Why Keynesian economics don't work

[rdean]

Also, the OP is seemingly against tax increases and yet ignores how over 35% of the Stimulus was in fact tax cuts.

American Recovery and Reinvestment Act of 2009 - Wikipedia, the free encyclopedia

While Keynes was also a Liberal, he is in fact not a hardcore socialist or a socialist at all like some make him out to be. A great line I read that describes him is in Keynes: Return of the Master by Robert Skidelsky was that "he came to critique Capitalism, not bury it."

Never said anything about tax increases, maybe you should watch those assumptions. I do know that about a third of the Obama Stimulus was tax cuts, for the lower and middle classes. Was supposed to stimulate demand and growth, and we were supposed to get unemployment down to below 8%, you remember that? Another example of how Keynesian economics did not work.


FWIW, I think we should increase the $106,800 ceiling on FICA taxable income, and I think the tax code should be scrubbed to eliminate or reduce deductions, loopholes, breaks, and credits that are obsolete, ineffective, or otherwise undesirealbe. Most of these things benefit the wealthy, but in any case revenue would go up.

Other than that, I would continue the Bush tax custs until the economy is on solid footing and unemployment has dropped below 7% or so.

What you wrote makes a great deal of sense, and is supported by historical data:

1. Federal spending went from 2.5 % in 1929 to 9 % in 1936: Washington’s portion of the economy increased by 360 % in just seven years- with no benefit to the economy.

2. Arthur Schlesinger, Jr., liberal New Deal historian wrote in The National Experience, in 1963, “Though the policies of the Hundred Days had ended despair, they had not produce recovery…” He also wrote honestly about the devastating crash of 1937- in the midst of the “second New Deal” and Roosevelt’s second term. “ The collapse in the months after September 1937 was actually more severe than it had been in the first nine months of the depression: national income fell 13 %, payrolls 35 %, durable goods production 50 %, profits 78% .

3. In 1935, the Brookings Institution (left-leaning) delivered a 900-page report on the New Deal and the National Recovery Administration, concluding that “ on the whole it retarded recovery.”

4. "America’s greatest depression fighter was Warren Gamaliel Harding. An Ohio senator when he was elected president in 1920, he followed Woodrow Wilson who got America into World War I, ...Harding inherited the mess, in particular the post-World War I depression – almost as severe, from peak to trough, as the Great Contraction from 1929 to 1933, that FDR inherited and prolonged. Richard K. Vedder and Lowell E. Gallaway, in their book Out of Work (1993), noted that the magnitude of the 1920 depression "exceeded that for the Great Depression of the following decade for several quarters." The estimated gross national product plunged 24% from $91.5 billion in 1920 to $69.6 billion in 1921. The number of unemployed people jumped from 2.1 million in 1920 to 4.9 million in 1921.

Compared to FDR, Harding had a much better understanding of how an economy works. Harding, wrote historian Robert K. Murray, in The Harding Era (1969), "always decried high taxes, government waste, and excessive governmental interference in the private sector of the economy. In February 1920, shortly after announcing his candidacy, he advocated a cut in government expenditures and stated that government ought to ‘strike the shackles from industry.’ ‘We need vastly more freedom than we do regulation,’ he said. Surprisingly, big business took very little notice of him at the time."

Federal spending was cut from $6.3 billion in 1920 to $5 billion in 1921 and $3.2 billion in 1922. Federal taxes were cut from $6.6 billion in 1920 to $5.5 billion in 1921 and $4 billion in 1922. Harding’s policies started a trend. The low point for federal taxes was reached in 1924. For federal spending, in 1925. The federal government paid off debt, which had been $24.2 billion in 1920, and it continued to decline until 1930."
America’s Greatest Depression*Fighter by Jim Powell
Not-So-Great Depression - Jim Powell - National Review Online

The second crash in 1937 happened because budget hawks swooped in and stopped government support which caused the economy to back slide.

Second, the Bush tax cuts did nothing except create and enormous deficit Republicans further built up with two unpaid for wars and Med Part D. Since both the tax cuts AND Part D were passed through "reconciliation", they can hardly be denied.

Rightwingers talk about "cutting" but haven't a clue about "investing". To them, investing means throwing money into the stock market or giving tax cuts to the rich who will then, because they are so charitable, "create jobs"... Yea, in China. The right needs to stay away from the economy, from science, from education, from foreign policy, from social policy. Everything they touch, they infect with their backward and embarrassing ideology. If only they had some small success to build on. Anything they can point to as an achievement. Creating an enormous deficit is NOT an achievement. Creating another Iran out of Iraq is NOT an achievement. Slandering Democrats is NOT an achievement. Throwing the elderly under the bus is NOT an achievement. Tax cuts for billionaires is NOT an achievement.

 

[Wiseacre]

We had 5 depressions before the government embraced Keynesian economics and none since.

Like the previous post states, Keynes didn't advocate deficit spending in good times. The examples of Keynesian economics 'failing' are cases where the spending wasn't initially enough and/or it came to slow.

I swear that talk radio and Fox News could convince people that the sky was red, 2+2=5 and that the moon was make of cheese... if it would further their agenda.

Why the cheap shot at FoxNews, what do they have to do with this conversation?

Do you have an example of Keynesian economics successfully recovering from a recession? Anywhere in the world?

Yeah, when Keyneian economics was fianlly used to rearm this nation for WWII.


I would respond that it wasn't Keynesian economics that pulled us out of the 30s depression but the war itself, an external factor. The Keynes view is that increased gov't spending leads to an increase in aggregate demand, true? But in WWII, it was the other way around, an increase in demand for war materials lead to more gov't spending which was not due to Keynesian economics.


