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MoneyWorksforMe (< 20)

Why Keynesian Economics is Failing America

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July 17, 2010 – Comments (27)

Over the last few months we have seen a dramatic shift in sentiment regarding the economy and the direction which it is headed. In the middle of April the markets peaked, while the consensus seemed to be that although the U.S. economy was still weak, things were gradually getting better. The stimulus would be sufficient to eventually spur the creation of jobs and ultimately, once withdrawn, organic growth. Much has since changed for the worse, as even the once euphoric Keynesian believers now find themselves incredulously wondering if government efforts will be enough to pull us out of this dreadful economic malaise. This decrease in confidence is now the fed's achilles heel.

Keynesian economics is to confidence as Life is to water. For those of you who had nightmarish experiences with SAT's in high-school, I apologize for the unpleasant reference. But the main reason I write this is because I believe it succinctly describes an extremely important point: Keynesian economics ultimately serves to bolster confidence within the economy. Just as life (as we know it) cannot exist without water, Keynesian economics cannot exist without public confidence. It creates an illusion of a strengthening economy--one that is self-sufficient and growing, endeavoring to convince employers to reinvest in their businesses, consumers to spend, and banks to lend. If the illusion fades before all of the former increase to "healthy" levels, Keynesian methods have the serious risk of failing--and failing quite extraordinarily. 

So why is Keynesian economics failing now? Well I would argue that it was doomed to fail--in this context--since the beginning. Why? The U.S. national debt. Why is this so problematic? Well the national debt has grown to a level that is serious--serious enough to consume 30% of US GDP by 2015. So many want to be fiscally responsible at a time when others--including the administration--want to spend enormous amounts of money. Prior to the stimulus bill being enacted into law, Obama and his constituents did acknowledge their concerns over the national debt and the importance of spending it prudently. But Keynesian economics cannot have fiscal restrictions. Having spending concerns due to high preexisting levels of debt places constraints on Keynes, limiting its flexibility and effectiveness. When looking to employ Keynes, preexisting fiscal problems make it extremely difficult to have success via the stimulus method, as timing, methodology, and magnitude of stimulus must all be implemented with superhuman accuracy. In order words, a solid balance sheet is a prerequisite to employing Keynes. With poor financial standing, people become concerned with "how long?" and "how much?" it will take before it can be withdrawn, undermining confidence. These questions cannot be the priority which they have become in order for Keynes to yield fruitful results. We must be under the illusion that the government can spend indefinitely, if need be, and how much the government spends does not trump efforts to spur a recovery. We of course are experiencing an increasing view of the opposite.

Therefore, what I am suggesting is that if the U.S.'s current levels of debt were half of what they are today, we would not be seeing the steep drop in many of the various economic indicators we have been seeing lately. Would Keynesian economics then succeed? I'm not so sure; however, it would undoubtedly have a much better chance.

With confidence on the decline, evidenced in stagnant unemployment, lack of inflation, consumer sentiment, small business sentiment etc. the Keynesian veil is being removed prematurely. And with cries over the U.S. debt growing louder, more stimulus would only act to erode confidence further.  

At this point it seems we have only one option and that is the way of the Austrian School. We must forego more stimulus, cut entitlement spending, and decrease government interference. The economy will likely fall back into recession as a result, causing a great deal of pain in the meantime. But as the economy falls back into recession, massive de-leveraging will ensue, setting the stage for a healthy, fast, and robust recovery once the excess is removed. My only fear is the real potential that if the de-leveraging process takes very long it could make it rather difficult for the government to make good on its debt payments, with a potential default. If that were to occur, well my friends, there is still very significant pain ahead.

While my outlook on the economy is rather bleak over the next few years, i have a great deal of confidence in this country. Long term my outlook is very positive and we will bounce back from this coming out stronger than ever before. 

27 Comments – Post Your Own

#1) On July 18, 2010 at 1:06 AM, ajm101 (32.87) wrote:

How much training do you have in economics?  College, postgrad, professional?

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#2) On July 18, 2010 at 9:51 AM, MoneyWorksforMe (< 20) wrote:

ajm101,

I'm in college studying atmospheric science. My background is mostly in mathematics and physics. I enrolled in only two business/ economics classes in college which was mainly due to a very strong interest in investing. Relatives of mine, with careers in finance have told me before I'm going to school for the wrong thing. They may be right. Nevertheless, after working as a scientist for some time I expect that I will  find myself back in school to obtain at least a B.S. in economics.

Aside from formal education, I can attribute most of what I know to much of the reading I have done over the past few years. The last five or so books I have read have been on economics, and in particular the financial crisis/ Great Depression.

