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Debt, Spending, & Keynesian Foolishness
#61
Huh...What? Wrote:
Quote:consumption is proportional to income

Not if you're the federal government, it ain't. For them, consumption is proportional to whatever the hell they want it to be, and to hell with the country.

You're sounding more like me every day. :twisted:
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"Falsehood flies, and truth comes limping after it" - Jonathan Swift, 1710
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#62
jt Wrote:C = cY : consumption is proportional to income

and

Output (Y) = Consumption © + Investment (I) + Government (G)

seem a bit of a stretch.

What part and why? On a normal planet (not planet Obama), C=cY should be a given. The output equation is usually expressed ...

GDP = consumption + investment + exports - imports

He stated in the article that he was removing the import/export consumption to simplify. Then he splits out 'consumption' in terms of personal consumption and 'government'. Are you arguing that 'government' doesn't equal 'consumption'?? Shock Now THAT sure as hell seems a bit of a stretch!

... or are you arguing that debt should be broken out from 'consumption'? I'd argue that it still counts as 'consumption' ... except of course on Planet Obama ...
"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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#63
Here is a great example of why Keynesian economic theory is "Alien Logic": Greenspan Says Economy May Be Undergoing a `Pause'. And it really doesn't make any difference which side of the political spectrum one is at either. Keynesians are all Brain Damaged!

Why in the hell would someone, who is supposed to be so G-d Damned brilliant make such a colossal understatement? These people are simply Idiots, running around with a high IQ, but no real common sense. It's just amazing!

"A Pause"? If this is a 'pause', may G-d help us if we have a real decline, or a crash. Jesus Christ on a crutch!
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"Falsehood flies, and truth comes limping after it" - Jonathan Swift, 1710
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#64
You have to remember that these folks all believe that their brilliant economics can eliminate the ups and downs of normal business cycles and the repercussions from when sh*t just happens. For all their theories and 'science' ... they might just as well be saying that they've managed to conquer death.

Check this out. In essence we are daring China to massively devalue the dollar. I say massive, because once the floodgates are opened, the are going to be difficult or impossible to close. The Chinese are already under huge internal pressure to raise their living standards (ie hike their prices ... independent of currency reindeer games). Dr _Rugman and others may be praying for inflation the way a farmer prays for rain, but while it dovetails nicely with their Keynsian bullsh*t, $8/gallon gasoline, $200 sneakers and and Weimar style price increases across the board are NOT going to be the soothing salve they envision. It's simply trading one version of SUCK for another. Real wages are declining. The current massive unemployment rate is going to reduce any incentive to raise them any time soon and we are only destined to endure much more torture as things unwind.
"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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#65
Quote:You're sounding more like me every day.

I've been on this train for twenty years.
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#66
Here is more Keynesian foolishness from our little Ferret Faced fellow at the NYTimes. According to our economic genius,

Quote:All the buzz lately is that the Obama administration is “antibusiness.” And there are widespread claims that fears about taxes, regulation and budget deficits are holding down business spending and blocking economic recovery.

How much truth is there to these claims? None. Business spending is indeed low, but no lower than one would have expected given widespread overcapacity and weak consumer spending. Business leaders are feeling unloved, but giving them a group hug won’t cure what ails the economy.

Now, if you believe that Demand determines Supply, you may actually believe this. And you may even believe that lack of investment is not because businesses are afraid. But there are now many Jackasses, who voted for the Boy Wonder, who are now agreeing that he really isn't pro-business.

And Krugman thinks not? Does this tell you about the reasoning ability of this 'so called' award winning economist? Perhaps Zuckerman is wrong? Or perhaps others at the Aspen group? Perhaps he will go there and tell all of them where they are wrong.
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"Falsehood flies, and truth comes limping after it" - Jonathan Swift, 1710
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#67
mr_yak Wrote:
jt Wrote:C = cY : consumption is proportional to income

and

Output (Y) = Consumption © + Investment (I) + Government (G)

seem a bit of a stretch.

What part and why? On a normal planet (not planet Obama), C=cY should be a given. The output equation is usually expressed ...

GDP = consumption + investment + exports - imports

He stated in the article that he was removing the import/export consumption to simplify. Then he splits out 'consumption' in terms of personal consumption and 'government'. Are you arguing that 'government' doesn't equal 'consumption'?? Shock Now THAT sure as hell seems a bit of a stretch!

... or are you arguing that debt should be broken out from 'consumption'? I'd argue that it still counts as 'consumption' ... except of course on Planet Obama ...
To clarify:

Y=(economic) output should not include government spending. The government creates nothing tangible. It only spends. If the point is to track all expenditures, this is ok, but the name should be changed.

C=cY: This assumes the government saves, it does not. It also assumes consumption © money is saved, an oxymoron. And, you are right, debt is not included. If it were, C=cY would be even more ludicrous. In any event, c would have to be quite a complicated variable in order to make the statement valid.

Is there any wonder that economists never agree and that the "consensus" opinion of economists is usually quite wrong?
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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#68
-Government spending counts ... as consumption

-Consumption (again in a rational world) is (or should be) proportional to income. This includes the portion that is 'consumed' in taxes, fees, FICA, tanning tariffs, etc..

The glaring omission is debt. Debt (both public and private) really should be rolled into 'consumption' (against forward earnings). Government debt should be counted as a separate line item in the consumption laundry list. It is NOT covered by taxes and fees ... again it's forward consumption.

