The Problem With keynesian economics

[Polk]

What planet are you living on? Spending wasn't "massively downsized" after the Second World War. It was lower than during the war, but it was way higher than it was pre-war. Same thing with taxes. The top tax bracket in 1940 paid 81.1%. The top tax bracket wouldn't drop below that level again until 1964.

Strangely enough, the bottom tax bracket was a lot higher then also. The reason for that is actually quite simple, the top tax bracket is never the main source of government revenue. If you want higher taxes at least be honest about it and admit you want to tax the middle class so you can pay for all of your pet programs.

I'll freely admit that keeping all existing programs at their current levels of service will require tax increases across the board. Both parties are too cowardly to admit that though.

 

[Polk]

Recessions are not defined by employment.

You're right, but employment is a pretty strong indicator of overall economic health. Recessions are defined by falling GDP. So what happened to GDP during the Depression? On the upswing from March of 1933 to May of 1937. Spending restraint kicks the economy back in to recession from May of 1937 to June of 1938. From there, the economy grows every month until February of 1945.

Giving FDR credit for economy growth because the FED started putting back the money siphoned off of the US economy is silly.

The FDR Depression was worse than the 7 Biblical Lean Years and a total central planning fail

The Fed wasn't an important player. Leaving the gold standard was the real key.

 

[Polk]

. The housing bubble was caused by the easy money policies of Alan Greenspan. Last time I checked, Greenspan is a Republican.

he was a libertarian but was not acting like one!!! Easy money is a long standing liberal policy dating back to the Cross of Gold Speech. Easy money favors the little guy debtor or so the theory goes. Bernie Sanders for example is very vocal now about using the Fed to inflate the currency and employment numbers

You know who really likes easy money? Incumbent politicians, because it greases the wheels of their reelection bids. And money always got a little looser around election time when Greenspan was running the Fed and Republicans were in the White House (and before you call that paranoid, there is empirical data to support it).

 

[Truthseeker420]

The Basic Premise of Keynesian economics is that you Spend money when the Economy is Down to Stimulate it, Then Make cuts when the Economy is up.

It's 2 Sides of a Coin. The Problem is the Keynesian are only Keynesian when the Economy is down. When it is Up they forget about the Rules of Keynesian Economics and Continue to Spend more than we have instead of Making cuts.

We never cut

I would hardly call Bush and the Republican congress, that took over a good economy and crashed it, "Keynesian".

True Keynesian economist Paul Krugman was very critical of Bush spending.

 

[itfitzme]

If we are to speak of Keynesian economics, then we are talking about fiscal multipliers. I have found a number of references that cover them fairly well. It would be nice to find something a little less technical, as an introduction.

The idea behind fiscal multipliers is that a reduction in taxes or an increase in government spending results in an increase in GDP that is some multiplier of the tax reduction or spending increase itself. The multiplier may range from less than negative one to greater then positive one. The exact value of the multiplier depends on the type and economic conditions.

A key to understanding the fiscal multipliers is that it is the change in taxes or spending that has a multiplier effect, not the absolute level. As well, the multiplier has an initial impact that dies off with time. In theory, given the appropriate set of conditions, the upward multiplier can be greater than one while a following downward multiplier can be less than one. Done right, in theory, they can be used to ratchet up the economy. Of course, as with many things, actual practice is much messier than in theory.

Simple government spending isn't Keynesian nor does in include a fiscal multiplier. A ramp up in defense spending may be done in response to some threat to national defense, and while it will have some fiscal multiplier associated with it, this doesn't mean it was done for the purpose of the multiplier effect. All the fiscal multiplier says is that there is an effect because the economy is a closed loop feedback system with gain. The fiscal multipliers are simply the gain. And there is nothing unusual about this. Nature, and especially engineering, is dependent upon feedback systems with gain. The interesting thing about the economy, and not terribly surprising, is that the complexity results in a gain that changes.

The best way to look at government spending is on a per capita, real dollar basis.

What is notable is that the real dollar, per capita spending began increasing in about 2001.

That spending has multiple purposes and effects. One is simply that it is a percentage of the total GDP, circulating funds around the loop. In the process, it provides necessary services, investment in common goods. In other cases, it seems more like busy work. With the US able to produce all the food necessary for the population with 2% of the work force, and everyone needs to work to buy food. Some of government seems to just keep it all moving. It is hard to tell how much of defense spending is providing an absolutely necessary level of preparedness and how much is just busy work. In terms of a jobs program, it's pretty good. Some of it is simply care-taking, caring for the disabled and elderly. Some of the spending, the continuous increase in real dollar per capita, fits with the fiscal multiplier, a continuous stimulus over years and years.

We shouldn't confuse the fiscal multipliers with all government spending. All government spending is not Keynesian.

