As is often the case, the ability and willingness of households to spend will be
an important determinant of the pace at which the economy expands in coming
quarters.
“The breakthrough was realizing that schizophrenia and Keynesianism have many of the same symptoms,” said Dr. Charles Rivers of the Harvard School of Medicine. “For example, both conditions cause delusions. A schizophrenic may think that the CIA is trying to kill him, while many Keynesians believe that government spending stimulates the economy.”
Is our prosperity derived from a continual circular flow of spending? Is it impossible for a society to increase it’s total savings? Can deficit spending by a government step in to replace private activity in order to maintain full employment and restore lasting economic growth? What is a liquidity trap and what does it mean for the economy? What did Keynes really mean by “in the long run, we’re all dead”?
sourceThough our current economic troubles are complex, many mainstream economists have endorsed the simplistic Keynesian theory that massive government spending will produce jobs and prosperity.
From such Keynesian thinking have flowed the "stimulus" and bailout measures that have increased the size and power of government and added trillions of dollars to the public debt...
Politicians, who are always looking for plausible rationales for their insatiable spending, borrowing, and power grabbing, had never abandoned Keynesianism, so they have been elated to find economic "experts" again confirming their self-interested inclinations...
But what does history teach?
History teaches that temporary surges in government spending give people money that, for the most part, they save or use to reduce debt, rather than setting in motion an upward spiral of income, expenditure, real output, and employment, as was envisioned by John Maynard Keynes, the British economist whose theory spurred massive government interventions in the economy from the 1930s onward.
History also teaches that government "emergency" spending tends to fatten the coffers of the politically connected. Thus, much of the so-called stimulus spending has served only to increase the pay and benefits of government employees, transferring income from the private sector to the government sector, and to reward groups, such as the United Auto Workers and low-income home buyers, for their support of the Obama administration...
Since the early 20th century, periods of national emergency — real and imagined — have triggered sharp increases in government power, scope, and cost.
The first five episodes were World War I, the Great Depression, World War II, the upheavals associated with the civil-rights revolution and the Vietnam War, and the post-9/11 events associated with the war on terror and U.S. engagements in Afghanistan and Iraq.
We are now in another such critical period, springing from the housing bust, financial debacle, and recession.
In their embrace of Keynesianism, many economists have concluded that even though the New Deal's hodgepodge of policies never brought about full recovery, World War II did, as the economy expanded to produce munitions and enlarge the armed forces. Huge, deficit-financed government spending, they argue, finally wiped out the lingering mass unemployment.
The truth, however, is really quite simple. In 1940, after eight years of New Deal pump priming, the unemployment rate remained about 10 percent even if, unlike the Bureau of Labor Statistics, we count people enrolled in federal emergency work-relief programs as employed. The gigantic buildup of the armed forces, primarily by conscription, then pulled the equivalent of 22 percent of the prewar labor force into the military. Voilà, unemployment disappeared, as it was bound to do regardless of any wartime Keynesian fiscal policies.
Looking to the World War II model of how to deal with today's economic crisis is nonsense. Whatever else the war might have accomplished, it did not produce conditions that we may properly describe as genuine prosperity.
Government spending — whether on our current armed forces and their more than 800 foreign bases or on "green" energy and other government-favored projects — does not produce prosperity. It only diverts resources, as it always has in the past, from the genuinely productive private economy and bulks up an already bloated government.
To see how ridiculous this idea is, have a look at what the leading Progressive Keynesian, Paul Krugman, and leading conservative Keynesian, Martin Feldstein, agree on: a big war is apparently the only way left to get the U.S. economy out of its doldrums. The National Journal reports that at a recent economic forum, Krugman and Feldstein agreed that Washington is too paralyzed to sufficiently stimulate the economy. “Only a high-impact ‘exogenous’ shock like a major war — something similar to what Krugman called the ‘coordinated fiscal expansion known as World War II’ — would be enough to break the cycle,” the report stated.
”I don’t think we’re about to launch a war against anybody,” Feldstein responded. “But Paul is right. That was the fiscal move that got us out” of the Great Depression.
Here is Keynesian economics taken to its logical end: government spending is so essential to restarting a stalled economy that a major war — with all its death and destruction — may be the only way to achieve the stimulation needed. It may go too far to say that Krugman and Feldstein would relish a war, but only by a little. They clearly believe that in the current circumstances, war is our only hope.
There is a superficial logic here. If you believe government spending stimulates an economy, then why not war? In a big war government taxes and borrows huge amounts of money in order to buy large quantities of things — airplanes, tanks, Humvees, bombs, guns, bullets, supplies, clothing, food. It also pays lots of people — bureaucrats, soldiers, sailors, pilots, engineers, manufacturing workers — to do things. In turn the recipients spend that money on the necessities of life. Hence, the jumpstart to the economy.
