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Why The Keynesian Superstition Doesn't Work
#1
I have always contended that John Maynard Keyenes is revered so highly, not because of his ideas, but more for the excuse he gave the Left, in assuming almost total control over the political establishments they lived within. This idea of spending one's way out of economic trouble, is almost like a cult religion, among Left leaning economists, and those they assist in government. Now, we are attempting to do the very thing that allowed up to be mired in a double whammy depression, in the 1930s, and the Left is at it again.

It's sheer stupitidy, gets us further in debt, and makes the number of possible solutions even smaller still. Soon, we will be forced to Pay The Piper, and Everyone will be the worse for wear. Why can't the Left see this, and stop all this economic foolishness?

Here is a good article, explaining why keynesian economics is not going to work.

Quote:Obama's big spending fallacy could ruin the US economy: a history lesson

Gerry Jackson
BrookesNews.Com
Monday 3 August 2009

I'm inclined to the view that the Great Depression was a seminal turning point in the history of economic thought. Thanks to that politically-induced tragedy something like 150 years of sound economic reasoning was overturned by two mercantilist fallacies that we now call Keynesianism, the first of which was the demand deficiency fallacy. This clearly leads to the second fallacy that increased government spending can promote growth, especially by encouraging consumer spending1,2. Both fallacies are responsible for the present economic crisis.

I have been publishing data for years that refutes both fallacies. Unfortunately Keynesianism seems to have taken on the characteristics of a cult that brooks no opposition — including contradictory evidence. Nevertheless, facts are facts and the idea that a high level of consumption as a proportion of GDP is needed to prevent unemployment from rising has been thoroughly refuted by statistical evidence as the following table amply demonstrates.

(View Chart at Article)

What's amusing about this table is that it reveals the so-called laissez-faire Hoover as doubling government spending as a proportion of GDP. (Hoover was well known at the time to being strongly opposed to laissez-faire policies. Thanks to the dishonest efforts of leftwing historians this fact has been turned on its head). This increased spending in dollar terms was far from trivial. Robert P. Murphy points out that for the financial year 2007 the Bush administration would have had to run a deficit of $3.3 trillion to equal Hoover's "overspending". (Robert P. Murphy, The Politically Incorrect Guide to the Great Depression and the New Deal, Regnery Publishing Inc., 2009, p. 47).

The data also demolishes the idea that debt is counter-cyclical. From 1930 to 1939 total debt rose by 150 per cent and yet America continued to be cursed by widespread unemployment. (Debt is expected to be 101 per cent of GDP in 2010). So how do we account for the very high level of unemployment? What matters to employers is the cost of labour relative to the value of its marginal product. (Every introductory economics textbook explains this process). It obviously follows that if the cost of labour (the gross wage) exceeds the value of its product persistent unemployment will emerge.

The fourth column in our table contains the productivity adjusted wage. This is arrived at by dividing productivity by the real wage. We can now see that real wages did indeed exceed productivity, and to a considerable degree, with the tragic results that economic theory predicts. No matter which indexes are used the result is always the same: excess wage rates. What makes the third column particularly interesting is that though Canada had no New Deal her employment record during the 1930s was vastly better than the US's to the extent that on average the US unemployment rate was 3.9 per centage points higher. (Murphy, ibid., p. 104). An important fact that is usually overlooked is that the great bulk of the unemployed were in manufacturing. In 1934 it was calculated

Quote:that of a total of almost 14 million persons were without jobs at the peak of unemployment in March, 1933, 6½ million were from the durable goods industries, nearly 6 million were from the "service" industries, and only 1½ million were from the consumption goods industries. Investment activity, in a word, is the tail that wags the industrial dog. (C. A. Phillips, T. F. McManus and R. W. Nelson, Banking and the Business Cycle, Macmillan and Company 1937, p. 235).

It was noted at the time and is borne out by the figures in the table that consumption was in fact being maintained and that it was the producer goods industries that were suffering the most, a fact that Joseph Stagg Lawrence, an eminent economist, tried to point out to the public. (The same thing happened during 2000 and 2001 recession). It was patently clear to the more astute economists that consumer spending was not the key to recovery.

Unfortunately for Australia Prime Minister Rudd is as profoundly ignorant of economics and economic history as is President obama. Rudd is arguing that the Premiers' Plan of 1931 that resulted in public spending cuts deepened the depression and raised the level of unemployment. However, Sinclair Davidson, a Professor in the School of Economics, Finance and Marketing at RMIT, produced a chart showing that unemployment not only peaked in 1931 it then began to fall despite government spending cuts.

[Image: 090308ausjobs1931.gif]

Why? He doesn't say but the following chart provides a clue. Unemployment peaked when productivity reached its lowest point, after which it began to rise as did the demand for labour. But for this to happen the productivity adjusted wage would have to fall. The real wage in manufacturing for full-time labour in 1927-28 equalled 100. In 1930-31 it was still 100. For 1936-37 it was 99. During this period it never fell below 98. (C. B. Schedvin, Australia and the Great Depression, Sydney University Press, 1988, p. 350).