The following presentations on fiscal policy and multipliers provides a nice summary

Fiscal Policy Decisions Top 5 Concepts
http://academic.kellogg.edu/mckayg/macro/presentations/MacroPresentation11top5revised.ppt

"This unit discusses the use of fiscal policy tools or levers (basically Keynesian ideas) to restore the economy to full employment. Recessions and inflationary periods are examined. Also discussed are some of the problems associated with focusing only on demand. The following research articles tabulate the fiscal multipliers under varying economic conditions."

This presentation goes over the macro economic theory of fiscal policy tools in changing aggregate demand.

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Fiscal Policy
http://www.markville.ss.yrdsb.edu.on.ca/economics/Fiscal Policy ppt(1).ppt

I haven't read this one but include it for comparison.

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Below are three research papers that I've been able to find. The first is a good overview of fiscal multipliers under varying conditions. The second is a very specific examination of the effect of military spending increases on local regions. The third article examines the effects of multipliers in a very technical analysis. Personally, it is the general form of the response presented on page 31 that provides the most useful "executive summary" information. The rest is a real groaner. I generally read the introduction, a bit into the body, the conclusion, and what tables and graphs I can make sense of.

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IMF Fiscal Multipliers
http://www.imf.org/external/pubs/ft/spn/2009/spn0911.pdf

"What determines the size of the multipliers?
The size of the multiplier is larger if: a) “leakages” are few (i.e., only a small part of the stimulus is saved or spent on imports), b) the monetary conditions are accommodative (i.e., the interest rate does not increase as a consequence of the fiscal expansion), and c) the country’s fiscal position after the stimulus is sustainable."

"Can the fiscal multiplier be negative?
Yes, fiscal expansions can be contractionary if they decrease consumers’ and investors’ confidence, especially if the fiscal expansion raises, or reinforces, fiscal sustainability concerns."

"What is the size of the fiscal multiplier?
The size of the fiscal multiplier is country-, time-, and circumstance-specific. In the March 2009 IMF staff note prepared for the G-20 Ministerial Meeting, a range of multipliers was used. The low set of multipliers included 0.3 on revenue, 0.5 on capital spending, and 0.3 on other spending. The high set of multipliers included 0.6 on revenue, 1.8 on capital spending, and 1 for other spending. Cross-country VAR estimates of fiscal multipliers in LICs range from negative to 0.5, in part because of higher fiscal sustainability concerns in LICs. However, these estimates can be downward biased because the lack of accurate data leads to attenuation bias. The table below provides a detailed survey of the estimated multipliers."

"Which multipliers should be used in specific applications and projections?
Fiscal multipliers have been calculated for some countries but should be carefully reexamined in light of the current events. The table below summarizes estimates of multipliers, mostly for advanced countries. Country circumstances, however, should be taken into account in arriving at the multiplier for a specific country. The factors mentioned at the beginning should be considered.
A rule of thumb is a multiplier (using the definition ∆Y/∆G and assuming a constant interest rate) of 1.5 to 1 for spending multipliers in large countries, 1 to 0.5 for medium sized countries, and 0.5 or less for small open countries. Smaller multipliers (about half of the above values) are likely for revenue and transfers while slightly larger multipliers might be expected from investment spending. Negative multipliers are possible, especially if the fiscal stimulus weakens (or is perceived to weaken) fiscal sustainability.

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Fiscal Stimulus in a Monetary Union Evidence from US Regions
http://www.columbia.edu/~en2198/papers/fiscal.pdf

"We use rich historical data on military procurement spending across U.S. regions to estimate the effects of government spending in a monetary union. Aggregate military build-ups and draw-downs have differential effects across regions. We use this variation to estimate an \open economy relative multiplier" of approximately 1.5. We develop a framework for interpreting this estimate and relating it to estimates of the standard closed economy aggregate multiplier. The closed economy aggregate multiplier is highly sensitive to how strongly aggregate monetary and tax policy \leans against the wind." In contrast, our estimate \differences out" these effects because different regions in the union share a common monetary and tax policy. Our estimate provides evidence in favor of models in which demand shocks can have large effects on output."

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MEASURING THE OUTPUT RESPONSES TO FISCAL POLICY
http://emlab.berkeley.edu/~auerbach/measuringtheoutput.pdf

"A key issue in current research and policy is the size of fiscal multipliers when the economy is in recession. We provide three insights. First, using regime-switching models, we find large differences in the size of spending multipliers in recessions and expansions with fiscal policy being considerably more effective in recessions than in expansions. Second, we estimate multipliers for more disaggregate spending variables which behave differently relative to aggregate fiscal policy shocks, with military spending having the largest multiplier. Third, we show that controlling for predictable components of fiscal shocks tends to increase the size of the multipliers in recessions."

 

[regent]

During the GD, increasing Government expenditures were only weakly correlated with decreases in unemployment. .