Thanks for reading; and I hope this new knowledge of my background does not significantly take away from the plausibility of this post. 

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#3) On July 18, 2010 at 10:02 AM, TigerPack1 (81.69) wrote:

A+ post.

People like George Soros and Alan Greenspan agree with your reasoning.

BEN never did think through the "sustainability" of his insane economics experiment on America.

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#4) On July 18, 2010 at 10:21 AM, MoneyWorksforMe (< 20) wrote:

TigerPack,

Thanks; that means a lot. 

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#5) On July 18, 2010 at 10:47 AM, eddietheinvestor (< 20) wrote:

MoneyWorksForMe,

That's a great post.  I thnk you are definitely right about Keynesian economics.  It's failing. The 787 billion dollar stimulus has added few jobs, leaving people to create the specious phrase "jobs created or saved."  How can one calculate how many jobs are saved or that the people hypothetically would have been fired?  You are correct about the danger of the debt as well. I don't agree with California Democratic Congressman Pete Stark, who claims that the larger the federal debt, the more prosperous our country is.You make several good points.  I don't agree with the first comment you received for your post, which asks about whether you have an economic degree.  Your post should be judged on the merit of its content and ideas, not whether you have academic credentials.

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#6) On July 18, 2010 at 12:01 PM, AvianFlu (20.96) wrote:

I agree with you. It is astonishing that so many people believe in Keynesian economics despite the track record of failure. To them I say this: "You can rationalize anything".

As a point of interest, we are similar in that I have a minor in mathematics and a minor in physics. My little brother has cowritten articles with Ben Bernanke and was the chairman of the economics department at Oberlin college. He is a nice guy, but a hard core socialist. As soon as we get nailed with the upcoming currency crisis I'm going to call him up and rag on him a little bit.

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#7) On July 18, 2010 at 1:45 PM, ajm101 (32.87) wrote:

I majored in Mathematics.   That was long enough ago to not be able to claim any high ground, but I got far enough to be able to remember the basics of things like p-adic numbers, commutative diagrams, and Lebesgue integration if I had to.

This is not meant to offend, because you seem like a nice person.  But honestly, I don't think economics is such an easy field that a lay person can have a very informed opinion on it (though it's really world enough to very much _want_ to have one).  Also, it's a fairly hard science with lots of real-world data, so most opinions are falsifiable (and when no data or suspect data is presented, I have to assume that it's indicative of either the effort involved in forming the opinion or the merit of the conclusions).

Anyhoo, one of the things life has taught me is a sense of humility at the boundaries of my own understanding, and the value of trying to be honest with myself about where those boundaries are.  As a result, I tend to be skeptical of people who are more confident than I would be based on what I can tell of their knowledge of a given subject.

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#8) On July 18, 2010 at 2:37 PM, whereaminow (< 20) wrote:

ajm101 

It's not that hard.  It's more likely that you're afraid to investigate the differences between these rival schools of thought, since you have been predisposed since your youth to view government favorably.

Not to be condescending, but you can say without any doubt whatsover that, for example,

"Anything that is 100% blue cannot also be 100% red."

If you can reach that conclusion on your own, without measuring everything in the world that is blue or red, then you are smart enough to understand economics.

David in Qatar

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#9) On July 18, 2010 at 2:46 PM, ajm101 (32.87) wrote:

See, I would disagree that understanding economics and the ability to differentiate red from blue are equally difficult.  I think economics is harder.  Just my $.02.

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#10) On July 18, 2010 at 2:55 PM, whereaminow (< 20) wrote:

ajm101,

But they're not diffferent at all.  The basics of economics are as simple to understand as the difference between red and blue. 

For example, if a person is completely satisfied, he will take no action.  Therefore, every action he takes is purposeful in that he wishes to exchange a less satisfactory state for a more satisfactory one.  All human action is purposeful action.

Now, you can't tell me that this concept is extraordinarily difficult.

David in Qatar

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#11) On July 18, 2010 at 2:55 PM, ajm101 (32.87) wrote:

And furthermore, the idea that one is some sort of Nietzschean ubermensch whose understanding of things is so far removed the rest society is a red flag for me.

All that matters are falsifiable statements with predictive value, the rest is just noise.

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#12) On July 18, 2010 at 2:58 PM, ajm101 (32.87) wrote:

David,

Are you saying that everyone knows how to increase their satisfaction and that all decision making is locally and globally rational?

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#13) On July 18, 2010 at 3:01 PM, MoneyWorksforMe (< 20) wrote:

eddietheinvestor,

>>That's a great post.  