[Image: ausproductivity1930s.gif]
Source: Recovery from the Depression: Australia and the World Economy in the 1930s, Cambridge University Press, edited by R. G. Gregory & N. G. Butlin, 2002,p. 268


Now we have our answer. When productivity fell the productivity adjusted real wage rose which then raised the level of unemployment. Once productivity began to increase again this reduced the productivity adjusted real wage and so increased the demand for labour. Therefore government increased borrowing and government spending had absolutely nothing to do with it. This the lesson of the 1930s and one the classical economists understood. Mill spoke for them when he wrote:

Quote:The utility of a large government expenditure, for the purpose of encouraging industry, is no longer maintained. Taxes are not now esteemed to be 'like the dews of heaven, which return in prolific showers'. It is no longer supposed that you benefit the producer by taking his money, provided that you give it to him again in exchange for his goods. There is nothing which impresses a person of reflection with a stronger sense of the shallowness of the political reasoning of the last two centuries, than the general reception so long given to a doctrine which, if it proves anything, proves that the more you take from the pockets of the people to spend on your own pleasures, the richer they grow; that the man who steals money out of a shop, provided that he expends it all again at the same shop, is a public benefactor to the tradesman whom he robs, and that the same operation, repeated sufficiently often, would make the tradesman a fortune. (John Stuart Mill, Essays on Economics and Society, Collected Works of John Stuart Mill, Vol. I, University of Toronto Press 1967, pp. 262-63).

Unfortunately President Obama and his advisors are hell bent on imposing on America unsustainable deficits and spending for which there is no economic justification and whose only result will be a great weakening of the economy. Only an unreasoning and fanatical belief in the power of state can account for such behaviour.
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1. The immediate post-war economic situation is highly instructive in that it completely explodes the Keynesian idea that government spending is vital if unemployment is to be prevented from rising. Between 1945 and 1947 the Truman government slashed Federal annual spending from $95 billion to $36 billion — a $59 billion cut in two years, a 62 per cent reduction that amounted to 26 per cent of GDP as it stood in 1945. Instead of the mass unemployment that Paul Samuelson confidently predicted would emerge when the war ended and government spending was slashed America entered an unprecedented period of prosperity.

2. In fact, recovery was already underway before Roosevelt could implement his destructive New Deal policies. Roosevelt was inaugurated on 4 March 1933. I don't want to be a party pooper but the depression bottomed out "in the late winter of 1932-33" and recovery was clearly underway in the February-March period with the Federal Reserve Index of Production rising from 60 to 100 in July. (Frederick C. Mills Prices in Recession and Recovery, National Bureau of Economic Research, Inc., 1936, p. 307).

Gerard Jackson is Brookesnews' economics editor

If you will note here, that I earlier stated the main reason wny England suddenly dropped it's power, due to it's post WWI policy of keeping taxes high, and spending even higher, in order to support all of it's socialized policy? He too states this about how we did NOT do this after WWII, and look what happened. We experienced the greatest economic boom of the 20th century, all courtesy of a Democrat president. Why cannot we find another one, such as Uncle Harry?
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#2
It may have been that Keyenesianism has been discredited in academic circles. Why would that matter to economically illiterate ideologues? They are not result oriented pragmatists. To counteract them, maybe one out to drum into peoples heads: "you can't spend your way to prosperity", although recently many citizens have tried to borrow their way into prosperity. However, most of them have been nicely toasted and should realize the fallacy.
Jefferson: I place economy among the first and important virtues, and public debt as the greatest of dangers. To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our choice between economy and liberty, or profusion and servitude. If we can prevent the government from wasting the labors of the people under the pretense of caring for them, they will be happy.
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#3
Keynesian economics started out as a model - but as the model failed to work, was used to create a language that could be used to explain away why the model failed.

Like speaking Romulan or Klingon, you can learn the words - but why do it? A 32nd level Keynesian will always know more secret words than you do, and will thereby look smarter and more erudite. He'll BE stupid as a sponge, but will look professorial.

In such an encounter, an untutored, undistinguished person who understands economics can debate circles around them. The trick is to redefine the nonsense words into real-life examples.

A good example would be to point out tax increase is not equivalent to tax revenue. Or that unemployment and interest rates are not reducible to either a direct or indirect relationship.
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#4
And there is more on the failure of Keynes. Ron Ross, Ph.d economist, states the obvious. So why won't the monster just die and put itself out of OUR misery.

Quote:Fatal Flaws of Keynesian Economics

By Ron Ross on 7.22.11 @ 6:08AM

It's now clear that the federal government's massive stimulus spending has not achieved its objectives. Why hasn't it? It's important that we have answers to that question.

The stimulus was premised on the economic model known as Keynesianism: the intellectual legacy of the late English economist John Maynard Keynes. Keynesianism doesn't work, never has worked, and never will work. Without a clear understanding of why Keynesianism cannot work we will be forever doomed to pursuing the impossible.

There's no real mystery about why Keynesianism fails. There are numerous reasons why and they've been known for decades. Keynesians have an unrealistic and unsupportable view of how the economy works and how people make decisions.

Short-Run Focus

Keynesian policy advocates focus primarily on the short run -- with no regard for the future implications of current events -- and they assume that all economic decision-makers do the same. Consider the following quote by John Maynard Keynes: "But the long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean will be flat again."