Here's what Henry Morgenthau, FDR's Secretary of the Treasury (the man who desperately needed the New Deal to succeed as much as Roosevelt) said about the New Deal stimulus: "We have tried spending money.We are spending more than we ever have spent before and it does not work... We have never made good on our promises...I say after eight years of this administration we have just as much unemployment as when we started... And an enormous debt to boot!"

"The New Republic"( at the time a FDR greatest supporter") noted. In June 1939, the federal public works programs still supported almost 19 million people, nearly 15% of the population" [page 313]


In fact in 1939, unemployment was at 17%, and there were 11 million additional in stimulus make work welfare jobs. Today when the population is 2.5 times greater we have only 8 million unemployed. Conclusion: legislation to make Democrats illegal
is urgently needed

You do realize Morgenthau was a right-wing hard money type, right? Of course you don't.

Morganthau was also a Republican, a friend of FDR; his expertise may not have been in finance, perhaps agriculture. As for Keynes it's all we have and it has never really been done correctly, as the OP said it is easy to borrow but not pay back. We tried the austerity route and again as many point out would you spend more money if you had just lost your job, a false analogy but it works with the less fortunate. It worked with FDR in the beginning, Morganthau to the end.
Is it possible to work out a prevention and/or a cure for the business cycles or will politics always prevent a solution?

 

[itfitzme]

You know who really likes easy money? Incumbent politicians, because it greases the wheels of their reelection bids. And money always got a little looser around election time when Greenspan was running the Fed and Republicans were in the White House (and before you call that paranoid, there is empirical data to support it).

I love empirical evidence that supports such ideas. What do you have?

 

[Quantum Windbag]

What planet are you living on? Spending wasn't "massively downsized" after the Second World War. It was lower than during the war, but it was way higher than it was pre-war. Same thing with taxes. The top tax bracket in 1940 paid 81.1%. The top tax bracket wouldn't drop below that level again until 1964.

Strangely enough, the bottom tax bracket was a lot higher then also. The reason for that is actually quite simple, the top tax bracket is never the main source of government revenue. If you want higher taxes at least be honest about it and admit you want to tax the middle class so you can pay for all of your pet programs.

I'll freely admit that keeping all existing programs at their current levels of service will require tax increases across the board. Both parties are too cowardly to admit that though.

The first thing we need to do is establish what the frack you are talking about. What, exactly, do you mean by "all existing programs?"

 

[Quantum Windbag]

. The housing bubble was caused by the easy money policies of Alan Greenspan. Last time I checked, Greenspan is a Republican.

he was a libertarian but was not acting like one!!! Easy money is a long standing liberal policy dating back to the Cross of Gold Speech. Easy money favors the little guy debtor or so the theory goes. Bernie Sanders for example is very vocal now about using the Fed to inflate the currency and employment numbers

You know who really likes easy money? Incumbent politicians, because it greases the wheels of their reelection bids. And money always got a little looser around election time when Greenspan was running the Fed and Republicans were in the White House (and before you call that paranoid, there is empirical data to support it).

If it were that simple money would be loose right now. All the signs indicate that it is actually tight.

 

[Quantum Windbag]

The Basic Premise of Keynesian economics is that you Spend money when the Economy is Down to Stimulate it, Then Make cuts when the Economy is up.

It's 2 Sides of a Coin. The Problem is the Keynesian are only Keynesian when the Economy is down. When it is Up they forget about the Rules of Keynesian Economics and Continue to Spend more than we have instead of Making cuts.

We never cut

I would hardly call Bush and the Republican congress, that took over a good economy and crashed it, "Keynesian".

True Keynesian economist Paul Krugman was very critical of Bush spending.

If Krugman is a true Keynesian than Bush is a communist.

 

[DSGE]

he was a libertarian but was not acting like one!!! Easy money is a long standing liberal policy dating back to the Cross of Gold Speech. Easy money favors the little guy debtor or so the theory goes. Bernie Sanders for example is very vocal now about using the Fed to inflate the currency and employment numbers

You know who really likes easy money? Incumbent politicians, because it greases the wheels of their reelection bids. And money always got a little looser around election time when Greenspan was running the Fed and Republicans were in the White House (and before you call that paranoid, there is empirical data to support it).

If it were that simple money would be loose right now. All the signs indicate that it is actually tight.

Does this mean we have another market monetarist in our midst?

 

[Polk]

Strangely enough, the bottom tax bracket was a lot higher then also. The reason for that is actually quite simple, the top tax bracket is never the main source of government revenue. If you want higher taxes at least be honest about it and admit you want to tax the middle class so you can pay for all of your pet programs.

I'll freely admit that keeping all existing programs at their current levels of service will require tax increases across the board. Both parties are too cowardly to admit that though.