Early in the last century folks came up with an albeit simplistic way of measuring output and growth. If it's not a metric, all you have to guide you are feelings - joy (boom) ... malaise ( bust). It seems like a reasonable idea but an army of geniuses have been trying to pollute it for decades. I suspect that debt has in one way or another been completely omitted or at least been drastically diluted in our bogus economic output numbers. Another example is the fact that Energy and Food are not included in inflation numbers (officially because they are considered volitile ... unofficially because their increase over time tells a sad story). At one time metrics were considered powerful tools ... now they are really no more than propagandist bullsh*t.
"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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#69
mr_yak Wrote:The glaring omission is debt. Debt (both public and private) really should be rolled into 'consumption' (against forward earnings). Government debt should be counted as a separate line item in the consumption laundry list. It is NOT covered by taxes and fees ... again it's forward consumption.
It appears that you are validating my argument (however vague it was). If "income" includes debt (future consumption moved to now) and non productive expenditures (gummint) how in the world can consumption be proportional to income? The only way it could is to define c=C/Y which makes c an uncontrollable dependent variable, depending perhaps on time and a myriad of other factors. For example, one cannot control the gummit and one cannot control consumer saving/spending. The model is simply too simplistic. Perhaps it is illustrative.

As I recall, economists make simple models like this for free economies, and when they introduce government taxes and expenditures, these appear as a dead weight on the production/consumption system.
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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#70
Our little Ferret Faced fellow finally meets his match,..............and quits. This is really BIG! And there is much more than Krugman involved here, but also Keynesian economics. I've got to keep a copy of this, so I can come back and relish it more than once. Wink1

Remember, this is how 'so called' experts are rebutted. Every time they make hair-brained statements, immediately jump on it, and thoroughly rebutt it. Soon the 'so called' expert can only attack the rebutter's character, and then leave. Which is exactly what Krugman did. He closed down his blog, since he could not win.

I haven't gone through all the links yet, but the ones I have, are delicious. And what is so Damning here is that Krugman is a recipient of the Nobel Prize, for 'whatever'. Does anyone seriously believe he won it for being a great economist? Or does he simply parrot the politically correct Keynesian line that Collectivists the world over use as an excuse to push their Utopian beliefs?

Again, the fact that he pulled the plug, after being blown out of the intellectual water, so many time, is a great example of how facts are able to defeat misguided rhetoric.

This almost deserves a thread of it's own, but for now, I'll post it here.

Quote:Paul Krugman Gives Up
By Fred Douglass
A marvelous thing happened over on Paul Krugman's blog at the New York Times last week. Krugman effectively conceded defeat on a range of economic debates. Who defeated him? People who posted comments on his New York Times blog. Mere commenters.

For those who do not know, Paul Krugman is one of the few who still claim that Keynesian progressivism is the answer to America's (and Europe's) problems, not their cause. He repeats that claim many times each month. Amid these repeated expressions of his "progressive" faith, he now also repeatedly expresses grim despair because his progressive policy prescriptions are being accepted less and less in the public square, even by the Obama administration.

Krugman is an academic. He has never run a company. He has never created a job. The closest contact he evidently ever had to "business" was as an adviser to Enron, where (in his own words) he was paid $50,000 to help build Enron's "image."

This, perhaps, explains the dozen or so points that Krugman makes over and over. Here are a few: Obama's stimulus was too small. Debt is good. Austerity is bad. Deflation is coming. Ken Rogoff, Greg Mankiw, Alberto Alesina (all at Harvard), and other serious economic scientists do not understand economics as well as he does. Those who do not agree with him are "mass delusional." And perhaps Krugman's favorite line: "I was right, of course."

Befitting his ideology, Krugman has only one policy to propose, regardless of topic: Transfer more resources from the discipline and dynamism of markets to the inefficiency and cronyism of government.

Government-run health care. Government-controlled banks. Government bailouts. High taxes. High spending. Krugman wants it all, just like in Europe (which, in 2008, he called "the comeback continent"). And Krugman has no problems denying economic science and current events to advocate it.

With the meltdown in Europe so obviously the consequence of too much Krugmanism and U.S. unemployment near 10% after a trillion dollars in stimulus, Krugman has attracted some criticism.

For example, Robert Barro, the distinguished Harvard economist, noted that Krugman "just says whatever is convenient for his political argument. He doesn't behave like an economist." The New York Times ombudsman Daniel Okrent observed that Paul Krugman has "the disturbing habit of shaping, slicing and selectively citing numbers in a fashion that pleases his acolytes but leaves him open to substantive assaults." James Taranto at the Wall Street Journal, after listing the falsities in Krugman's latest piece on climate last week, hazarded that perhaps "Krugman makes himself ridiculous merely to make our job easy."

But no matter how low Krugman's fallacious fruit hangs, Krugman has long been comfortable among the acolytes who frequently post on his blog. A representative post is: "Paul, you are a God-send for those of us who appreciate a superior intellect with common sense! Thanks for applying your brilliance." Or this: "Paul, dig deep dude. You are brilliant." It was hardly surprising that last January, Krugman declared, "I love my commenters."

No longer.

For just as Krugman was declaring his love for his blog commenters last January, people started posting serious rebuttals of Krugman's standard claims about economics. These commenters were not obviously Republican stooges. They were not obviously members of "the political class." They were not obvious ideologues.

Rather, the posters simply knew some economic science and how jobs are created and economies grow, perhaps because they were members of "the productive class." And they came prepared to support their rebuttals of Krugman's ideology and his singular policy prescription by facts and peer-reviewed economic science.

