Keynes? Could he have been right?

[CuteOldGuy]

Spending is the problem. But you said Ron Paul didn't support the gold standard. Maybe you should tell him.

http://www.ibtimes.com/articles/2581...aper-money.htm

[WTF]

Originally Posted by CuteOldGuy

Spending is the problem. But you said Ron Paul didn't support the gold standard. Maybe you should tell him.

http://www.ibtimes.com/articles/2581...aper-money.htm

Maybe you should learn what subtle nuanced positions are.
http://en.wikipedia.org/wiki/Politic...ns_of_Ron_Paul

He opposes dependency on paper fiat money, but also says that there "were some shortcomings of the gold standard of the 19th century ... because it was a fixed price and caused confusion." He argues that hard money, such as backed by gold or silver, would prevent inflation, but adds, "I wouldn't exactly go back on the gold standard but I would legalize the constitution where gold and silver should and could be legal tender, which would restrain the Federal Government from spending and then turning that over to the Federal Reserve and letting the Federal Reserve print the money."[123] Paul strongly supports legalization of parallel currencies, such as gold-backed notes issued from private markets and digital gold currencies.[124] He would like gold-backed notes (or other types of hard money) and digital gold currencies[125] to compete on a level playing field with Federal Reserve Notes, allowing individuals a choice whether to use sound money or to continue using fiat money.[126][127][128] Paul believes this would restrain inflation, limit government spending, and eventually eliminate the ability of the Federal Reserve to "tax" Americans through inflation (i.e., by reducing the purchasing power of the currency they are holding), which he sees as "the most insidious of all taxes".[129]

[anaximander]

The GOP congresses ended in 2006.
Subsequent congresses from 2007-10
were democrat led and controlled.
Govt expenditures ballooned in this
time period. The biggest budgets Bush
signed were submitted by pelosi.

Cost of war itself is overstated.
Operational costs of a peacetime
carrier group vs combat operative
is largely a rounding error by
comparison to other fed spending.

Only problem with a hard currency is the
current scale of our economies. Is our
economic growth to be partly dictated
by recent gold finds in south africa or siberia?
Even so. People will freak on deflation
adjusted prices. You get paid $12-18 a week.
But a chz bgr w/fries and shake is $.85.
Theater is $.10 popcorn incl.
16oz coke .5 cents

Oddly the more prosperous we become
and the value of our money increases
without subsequent adjustment prices
must seemingly drop along with your pay.
It all works out but psychologically people
have a hard time accepting a percieved drop
in value for identical work. There is a limit
to deflation nothing ends up free but it does
get kooky to what $1 could be worked to buy.

[Texas Contrarian]

The question posed in the thread title is whether Keynes might have been right. However, I think a more pertinent question is how his work has been misinterpreted by so many pundits and policymakers, many of whom have no understanding of economics or economic history.

It's important to realize that Keynes lived during a time when advanced industrial nations often ran surpluses in good times, or at the very least kept fiscal budgets balanced or in near-balance, so that there was some margin for countercyclical spending to combat or mitigate the severity of recessions. He was alarmed by large structural deficits, and I believe it's also important to note that he counseled against the continuation of high levels of spending as World War II was winding down. At the time, a number of economists who considered themselves newly "Keynesian" thought the depression would continue after the war ended if governments didn't maintain high levels of spending. That obviously didn't happen.

After the experiences of the 1970s pointed up the obvious failures of "Keynesianism 1.0", as I've sometimes referred to it, a number of young economists developed something called "new Keynesianism." It melded together some of the elements of earlier Keynesianism, classical economics, and even Milton Friedman-style monetarism. Pioneers of this school of thought include Greg Mankiw and David Romer (husband of Christy Romer, former Obama administration CEA chair).

Overall, in my opinion it would be fair to say that Keynes, clearly a very creative thinker, was undoubtedly right about a number of things, and I strongly suggest that everyone with even the slightest interest in economics read The General Theory of Employment, Interest, and Money. But at the same time, it's also important to read about what has been learned since his day.

However...

I think Krugman gets a lot of things very wrong, starting with the very first paragraph in the article, where he suggests that cuts in government spending caused the 1937-38 downturn. I strongly disagree, and cited a number of factors in a blog post about 6 months ago:

"Withdrawal of government spending is not what caused the 1937-38 downturn. It was caused by several other factors. Monetary policy was dramatically tightened in 1936 with a large increase in bank reserve requirements. Taxes on high incomes were dramatically increased and a punitive tax on undistributed corporate profits was imposed. Laws forcing compulsory unionization were passed in the mid-1930s and as a "partial sweetener", some companies were allowed to engage in price collusion. Therefore, wages and prices were artificially increased at a time when recovery was far from ensured. Additionally, big tax increases on high-income earners and undistributed corporate profits were imposed. And Roosevelt decided to engage in a rhetorical war on business at about that time, continually referring to business leaders as 'princes of greed.' It should therefore come as a surprise to no one that a lot of capital decided to go on an extended vacation."