The first thing we need to do is establish what the frack you are talking about. What, exactly, do you mean by "all existing programs?"

As in, programs that exist under current law.

 

[Polk]

he was a libertarian but was not acting like one!!! Easy money is a long standing liberal policy dating back to the Cross of Gold Speech. Easy money favors the little guy debtor or so the theory goes. Bernie Sanders for example is very vocal now about using the Fed to inflate the currency and employment numbers

You know who really likes easy money? Incumbent politicians, because it greases the wheels of their reelection bids. And money always got a little looser around election time when Greenspan was running the Fed and Republicans were in the White House (and before you call that paranoid, there is empirical data to support it).

If it were that simple money would be loose right now. All the signs indicate that it is actually tight.

Guess you missed the part about Republicans being in the White House. People tend to not do things that'll aid their opponent and Big Ben is no exception (or he may just be comically stupid).

 

[Quantum Windbag]

I'll freely admit that keeping all existing programs at their current levels of service will require tax increases across the board. Both parties are too cowardly to admit that though.

The first thing we need to do is establish what the frack you are talking about. What, exactly, do you mean by "all existing programs?"

As in, programs that exist under current law.

You support everything the government is currently doing?


Are you fracking insane?

 

[Quantum Windbag]

You know who really likes easy money? Incumbent politicians, because it greases the wheels of their reelection bids. And money always got a little looser around election time when Greenspan was running the Fed and Republicans were in the White House (and before you call that paranoid, there is empirical data to support it).

If it were that simple money would be loose right now. All the signs indicate that it is actually tight.

Guess you missed the part about Republicans being in the White House. People tend to not do things that'll aid their opponent and Big Ben is no exception (or he may just be comically stupid).

I guess you missed the part about Clinton getting reelected because Greenspan kept the money loose. I guess you also missed the part where Greenspan is not currently running the fed.

 

[Polk]

If it were that simple money would be loose right now. All the signs indicate that it is actually tight.

Guess you missed the part about Republicans being in the White House. People tend to not do things that'll aid their opponent and Big Ben is no exception (or he may just be comically stupid).

I guess you missed the part about Clinton getting reelected because Greenspan kept the money loose. I guess you also missed the part where Greenspan is not currently running the fed.

Bernanke and Greenspan are both Republicans. No change in ideological makeup. Money was loose in 1996 because Greenspan blackmailed Clinton threatening to raise rates if Clinton didn't cave to his demands on the budget.

 

[Quantum Windbag]

Guess you missed the part about Republicans being in the White House. People tend to not do things that'll aid their opponent and Big Ben is no exception (or he may just be comically stupid).

I guess you missed the part about Clinton getting reelected because Greenspan kept the money loose. I guess you also missed the part where Greenspan is not currently running the fed.

Bernanke and Greenspan are both Republicans. No change in ideological makeup. Money was loose in 1996 because Greenspan blackmailed Clinton threatening to raise rates if Clinton didn't cave to his demands on the budget.

In other words, you have your head up your ass.

 

[EdwardBaiamonte]

Bernanke and Greenspan are both Republicans.

being a Republican and acting like one are very different things!! Is that concept really over your head?

Democrats have been for easy money at least since Cross of Gold speech

 

[BakshisMouse]

The Basic Premise of Keynesian economics is that you Spend money when the Economy is Down to Stimulate it, Then Make cuts when the Economy is up.

It's 2 Sides of a Coin. The Problem is the Keynesian are only Keynesian when the Economy is down. When it is Up they forget about the Rules of Keynesian Economics and Continue to Spend more than we have instead of Making cuts.

We never cut

There were people on both sides of the isle who decried deficits in times of prosperity. Paul Krugman, the most famous Keynesian around, slammed Bush Jr. for his unnecessary tax cuts and military spending, which needlessly caused huge deficits. If you remember, it was the Democrat Bill Clinton who last had a balanced budget during his administration.


Wouldn't you rather have the government decide what to cut from the budget when the unemployment rate is low than have the government decide what to cut from the budget when we have so many unemployed people?

In any case, the first priority right now should be to lower the unemployment rate. The way I see it, that's probably going to require further government spending on productive initiatives and more aggressive stimulus by the Federal Reserve. That will most likely raise debt-to-gdp Ratio, but if done correctly, the debt would not reach unsustainable levels before a true recovery kicks in. Government spending could be scaled back then. It might not be scaled back enogh to bring a balanced budget, but we'd all prefer an economy with fewer unemployed.

Talk about the deficit when we have an unemployment rate under 6% and the labor force participation is back to 66%.

 

[EdwardBaiamonte]

The way I see it, that's probably going to require further government spending on productive initiatives and more aggressive stimulus by the Federal Reserve.

too stupid but perfectly lliberal. It was Fed stimulus that caused the current depression!! You want a fical and monetary bubble but lack the IQ to know it.