Thanks! I'm glad you enjoyed it.

>>Your post should be judged on the merit of its content and ideas, not whether you have academic credentials.

I am inclined to agree with this. However, I do understand that most people will become naturally more skeptical if there is no quantitative or qualitative way for one to truly demonstrate their knowledge of a given subject. There is also much to be said for self-education. I have taught myself a lot more than I have learned in any classroom.

AvianFlu,

>>As a point of interest, we are similar in that I have a minor in mathematics and a minor in physics. 

Very cool. You'd probably agree it has made you more analytical and a much better problem solver.

>>My little brother has cowritten articles with Ben Bernanke and was the chairman of the economics department at Oberlin college. 

Wow. You guys must share some very interesting conversations...

>>As soon as we get nailed with the upcoming currency crisis I'm going to call him up and rag on him a little bit.

Hahaha. I would do the same in your position. Poor guy. I would NOT want his job right now...

ajm101,

>>But honestly, I don't think economics is such an easy field that a lay person can have a very informed opinion on it (though it's really world enough to very much _want_ to have one). Also, it's a fairly hard science with lots of real-world data, so most opinions are falsifiable (and when no data or suspect data is presented, I have to assume that it's indicative of either the effort involved in forming the opinion or the merit of the conclusions). 

I don't find it particularly difficult--perhaps I'm being naive. Admittedly there is still much more for me to learn, but wrapping my mind around some of the "Why?" of the Great Depression and Financial crisis required nothing more than a mental exercise. I am not proclaiming to have prescient knowledge of economics. I have done--in my opinion--enough research to have an informed opinion on the current state of the economy--enough such that I have the confidence to post my opinions here, and make my own investment decisions. And by the way, this being a blog on the internet, anyone can claim to possess credentials which they do not actually have. So ultimately it is up to you to decide what seems plausible and what doesn't based on your own knowledge of the subject. 

Data only allows one to form hypotheses/ theories in economics. In other words, it is a very imperfect science in the sense that the scientific method cannot be applied to form absolute conclusions. Results are not repeatable. Economies are too large and complex, and as such there is currently no way to perform a controlled experiment involving one. Data may also be skewed because of the difficulty in isolating variables in such a complex system. This is why it is important to be able to deduce trends without relying too heavily on just data.

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#14) On July 18, 2010 at 3:07 PM, whereaminow (< 20) wrote:

ajm101

Are you saying that everyone knows how to increase their satisfaction and that all decision making is locally and globally rational? 

I'm not saying that at all. 

Human actors can be wrong.  They can appear to be irrational to you.  But what they do have is a means-end framework.  That is all.  It may be completely stupid or pure genius.  It may be passionate or calculated.  It may be instinct or analytical.  But it always is purposeful.

I think you are trying very hard to read negatively into what I said.  It's a defense mechanism.  You need to put your guard down and be open minded.  I know people here criticize me for what appears to be a closed mind, but how could it be if I was formerly a believer in exactly the same thing as you - that economics is too hard for the lay person - and now I can teach these simple concepts to everyone I know.

 

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#15) On July 18, 2010 at 3:53 PM, Acesnyper (< 20) wrote:

Outstanding work!

 I greatly enjoyed reading this, I'm finishing my masters and made my mind up to go back into education for economics. I hope one day to have students like you!

Great post and keep up the good work :) 

 

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#16) On July 18, 2010 at 4:02 PM, ajm101 (32.87) wrote:

David,

I'm a strong believer in emergent complexity, and think the people (and as a result, governments and economies) are intrinsically self-organizing and have a fractal dimension that may be culturally independent.  I don't find your view of government particularly unappealing, I just think it's fighting against human nature as populations get sufficiently dense and interconnected.

MoneyWorksForMe:

If you are in atmosphere science, then I really am surprised to hear you talk about complex systems that way.  I think that weather forecasting is a pretty apt anologue for economics.  I just think that a lot of the economic discussion is more of the Farmers' Almanac variety.

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#17) On July 18, 2010 at 4:18 PM, whereaminow (< 20) wrote:

ajm101,

You are purposefully avoiding the simple premise that I have presented to you.  I said nothing about societal organization, fractal dimensions, cultural identification, or government control.  You have already stated that you don't understand these things in previous comments (it's too hard, remember?)  That's why I'm starting with the building blocks.

For the third time, I simply pointed out how easy it is to understand that every human action is purposeful.  I am nearly certain that you grasp this concept, despite your attempts to divert the conversation.  I am also becoming convinced that you are leery of finding out what other things we can deduce now that we have this axiom to work with, as it will increase your discomfort.