But of course war means death, injury, and destruction. How can making things that will be used to destroy other things, including lives, produce economic well-being? Are we really ready to accept the Orwellian notion that war is prosperity?
If we have reached the point of seeing war as a source of good things, it is time to check our premises. Right away we see that if the government pays people money to make war materiel, private entrepreneurs can’t pay them to make things consumers will want to buy. This is the “broken window” fallacy: being so distracted by the visible “benefits” of a government policy that one overlooks the unseen costs. Government doesn’t create resources; it only moves them around. When government taxes or borrows, it transfers scarce resources and labor from the productive sector to politicians and bureaucrats. The Keynesian will say that since the resources are idle, there is no cost and only benefits from the transfer. That is a shallow response.
Resources may well be idle, but there’s a reason for that. A recession follows a government-produced inflationary boom that misallocates resources by artificially lowering the interest rate. The misled entrepreneurs thus put resources in the wrong places and commit them to the wrong purposes relative to consumer preferences. When the boom ends and the recession sets in, the errors reveal themselves and have to be corrected. That takes time, but government delays the recovery by interfering and by poisoning the investment climate with uncertainty. Who will commit to a long-term project while unsure what tax or regulatory policy might be next month or next year?
As for World War II’s ending the Great Depression: nonsense. The Depression was bad because living standards fell when, because of the previous inflationary boom, production didn’t match consumer preferences. Business projects were liquidated, creating high unemployment, and government interference and uncertainty impeded recovery. The war did not restore living standards — consumer goods were rationed — and unemployment ended only because of conscription. Improved statistical aggregates for national income or investment only concealed what was really going on. What ended the Depression was not government spending but the retrenchment of government after the war.
So thank goodness we don’t need a war to prosper. Shame on those who say we do.
sourceWe have recently stumbled on the phrase "military Keynesianism," and more and more we wonder if this is not an apt description of the system that the Anglo-American axis has put into place. We found a definition of military Keynesianism at Wikipedia as follows:
Military Keynesianism is a government economic policy in which the government devotes large amounts of spending to the military in an effort to increase economic growth. This is a specific variation on Keynesian economics, developed by English economist John Maynard Keynes...The economic effects advanced by supporters of military Keynesianism can be broken down into four areas, two on the demand side and two on the supply side. On the demand side, increased military demand for goods and services is generated directly by government spending. Secondly, this direct spending induces a multiplier effect of general consumer spending. These two effects are directly in line with general Keynesian economic doctrine.
On the supply side, the maintenance of a standing army removes many workers, from the civilian workforce. In the United States, enlistment is touted as offering direct opportunities for education or skill acquisition. Also on the supply side, it is often argued that military spending on research and development (R&D) increases the productivity of the civilian sector by generating new infrastructure and advanced technology.
Of course all this is nonsense. It is part of the well-known "broken-window fallacy" and therefore partakes of the dubious assumption that one can create prosperity by destroying things and then rebuilding them. In fact, there is certainly logic to the idea that destruction creates prosperity if one simply looks at World War II from the American point of view. But a ruined Europe surely paid the price for America's resurgence.
Keynesianism is truly a disease of the West, an economic theory that does not die. Simplified to its most basic components, it uses force to grant government (and the shadowy, mercantilist elite behind it) the power to print money via central banks. Central banks then overprint money causing endless economic misalignments that result in booms and busts. Having impoverished society, those in charge of the printing presses are tempted to "stimulate" the domestic economy (and their own bank accounts) by creating war.
Conclusion: Always, Keynesianism is destructive. It spreads poverty at home and violence abroad. It centralizes power wherever it is practiced, so that the banking establishment and the military complex are inexorably pressed together until they are virtually one unit. Eventually, a large portion of a nation's creativity and creation may be co-opted by military production and subsequent sales. This is the political system that the West has exported to Iraq and is in the process of attempting to spread to Afghanistan. We prefer free markets.
Promoting a revamped Keynesian economic theory – one without any guarantee of job growth – is the equivalent of selling a lifetime subscription to a revamped Playboy: one without any photos. It's a tough sell. Yet this is what Keynesians are facing today. This will be fun to watch.
In the last few days, we have begun to see reports from mainstream Keynesian forecasters and economists who are talking about the possibility of a double-dip recession...
This remains the mainstream consensus: no double-dip recession, but weak economic growth and slow job growth. A few forecasters have said that unemployment will in fact increase. I have, but I am not in the mainstream...
The financial media are beginning to report statements from Establishment forecasters who are saying that a double-dip recession is looking more likely. One of the most prominent of them is Yale economist Robert Shiller. He is the co-creator of the Case-Shiller monthly report on the residential housing prices in 20 American cities. He also coined the phrase "irrational exuberance." He now thinks the odds favoring a double dip are above 50–50. He says that the job market is the problem.
