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Obama Gives Keynes His First Real-World Test
- avdempsey 18y agoGiven the headline I expected more of an argument about how Obama's stimulus plan is Keynesianism's first "true" test. Really the argument amounts to this: 1. FDR didn't really try Keynesianism until he was forced to during WWII (the 30s didn't count). Too little Keynes. 2. The whiz kids of the 60s took Keynes too seriously. 3. The ~$650 billion Obama wants to spend follows directly from Keynes's formula. Goldilocks Keynes. Not particularly rigorous, but the link to the "Marginal Revolution" blog might be fruitful. http://www.marginalrevolution.com/ http://www.marginalrevolution.com/
- deleted 18y ago[deleted]
- russell 18y agoRichard Nixon said, "I am a Keynesian." Obama is no better than in second place (in Keynsianism :-).
- iuguy 18y agoTo be fair, Richard Nixon also said 'I am not a crook' and that turned out to be untrue.
- paddy_m 18y agoNixon was a keynesian and a statist. I'm not calling him a statist becuase of what he did in watergate. http://en.wikipedia.org/wiki/Richard_Nixon#cite_note-66 http://en.wikipedia.org/wiki/Richard_Nixon#cite_note-66 http://en.wikipedia.org/wiki/Richard_Nixon#cite_note-76 http://en.wikipedia.org/wiki/Richard_Nixon#cite_note-76 (moved us off of the gold standard, giving the government complete control over our currency) http://en.wikipedia.org/wiki/Richard_Nixon#cite_note-Hetzel2008_p92-72 http://en.wikipedia.org/wiki/Richard_Nixon#cite_note-Hetzel2... (implemented price controls on agricultural products) http://en.wikipedia.org/wiki/Richard_Nixon#cite_note-.2770s_180-137 http://en.wikipedia.org/wiki/Richard_Nixon#cite_note-.2770s_... (established the EPA) http://en.wikipedia.org/wiki/Richard_Nixon#cite_note-pbs2-69 http://en.wikipedia.org/wiki/Richard_Nixon#cite_note-pbs2-69 (established OSHA) Nixon was far from what I or most people would consider a classical.
- mattmcknight 18y agoI find the assumption that the WWII spending helped us. As in "Then, finally, geopolitical events took over, and World War II forced Roosevelt to spend as much money as Keynes wanted. " In fact, our exports ramped up because the industrial capacity of the rest of the world was destroyed. Our economic golden era following the war was driven by exports- first selling military equipment to the UK, and then other industrial goods after the war as we were the one of the only places making anything. The money we gave to other countries to rebuild was spent on a lot of American goods. It's really the Chinese who are trying that approach, lending us money to buy their exports and then hopefully collecting the interest later (except we keep borrowing more money to pay the interest). At some point (now?) this starts to fall apart. One way is that we have massive inflation so that our future debts aren't worth much.
- pragmatic 18y agoOne point about Keynes theory that if I remember correctly goes something like spend in bad times cut back in good times. Keynes is overused much like prescription antibiotics. "Prescribing Keynesianism to some politicians is like prescribing crack to a coke addict. In the 1970s, the patient hit rock bottom. The U.S. had high unemployment, and the Keynesian solution stopped working. The national government spent and spent, but unemployment only got worse. Then came inflation, something Keynesians had no answer for." The problem is we have been borrowing and spending like crazy both publicly and privately. We've had the accelerator pushed to the floor, how do we go faster now? Keynes (again as I remember) recommended these fixes for short term problems. Our problem is systematic over spending. Obama et al. are prescribing aspirin because they believe the patient has a hangover, when the country really needs chemotherapy for debt cancer. The bad debt that has accumulated needs to be accounted for, losses have to be taken, companies need to go into bankruptcy (which is often reorganization, not necessarily going out of business.) We can't "cheat" our way out of this with Keynes.
- avdempsey 18y agoThe article cites this as the essential feature of Keyne's theory that Obama is calling for: government spending should make up the difference between national capacity for economic output, and the current projected level of economic output. Paraphrasing the article: the US economy has a $15 trillion capacity, but the lack of effective demand has reduced our projected output to $14 trillion. By spending $650 billion we can make up that difference in output with the help of Keynesian multipliers. I certainly sympathize with the parent. For the last three months I canvassed for Greenpeace pushing a reinvestment in renewable energy. One gentleman whose door I knocked on was skeptical (way more than just this one guy, door-to-door canvassing amidst recession is a great job if you enjoy getting kicked in the nuggets 100 times/day). He speculated the green movement was just another attempt to sell a newly packaged bubble to the American people. So are we foolish to pursue this short-term fix? Is the reinvestment plan fairly characterized as a short-term fix? To the first question I can at least express the hope that this investment will leave us with something inherently useful: much needed improvements to our infrastructure. We've been riding the wave of cheap energy from the petrochemical revolution for the last 100 years (thanks Steve Jobs Playboy article) and that is certainly appearing to mainstream America as a habit to kick. To the second question, maybe it will help to explore the long term consequences of not meeting our productive capacity. By analogy we can consider the consequences of not meeting our capacity to educate. Imagine if America lost an entire year of engineering graduates. A short fall in capacity may result in a long-term compounded drop in overall engineering output.