David in Qatar   

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#18) On July 18, 2010 at 4:23 PM, ajm101 (32.87) wrote:

David,

I think we'll just have to disagree.  I don't think that every human action is purposeful, or that the word 'purposeful' has an particular meaning in that context.

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#19) On July 18, 2010 at 4:29 PM, NOTvuffett (< 20) wrote:

I guess Keynesian economics might work if there was actually a big pile of cash the govt. was sitting on that they could spend to just get things moving. That is not the case however, they are spending money either by inflating the current money supply or borrowing it from the future (with interest).

So let me get this straight, they will both steal money from me (inflation), raise my taxes and make me take out a loan against my wishes?

The govt. has a weird calculation that their spending will spur growth in the economy by 50%.  Why is it better for the economy for govt. to spend the money than individuals? If we are all going into debt, send us all a check so that we can share the wealth around.  Better yet, enact a law that we all have to go get a credit card and buy stuff we can't afford.

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#20) On July 18, 2010 at 4:52 PM, NOTvuffett (< 20) wrote:

money,

Part of my message was cut off, I wanted to say I thought your blog was well written and reasoned.

The other thing was don't listen to people that detract from your opinion because of credentials.  You don't need math in this case above a Venn diagram (this works and that doesn't work and they don't intersect).  Wai,t that is either/or is this logic or Boolean algebra? lol.

 

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#21) On July 18, 2010 at 4:52 PM, whereaminow (< 20) wrote:

ajm101,

And I guess I will let you off the hook, but it is depressing.  I showed how your objections were misplaced, and I would like you to explain why this simple premise is incorrect.  I certainly wouldn't want to go through life accepting something as correct when it is not.

David in Qatar

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#22) On July 18, 2010 at 5:01 PM, NOTvuffett (< 20) wrote:

David, i never really thought about it in those terms, every human action would be purposeful, even if irrational. 

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#23) On July 18, 2010 at 5:05 PM, starbucks4ever (97.79) wrote:

Economics is not very hard. It's just that too many people are incentivized to get this science wrong because it affects their financial interests.

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#24) On July 18, 2010 at 5:30 PM, ajm101 (32.87) wrote:

David - your reluctance to give up on me is appreciated, fwiw.  For my part, I'll keep trying to convince you.

zloj - i think thats like saying computer programming isn't hard.  granted, anyone can download a perl runtime, spin up a shell, and write "print "hello world!\n". but the field gets almost arbitrarily interesting the closer you look at it.  that being said, i completely agree with the rest of what you said.

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#25) On July 18, 2010 at 7:54 PM, MoneyWorksforMe (< 20) wrote:

Acesnyper ,

"Outstanding work!

I greatly enjoyed reading this, I'm finishing my masters and made my mind up to go back into education for economics. I hope one day to have students like you!

Great post and keep up the good work :) " 

Thanks a lot. I'm very happy you enjoyed it. Your compliments are very kind; thank you. Congratulations on finishing up your Master's! And best of luck achieving your goal to become a teacher! 

NOTvuffett

>>Part of my message was cut off, I wanted to say I thought your blog was well written and reasoned.

Thanks!

>>The other thing was don't listen to people that detract from your opinion because of credentials.  

You're right. And oddly, sometimes, credentials don't mean a whole lot. Some of the most "qualified" economists helped to create some of our worst recessions.

ajm101

>>I think that weather forecasting is a pretty apt anologue for economics. 

I agree. It is one of the reasons I find economics so intriguing. I'm surprised you understand this--not many people I've spoken to do. 

>>I just think that a lot of the economic discussion is more of the Farmers' Almanac variety.

I agree again. Because the system is so large and dynamic it necessarily must be. Hypothetical generalizations are made based on a multitude of factors.

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#26) On July 18, 2010 at 9:50 PM, ajm101 (32.87) wrote:

David - I'm not being intentionally dense, but I don't see what you're trying to lead me to.  I don't want to threadjack this post any more than I already have (if that's even possible), so feel free to continue it here: http://caps.fool.com/Blogs/a-walking-shadow-a-poor/421462

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#27) On July 18, 2010 at 10:55 PM, ajm101 (32.87) wrote:

MoneyWorksForMe -

Thanks for the complement.  I leave with one piece of advice - it doesn't not pay to put you money on any kind of '-ism', whether it be Keynsianism, Austrianism, Monetarism, etc.  Unless they perfectly model the system they study, then they are simply a set of cognitive blinders that will reduce your ability to recognize truth.  And, as zloj noted, it's a highly manipulated subject because of the financial incentives involved.

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