After passage of the stimulus package, Lawrence Summers, Obama's chief economic advisor at the time, often said that the spending should be "timely, targeted, and temporary." Although those sound like desirable objectives, they illustrate the Keynesian focus on the short term. Sure it would be convenient if you could just spend a bunch of money and make the economy get well, but it's not that simple.

The implication of a Keynesian perspective is that you can hit the economy a few times with a cattle prod and get society back to full employment. Remember that so-called "cash-for-clunkers" program? Maybe it accelerated some new car sales by a month or two, but it had no lasting impact.

The "Chicago School" is the primary source of serious research and analysis related to the Keynesian model. Two Chicago School conclusions, in particular, make it clear where Keynesian policies run aground. The two theories are the "permanent income hypothesis" and the theory of "rational expectations."

The "permanent income hypothesis" was how Milton Friedman termed the findings of his research on the spending behavior of consumers. The MIT Dictionary of Economics defines the permanent income hypothesis as "The hypothesis that the consumption of the individual (or household) depends on his (or its) permanent income. Permanent income may be thought of as the income an individual expects to derive from his work and holdings of wealth during his lifetime."

Whether consumers and investors focus mostly on the short run or the long run is basically an "empirical question." A convincing theoretical case can be made either way. To find out which focus actually conforms closer to reality, you have to gather evidence.

Not Evidence-Based

Much of the difference between the two schools of thought can be explained by differences in their methodologies. Keynes was not known for his research or empirical efforts. Keynesianism is definitely not an evidence-based model of how the economy works. So far as I know, Keynes did no empirical studies. Friedman was a far more diligent researcher and data collector than was Keynes. Friedman fit the theory to the data, rather than vice versa.

The Keynesian disregard for evidence is reflected in their advocacy for more stimulus spending even in the face of the obvious failure of the what's already been spent. At a minimum, we are due an explanation of why it hasn't worked. (Don't expect that to be forthcoming, however).

Failure to Consider Incentives

Another of the Chicago School's broadsides against Keynesianism is the theory of "rational expectations." It's a theory for which the 1995 Nobel Prize for Economics was awarded to Robert Lucas of the University of Chicago. As economic theories go, it is relatively straightforward. It essentially states that "individuals use all the available and relevant information when taking a view about the future." (MIT Dictionary of Modern Economics) The rational expectations hypothesis is the simple assertion that individuals take into account their best guesses about the future when they make decisions. That seemingly simple concept has profound implications.

The Chicago School's research led them to conclude that individuals are relatively deliberate and sophisticated in how they make economic choices. Keynesians and their liberal followers apparently think individuals are short-sighted and simple-minded.

An elemental but too often overlooked reality about our economy is that it is based on voluntary exchange. Voluntary exchange is an even more fundamental feature of our economy than is the market. A market is any arrangement that brings buyers and sellers together. In other words, the primary purpose of a market is to make voluntary exchange possible.

Voluntary exchange leaves large amounts of control in the hands of private individuals and businesses. The market relies on carrots rather than sticks, rewards rather than punishment. The actors, therefore, need to be induced to move in certain desired directions rather than simply commanded to do so. This is the basic reason why incentives are such an important part of economics. If not for voluntary exchange, incentives wouldn't much matter.

In designing economic policy in the context of a market economy it becomes important to take into account what actually motivates people and how they make choices. If you want to change behavior in a voluntary exchange economy, you have to change incentives. Keynesian policies do not take that essential step.

The federal government's share of GDP has gone from 19 percent to 24 percent during Obama's time in the White House. A larger government share of GDP ultimately necessitates higher taxes or more debt. In and of themselves, higher taxes retard economic growth because of their impact on incentives. The disincentive effect of higher taxes illustrates why big government is far costlier than it first appears.

It's no accident that Keynesianism is so popular with liberals. It blends well with their unquenchable thirst for expansive government. It doesn't work for the economy but it works for them. The obvious failure of Keynesianism is further evidence of the bankruptcy of liberalism.

Keynesianism is essentially all the Democrats have. It's a one-trick pony. That one trick hasn't worked and now Dems are floundering with nothing more to offer.

All but one member of the president's original economic team has exited. According to liberal columnist Ezra Klein, "Lawrence Summers and Christina Romer were two of the most influential Keynesians in the country. Obama didn't just have a team of Keynesians. He had a Keynesian all-star team."


Now the president has a Keynesian all-gone team. It will be a brighter day for the country when Keynesianism itself is gone for good.

Ron Ross Ph.D. is an economist who lives in Arcata, California. He is the author of "The Unbeatable Market". Reach him at rossecon@gmail.com.
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#5
(08-11-2009, 06:34 PM)WmLambert Wrote: Keynesian economics started out as a model - but as the model failed to work, was used to create a language that could be used to explain away why the model failed.

Like speaking Romulan or Klingon, you can learn the words - but why do it? A 32nd level Keynesian will always know more secret words than you do, and will thereby look smarter and more erudite. He'll BE stupid as a sponge, but will look professorial.

In such an encounter, an untutored, undistinguished person who understands economics can debate circles around them. The trick is to redefine the nonsense words into real-life examples.