- jacoblyles 18y agoThis list of Macroeconomist opinion is interesting: http://www.ambrosini.us/wordpress/2009/01/political-affiliations-of-modern-macroeconomists/ http://www.ambrosini.us/wordpress/2009/01/political-affiliat... Seems the professional macro guys are ambivalent about the stimulus. Of course, the only economists' views that will actually make it into policy will be the Democrat economists.
- markessien 18y agoAll this spending - will it not cause inflation? And considering the weakness of the dollar, will the inflation not cause further weakness? And when American goods become so cheap, considering that most manufactured goods are imported, will this not cause an exodus of capital? I really don't know, since I have no real understand of global economics.
- anthonyrubin 18y agoDon't fret, neither does anyone else.
- thomaspaine 18y agoThere's a much bigger fear of deflation rather than inflation at the moment. Also, the dollar has actually been relatively strong since the financial crisis because there's been a large increase in the demand for safer assets, ie cash and treasury bills. A weakening dollar would probably be better for the economy as goods manufactured in America would be cheaper abroad, leading to an increase in net exports. I don't quite follow the reasoning of cheap American goods -> exodus of capital.
- profgubler 18y agoThe problem with deflation is what is going to happen afterwards. My guess is hyperinflation. Once prices get so low, you will have a lot of people coming back into the market that have been hording dollars. Once they get back into the market you will have to many dollars chasing to few goods, since the world has slowed production. I really agree with you. That is why deflation is scary, it will likely lead to hyper-inflation.
- shader 18y agoAs far as I know, deflation cannot cause inflation. Maybe the governments response to deflation (print money!) can cause inflation, but the destruction of value and the reduction of the money supply cannot cause the overvaluation of assets or an expansion in the money supply, except through government action. Of course, it is true that hyper-inflation, if it happens, will happen quickly. People will be, as you say, hoarding their cash because of uncertainty. But when they become confident enough to borrow from the banks again, and the large reserves they have been stockpiling hit the fan, it is quite possible that people will quickly notice the change in money supply, and react by trying to get rid of their money too. Which would set off hyper-inflation. But this hyper-inflation is not caused by deflation, but rather by inflation, which people may not notice because of their presently high hoarding rate.
- rml 18y agoThe problem I have with the idea of "managing the economy" is that we might not even know what that phrase actually means. I often read "economy" and translate that as "runaway complexity." I sense this complexity in a system of such magnitude, involving so many interacting systems, and so many individual actors (many of which are computer programs at this point, I think) that it simply cannot be grasped by any single human mind, no matter the training or intelligence. This is just my sense of this; am I wrong? Someone here, please educate me.
- corentin 18y agoDo you know what your neighbours want? What they like and dislike, what they want for their children, and so on? Now, do you think a genius would know? And if he knew, would he know better than them? You can "run the economy" (that is, rule other people) to achieve your goals (e.g. if you are a pharaoh and want your own pyramid) but you just can't go against people's will to help them achieve their own goals.
- rml 18y agoI agree with you inasmuch as an economy is about people, but what if it isn't about people so much as some larger "thing" (an incomprehensible interaction of systems, perhaps?) that individuals, and even governments, have to deal/interact with? What if that's just as true for the so-called global "elites" as for the rest of us? I suspect that it is. I think that what you say about people controlling other people is accurate; I just think it's only a small percentage of the data we have to account for.
- Calamitous 18y agoIf it isn't about people, who or what could it possibly be about? What other data are you looking for? What do you think is moving the money around? The economy isn't some magical system that randomly shuffles dollar bills around, it's people and businesses buying things.
- cchooper 18y ago"Managing the economy" is not what Keynesianism is really about. It's about correcting a specific flaw in capitalist economies (the existence of multiple inefficient equilibrium positions). The idea is that once you correct that specific flaw, the economy will run itself better. To look at it another way: Keynes argued that no one can manage the market, including the market itself. But that doesn't mean it can't be managed better than it is.