(Krugman probably knows all of that, but he won't tell you because it doesn't fit in with his narrative that we need to maintain high levels of spending!)

At about the same time, I also wrote this:

But I think the biggest problem of all is that attempts to "stimulate" an economy with big fiscal packages work far less well than their proponents claim, and generally are a net negative for the economy. In a feeble attempt to defend the failed stimulus package, Mark Zandi did a piece of analysis where he claimed that giving away food stamps, unemployment insurance checks, or other transfer payments produced a fiscal multplier of about 1.7. If it really worked in the real world, don't you think the sheer wonderfulness of the idea would be self-evident, and that the economy would look much better today?

The ECB recently commissioned robustness analysis of some of the macro models relied upon by several European finance ministers. They determined that the multpliers produced by social spending are nowhere near the levels Zandi and others claim, and depending on other variables tend to be around 0.5. And remember, these are folks who try to do everything thay can to justify increased social spending, or at the very least not find reasons to oppose it.

One might also do well to examine the work of Harvard's Robert Barro, who has been doing work on the "multiplier" issue since the 1970s. His research indicates a fiscal multiplier of something around 0.6-0.8 for certain types of military spending, but shows that the "multiplier" (divisor?) for social spending such as food stamps is often "significantly closer to zero."

In my view, the only way you can produce a positive "multiplier" effect is by investing in something that actually produces payoffs of some sort. For instance, many analysts have calculated (although it's very hard to do so accurately!) quite substantial "spinoffs" from the space program.

I advocate wise government spending for useful and valuable projects, such as badly needed infrastructure. (Legitimate infrastructure projects, not pork-barrel patronage spending such as "bridges to nowhere." On the other hand, much of what Krugman has written, in the OP here and elsewhere, fails to make such a distinction. He seems to feel that almost any type of spending, no matter how wasteful, is likely to provide enough demand stimulus to boost the economy.

I might also note that he's recommended additional QE in the amount of $8-10 trillion! It seems that no amount of over-the-top intervention is too much for Paul Krugman. He's all alone out there on that one.

Another point I would like to make is that you can look at the entire last decade as one big "stimulus package", both from fiscal and monetary standpoints, interrupted of course by a severe financial crisis following the bursting of an asset bubble pumped up by unsustainable monetary accommodation and massive financial sector madness. Monetary stimulus has been virtually nonstop, interrupted only by a short-term inversion of the yield curve in 2006, which quickly had to be reversed to avert serious problems. We have been consuming too much with borrowed money for many years and have run up debt (both in the public and private sectors) to dangerous levels. If we need to continue to run deficits of around 9% of GDP or greater in a continuing attempt to resuscitate a credit-fueled consumption boom, we're obviously in far more trouble than most people realize.

Actually I think we are in far more trouble than most people realize, and that pouring in more and more fiscal "stimulus" won't do much more than kick the can down the road for another year or two and create the risk of a bigger bust next time.

In the meantime, no one is addressing the very serious structural problems our economy faces. Until we begin undertaking serious steps to do that, I don't see any way we can have a strong recovery.

We are likely to face several years of sluggish growth, continuing financial crises, and difficult markets, and I have counseled investors to act accordingly.

[IIFFOFRDB]

Originally Posted by bigtex

Were you the one designated by the TEA Party to fill in for Marshy during his absence?

No and CaptainMidnight wants to talk to you.

[Texas Contrarian]

Just came across this post from Tyler Cowen, one of today's smarter economists and editor of the "Marginal Revolution" blog:

http://marginalrevolution.com/margin...+Revolution%29

He provides a link (subscription may be required, since it's an archived NYT article from 2006) starkly demonstrating Krugman's somewhat "flexible" belief system.

I love the way Cowen refers to left-wing bloggers who suffer from Krugman idolatry as a sort of "hallelujah chorus." (Believers in the Kool-Aid Krugman continually tries to peddle constitute something like a religious cult.)

Paul Krugman (justifiably) slammed the Bush administration and Republican congress for fiscal recklessness six years ago. But when Obama and Pelosi's congress faced deficits several times larger in 2009, running up hundreds of billions of dollars of additional unjustified deficit spending was perfectly OK with him!

Hypocrisy, anyone?

[Fast Gunn]

Thanks for your usual profound post, CM.

Your writing is not easy to digest, but it does have substance.

I have been reading the book that TH recommended in an earlier post on the subject.

Essentially, I think Keynes theories are coming back into vogue.

. . . Some of these things (Black Swans, called by some) are so complex and so esoteric that few people can really grasp them and even today there is no general consensus on what caused the Great Depression so it is with the Great Recession.

[anaximander]

Whoa CM that was cool.
Beat the crap outta my econ prof.

That's the rub then. This whole thing
is tanking the only questions are
the depth of loss and duration.
That and the point you can see
everything unwind.

Severe public austerity is in order.
The military must be insulated.
Propping up the welfare state
will come at the cost of our nation state.
In the end both are lost.

There are no pleasant options.
The longer it's delayed.
The worse it will be.