He is a Keynesian. So, he calls on Congress to spend lots more money on another deficit-funded stimulus. He says that the Federal Reserve is "out of bullets." Economists rarely say this about the FED. When they do, it indicates near-panic. He assures us that "If we focus on creating jobs, it's not as expensive as you might think."...
David Stockman, who was briefly Reagan's budget director before he resigned, recently wrote an article on the gargantuan size of the Federal deficit. He made an important but neglected observation. Ever since the third quarter of 2008, the nation's nominal GDP has increased by a tiny $100 billion, but the Federal debt has increased by 25 times the GDP increase.
This means that the hoped-for stimulus has not worked. It has taken $25 of Federal deficits to produce $1 of GDP growth. This marks a major anomaly for Keynesian economic theory. The justification for government deficits in Keynesian theory is that government spending restores economic growth. Money spent by the private sector does not increase economic growth in a recession; government spending does. This has never made any economic sense, but now the non-response of the economy is exposing this original nonsense for what it always was: nonsense. The Federal deficit is skyrocketing, but the economy has barely increased, statistically speaking, and is now slowing...
The optimists are saying that the double-dip recession will not happen, but job growth will be minimal. A jobless recovery is the new normal. This is the abandonment of Keynesianism. This is loss of faith on a paradigm-changing scope. The old Keynesian formula is no longer working. Huge deficits have not led to a V-shaped recovery, or maybe any recovery. The Keynesian multiplier is barely even adding. The Federal Reserve is pushing on a string. But so is Congress. The deficits are not working.
What's a Keynesian to do?
Call for more spending, of course. Call for even larger Federal deficits. Call for bailouts of deficit-plagued state governments, which cannot get loans from Asian central banks...
The Keynesians have only one solution: deficit spending. That is all they have had since 1936. Keynes baptized deficit-spending policies that all governments had begun several years before...
Keynesians assume that money collected by means of badges and guns is far more efficient in producing economic growth than money invested in terms of a hoped-for prospect of a positive rate of return. Keynesianism rests on faith in the following:
1. Badges and guns
2. Government IOUs
3. The wisdom of governmentIt is based on a lack of faith in the following:
1. Voluntary exchange
2. Private investment
3. The wisdom of entrepreneurshipThe government will move to gridlock next year. It will remain there for two years. The deficits will remain high. The economy will stagnate at best, or fall into a decline. There will be no major recovery that persuades voters that they are safe, that the economic future is bright.
We are seeing a loss of faith. It is all-pervasive. The voters see that Congress is impotent. The Keynesians see that the FED is impotent. The economists as a profession have rushed to the Keynesian pump to keep the ship from sinking, but the ship appears to be taking on water despite their best efforts.
read the entire essay
If any of that were remotely close to being true then, as a matter of simple accounting, rising federal spending would have shown up as a huge offset to falling GDP in 2009, and also as a major component of the modest increase in GDP growth in early 2010. On the contrary, the table below shows that the increase in federal nondefense spending contributed only two-tenths of one percent (0.2) to the change in GDP in 2009. That was no better than 2008 when the Recovery Act did not exist. If nondefense spending had not increased at all in 2009 (unlike 2008) then GDP would have fallen 2.8% rather than 2.6% — scarcely the difference between a recession and a “second Depression.” If nondefense federal spending had not increased at all in 2010, the economy still would have grown at a 3.6% pace in the first quarter, 2.1% in the second. Cutbacks in state and local spending were a trivial damper on GDP growth last year, contrary to recent speculation, and real state and local spending rose significantly in this year’s second quarter (unlike the first).
This is just an exercise in crude Keynesian accounting, not economics. Yet it nonetheless makes the stimulus bill look like a huge waste of money. The reason Keynesian accounting is no substitute for economics is that governments can only spend other peoples’ money. To claim that such spending is a net addition to “aggregate demand” is to ignore those other people — namely, current and future taxpayers.
When Keynes burst on the scene, most economists were against government economic interventionism. Still, there was a growing influence of Marxist ideas, evidenced by the inroads of welfarism in Europe, especially in Great Britain and Germany. And favorable reports of “success” in Mussolini’s Italy and Stalin’s Russia influenced the political direction of the United States...
Keynes was a revolutionary who provided a rationale for intellectual and political leaders who were increasingly enamored with Marxist political objectives but somewhat constrained by conventional economic wisdom...
Keynes’s theories provided intellectual support for the economic policies of Franklin Roosevelt, which were welcomed by a public desperate for change in the dire circumstances following the crash in 1929. They provided cover for massive government spending, abandoning the gold standard, and political control of market functions — all contrary to the economic wisdom that had taken two centuries to develop and had led to unparalleled prosperity in the United States.