- jwb119 18y agoLike all policies, you have to look at the downside risk. IMO, the downside of a Keynesian solution is MASSIVELY larger than an chicago school type solution. You have the government taking on huge quantities of debt, no guaranteed cure for unemployment, and a risk for massive inflation..
- Tichy 18y agoI wish him luck, but it seems like a really big gamble to me :-( Going the Keynes route seems relatively uninspired - isn't that what all governments like to do, because it gives them an excuse to spend large?
- newt0311 18y ago"isn't that what all governments like to do, because it gives them an excuse to spend large?" Well, if you are talking about irresponsible governments full of bureaucratic self-serving idiots (which would be most modern governments), then yes. That is what all governments do.
- nazgulnarsil 18y agoI recommend checking out Keynes' opus The General theory of Employment Interest and Money. If it seems too daunting skip straight chapter 24 for a more general take before diving into the rest. http://www.marxists.org/reference/subject/economics/keynes/general-theory/ch24.htm http://www.marxists.org/reference/subject/economics/keynes/g... If that first sentence doesn't strike you as odd go back and re-read Mind the Gap by Paul Graham.
- rms 18y agoWhat do you think the fundamental flaw of capitalism is? The wording is a little odd, but capitalism by its very nature has a tendency to concentrate capital in the hands of the few.
- nazgulnarsil 18y agoWhy is that a bad thing? Successful companies in the free market are successful because they have given people something they want for a voluntary exchange of capital. These companies turn around and develop more products that people want. Why do you seek a flaw in capitalism? Capitalism simply means the voluntary exchange of goods and services. The alternative is non-voluntary exchange i.e. you are forced. If you don't know why privately controlled means of production are good you have a lot of reading to do. Might I point you to the Cato Institute or Ludwig Von Mises Institute (google for free literature). Or for a more popular example check out Friedman's bestsellers. For the ugly and fast version: Would you put up with wal-mart taking $40 from your paycheck every month and telling you that you can come get a gallon of milk every week for "free"? first you should be free to choose whether you want milk or not and whether to support it with your money. second you have no way of knowing if you're overpaying because you have no idea what price milk would sell for if several companies were competing for your business. thirdly you have no recourse if the quality of the milk goes down. you can try to sue wal mart..good luck with that. You might claim that people are still free to go buy other milk, but any other company selling milk is at a huge disadvantage. People have to pay that $40 a month regardless, so most figure they might as well get the milk out of it. competitors milk could cost half of what wal-mart charges, $20 a month. But from the perspective of the citizen that "private milk" costs $60 a month since they have to pay the $40 regardless. In this scenario wal-mart has you as a captive customer. Before it made money by convincing you to buy milk from it with high quality and a low price. Freed of having to convince you to buy it wal-mart doesn't have to care much about customer service or product quality. This is essentially the scenario of state owned goods and services. you're assuming that the central planner can come up with a better solution than lots of entrepreneurs taking a crack at it.
- jordanf 18y agoFirst real-world test? Look at Japan in the 1990s. How soon we forget history...and repeat it.
- jwb119 18y agoI don't think Japanese monetary policy in the 1990's really qualifies as Keynesian.. They had a zero % interest rate and pioneered the concept of quantitative easing, but the theory underlying the policy wasn't exactly based on being able to manage growth through government spending
- thomaspaine 18y agofrom an article on japanese fiscal policy in the 90s: "In the end, the September 1995 stimulus package did add significantly to economic growth in 1996. Not only was the actual real GDP growth of 3.6 significantly higher than the 0.9 percent recorded in 1995, it was at least 0.9 percent higher than the growth forecasted for 1996 by all of the major international institutions and the financial consensus...This stimulative effect can largely be attributed to the fiscal package, although the decline in the yen also stemmed the decline in net exports (by -1 percent of GDP in 1995 and by -0.4 percent in 1996)...There was actually no other source of positive impetus to the Japanese economy in late 1995 and early 1996 that can be identified except discretionary fiscal policy." here's the rest: http://www.marginalrevolution.com/marginalrevolution/2008/12/japanese-fiscal.html http://www.marginalrevolution.com/marginalrevolution/2008/12...
- llimllib 18y ago> Organized public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organisation (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle. -John Maynard Keynes
- bokonist 18y agoJapan tried Keynesian policies. The result was the infamous lost decade: http://www.heritage.org/research/economy/bg2222.cfm http://www.heritage.org/research/economy/bg2222.cfm