation is equivalent to a same-year surplus don't understand the definitions and purposes of each of these terms.

He is absolutely correct here. The gross level of federal debt is a completely separate issue from the debt load of a country.

But, what the author doesn't spend much time on, is the fact that the gross level of debt is inconsequental. Who cares if the gross level of federal debt went up a little bit?

The debt load is the only measure which effectively describes whether or not the fiscal health of a nation is getting better or worse.

Once again, my figure shows that Clinton decreased the deficit every single year. Decreasing the deficit is best described as "tightening". There was a very large deficit when he took office, and he reduced the deficit every year, ending with an extremely small deficit.

He also greatly decreased our debt load, which means that our fiscal strength greatly improved during his presidency.

So, if you want to cling to the argument that, technically, there was not quite a budget surplus, then you are the one using meaningless technicalities here. You are ignoring the truly meaningful figures which most accurately describe the fiscal strength of our country.

Also, you haven't commented on the performance of Keynesianism from the 40's through the early 70's. Do you agree with me that Keynesians did a good job of managing the federal budget during this period?

"A housing boom and an economic boom are 2 different things."

The housing boom coincided with GDP growth, rising prices, and rising debt. This is the exact type of situation where Keynes advocated a tightening of fiscal policy. Disagreeing with this point would be a complete mischaracterization of Keynes' ideas.

"1) total BS. Taxes have gone up not down. Most of that bill was not tax cuts. Most of that bill was pork sold as economic relief. That's one reason why it didn't work. "

Read the bill sometime, Chris. Tax cuts. Not tax increases.

"2) Monetarists would want tax cuts, not Keynesians."

Both schools of thought recommend using tax cuts during an economic downturn.

"Keynesians would prefer to print money and hand it out."

Also incorrect. Keynes never said that printing money could stimulate the economy - in fact, he said the exact opposite.

You are confusing fiscal policy with monetary policy. Monetarists advocate printing money during a liquidity crisis / economic downturn. That is one of the most basic tenets of Monetarism - not Keynesianism.

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#43) On June 07, 2011 at 4:35 PM, JakilaTheHun (99.93) wrote:

Chris,

I wouldn't agree with your analysis on Greenspan or Bernanke at all.  You're using the term "Keynesian" as a catch-all synonym for "things I don't like." 

I don't really disagree with you on the flaws of Greenspan's actions.  But they're not "Keynesian" by any stretch of the imagination. Flooding the market with cheap liquidity during a housing boom has absolutely nothing to do with Keynesian economics.  Moreover, it was Keynesians that were most likely to oppose Greenspan's actions on philosophical grounds.

All I'm saying here is that I wouldn't worship or demonize an economic philosophy label.  You've got to look at the philsophy of  the individual.  One might say they are an Austrian and contradict that philosophy; or one might call themselves "Keynesians" and contradict Keynes' ideas. 

Greenspan was an Austrian.  Most Austrians I've encountered are now very criticial of him, so maybe he's just a really crap "Austrian." 

 

Bernanke is more debatable, admittedly, but most of his writings suggest that he's a Monetarist. He has supported some Keynesian actions, but the bulk of evidence suggests that he follows a Monetarist philosophy. QE2 was not a Keynesian idea at all; remember, Keynes supported fiscal stimulus and believed monetary stimulus would be mostly ineffective during this type of crisis. 

I'm not saying all Monetarists support this.  Many do not.  But his actions certainly come from more of a Monetarist mentality than a Keynesian one. 

Once again, maybe he's just a crap Monetarist. 

 

Fwiw, I've disagree with the "he's creating inflation" narrative.  I just don't think QE2 has been effective, as Keynes would have likely predicted.  Some Austrians have actually predicted that an action like QE2 would be more likely to create deflation than inflation.  I don't have a strong view on this, but I believe these arguments are at least worth exploring. 

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#44) On June 07, 2011 at 8:33 PM, ChrisGraley (29.97) wrote:

@ETF's

I have read many articles about it, but I don't think that I've read that specific one. I may be wrong about that. It's been a while.

You can't  say that Clinton even reduced the deficit. We still had the same deficit but the more of the debt was sold to the SSA instead of the public sector. That lets us write it of the books, but we still owe that money or grandpa isn't gonna get his SSA check. That is not tightening buy any sense of the definition. The debt GREW. We taxed future productivity and that debt has to be paid with interest. There is not any other way to look at this. We owed more when he left than when he got in. Bush was even worse and Obama is even worse and future Presidents will struggle not to be even worse because that debt compounds. We are borrowing money to pay what we borrowed years before. When we actually stop selling more bonds in one year than we sold the year before, then we are officially tightening (disclaimer here in the government figures out how to borrow another way)

 

@Jakilla

You say Greenspan is the world's worst Austrian and I can't agree to to this at any point. He was sold to the public as a monetarist and the next Volker. He did have some Austrian writings, but he did the exact opposite of what any Austrian would do for his enitire career. I would agree that Keynes would not like the continued pumping of the housing boom, but remember that when it was started it was to boost a lagging economy. What you see as anti-Keynesian, I see as a crucuial flaw of Keynesianism. Nobody knows when to say when. Nobody wants to be responsible for slowing down the economy.