For six months, they made Krugman's blog one of the more informative and interesting places to hear economics debated. In part, this was because they gave Krugman a serious run. Their posts were long, near the 5,000-character limit set by the New York Times. They were reasoned. They were knowledgeable. They carried citations to economic science literature that one might expect in a Ph.D. dissertation.

And so their rebuttals were often decisive.

For example, when Krugman a month ago drew one of his famous "trend lines" based on a single point, a blogger named rjh immediately responded, "These trend lines you are drawing all over the place. Pardon my French, they are complete garbage." And nearly half of Krugman's commenters joined to point out that Krugman was arguing junk. Krugman was forced to make two defensive replies; both were immediately refuted.

Responding to Krugman's praise for the high taxes in Europe and his repeated denial that tax cuts might stimulate an economy enough to make up for revenues lost, a European posting under his initials jg pointed out that the low Reagan-Clinton tax rates made "being an entrepreneur interesting again. All those internet startups like eBay, Amazon or Netscape would probably never have been created if it weren't possible for the inventors to get rich." This anti-progressive notion that the "evil rich" might actually create growth if they were not taxed -- on his "personal" blog, no less -- must have made Paul spit up his morning coffee.

But things got worse for the professor. Matching Krugman's repeated claim that the "stimulus" was too small, Sean produced peer-reviewed economic science from Alesina, who examined 92 attempts at stimulus since 1970 in OECD countries and found that tax cuts, but not spending, stimulated. Krugman stammered a reply, but the damage was done; his acolytes had learned that economic science existed that contradicted Krugman's claim (central to Obama's "stimulus" legislation) that government's spending your money helps an economy.

Matching Krugman's claim that government can "create wealth by printing money," several posters cited the latest economic science showing that the "multipliers" that Keynesians use are wrong. They further noted that Krugman had used these wrong multipliers seventeen months ago to predict incorrectly that Obama's stimulus package would keep unemployment below 9%.

And so Krugman's blog presented the most unforgivable conclusion: Krugman had actually been wrong. As he had been when he advocated low interest rates and the creation of a housing price inflation in 2001, one of the causes of current economic difficulties.

Things then got still worse. When Krugman repeated his claim that Bush's tax cuts had "caused" the deficit and damaged the economy, commenters first taught Krugman how to count. They then cited two papers by the Romers showing that tax cuts help economies. Christina Romer is, of course, the chief economic advisor to President Obama.

When Krugman repeated one of his "debt is good" posts, posters linked to the economic science from Reinhardt and Rogoff showing that high debt is inimical to economic recovery.

Occasionally, Krugman attempted a reply. For example, he dissembled that Reinhardt and Rogoff had "highlighted" a single postwar American experience, which he dismissed as "spurious." The commenters did not let him get away with it. Within 24 hours, Sean had pointed out that Reinhardt and Rogoff had found similar effects of debt in six countries on three continents over four decades, including Canada, Japan, Greece, and Belgium. Krugman then struggled to find something "spurious" about each of these. Sean's rebuttal showed that Krugman was refusing to meet any burden of proof. Still worse, Samuel showed that Krugman's reasoning, if applied generally, would forever insulate Krugman's ideology from any refutation of any kind.

...Which is perhaps what Paul Krugman wants, but it is not economic science.

Krugman's blog commenters were especially relentless in pointing out his inconsistencies. In one post, Krugman admitted that "politicians will always find ways to shield the powerful." Posters piled on, pointing out that Krugman's universal policy prescription gave politicians more power under the assumption that they would defend "the proletariat." Krugman replied that he was "sure that there's a large literature" on government cronyism and corruption. Secure in his big-government ideology, he admitted that he had never read that literature. But like the ideologue that he is, Krugman then expressed his faith (the only word appropriate) that "bureaucracy will do a heckuva job" if it is not "downgraded and devalued." Bloggers responded by citing the latest economic science showing the impossibility of Krugman's "utopian dictatorship-by-bureaucracy."

Paul Krugman has spent his career as a pundit advocating that government bureaucrats and political process replace markets. He knows that there is a large literature that says that this is a bad idea. That literature is transparently relevant to Krugman's only policy proposal. And yet Krugman has not read it...and admits that he has not read it, without embarrassment.

By July, Krugman had lost his "Battle of the Blog." On July 23, Latrina commented, "Who is this Sean from Florida? He takes everything that [the] Professor [says] and shreds it, piece by piece. He shouldn't be allowed to post his comments on this blog since he seems to be winning all the debates. We progressives need to stick together and embellish our talking points without someone from the outside pointing out fallacies in our ideology."

Krugman had also had enough. On July 23, Krugman showed that he was clearly no longer "in love" with his commenters. Now he called them "ranters" and "trolls." On July 28, Krugman changed his comment moderation policy. Claiming that "ranters ... say the same thing every time," Krugman announced that he was going to throw away posts longer than "three inches." His thinking must have been thus: Three inches are sufficient to write "Krugman is brilliant," but not sufficient to present a documented and persuasive rebuttal to whichever of Krugman's standard arguments he was peddling that day.

Within 24 hours, those outside the Times had taken notice. Stephen Spruiell at the NRO noted the absurdity of Krugman's complaint that bloggers might use the same responses to rebut Krugman's repeated statements of the same ideology. Wrote Spruiell:


Quote:This [is] from the guy who has spent the entire summer rewriting the same blog post", Spruiell went on to point out that "Krugman's sycophants ... also say the same thing every time." "Krugman's policy seems geared to limit comments to "Yay Dr. K!" "Way to go!" "Keynes was right!" etc.