A good example would be to point out tax increase is not equivalent to tax revenue. Or that unemployment and interest rates are not reducible to either a direct or indirect relationship.
An insightful post. Keynesianism is a language, and the only way to falsify statements in that language is within the language. I disagree with the second part of the post, however. Simpler analogies may or may not hold. The relationship between interest rates and employment was refuted using the language of Keynesianism. In fact, your thinking is exactly what the second article cautions against.

Quote:Not Evidence-Based

Much of the difference between the two schools of thought can be explained by differences in their methodologies. Keynes was not known for his research or empirical efforts. Keynesianism is definitely not an evidence-based model of how the economy works. So far as I know, Keynes did no empirical studies. Friedman was a far more diligent researcher and data collector than was Keynes. Friedman fit the theory to the data, rather than vice versa.
Now, I wonder what this author would have to say about Austrian economics, which is even less evidence-driven than Keynesianism.
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#6
(07-23-2011, 05:25 PM)b5d Wrote: Now, I wonder what this author would have to say about Austrian economics, which is even less evidence-driven than Keynesianism.

Sounds like you have all the talking points down pat David. Of course Austrian Economics is nothing more than Classical Economics, which was around centuries before Keynes. You know, Adam Smith, Frederic Bastiat, Jean Baptiste Says, and other.

Please give us your boilerplate answer to how the Austrians cannot be taken seriously, and why, by default, Keynes is really correct?

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#7
(07-23-2011, 05:33 PM)John L Wrote: Please give us your boilerplate answer to how the Austrians cannot be taken seriously, and why, by default, Keynes is really correct?
Money, like anything else, has a supply and demand function, whereas the Austrians say that the value of money only comes from its supply.

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#8
(07-23-2011, 05:43 PM)b5d Wrote:
(07-23-2011, 05:33 PM)John L Wrote: Please give us your boilerplate answer to how the Austrians cannot be taken seriously, and why, by default, Keynes is really correct?
Money, like anything else, has a supply and demand function, whereas the Austrians say that the value of money only comes from its supply.

Is that your idea of Production Side(Classical) Economics? There is more to all this than money. Last I looked, Production referred to things such as goods and services.

And too, let's see how Demand side economics works on the Space industry. There are millions of people, myself included, who are demanding we get into space. Now, we are demanding it, so why don't we automatically have it appear?

Could it be that Says Lay that "Production tends to create it's own demand" had more import than just the demand?

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#9
(07-23-2011, 05:49 PM)John L Wrote: Is that your idea of Production Side(Classical) Economics? There is more to all this than money. Last I looked, Production referred to things such as goods and services.
All made from (things bought with) money. The economy doesn't work on barter - even if a corporation buys things from itself, it still tends to account for them in dollar values, not straight quantities.

Quote:And too, let's see how Demand side economics works on the Space industry. There are millions of people, myself included, who are demanding we get into space. Now, we are demanding it, so why don't we automatically have it appear?
Keynesian economics gets called 'demand side' because it takes into account both supply and demand. But that label was never accurate - supply is important as well.
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#10
(07-23-2011, 05:49 PM)John L Wrote: Could it be that Says Lay that "Production tends to create it's own demand" had more import than just the demand?
Interestingly, this principle that production generates its own demand has been accepted by some Keynesians and incorporated into their theories. John Kenneth Galbraith, who as you know was a disciple of Keynes, recognized that large corporations develop innovative products for which there is no real demand, and must therefore artificially create demand through advertising and other means of persuasion. Of course this had much different implications for Galbraith than it did for the orthodox or Austrian schools of economics. Because there is no reliable market for high-tech products, corporations need government support and keynesian planning to minimize risk and ensure a return on their investments.
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#11
(07-26-2011, 08:05 PM)Gommi Wrote:
(07-23-2011, 05:49 PM)John L Wrote: Could it be that Says Lay that "Production tends to create it's own demand" had more import than just the demand?
Interestingly, this principle that production generates its own demand has been accepted by some Keynesians and incorporated into their theories. John Kenneth Galbraith, who as you know was a disciple of Keynes, recognized that large corporations develop innovative products for which there is no real demand, and must therefore artificially create demand through advertising and other means of persuasion. Of course this had much different implications for Galbraith than it did for the orthodox or Austrian schools of economics. Because there is no reliable market for high-tech products, corporations need government support and keynesian planning to minimize risk and ensure a return on their investments.

That may qualify as a 'start', but it would have to completely overhaul it's basic premises to keep up with the return to good old fashion Classical Economics.

Keynes is to economics what "New Math" was to basic arithmetic and algebra. Were it not for the incestuous relationship between it and Collectivism, it would no longer be around.
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#12
(07-26-2011, 08:05 PM)Gommi Wrote: Interestingly, this principle that production generates its own demand has been accepted by some Keynesians and incorporated into their theories. John Kenneth Galbraith, who as you know was a disciple of Keynes, recognized that large corporations develop innovative products for which there is no real demand, and must therefore artificially create demand through advertising and other means of persuasion. Of course this had much different implications for Galbraith than it did for the orthodox or Austrian schools of economics. Because there is no reliable market for high-tech products, corporations need government support and keynesian planning to minimize risk and ensure a return on their investments.