As far as the Bernank, I see nothing monetarist about him and struggle with your view that QE2 was monetary and not fiscal. It seemed to me that great strides were taken to avoid the velocity of money and to put QE2 in the hands businesses that would invest and shore up balance sheets rather than create jobs directly. Indeed it seemed here that velocity of money was a huge concern where a monetarist would normally find it nessesary.

Again, I agree that maybe he's just a crap monetarist.  But I would prefer to judged him on his actions which seem more anti-monetarist than anti Keynesian to me.

One thing is for sure, I have seen nothing Austrian about the actions of either.

Maybe all these economists are just hybrids now. Maybe I'm just seeing this from a viewpoint that I can't shake.

I'm certainately not monetarist and would be equally critical if I saw the last 2 Fed chiefs with these results and monetarist policies, but I don't see it. 

Just my opinions, but I think that ETFs applies his label based on liberals vs conservatives.

I think you seem to look more on their writings before they got the job.

I'm just looking at this on what they did when on the job.

I could almost call Greenspan a monetarist with all the tinkering that he did with the rate mechanism, but a monetarist following his own philosophy would have never let that housing boom start, let alone continue for as long as he did. Remember they are for smoothing out all the highs and lows. An Austrian economist would have been shot for even thinking about it.  

I really would like to hear about your view on QE2 being monetary and not fiscal though. That fact that I don't see it may mean that I'm not looking in the right place. I would doubt that it would change my opinion about helicoptor Ben, but you never know.

 

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#45) On June 08, 2011 at 12:32 AM, ETFsRule (99.94) wrote:

"You can't  say that Clinton even reduced the deficit."

Chris, If you want to define the "true deficit" as being equal to the reported deficit plus the net borrowings from social security, that's fine. That's a reasonable way to look at it. Even using that method, he still decreased the deficit from $281.26B to $133.29B.

And again, the "debt load" or debt/gdp ratio is much more meaningful, in my opinion.

"Just my opinions, but I think that ETFs applies his label based on liberals vs conservatives."

I don't use any of these labels, they oversimplify the issue. I'm an independent - I've never belonged to a political party and I never will.

I consider myself to be mainly self-taught. That's one of the benefits of living in the information age... the data is freely available to everyone. But, I have certainly spent more time reading Keynesian theory than I have spent studying Monetarism or Austrian theory.

"...a monetarist following his own philosophy would have never let that housing boom start, let alone continue for as long as he did. Remember they are for smoothing out all the highs and lows. An Austrian economist would have been shot for even thinking about it."

Now we're getting somewhere. Here's the key: Monetarists and Keynesians both try to smooth out the economy and prevent bubbles from forming. They just do it differently.

Monetarists use money: they create more money during busts, and create less money during booms.

Keynesians use gov't spending: more spending during busts, and less spending during booms.

QE2 was basically an effort to "print money" and increase liquidity. It was mainly a supply-side policy, AKA Monetarism.

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#46) On June 08, 2011 at 9:01 PM, ChrisGraley (29.97) wrote:

@etfs

And again, the "debt load" or debt/gdp ratio is much more meaningful, in my opinion. 

Careful with that measurement, because remember that we were in a dot.com bubble at the time. Over a long term of differing economic conditions though, I would agree that would be a better measurement. The problem with that measurement is that it is direct conflict with Keynesian practices. A Keynesian would need more debt at an economic bottom to pump the economy and would grade very poorly with that measurement. A monetarist would too for that matter.

 Now we're getting somewhere. Here's the key: Monetarists and Keynesians both try to smooth out the economy and prevent bubbles from forming. They just do it differently.

Monetarists use money: they create more money during busts, and create less money during booms.

Keynesians use gov't spending: more spending during busts, and less spending during booms

I think that this is where we differ on our viewpoints the most.

My definitions of those two things are as follows...

Monetarists want to control the money supply. They think that money should be micro-managed in that pursuit. At least in their minds, the adjustments should be small and incremental according to indicators of things like inflation and unemployment. It would be common to take 2 steps forward and one step back in that scenario. It would not be out of character for a monetarist to open the flood gates of money in an extreme deflationary moment, but that same economist should be riding the brake shortly after opening the flood gates. So it should look something like this....

We printed a trillion dollars.

We bumped the interest rate a tick.

We printed 500 billion dollars.

We bumped the interest rate a tick. 

When they do print money, they want it to have a high velocity. They want it to be put directly in the hands of the consumer. Fiscal projects take time to accelerate that velocity. It's much quicker to put money in the hands of Joe paycheck. He can buy pork-chops tomorrow and the pork chop company will be hiring while bridge that the Keynesian wants to pay for is still being designed. The monetarist doesn't really care how the money is spent as long as it's spent over and over again quickly.

The Keynesian believes that government should fill in for the role of the consumer temporarily during those bust times and be frugal during the booming periods. (2nd part never happens) A good Keysian policy would employ workers on government projects and hope that their incremental purchasing power would result in more lasting positive economic conditions. Because of the slow start of this approach, a Keynesian would need to throw more initial money at the problem but would have a steadier economic rise as the money is paid out in installments for the ditch diggers and bridge builders as they complete the projects. As those workers get back on their feet, the businesses selling them goods also start hiring again.