As indeed it has. Krugman's blog the day after the policy change had just six comments the last time I looked. "Hurray," said one. "Awesome!!" said another.

In his appearance on Sunday on "This Week," Krugman repeated his attack on Rogoff. He repeated his claim that he, a deflationista, "was right." Regulars could go to Krugman's blog and download the economic science that showed that Krugman was blowing smoke on "This Week," a gig that may pay Krugman more than even Enron.

And so after his ride back to Princeton, Krugman pulled the plug. He twice scolded "whiners," claiming that this blog under the New York Times masthead was "a personal not-for-pay venture." He claimed that he was burdened by needing to see if posts contained "obscenities" (none had, other than the "French" cited above). And he declared that he has "no obligation to provide" space for "ranters" and "whiners" who might rebut the ideology that he routinely markets.

Of course not. It is his blog. But it is newsworthy that after years of allowing 5,000-character responses consistent with Times policy, Krugman pulled the plug just as he was so obviously losing the debate. The academic world and the business world share something: They both view this as an admission of defeat.

Krugman is also "losing the audience." Eighteen months ago, Krugman's progressive ideology that was the consensus of the president, the House, the Senate, and not a few Republicans. Now, the Obama administration is evidently worried that it bought economic snake oil from Keynesians like Krugman. Even Ezra Klein is beginning to question the Keynesian economic models of Blinder and Zandi that "got it so wrong."

And so a six-month episode of enlightening economic debate has come to a close. Will Krugman respond to posts on other blogs? We do not know, but routinely in the past, he simply refuses to do so. He is clearly unable to do so, and, surrounded now sycophants and acolytes who tell him how brilliant he is, why should he even bother to try?

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"Falsehood flies, and truth comes limping after it" - Jonathan Swift, 1710
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#71
FYI: We Are Now in the Persistent Depression Predicted by Keynes.
Sanders 2020

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#72
mv Wrote:FYI: We Are Now in the Persistent Depression Predicted by Keynes.

Quote:According to both of us, the trade deficit is causing the economic recovery to stall.

That makes no sense to me. First off, what he is calling a 'trade deficit' is not true. It is just a 'trade imbalance'. Trade deficits are where imports are accepted with a promise to pay at a later time. There is a deficit there, because an equal exchange has not occurred.

His explanation doesn't mean much to me. Sorry.

Dr Walter Williams states in "Trade Deficits: Good or Bad?":

Quote:Professor Don Boudreaux, chairman of George Mason University's Economics Department, wrote "If Trade Surpluses Are So Great, the 1930s Should Have Been a Booming Decade" (www.cafehayek.com). According to data he found at the National Bureau of Economic Research's "Macrohistory Database", it turns out that the U.S. ran a trade surplus in nine of the 10 years of the Great Depression, with 1936 being the lone exception.

During those 10 years, we had a significant trade surplus, with exports totaling $26.05 billion and imports totaling only $21.13 billion. So what do trade surpluses during a depression and trade deficits during an economic boom prove, considering we've had trade deficits for most of our history? Professor Boudreaux says they prove absolutely nothing. Economies are far too complex to draw simplistic causal connections between trade deficits and surpluses and economic welfare and growth.

It is also worth noting that the Great Depression was in fact two depressions, back to back. By 1936 the US had come out of the first one(note the 'so called' trade deficit). However, due to predatory legislation, the economy was once again forced into the second phase of the Great Depression. So,........'so called' trade deficits are not bad for the economy, much less during a depression.
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"Falsehood flies, and truth comes limping after it" - Jonathan Swift, 1710
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#73
Great article by Douglass. Of course Krugman has always been easy to refute. A charlatan of his limited ability and over exaggerated claims is easy to put in his place. The only saving grace that has allowed his face to appear in the news is the complicit media genuflecting and praising him.
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#74
Quote:...That makes no sense to me. First off, what he is calling a 'trade deficit' is not true. It is just a 'trade imbalance'. ...

Trade deficit is probably a contributing factor, but not the main problem.

What is interesting to me is that the article may be predicting correctly the course the admin will take when it will become obvious that no recovery is occurring... trade tariffs and conflicting with China....perhaps toward the end of the year, since they will be afraid to rock the boat even further before the elections.

Now, how much will the tariffs help in an economy that has little manufacturing ability and is depressed already... I think short-term it will make things yet worse. May pay off in twenty years....
Sanders 2020

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#75
And from our friends at FEE(Foundation for Economic Education), the premier Austrian site, is this great expose on Keynes. Eventually common sense is going to prevail, and most people are going to finally realize that deficit spending, in an economic turn-down, is not economical.

This article is a bit longish, and should be consumed slowly. But it is well worth it, in that it is 'spot on'.

Quote:John Maynard Keynes, R.I.P.

by Richard B. McKenzie • October 2010 • Vol. 10/Issue 8


The late revered British economist John Maynard Keynes, whose 1936 treatise, The General Theory of Employment, Interest, and Money, changed the way many economists think about recessions, once wrote that “in the long run we’re all dead.” Well, maybe so . . . for everyone but Keynes.