That's frankly self-contradictory that production creates its own demand, yet needs government help to do so. Galbraith was a really practical person, which might have rubbed some people the wrong way at one point. He didn't have much to say about economic theory, outside of the context of those specific political battles he was involved in. Even Krugman apparently doesn't think that highly of him - I see him more of a political figure than an economist.
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#13
Sheldon Richman discusses why Keynesians find comfort in rising macroeconomic aggregates while ignoring how flesh-and-blood people actually live. And note his explanation on what really ended the Great Depression. A hint: it wasn't WWII as many would think.

Quote:Depression, War, and Recovery
The way not to go.


In a recent mini-debate on the radio with a Keynesian economist, I ran into the increasingly popular claim that massive spending during World War II ended the Great Depression. (Listen to my response here.) In an odd way this is progress. If it took World War II to end the Depression, that must mean the New Deal didn’t do it.

Be that as it may, advocates of peace and freedom can’t be comforted by the war explanation. No Keynesian I know of wishes for war to stimulate the economy, but some have lamented that it’s too bad it takes a war to win mass support for government spending large enough to end a big downturn. There’s something to this, of course. John T. Flynn, the Old Right opponent of the New Deal and foreign intervention, pointed out in "As We Go Marching" that military spending is the one variety of government spending that will unfailingly win conservative support. Hence the tendency toward militarism.

For the sake of peace, then, we peace-and-freedom-mongers must refute the World-War-II-got-us-out-of-the-Great-Depression argument.

It’s not hard to do when you break things down to their elements.

I begin by asking anyone who makes this argument: What do you mean by “end the Depression”? Since depressions and recessions are marked by a general loss of economic well-being, a commonsense definition of “end the Depression” should be: “a general rise in economic well-being,” with well-being indicating growing opportunities for consumption and leisure.

GDP and Unemployment

But that’s not what Keynesians mean. The one I debated talked not about prosperity but rather changes in GDP and unemployment, as if those were indicators of well-being. I guess they might be, but not necessarily. A rise in well-being will probably be reflected in GDP and employment statistics, but the reverse is not necessarily so. A rise in those indicators may not signify an increase in well-being.

To see this, we need only look at what was going on during the war. Robert Higgs has done the heavy lifting on this subject, so my debt is to him. GDP supposedly measures national output, but it includes government spending. During the war of course the government spent a huge amount of money, making any rise in GDP is misleading. (Murray Rothbard once suggested that government spending be subtracted from GDP.)

Higgs writes:

Quote:Yes, national output as conventionally measured did grow hugely during the war. . . . [G]ross domestic product (in constant 1987 prices) increased by 84 percent between 1940 and 1944. What the orthodox account neglects, however, is that this “miracle of production” consisted entirely (and then some) of increased government spending, nearly all of it for war materials and equipment and military personnel. The private component of GDP (consumption plus investment) actually fell after 1941, and while the war lasted, private output never recovered to its pre-Pearl Harbor level. In 1943, real private GDP was 14 percent lower than it had been in 1941. If a nation produces an abundance of guns and ammunition, it does not thereby achieve genuine prosperity. [Emphasis added.]

With the government diverting resources from butter to guns, it does not seem that the average person would have been better off economically in the 1940s than in the 1930s.

Higgs goes on:

Quote:Those who lived through the war . . . forget the scarcity of decent housing, the hassles in commuting to work, and the severe rationing or complete absence of basic consumer goods. . . .

. . . Because of the many other ways that the well-being of consumers deteriorated during the war, which the official data fail to capture, actual wartime conditions were even worse than [the] figures suggest.

Well, what about unemployment? It fell from 14.6 percent in 1940 to 1.2 percent in 1944. “There you go! Case proved,” a Keynesian might say.

Hang on, Higgs replies:

Quote:What the orthodox account neglects, however, is that during that same period the government, mostly by conscription, increased the active-duty personnel of the armed forces by 11 million persons, equivalent to almost 20 percent of the total labor force (employed plus unemployed) in 1940. If a nation shoves 11 million persons into military service and, as a result, reduces the number of unemployed persons by eight million, that performance scarcely signifies the achievement of true prosperity. [Emphasis added.]

Prosperity did not become a feature of life until after war. Do we really need technical economics to understand this? Except for government contractors and politicians with privileged access to stashes of goods, who else can prosper during a war in which government commandeers the entire economy and devotes virtually all resources to that effort? You can’t eat bullets, tanks, or planes. What good is a job if there is nothing to buy?

Keynesians find comfort in the rising macroeconomic aggregates while ignoring how flesh-and-blood people actually lived. How else can they blithely declare that war spending ended the Great Depression?

In no sense did the war end the Depression. It delayed recovery — just as government spending delays recovery today.
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#14
Stephen Moore asks the premature question: Is Keynes Finally Dead? Well, not yet. Collectivism/Statism is still alive and well. And Keynes is the ultimate enabler of it, so as long as one exists, so will the other.

Quote:Is Keynes Finally Dead?

By Stephen Moore

One would think so -- yet under this presidency he will never be allowed to rest in peace.