Both sides seem to try to avoid a jumpy economic graph, but a monetarist wants a quicker pop that he will slow down just as quickly and then a smaller quick pop that he will slow down quickly. He doesn't want to reverse the pop, just slow it a little. He's hoping to ease up interest rates as he adds money to the system to avoid waiting on raising rates and then getting a huge negative market response when he does. A good monetarist should be Jekyl/Hyde in press conferences. "We fixed it! We had a small set back. We really fixed it this time! We had a small setback."

A Keynesian believes more that slow and steady wins the race. His projects will take time to ramp up, but the bridge builder knows that he has a job for the next 2 years until that bridge is built and will spend his money accordingly. The town that the bridge is being built in knows it has money coming in for the next 2 years as well and the neighboring towns know that they can capture a piece of that as well.

A Keynesian looks at these projects as money that they won't have to spend in the boom. A Keynesian wants this slow ramp and prefers not to rely on the velocity of money to help avoid inflationary pressure. He knows that he eventually has to hit the interest rate switch some time and would prefer to have consumer confidence to have a strong foothold when he does. He knows that bad timing means that he may have to cut an even bigger check in the future, so he wants to make sure that he is sure before he throws the switch.

In my opinion, QE2 was low velocity money. It was not put directly in the hands of the consumer. In fact we seemed to take steps to avoid that specifically. We haven't tinkered with the interest rate either. While I will say that I would have expected more job creating programs for what I think is a Keynesian plan, I blame that on a greedy vote bribing congress more than anything. That's also why the money hasn't been as effective as it should be.

Also ETFs, please don't take offense at the liberal vs conservative thing. What I meant to say was that you seemed to paint a liberal administration as Keynesian and a conservative one Monetarist. A lot of these administrations had FED chiefs hired by a previous administration and I believe that the FED has more control on economic adjustments than even the President. I also believe that these guys in practice tend not to be what we thought we were getting when we hired them.

Maybe Jakila got it right.

Maybe we just have a bunch of crap economists. 

Chris 

 

 

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#47) On June 09, 2011 at 3:52 PM, ETFsRule (99.94) wrote:

"They want it to be put directly in the hands of the consumer."

Yes, that's what they want. This is what Bernanke was trying to say with his much-maligned "helicopter" quote. He was expressing frustration at the fact that the Fed really has no way to effectively put money directly into the hands of consumers.

Maybe monetarism would be more effective if we just gave him his helicopter.

"The Keynesian believes that government should fill in for the role of the consumer temporarily during those bust times and be frugal during the booming periods."

Agreed.

"(2nd part never happens)"

If this were true, then Keynesianism wouldn't work. But, in fact, Keynesians have been some of the most fiscally responsible presidents we've ever had. However, it only works when we have elected officials who believe in Keynesianism, instead of people like Bush who try to sabotage it.

Here is yearly growth of the federal debt minus yearly GDP growth. This was textbook Keynesianism - we only ran "true" deficits for very brief periods during recessions. The rest of the time, our debt burden was decreasing. Federal debt was minimal.

We started to abandon Keynesianism for some very misguided reasons during the 70's... and since then the rest is history. Massive debt, more severe recessions, more severe boom and bust cycles, etc.

The paradigm shift basically occured in the early 80's... and the worst offenders ever in terms of managing the federal debt have been Reagan and Bush Jr (both are monetarists).

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#48) On June 09, 2011 at 4:26 PM, ETFsRule (99.94) wrote:

It would be a sin to leave this out: debt/gdp, 1945-present

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#49) On November 20, 2012 at 4:44 PM, ChrisGraley (29.97) wrote:

Etfs I tend to ignore you because you have a false omnipitence when it comes to Keynesianism. It's pretty much the only topic that you have an opinion on that is close to defendable and it's a poor one at that.

 It would be a sin to leave this out debt 1940 to 2010.

The last couple of posts I remember from you were begging people to deny that printing money was the problem and that Obama's biggest flaw was that he didn't print enough money to get us out of the problem that Keynesianism created. My kids are honestly in enough debt ETF's. They don't need any more debt created for them by the govenment on their behalf. The housing crisis was created because government had to relax lending standards to allow people to buy homes they can't afford because the values of those homes are inflated due to a weak dollar policy. My kids will work most of their lives to repay a debt made to pay my bills, not theirs.

So if I am a little snarky, you might be able to understand. I'm a little protective of you robbing the kids piggy bank.

TDM, I do agree that stagflation is probably what will happen.I said inflation, but I was talking strictly about the dollar. The reason I am pulling money out of the stock market because I fear stagflation. 

ETF's I would hope you would refrain from ever telling anyone that "they might learn something" from anything you post. They probably will, but the only thing they will learn in the end is that the policies that you cling to are totally wrong. My kids can't afford too many more people that think like you.

If it makes you feel any better, the monetarists are wrong too. 

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