Keynes’s ghost has haunted the halls of the Bush II and Obama administrations, where various “stimulus” packages were concocted. The Keynesian arguments undergirding the fiscal stimulus froth over the past two years went remarkably unrecognized in the media for their one-sidedness. The basic stimulus argument goes something like this: If the federal government engages in deficit spending during a recession, the added government expenditures (unaccompanied by tax increases) will boost “aggregate demand.” Greater federal spending on a road, for instance, will create jobs for construction workers, who can be expected to spend some if not all of their additional income on, say, bread. Bakers now will have more to spend on, say, cars and so on.

National income stimulated by the initial government road project can grow by some multiple of the expenditure, the theory says. It can even be wasted on pork-barrel construction projects like bridges to nowhere, according to Keynes. He even dared to advocate that the government bury dollars in bottles. Entrepreneurs could then be expected to spend money digging up the bottles, unleashing the multiplier magic and reducing unemployment (in the same illusory way).

A stimulus package (and budget deficit) of, say, $1 trillion would morph in short order, stimulus backers have assured us, into a minimum of $1.5 trillion in additional national income—maybe even into $4 trillion or $10 trillion. Pick your multiplier, because no one in Washington or academe really knows what it is. Even the best of econometricians can’t accurately assess the multiplier when the current crisis is “unprecedented,” as widely claimed.

Fantastic, wouldn’t you agree? Keynesianism offers the proverbial free lunch several times over.

But if it sounds too good to be true, it is. If such income growth were possible, the country and the world would now be awash in prosperity, given that the federal government increased the national debt by $1.88 trillion in fiscal 2009 and could run deficits of $1.6 trillion and $1.3 trillion in fiscal 2010 and 2011, respectively. Between 2012 and 2015 it will add at least another $3 trillion to the national debt. Why not go for even greater deficit spending, if Keynesian theory worked so magically? Of course, many Keynesian enthusiasts have recommended stimulus packages two and three times what the Bush and Obama administrations sought two and three years ago, with little to no recognition that an escalation in the size of the deficit can, at least beyond some point, curb any multiplier effect (if there were the prospects of a positive one) as the budget deficit rises and crowds out expenditures in private sectors of the economy.

In the 1960s Keynesianism was followed as fiscal religion, but by the 1970s economists found it to be a snare and delusion for a simple reason: The political version of Keynesianism is a one-sided theory, with almost total emphasis on what the federal government spends. It pays virtually no attention to the potential private-sector offsets to the greater deficit spending by government or to how current fiscal policies could have negative long-run real income effects that can feed the current generation’s expectations of impaired futures. Keynesianism, in the form practiced in political circles, has no appreciation for how people’s expectations can affect their current spending and investing plans.

The late great economist Milton Friedman frequently peppered Keynesian enthusiasts in the 1960s and 1970s with a remarkably simple question that needs to be remembered today: Where does the government get the money it spends on roads (or bridges to nowhere)? Friedman followed with an equally revealing observation: When the government engages in deficit spending, it must borrow the extra funds from someone who could have spent them on private-sector projects. An increase in government spending could be totally offset by a decrease in—or a “crowding out” of—private spending, as lendable funds are diverted from private to government uses. The net effect can be no net increase in aggregate demand—and no multiplier effect. Indeed, with the inevitable waste in government stimulus projects, the multiplier effect could as easily be negative as positive.

Okay, in a down economy some of the funds the government borrows to cover stimulus expenditures might have remained idle, which can mean that the increase in government spending is not totally offset. But Friedman still has a point: The multiplier effect of greater government spending will be muted at least somewhat and maybe in large measure. Commentators who tout the glories of stimulus packages and bemoan the difficulty that small and large businesses and consumers have been having in finding credit never seem to make the causal connection that government borrowing can dry up, and has dried up, credit for nongovernmental purposes. Why should banks loan their available funds to people for risky private projects when they can loan their funds at little risk to the government, with 300-million-plus Americans it can tax to cover the debt?


The Piper Don’t Take Visa

Keynesian policy advocates rightfully assume that if the government hikes taxes along with expenditures, the stimulus effects of the added government spending will be seriously muted, maybe negated. The problem is that American taxpayers aren’t the fools the Keynesian advocates would like to think they are. With the potential of a doubling of the national debt over the next ten years, many not-so-stupid Americans can anticipate that the fiscal piper will have to be paid in the future—with higher tax rates on future incomes. The anticipation today of those higher future tax rates can dampen private demand, as people set aside savings for future higher tax payments and as they refrain from making all the investments that can translate into higher future incomes—which will be taxed at higher future rates. And higher tax rates imposed currently on the rich can affect many now poor Americans’ saving and investment plans because they expect to be not-so-poor, and maybe rich, in the future. In short, the anticipated future tax rates will be another offset to today’s stimulus expenditures.

Then you have the threat of future inflation from today’s fiscal profligacy. The anticipated higher inflation is seen as a wealth tax. If the government has little debt, it gains little by hiking the inflation rate to lower the real value of its debt. However, when the debt grows to enormous levels, as already budgeted, the government’s temptation to inflate away its own debt—and the wealth of bond holders—grows concomitantly. And we must not forget the lessons learned in the inflationary 1970s: Inflation, and inflationary expectations, can have debilitating effects on the real economy—in people’s real income and real income expectations and, thus, on current demand.

Of course, if debt holders begin to worry that the real value of their debt will depreciate due to any future orchestrated government inflationary policy, all those foreign bondholders—most notably, the Chinese and British—might lose confidence in the international value of the dollar, which can cause them to dump their dollar-denominated bonds on international money markets, which in turn can lead to a deterioration in the international value of the dollar and to a reduction in the real incomes of Americans across the board—and to contraction in private demand, yet another offset to government stimulus spending.