In the immediate aftermath of the debt ceiling deal in August, liberal Democrats on Capitol Hill felt as though they had been flattened by the Tea Party express. The plan promised $2.1 trillion in budget cuts over the next decade. For conservatives, that was not a huge amount of savings out of $44 trillion in anticipated federal spending. But the left was apoplectic about even a haircut for government programs. Senator Richard Durbin, the Illinois Democrat, fumed that the agreement and its $21 billion of savings in 2011 might as well be "the final interment of John Maynard Keynes." He continued glumly: "Keynes died in 1946 but it appears we are [now] going to put him to his final rest."

Now that's a pleasant thought. Keynes was, of course, the influential Depression-era British economist who advised politicians to ramp up government spending, borrowing, and printing of money during an economic downturn in order to prop up demand for goods and services and thus return to prosperous times. Borrow now, from future generations, and let the kids worry about it, because, as he famously said, "in the long run, we are all dead." That philosophy has been the guiding doctrine of liberalism for at least 75 years. So triumphantly has this doctrine penetrated academia and politics that President Richard Nixon famously declared, "We are all Keynesians now."

The leader of this new branch of economics was, for a long time, the late and highly influential Keynesian disciple Paul Samuelson. He was to Keynesianism what Paul was to the spreading of Christianity. Mr. Samuelson's tour de force was his best-selling textbook, Economics: An Introductory Analysis. Written in the late 1940s, and with more than 4 million in sales, the book has indoctrinated three generations of students with its illogic.

Samuelson was enamored with the power and wisdom of the political class to tinker with the economy to make it function like a well-oiled machine. He was godfather of the idea of pumppriming an underperforming economy with more federal spending and more money. He believed so powerfully in the efficacy of government tinkering that, in the Cold War years, he routinely warned that the Soviet economy would catch up to the U.S. In the 1989 edition of his textbook, he wrote: "The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive." A year later the Soviet economy imploded and the Berlin Wall came down. One would think that would have been pretty much the end of the line for America's first Nobel-prize winning economist. Since then at least a dozen of Samuelson's disciples have won the prize.

Keynesianism is based on the flawed idea that the economic problem underlying recessions is insufficient consumer demand for goods and services, and that by goosing demand with free money the government can increase output and employment. As Doug Holtz-Eakin, former director of the Congressional Budget Office, explains, "The idea behind Obamanomics and Keynesianism is that the government can trick people into spending more money than they would otherwise." It turns out people aren't that gullible.

Seldom has an economic theory been so thoroughly rebutted by real world events. After eight years of the first grand Keynesian experiment -- the New Deal during the Great Depression -- the unemployment rate in 1939 was 20.7 percent and output was still growing at a crawl, seven years after Franklin Delano Roosevelt took office. That's some victory. As Burton Fulsom, author of the Depression history New Deal or Raw Deal, has argued: "The greatest myth of the twentieth century is that Franklin Roosevelt's New Deal ended the Great Depression."

Japan has employed textbook Keynesianism for 20 years and nearly the whole island has been paved over by public works projects, yet the economy continues to flounder and asset values are still only half what they were in 1990.

BUT THE MOST EMBARRASSING repudiation of Keynes has been the Great Recession of 2008– 2011. Never in modern times has the premise that open-checkbook government spending and pedal- to-the-metal money creation lead to economic growth been put to such a large-scale trial. The results have been completely the opposite of what was predicted.

The key to the magic of Keynesianism is to boost growth in demand by running economically expansionary deficits. In 2008 President George W. Bush doubled the deficit by enacting a $100 billion Keynesian tax rebate. Then, in 2009 we ran a $1.4 trillion deficit, thanks in large part to President Obama's $830 billion stimulus plan. This was double any other deficit, in real dollars, in peacetime history and by far the largest as a share of GDP (at 10 percent) in peacetime history.

In 2010 we ran another $1.3 trillion deficit, followed by $1.3 trillion more this year. So that's $4.0 trillion of debt, which has produced -- drum roll, please -- 9.1 percent unemployment and GDP growth of less than 1.0 percent -- barely an economic pulse. Every major economic forecaster has downgraded their predicted growth rate for 2012, and there's now more panicked talk of a double-dip recession.

The Keynesians' retort is what it always is when their ideas are shown to fail: we haven't had enough stimulus for long enough. The White House is now arguing that Neanderthal Republican tea partiers turned off the spending and borrowing spigot way too soon. Christina Romer, the first chief economic adviser to Mr. Obama, regrets that "we only got one shot" at stimulus and her prescription is "more."

This was the excuse for why Keynesianism failed to reverse the Great Depression. Those short-sighted Republicans in 1937 allegedly turned off the debt machine, insisted on balancing the budget, and once the medicine was shut off, the economy tanked again. But there was no prosperity in the 1930s at any time after FDR doubled federal spending and government debt as a share of GDP. Unemployment never fell below 10 percent until millions of young people donned uniforms and the nation mobilized for World War II.

In any case, where is the evidence that Keynesian fiscal stimulus has been put on hold this year? There is none. The 2012 deficit is going to be roughly 10 percent of GDP, which, five years ago, would have been considered an unthinkable level of pump-priming. Federal spending is up $140 billion this year, and that is layered on top of the massive stimulus of 2009 and 2010. The latest GDP numbers show that federal government spending was one of the few areas where the economy expanded in the first half of this year-- even as much of the private economy flat-lined. And many have forgotten that we got a further dose of stimulus that was guaranteed to produce jobs back in December when Mr. Obama won a one-year payroll tax cut with a price tag of $112 billion. That has corresponded with a rise, not a fall, in the unemployment rate, yet the White House wants to extend it for another year.

