Obama Gives Keynes His First Real-World Test
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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.
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.
Only if the multiplier is significnatly greater than 1. One of Obama's advisors made her bones showing that the multiplier for govt spending tended to be around 1 at and that the multiplier for tax cuts was around 1.5 both at current levels.
"at current levels" is important. If the multiplier is always greater than 1, the right thing to do is to have an infinitely large stimulus because the return will likewise be infinite. Does anyone believe that would happen?
Methinks the long run has finally arrived. Keynes and pals, as he predicted, are gone.
I get the feeling that while this is intuitively the best idea, it is also far riskier. What if allowing the economy to tank sends us into some kind of never before seen death spiral? The stakes here are extremely high and there is much that is not understood. Considering the circumstances, it seems better to take conservative actions which, though they may not be a great solution, at least prevent disaster.
Fearmongering about the end of the world can cut both ways, but it usually cuts in the direction you were already leaning.
(1) Actually, the "stimulus"-caused inflationary death spiral has been seen before. However, I'm not going to argue that this will or will not happen as a result of the currently proposed stimulus. Fact is, I have no idea.
The average auto worker is not producing 100k worth of value and the average banker is not producing 500k of value on wall street. But don't try and tell them that.
EX: The jobs bank program is not a big deal if you run the numbers assuming constant growth forever.
They also all focus on how American workers at Japanese owned plants make so much less. They never mention that American-auto company executives make orders of magnitude more than their Japanese counterparts.
Completely agree on the executive compensation. Maybe the union should be abolished and management and employees should be given enough dividend producing equity to care about the actual profitability of the company. If management and the union drive these companies out of business, I'm paying their stupid pension.
[1] http://www.evolvingexcellence.com/blog/2008/12/its-work-rule...
PS: The Japanese Yen just increased 25% so a lot of these US vs Japan comparisons are not as unbalanced as you might think.
Indeed. It is the fault of the United States for legalizing (through exception in the RICO Act) corrupt organization of labor. http://en.wikipedia.org/wiki/Trade_union#Criticism
unions are regarded as a form of legalized conspiracy and extortion. American racketeering statutes still include an exemption for union activity.
That's because the total amount of money for executive compensation at US auto manufacturers is in the noise.
BTW - GM could probably handle the wages and pension if it got Toyota's work rules AND could concentrate on building the cars that it can sell at a profit and stop selling the ones on which it barely makes any money. The UAW won't accept Toyota's work rules at "American" auto makers and Congress insists on CAFE.
The folks who want an economy car prefer Toyota, Honda, etc. They'll only buy GM at a significantly lower price, which means that GM has to make money elsewhere. (And, thanks to the rule that says that GM's imports don't count toward CAFE, it gets to make them under UAW's GM rules.)
It's not clear that there is "the correct amount". There's probably a correct amount in a given line of work at any moment in time, but that's not actionable.
The problem with trying to guide the economy is that the guiders always have an agenda.
Remember "he meant well" is an insult.
My point is simply that a light hand is probably better, but avoiding acting when things are getting really bad is a horrible idea.
Govt doesn't do "light hand". Moreover, doing the wrong thing is worse than doing nothing. The US govt is still trying to protect textile jobs in the Carolinas. (It would be mean to point out the mess that is govt efforts wrt the auto industry.)
When proposing/supporting regulation, it's poor form to assume that it will be done "correctly" by "the right people". Instead, you should assume what we actually observe - that it will be done badly, if not maliciously, by incompetents.
If you want to assume "correctly by the right people", make an existing govt system IN THE US work that way.
You're assuming (1) "a light hand" is a stable situation and (2) that the folks doing the acting will do
Example of the government using a "light hand" the borders. Food safety inspections. Most pollution controls.
There are plenty of areas where the government's approach is to wait for problems and then step in. The millions of illegal immigrants in the US is not really a hard problem to stop from an enforcement standpoint, but in this case the government seems to focus on the appearance of doing stuff vs actually doing stuff.
Would this be the borders where they seize laptops and randomly harass people? Or, the borders that are completely uncontrolled?
I don't think that "light" means "a random mix of hard and none".
> Food safety inspections.
I'd put that under incompetent, not light.