Perverse Politics

Even if Keynesianism had validity, we would still have to worry that the politics of the day would pervert the goal of reviving the economy as politicians fall over themselves to pack “stimulus packages” with pork, designed mainly to stimulate the private economies of their supporters and not the national economy. (Indeed, that is what happened). As economists James Buchanan and Richard Wagner argued long ago, Keynesian economics provides a grand excuse for politicians to do what they love to do: spend other people’s money without having to incur the current political costs of asking them to cover the expenditures with higher taxes. Make no mistake about it, Keynesianism has the potential of transforming the United States in the not-too-distant future into a financial basket case much like Greece, Spain, and Ireland are today.

The Keynesian recovery prescription never gets sillier than when, as noted, advocates claim that the economic merit of the funded government projects is of little consequence. What counts for them is more spending. That couldn’t possibly be true, given Keynesian insistence that private aggregate demand is inextricably tied to aggregate real income. If a bridge to nowhere is built, the bridge is obviously of no economic value, which means it adds nothing to national income. Its construction must draw resources at least some (if not all) of which could have been used to produce something of real value to people. Bridges to nowhere can only undermine any potential Keynesian multiplier effect. If anything, bridges to nowhere must have a negative multiplier effect through the effect of the impairment of long-term income growth over time through the depression of aggregate demand.

But Keynes and his followers failed to appreciate the extent to which the long-run effects of short-run policies can affect people’s wealth and income expectations, which in turn can undermine their current buying decisions. If people’s expected future incomes and wealth holdings are reduced (from what they would otherwise be), then surely Keynesians would, for the sake of consistency in argument, have to conclude that current private consumption and investment demand would also be suppressed, which would partially negate the so-called stimulus packages.

Finally, when a national economy gets seriously out of whack as happened over the last decade—with housing prices rising to unsustainable levels because of an unsustainable credit binge, with the rising housing prices fueling the demand for big-ticket consumer goods as homeowners used their houses as ATMs—then the only route to recovery is a painful one, with falling housing prices, lost jobs, and foreclosed homes. Ownership of houses, office buildings, and plants must be shifted from those who can no longer afford them to those who can afford them and can use them productively and profitably at the lower prices.

So much of what the government has done under the guise of stimulating the economy has been directed at retarding the required adjustments—and therefore preventing the recovery. The government has worked hard to prevent housing prices from falling as far as they must by offering tax credits to first-time homebuyers and slowing the pace of home foreclosures. The Cash for Clunkers program has been a policy clunker in itself, given that it caused a minor boom and bust in automobile sales, just as the homebuyer tax credit distorted sales of houses over time. These are hardly the kinds of stabilizing forces the economy needs in times of instability.

Then, of course, the federal government has chosen to fight the devastating consequences of the private credit binge of the last decade with a credit binge of its own (with nearly one out of every two recent budget dollars financed with debt, or leverage). If the private credit binge gave rise to the moral hazard of excessive risk-taking in the private sector (by banks, nonbanks, homeowners, and credit card holders), should anyone not expect the same excessive risk taking in the political sphere when the government heavily leverages its current spending? Such risk-taking shows up in the government’s adopting the mantra of Keynesian stimulus economics even when it has little promise of yielding the results promised and carries the nontrivial risk of damaging the future growth path of the private economy.

Given all the Keynesian hype over the past two to three years, one fact stands out: The recovery has been weaker than what would have been expected from the promises of Keynes’s devotees.

Nevertheless, a recovery (at this writing) appears underway, albeit more delayed than past recoveries. But, as argued here, everyone should harbor deep skepticism that the current weak signs of recovery can be traced to the stimulus packages of the last couple of years, especially since the rate at which displaced workers have been finding new jobs has been the most sluggish of all recessions since World War II. This is partially because government policies have gradually increased the long-term costs of firms hiring workers, with the most recent imposed burden being the effective nationalization of health care and health insurance.

Think the analysis here is pie-in-the-sky theory? Well, Harvard macroeconomist Robert Barro has estimated that the five-year effects of $600 billion in fiscal stimulus over the past two years will come at a cost of $900 billion in reduced private demand. That’s hardly the free lunch the country has been promised.

The Obama administration has not been shy in its first year about floating a variety of tax-hike proposals, supposedly for higher-income groups. And the expected federal budget deficits harbor threats of major future tax increases, as a growing list of researchers are finding. For example, the Congressional Budget Office projects that under current law (with marginal income tax rates unchanged), the national debt will almost double, rising by more than $11 trillion, between 2009 and 2020. Researchers at the Tax Policy Center figure, optimistically, that if the annual deficits are reduced to 2 percent of GDP between now and 2020 and if all tax rates are raised proportionately for all income groups, the lowest federal income marginal tax rate would have to rise from 10 to 15 percent and the highest marginal rate would have to rise from 35 percent to 52 percent. If the deficit were lowered only by raising the top two marginal tax rates, now 33 and 35 percent, those top rates would have to go 86 and 91 percent—which of course might actually worsen the deficits, given that the current “rich” and the “rich-wannabes” would have little incentive to work, save, and invest.

The country will learn anew an old lesson: Don’t count on the federal government to wave away the country’s economic troubles with some refurbished fiscal wand. The wand didn’t work in the 1960s and 1970s (it only contributed to “stagflation”). The wand is an illusion that should have died with Keynes long ago. We will also relearn the oft-repeated wisdom of Keynes when he wrote, “Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”

How true, how true! Regrettably.