In other words, the current Keynesian argument is that $100 billion of stimulus a month isn't enough. That we need, what? Another $150 or $200 billion a month in deficits to make the economy grow? And if that $2 trillion isn't enough, then what?

Maybe QE3 from Ben Bernanke and the Fed. Those who say "more stimulus, please" forget that the Federal Reserve has run the most expansionary money creation strategy in history, first through near-zero interest rates, and next through asset purchases, known as QE1 ($1.2 trillion in mostly mortgage-backed securities purchased by the Fed in 2009), followed by QE2. QE2 started late last year and pumped $600 billion into the economy through the purchase of U.S. Treasury securities. But that latest debt and money pump-priming has corresponded with this year's economic slowdown. And the resulting higher prices in gasoline and food have made Americans feel poorer not richer, thus dampening consumer demand. Oops.

Time out for a historical digression. One can't listen to the left these days order up more and more deficit spending without harkening back to the early 1980s, when Ronald Reagan rescued the U.S. from the greatest financial collapse since the Depression. In the 1970 and early 1980s, the stock market in real terms lost almost 70 percent of its value. Reagan slammed the brakes on money and cut tax rates. The deficits of that era averaged about 5 percent of GDP. Back then many leading Keynesians, including Samuelson, first swore this would never tame inflation and restore growth, then by 1984, when the economy grew at 7 and even 8 percent, they shrugged and posited: this was simply a classic Keynesian recovery. The deficits caused the growth. Never mind that other nations that ran even bigger deficits didn't grow. And back then, hypocritical liberals trashed Reagan for running deficits they now trumpet as virtuous. One of the few exceptions was Robert Eisner of Northwestern, who applauded Reagan's deficits. He was one of the few honest Keynesians of his day.

BUT HERE'S THE POINT: if Reagan's deficits caused a 7 percent growth rebound with deficits of 5 percent of GDP, why have Obama's deficits, which are twice as large, generated only 1 to 2 percent growth?

The answer is that Reagan's supply-side, tax rate-cut policies, not the deficits, stimulated production and investment, not demand. In nominal terms, demand grew very little in the mid-1980s. You can't have a demand-side Keynesian expansion with falling prices; it's impossible within that model.

The fundamental flaw in the theory of government as pump primer is that the public sector can
only get a dollar to spend in the first place by parasitically taking it from the more productive private sector, which is why the mythical "multiplier effect" of government spending -- the increase in total GDP for each dollar spent by the government -- is less than one.
Robert Barro of Harvard has found exactly that in his empirical studies on stimulus spending. He found that government spending often crowds out private spending, rather than stimulating it.

But now, in the 21st century, Keynesianism has run into a new and formidable impediment to its deficit theories: global bond vigilantes. They are telling nations that debt-financed stimulus spending has run its course. Interest rates have soared in many eurozone nations like Greece and Ireland. Yet the U.S. is attracting so many bond buyers that interest rates are at 30-year lows. How long can this bubble inflate? Meanwhile, Fed Chairman Bernanke's zero interest rate and asset purchasing schemes have driven gold to $1,800 plus an ounce, as investors lose trust in paper currencies. Will it take a 2008 style financial panic to get Washington to understand that the free-lunch era is over?

Perhaps the biggest lie from the Keynesians is the premise that -- with so many Americans unemployed -- we should delay cuts in spending during this soft patch in the economy and lock in long-term cuts in entitlements in future years, when the economy is growing. This is the Obama pitch. But when have Democrats (or even Republicans for that matter) ever in any of our lifetimes said, "Now is the time to cut spending"? Nancy Pelosi has sprinted to the microphone after every negotiation with Republicans pledging that there would be no cuts in Social Security, Medicare, and Medicaid—not now, not next year, not ever. These are the programs that nearly everyone acknowledges are driving the red ink tsunami, with budgets that are expected to climb to $2.4 trillion from $1.6 trillion this year, and yet they are labeled untouchable by the fiscal doves.

Republicans would be fools to fall for the "spend now, save later" gambit. This is the attitude of a teenage girl roaming the mall with daddy's credit card. It is a promise never to cut spending. That's because Keynesianism isn't a real scientific economic theory. As economist Don Boudreaux of George Mason University puts it: "When you get right down to it, Keynesianism is just a convenient excuse for what the left wants to do anyway: spend more government money." It has left us with a $14.5 trillion national debt and an economy flat on its back.

Now Obama and the rest of Keynesian cult say that if we can just spend and borrow more, the economy will get better and the jobs will come back. If there's any good news from the events of the last three years it's that Dick Durbin may be right: almost no sane person really believes that anymore.
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#15
John, to the Left, facts and data do not matter; their method is emotion based politics. What matters is control and power. Thus, they will not get over Keynesianism until they are decisively thrown out of office. This will only happen if citizens get fed up with government control and useless spending. The political case must be made to the great unwashed electorate that government control and excess spending are leading us to doom and servitude. The general electorate probably won't understand Keynesianism (or maybe they will) so Keynesianism has to be attacked on its results, not its foundations.
Jefferson: I place economy among the first and important virtues, and public debt as the greatest of dangers. To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our choice between economy and liberty, or profusion and servitude. If we can prevent the government from wasting the labors of the people under the pretense of caring for them, they will be happy.
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#16
Good article, John, and jt is only partly right.