The great economists of the 20th century, Ludwig von Mises, Friedrich Hayek, Milton Friedman, Henry Hazlitt, and Murray Rothbard, all clearly and thoroughly discredited Keynes. Hayek and Friedman both won Nobel Prizes in economics. In 1931 Hayek challenged Keynes in a famous series of debates, which focused on Keynes’s Treatise on Money. In the decades since, history has proven the correctness of Hayek’s views. Roosevelt’s New Deal was a failure and prolonged the Depression by about six years, as various research studies have shown. And though popular for several decades, Keynes eventually fell out of favor. Until now, when he is the “defunct economist” who provides the intellectual cover for Obama, just as he did for Roosevelt...
The end of Keynesianism? Yes, I think we’re seeing it now. Fed Chief Bernanke in his writing blamed the Great Depression on the Fed for shrinking the money supply. In fact, Bernanke even apologized on the part of the Fed for “causing the Great Depression.” Bernanke, wrote a famous piece explaining to “us know-nothings” that the Fed has a magic instrument, it was the ability to print money, and, if necessary, to drop this Fed-created money to the American people from helicopters. With his magic power, concluded Ben, there was no way the US could slide into another Great Depression.
It was great and comforting concept, but it didn’t work. After leaving rates at zero, printing over two trillion “dollars” and backing billions of dollars in stimulus plans, unemployment remains high, housing stays in the dumps and the national debt has sky-rocketed beyond all reckoning.
The spending plans of the Obama administration and the expansion of money by the Fed has left the US in worse shape than ever. Unemployment is still high, and the US has taken its place along with Greece and Portugal as another “half-broke banana republic.”
How did this horror story befall the once “greatest nation on earth” and the one-time “Arsenal of Democracy?” If a house is built on sandstone and with rotten timber it’s not a question of whether that house will fall apart — it’s a question of WHEN. Ever since the end of World War II, Americans have been enjoying the greatest standard of living the world has ever seen. How did we do it? Was it hard work, sweat, original thinking, risk-taking or pure luck? Hardly any of those, it was through borrowing and creating a gigantic house-of-cards. The cards were the newly-created bits of paper that we call dollars (actually, they are Federal Reserve notes backed by nothing).
Without its abilities to create fiat money, the US could never have built its “house-of-cards economy.” Without the insidious Fed, the US would never have had the ability to create trillions of unbacked Fed notes.
I’ve insisted all along that the US should have allowed the primary bear forces to fully express themselves, as they inevitably will do anyway. But in its arrogance and ignorance, the administration decided that they could halt or sidestep a recession by printing us out of trouble. It’s been a terrible and expensive mistake. Finally, with debts now pushing above 90% of GDP, the American people have shouted “Stop, it’s not working, we can’t find jobs, and you people in Washington are pushing us and our children into a state of bankruptcy. If you don’t know what you’re doing — stop it!”
When the voters are “mad as hell,” the politicians take notice. What’s happened is that 65 years of over-spending and borrowing has never been corrected in a major way. But the gods of the market have finally warned, “You nations of the world have crossed a line in the sand. Now it’s “pay-back or correction time.” Now is the time to pay for 65 years of unearned prosperity. You wouldn’t build up your economies through hard work, sweat and tears. Like children you’ve demanded, “I want it, and I want it now.”
What’s next? I think Washington will continue trying to spend us out of recession. This did not work in the past, and it’s not going to work now. The primary bear market will not allow it to work. But what if the Administration gives up and allows the forces of deflation and correction to express themselves?
Here’s where my crystal ball gets very cloudy. I don’t see Washington accepting another long, drawn-out recession or another Great Depression. The temptation will be too strong to try to print us out of the recession or to create enough government-sponsored jobs to drag us out of the recession. That’s what I see happening.
What would I have done? I would have done exactly the opposite of what has been done by Obama. Instead of promising prosperity and “back to normal,” I would have told the nation the truth. You’ve lived the great and unearned life for 65 years, all created by credit and borrowing, fun’s over. You must now pay for it with SACRIFICE. Americans must cut back to the bone. Children may have to move back with their parents, Americans may have to build “victory gardens” as we did during World War II. We’ll have to learn to save and scrimp. If you want to buy a house or a car or a washing machine, you’ll have to wait until you earn enough to pay for those items.
The difficult choice is to sacrifice or America shrinks to a has-been power — this is the “hard rain” I’ve been warning about.
Question — Russell, the story now is sacrifice or lose our freedom and become a second or even third class power. Is that your scary story?
Answer — That’s right. My generation is called “the greatest generation.” Why? Because we had to sacrifice, first through the Great Depression and then through World War II. But we did survive. At the end of the War, America was accepted as the greatest and most powerful nation on earth. Every man and woman in the world wanted to come to America, where the streets “were paved with gold” and people were free. That’s about over now. America is losing engineers and scientists and its best minds to other nations where it is thought that opportunities are better. It’s hard to believe, but it’s the bitter truth.