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"Falsehood flies, and truth comes limping after it" - Jonathan Swift, 1710
Reply
#76
Here's more Keynesian foolishness.

Quote:Most Wall Street analysts expect the Fed to decide, at its meeting in early November, to resume the debt-buying strategy known as quantitative easing, in which the Federal Reserve would purchase Treasury securities to make borrowing cheaper. But while that outcome is possible, it is not certain, according to minutes of the Fed’s last policy meeting, which the central bank released Tuesday.

What this means is that the Fed is quickly printing money, in order to help pay off the quickly burgeoning debt.

As usual Sheldon Richman is on top of this mistake.

Quote:Inflation as Income Distribution

by Sheldon Richman

Sheldon Richman is the editor of The Freeman and “In brief,” and author of “Fascism” in The Concise Encyclopedia of Economics.

The Federal Reserve has been pumping hundreds of billions of newly created dollars into “the economy.” Much of that money has been sent to Wall Street to bailout large, struggling firms. But that’s just the beginning. President-elect Obama says that since he needs to “stimulate the economy” we can look forward to trillion-dollar budget deficits for years to come. Even before the financial turmoil began, the deficit had approached $500 billion. (Not to worry, though–Obama says deficit spending will impose “fiscal discipline” in the future.)

Of course, when the federal government spends more than it taxes, it has to get the extra money somewhere. Therein lies the treachery. The government’s vendors and other beneficiaries demand to be paid on time. So it borrows from the credit markets by selling Treasury securities to investors. The Federal Reserve in turn monetizes the debt by buying Treasury securities in the marketplace. It pays for those securities by creating bank reserves–money–from nothing, or as John Maynard Keynes suggested, by performing the “miracle … of turning stone into bread.”

Since we, like the rest of the world, have long lived with a fiat-money system–that is, a system in which the paper money is not backed by anything–there is nothing remarkable about this for most people (if they are aware of the procedure at all). But before long, they will pay a steep price whether or not they know who the culprit is.

The central bank’s expansion of money and credit used to be called inflation. Today that word is used mostly for one of the consequences of monetary expansion: generally rising prices. That’s unfortunate because that definition papers over the most important effects of deficit spending and monetary inflation.

To think of inflation as generally rising prices is to miss the real point. If an increase in the money simply raised the “price level” uniformly, it would be little more than an inconvenience. Prices might outrun wages at first, reducing real incomes, but soon wages would catch up and, in real terms, we’d be back where we started. The dollar values would larger, but without real consequence.

That’s not how it works, though. Ludwig von Mises explained the process in a lecture he gave in Paris in 1938 and again in New York in 1945. It was later published under the title “The Non-Neutrality of Money.” (It appears in Money, Method, and the Market Process: Essays by Ludwig von Mises, edited by Richard M. Ebeling.)

Barter Economy


In this lecture Mises was determined to disabuse his listeners of their belief in the neutrality of money–that is, the idea that changes in the money supply leave real factors undisturbed. He understood why economists have held this erroneous belief. They began thinking of exchange in the admittedly simplified terms of a barter economy in which goods exchange for other goods. When they added money to this unrealistic picture, they assumed nothing of importance changed. As Mises put it, they believed “The functioning of the market mechanism as demonstrated by the concept of pure barter was not affected by monetary factors.”

These economists acknowledged that money prices can vary, but “they believed–and this is exactly the essence of the fallacy of money’s neutrality–that these changes in purchasing power were brought about simultaneously in the whole market and that they affected all commodities to the same extent.” Thus according to this view, the price level changes, but relative prices do not.

Here’s the problem. There really is no price level, except for ones constructed by averaging the prices of an arbitrary basket of goods and services. What really exist–and therefore what really count–are millions of prices for goods and services that are constantly subject to change in relation to one another. These prices emerge from the decisions of potential buyers and sellers who pursue their ends according to their subjective priorities.

You’d hardly know this by reading mainstream economics, but economic phenomena happen on the ground–where human action and interaction take place–and not at the level of statistical aggregates and averages that no real person ever encounters..

“Monetary problems are economic problems and have to be dealt with in the same way as all other economic problems,” Mises continued. He meant that when analyzing inflation and other monetary issues, our focus should not be “the economy” holistically conceived. As he put it, “Changes in the quantity of money and in the demand for money for cash holding do not occur in the economic system as a whole if they do not occur in the households of individuals. These changes in the households of individuals never occur for all individuals at the same time and to the same degree and they therefore never affect their judgments of value to the same extent and at the same time.”

In the economists’ lingo, macroeconomics is, or should be, rooted in microeconomics.


Inflation and Its Consequences

Take inflation. When the government expands the supply of money, it does not do so by dropping Federal Reserve notes evenly across the land from the proverbial helicopter. In the old days government would print money or filch precious metals to make coins, then spend the money as it liked. A few select people received the money first, and they could then enter the market and buy what they liked at prices still unaffected by the inflation. the late receivers were the losers.

These days the process is more complicated. The Treasury borrows money from private lenders by selling securities. With that cash it pays contractors and welfare-state beneficiaries. Meanwhile, the Federal Reserve creates money in the form of bank reserves by buying government securities. It’s called monetizing the debt. Banks then pyramid loans on these new reserves, expanding the money supply and lowering interest rates. Among the consequences is the depreciation of the monetary unit (rising prices) and the boom-bust trade cycle described by Mises and F.A. Hayek. (Hayek won his Nobel Prize in 1974 partly for his work on the trade cycle.).