Keynesian economics is primarily used because it provides terminology which can rationalism anything. It cannot be predictive, but the words enshrouded within it can explain away all it fails to accomplish. To those who are too dim to understand the real world, having a vocabulary of excuses is more important than success.
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#17
According to an op-ed piece in the WSJ (at least in my opinion), the recent Nobel prize in Economics inveighs against the Keynesian theory.

Quote:Consider Mr. Sargent's influential work on rational-expectations models. According to this theory, people do not respond passively to changes in economic policy or circumstances. They anticipate future conditions and adjust according to their best interests.

As Mr. Sargent, who teaches at New York University and is a fellow at the Hoover Institution, has put it: "The concept of rational expectations asserts that outcomes do not differ systemically (i.e., regularly or predictably) from what people expected them to be. The concept is motivated by the same thinking that led Abraham Lincoln to assert, 'You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time.' . . . [Rational expectations] does not deny that people often make forecasting errors, but it does suggest that errors will not persistently occur on one side or the other."

This means it is hard for politicians to manipulate people into behaving in ways that don't make economic sense. One implication is that loose monetary policy cannot permanently lower unemployment because people will anticipate higher future inflation and demand higher wages and interest rates in compensation. Likewise, temporary fiscal stimulus won't change consumer spending permanently because it doesn't change underlying wealth or income.

If Keynesianism is not manipulation, what is?

LINK
Jefferson: I place economy among the first and important virtues, and public debt as the greatest of dangers. To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our choice between economy and liberty, or profusion and servitude. If we can prevent the government from wasting the labors of the people under the pretense of caring for them, they will be happy.
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#18
If you will note the part about people actually anticipating future conditions and adjust according to their best interests, they are using the rarely understood wonder of "Real Life Conditions" where dynamic influences prevail.

It is anti-Keynesian because the followers of Keynes almost always use "Static" forecasting, and are almost always behind the '8 ball' when it comes to accuracy. Just look at that little ferret faced fellow at the New Yawk Times, who tries to pass himself off as an economist.

Can you perhaps think of any other good reasons for taking Keynesian theory and dumping it in the nearest dumpster?

I wonder if these guys are followers of Wanniski, or Menger?
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#19
Just one. It doesn't work. And you are absolutely correct about the fatal flaw in static forecasting: It leaves out human behavior.
Jefferson: I place economy among the first and important virtues, and public debt as the greatest of dangers. To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our choice between economy and liberty, or profusion and servitude. If we can prevent the government from wasting the labors of the people under the pretense of caring for them, they will be happy.
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#20
John's article above Wrote:Keynesianism is based on the flawed idea that the economic problem underlying recessions is insufficient consumer demand for goods and services, and that by goosing demand with free money the government can increase output and employment. As Doug Holtz-Eakin, former director of the Congressional Budget Office, explains, "The idea behind Obamanomics and Keynesianism is that the government can trick people into spending more money than they would otherwise." It turns out people aren't that gullible..

Seems like it's pretty much that in a nutshell. I keep hearing them banging that 'demand' drum. They had one of these pundits on one of the Fox shows recently arguing with a small business owner. The business woman's response was that she had PLENTY of demand ... her issue was concern about the rules changing and not being able to make a reasonable guess about whether or not her profitable business would remain that way. 'Demand' for a product or service doesn't mean squat if you can't make a profit selling it. That's something these blockheads just can't get. There's lots of 'demand' for food in North Korea, but all that is 'producing' is misery.

It seems so schizophrenic. Progressives typically are down on consumption ... less CO2 (Steven Chu), less calories (Michelle Obama) ...

Guess Who Wrote:We can't drive our SUVs and eat as much as we want and keep our homes on 72 degrees at all times ...

... how exactly does that square with this love affair with "goosing demand"? Isn't 'demand' something similar to setting the thermostat to 72 and ducking out in that new SUV to pick up a cheeseburger? Maybe it's some perverse twist on class warfare and coveting wealth? Perhaps they want us to 'demand' more but consume less??

Keynesianism appeared to work in 1933 when there was a gold standard to debase. Today ... not so much. The genie has long departed the bottle. There's nothing left to inflate more bubbles ... there isn't enough monetary pressure to move all that "free money" past the walls of the banks ... which I suppose is great if you're a well connected banker ... but if you're earning a 'static' salary in an economy that Bernanke & Co. are 'goosing' ... it feels a lot like contraction ... and if you don't have a job it even feels worse.

Too bad economists don't have something akin to a Hippocratic oath ... seems like the first rule of policy making should be "do no harm ... " ... that's certainly not how these guys roll. All this damned "free money" is going to get expensive as hell.
"Democracy is the theory that the common people know what they want and deserve to get it good and hard."
-- Henry Mencken
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