> Most pollution controls.
You're joking, right?
> but in this case the government seems to focus on the appearance of doing stuff vs actually doing stuff.
"in this case" suggests that focusing on appearance is the exception, not the rule. It may not be the majority, but ....
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/
Nixon was far from what I or most people would consider a classical.
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.
I really don't know, since I have no real understand of global economics.
I don't quite follow the reasoning of cheap American goods -> exodus of capital.
I really agree with you. That is why deflation is scary, it will likely lead to hyper-inflation.
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.
1) That purchasing power went somewhere. Instead of going to what people wanted, though, it will have gone to what the politicians want, which is most likely a waste of resources. At the very best, the investments will be mostly harmless.
2) It doesn't just cause the exodus of capital, it practically is the exodus of capital: by printing money, they devalue all of the cash investments in the United States, thus reducing the amount of investable funds. While the foreign capital may be able to buy more dollars worth of goods per euro, there would be far less local capital to be invested.
3) While in theory the lower value of the dollar would make purchasing American goods more attractive to foreigners, that is often not the case. Just because a currency is cheap doesn't mean that items denominated in that currency are cheap. One example of this which I have experienced recently is the East Carribean Union dollar, which is worth much less than a US$, but where all of the items cost as much or more than they do here. Just because the currency is low in value doesn't mean that goods are actually cheap. Prices can rise to make up the difference, and often do.
However, if the dollar becomes cheaper not due to inflation, but because of our continued trade imbalance then yes, your description of increased exports would be quite accurate. Trade imbalances aren't bad, and they can't last forever. What goes in must come out or accumulate. And in the case of dollars, accumulation causes a relative change in value. Supply and demand and whatnot.
4) Extreme inflation can cause instability, and reduce investor interest. No one wants to invest in Zimbabwe, because they are financially (and in other ways as well) unstable. Inflation is bad because it throws the future into question, and makes people less likely to lend money. If they do it is often at a higher interest rate.
Also, deflation is not nearly as bad as many people think. Yes, dramatic and sudden deflation is just as bad for an economy as dramatic and sudden inflation. But an economy can get used to deflation just as well as it can adjust to inflation. In fact, it is almost a bonus, because it encourages saving, and thus investment and growth. I'm not saying that we should intentionally cause deflation, just that it's not a guaranteed cause of a death-spiral. The United States had a long deflationary period in the 1800s, and it was also one of the longer periods of high sustained growth. This will not always be the case, but there is little reason to be more afraid of deflation than inflation.
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.
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.
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.
If that first sentence doesn't strike you as odd go back and re-read Mind the Gap by Paul Graham.
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.
Going with the other issue: unemployment at least has some legs to stand on as it has been suggested that there just aren't enough low skilled jobs for all of the low skilled people to do since most low skill work has been either automated or increased in efficiency to the point where 1 person can do something 1000 used to do.
If history has taught anyone anything, it should be that civilizations are not static. I very seriously doubt that democracy and capitalism will be the predominant foundations of society 1,000 years in the future.
When will the "next big thing" come? I have no idea, nor does anyone else. But to say that there are no alternatives to capitalism, and to imply that there never will be, is shortsighted.
like I said before, the alternative to a free exchange of goods is a forced exchange of goods. I don't see how to improve on this. capitalism isn't a system in the same way socialism is. It's just what naturally happens when violence is made less profitable than free exchange.
Capitalism vs. socialism is not an example of free exchange vs. force, but of two different standards of when force is appropriate.
This would be a devastating argument. If I had a choice in the matter. In a free market system of courts and transportation I would pay a fee for use. This is fair. But to tithe a percentage of my productivity regardless of how much or little I make use of said system seems fraudulent.
I also don't understand the term 'contrary to reason'. How can a set of conventions be rational or irrational? They can be beneficial, harmful, fair, unfair, moral, immoral etc, but how can they be contrary to reason?
Also: taxation is as much a part of capitalism as it is a part of socialism, especially taxation for expenditure on police and law.
Capitalism really is a bad term anyway. Marx invented it so he could use it for his straw-man arguments. But really it should be called free markets, or freedom, or opportunity, or the American Dream or something.
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.
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..
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
"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...
-John Maynard Keynes