Whichever method is used, the point is that the newly created money enters the economy at specific points rather than blanketing society evenly. The result is a diversion of the economy from the path it would have taken in the absence of the disturbance. A new pattern emerges the details of which cannot be predicted. Why not? Because people are people not robots. If your cash balance doubled tomorrow you wouldn’t mechanically double the quantities of everything you buy now . Instead, you would change the proportions–buy more of this and less of that–and even buy things you don’t buy today. You yourself can’t predict exactly what you would do in these circumstances.

“The additional quantity of money does not find its way at first into the pockets of all individuals; not every individual of those benefited first gets the same amount and not every individual reacts to the same additional quantity in the same way…,” Mises summed up. “The additional amount of money offered by them on the market makes prices and wages go up. But not all the prices and wages rise, and those which do rise do not rise to the same degree.”

Income Distribution


Now things get interesting. We begin to see that inflation is a form of government distribution of income. (I don’t say “redistribution” because in a true market economy income is not distributed but rather acquired through exchange.)

“If [for instance] the additional money is spent for military purposes,” Mises wrote, “the prices of some commodities only and the wages of only some kinds of labor rise, others remain unchanged or may even temporarily fall. They may fall because there are now on the market some groups of men whose incomes have not risen but who nevertheless are obliged to pay more for some commodities, namely for those asked by the men first benefited by the inflation. Thus, price changes which are the result of the inflation start with some commodities and services only, and are diffused more or less slowly from one group to the others. It takes time till the additional quantity of money has exhausted all its price changing possibilities.”

Make no mistake about it. This is a government-engineered transfer of resources, that is, a violation of property rights. And by the way, the distribution is not from rich to poor. If anything, the distribution is upwards.

As Mises explained, “But even in the end the different commodities are not affected to the same extent. The process of progressive depreciation has changed the income and the wealth of the different social groups. As long as this depreciation is still going on, as long as the additional quantity of money has not yet exhausted all its possibilities of influencing prices, as long as there are still prices left unchanged at all or not yet changed to the extent that they will be, there are in the community some groups favored and some at a disadvantage…. As long as the inflation is in progress, there is a perpetual shift in income and wealth from some social group, to other social groups.”

We have seen that government expansion of the money supply rearranges resources in society and interferes with the market’s natural tendency to serve consumers according to their own priorities. Thus inflation would be objectionable even if it did not cause malinvestment and seed the ground for a subsequent depression, that is, even if it did not spawn the trade cycle.

It is incumbent on the inflationists–specifically, the incoming government officials–to explain why income distribution is a proper function of government.

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"Falsehood flies, and truth comes limping after it" - Jonathan Swift, 1710
Reply
#77
It looks like more than Americans are wishing that little ferret faced fellow, masquarading as an economist, would just STFU.

Will someone please shut Krugman up
___________________________________________________________________________________________________
"Falsehood flies, and truth comes limping after it" - Jonathan Swift, 1710
Reply
#78
It looks like more than Americans are wishing that little ferret faced fellow, masquarading as an economist, would just STFU.

Will someone please shut Krugman up
___________________________________________________________________________________________________
"Falsehood flies, and truth comes limping after it" - Jonathan Swift, 1710
Reply
#79
John L Wrote:It looks like more than Americans are wishing that little ferret faced fellow, masquarading as an economist, would just STFU.

What's the point John? I used to read him fairly often to figure out what the other side was thinking ... what the talking points du jour would be. But frankly, I doubt that he has much of an audience anymore. His articles have taken on a cartoonish Zippy Pinhead quality that I doubt that anybody (on any point in the econo-political spectrum) can glean much value from.

... I wonder if he paid cash for his vacation home in the Caribbean? My bet is that he doesn't drink his own Kool-Aid when it come to his own personal finances. For a guy that worships debt as a religion, it would be interesting to see how much skin he actually has in the game. A 'real' inflationary disciple would be mortgaged to the hilt.

I had a friend that worked in Chile during a major devaluation. He said it was common practice to walk down to the corner store in the evening and buy a pack of gum, or something ... anything ... just to ensure you wouldn't be stuck with any money the next morning. So the question is ... do ya think Dr. _Rugman's pockets jingle anymore? :?
"Democracy is the theory that the common people know what they want and deserve to get it good and hard."
-- Henry Mencken
Reply
#80
John L Wrote:It looks like more than Americans are wishing that little ferret faced fellow, masquarading as an economist, would just STFU.

What's the point John? I used to read him fairly often to figure out what the other side was thinking ... what the talking points du jour would be. But frankly, I doubt that he has much of an audience anymore. His articles have taken on a cartoonish Zippy Pinhead quality that I doubt that anybody (on any point in the econo-political spectrum) can glean much value from.

... I wonder if he paid cash for his vacation home in the Caribbean? My bet is that he doesn't drink his own Kool-Aid when it come to his own personal finances. For a guy that worships debt as a religion, it would be interesting to see how much skin he actually has in the game. A 'real' inflationary disciple would be mortgaged to the hilt.

I had a friend that worked in Chile during a major devaluation. He said it was common practice to walk down to the corner store in the evening and buy a pack of gum, or something ... anything ... just to ensure you wouldn't be stuck with any money the next morning. So the question is ... do ya think Dr. _Rugman's pockets jingle anymore? :?
"Democracy is the theory that the common people know what they want and deserve to get it good and hard."
-- Henry Mencken
Reply


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