[WTF]

Originally Posted by CaptainMidnight

Paul Krugman (justifiably) slammed the Bush administration and Republican congress for fiscal recklessness six years ago. But when Obama and Pelosi's congress faced deficits several times larger in 2009, running up hundreds of billions of dollars of additional unjustified deficit spending was perfectly OK with him!

Hypocrisy, anyone?

Simply put , the difference is that Keynes said you do not run up deficits in good times, you pay down debt.

Maybe that is why Krugman critized one and not the other. We were not in a recession when Bush was running up debt. We all know that Krugman is for spending government money in times of recession!

So I am not so sure it is Hypocrisy.

[WTF]

Originally Posted by anaximander

Severe public austerity is in order.
The military must be insulated.
Propping up the welfare state
will come at the cost of our nation state.
In the end both are lost.
.

Are you outta your fuc'n mind.

The Simpson Bowles commission had it right.

The last thing you want to do is cut all government spending or exempt the military.

[CuteOldGuy]

Nobody is saying cut all government spending, dimwit, we simply need to not spend more than we take in. Why is that so hard to comprehend?

[WTF]

Originally Posted by CuteOldGuy

Nobody is saying cut all government spending, dimwit, we simply need to not spend more than we take in. Why is that so hard to comprehend?

Do you understand wtf would happen if we did that all at once?

And by all , I meant not to exempt the military.

Did you see where I embraced the Bowles-Simpson Commission? That ought to tell you where I stand. Jesus.

[CuteOldGuy]

That's MR. Jesus to you.

And I know we can't balance the budget in one year, but so far no one is even trying to bring spending under control. We need to do it fast, however. No more than ten years, with significant cuts each year until balanced.

And yes, the defense budget must be included. They can start with cutting any funding for arresting and detaining American citizens on American soil. If they aren't willing to to do that, nothing else really matters.

[WTF]

Originally Posted by CuteOldGuy

That's MR. Jesus to you.

And I know we can't balance the budget in one year, but so far no one is even trying to bring spending under control. We need to do it fast, however. No more than ten years, with significant cuts each year until balanced.

And yes, the defense budget must be included. They can start with cutting any funding for arresting and detaining American citizens on American soil. If they aren't willing to to do that, nothing else really matters.

Ok Mr Jesus then you , like I , probably agree with The Simpson Bowles.

That is all.

We need to slowly cut spending. Redo our tax system while taising taxes on some....

But if you think, like some of these Tea Nuts that you can do it all at once, you are an extremnist.

[Texas Contrarian]

Originally Posted by WTF

So I am not so sure it is Hypocrisy.

Viewed in the context of everything Krugman has written, I think it's hypocrisy because he has always been a sycophantic supporter of those who promise expanded social democracy and lavish entitlement growth. Please note that Krugman always dodges the issue when pressed for answers concerning how he would propose to pay for all this largesse, vaguely suggesting that taxes on the "rich" would go a long way toward narrowing the deficit.

Since Krugman is obviously smart enough to be able to do simple arithmetic, there's no way in hell he could possibly believe that. He's a big fan of the European "social democratic" model, and has stated so on numerous occasions. But the only way you can pay for that sort of thing is by imposing a VAT. Everybody knows that, but Krugman seems unwilling to admit it.

But you correctly make the point that Keynes was not the wild-eyed radical some seem to believe; in fact, he was rather insistent on fiscal responsibility in non-recessionary times. The problem we have is that gross fiscal recklessness before the recession started left us with limited room to maneuver, and that in my view is why it's so important to spend the nation's treasury wisely, not just liberally. (And we obviously have not been doing that.)

@Fast Gunn:

The Skidelsky book (that's how his name is spelled; it was misspelled in an earlier post by the person who recommended it) is an interesting read, but you should be aware that the author, a fawning admirer of Keynes, exhibits rather clear bias. In particular, he gives short shrift to Keynes's intellectual opponents, and is dismissive of anyone who has produced mathematical models that in any way do not support his narrative. That's a big problem, since Keynes's followers have failed to provide the analytical rigor needed to support some of his theories, and dissenters have refuted some of the macro models they produced a few decades ago.

By his own admission, Skidelsky has something of an aversion to mathematics. He wrote a readable and interesting biography of the man, but it's important to note that he has little understanding of Keynes's legacy and how it should be viewed.

In my opinion, the biggest problem today with misconceptions of his legacy is that they are used to justify all sorts of interventions and government spending initiatives. Bastardization of the theory is used to provide the intellectual underpinnings for arguments in favor of buying votes with other people's money, which is what politicians always want to do!

One of the leading offenders is economist-for-hire Mark Zandi, who practically twisted himself into a pretzel in a forlorn effort to defend the ineffective $800 billion "stimulus package" of 2009. In fact, he actually claimed a fiscal "multiplier" of 1.73 for food stamp dispensation. There's absolutely no credible evidence whatsoever that the "multiplier" for that sort of social spending is anywhere near 1.0, let alone 1.73.

I have long maintained that buying into this sort of nonsense is not significantly different from falling for Bastiat's "broken window fallacy."