What did we do there? We used money we did not have to go to war and by doing so we revitalized our moribund economy.

Now do you have an example of a society that used TICKLE DOWN ECONOMIC policies that did not result in economic bubbles followed by economic depressions?

There must be an example of that, but I can't think of one.


Bubbles and recessions are normal occurrences, are they not? ANY bul market is going to have a bear market following it no matter how or why the bulmarket started. We had a pretty good economic run following Reagan's tax cuts and Bush43's 2003 tax cuts until the housing bubble popped. Didn't Canada use Reaganomic principles to pull themselves out of a financial quagmire back in the 90s? So did Britain under Margaret Thatcher.


One uses supply side economic policies when ones supply side is short of capital. That is the best time and the ONLY time to put such policies in place.

One uses DEMAND SIDE policies when ones economy is fibrilating because the consumers are broke.


Hasn't worked so far for us, has it? Paul Krugman says we should invest another trillion or 2 in more stimulus, do you think that would work? I think we'd get some uptick, but not enough to make it worth the money spent. Partly cuz I don't think the gov't would spend it wisely, politics would interfere with the best use of the money.


In BOTH CASES these policies are a STOP GAP measure to rejuvinate the economy.

But the real solution is always to see to it that the scales between SUPPLY SIDE and the DEMAND SIDE of the economy are in balance.

And that is EXACTLY what we have not been doing for about 40 years.

Hence the bubbles that blew up in investors faces, and hence the stead erosion of middle class purchasing power.

And now, now that we've ignored this problem for decades, the economy is so sick that I seriously doubt it's fixable.

I think it's fixable, but it's going to take quite awhile, maybe 20 years just to get things turned around and at least balance the budget. That means our elected reps are going to have to stop spending every dollar they get on pet projects. Yeah, that'll happen.

 

[gasinclair]

Keynes theory involved surpluses first and then using natural stabilizers (unemployment ins. food stamps, etc.) and allow tax revenue to decline during the recession. It is ok to move into a deficit. Any further government help should be focused on encouraging private investment because investment goes down in a recession and that is where all jobs are created. How does that approach compare to our recent "Keynesian" approach? Now let us look at our progress---GDP has increased around $1 trillion through 7 quarters of recovery and the federal government has borrowed an extra $2.5 trillion to accomplish that. That proves it was not very efficient and was poorly designed. There is no consideration of the long term affect of interest on that debt and the damage that government debt does to future growth. Keynes never said his plan could help with structural problems. We have wasted a lot of this money thinking it was just a cyclical downturn. We have depended too much on construction and we have lost a lot of manufacturing jobs that are not likely to come back. We need to get more efficient in business and in government to put us on a better path. Debt created this problem and the consumer must save more and de leverage. Borrowing at the federal level will not solve the problem. In fact since we are near 100% debt to GDP ,which reduces future growth, and on notice for a credit downgrade, risks going forward are ratcheting higher. Increased borrowing in such an environment risks a weaker $, more inflation, higher interest rates and guarantees a lower standard of living. It may be the smoothest approach for politicians but it does not make any financial sense. There is no easy way out of this hole. We must cut the deficit or face a string of credit downgrades. The sovereign debt problem is an active problem in Europe and Japan is buried in debt and was recently put on watch for another credit downgrade. Their savings rate is moving to zero and their debt is held internally while their retirement plan is expected to liquidate $78 billion of JGB's this year to pay pensions. Who is going to buy the debt to cover this year's planned deficit of $538 billion plus $200 or $300 billion more for earthquake recovery in a $5 Trillion economy? The banks and insurance companies are risking their capital base if interest rates on their Japanese Government Bonds are forced higher. They created all their debt problem following supposed "Keynesian" stimulus theory and if did not work. Look at what has happened to interest rates in the periphery of Europe; Japan or ourselves are not immune. We need to get our house in order now.

 

[MikeK]

I've seen it written around here that Reaganomics is wrong and that everyone knows that if the gov't gives money to the low income people, they'll spend it, thereby increasing demand which leads to more jobs. "Priming the pump" it's called, to get the money flowing and the economy moving. Sounds great, so why doesn't it work? Bush43 gave out a couple of tax rebate checks, neither of which helped. Japan tried 10 different stimulus packages, that didn't work. And of course Obama tried a couple of stimulus packages that didn't work too well either. So why weren't those efforts more successful?


I think it's mostly because people don't see the permanence of it. They don't need a check for a couple hundred bucks, they need a job. There needs to be reasons why people believe the future looks better financially, and indeed in every other way too. A stimulus program doesn't cut it, not by itself. You need a change of policy that is significant enough and logical enough to convince the public that we're on the right track. Have you sen the latest poll numbers, 69% think we're on the wrong track in this country. I think we need substance over smoke and mirrors.


Paul Krugman and others on the left think that we need to double down, more stimulus money to the low income people. Raise taxes on the rich to pay for it? But that's not really an increase in spending, but rather just a different group of people doing the spending. Saving money in a bank, or investing in a company has the same effect on a macrolevel because that money finds it's way into the system too. Borrow money internally within the gov't or with US citizens? Same deal, there's no real net increase in consumption if you take a dollar from here and give it to someone over there. How about printing more money? Then the value if your currency goes down and you eventually end up with inflation.


History tells us that increased gov't spending doesn't help your economy get out of a financial hole. That's why every other country in financial trouble is reducing their spending. Keynes' model was designed for a closed authoritarian economy, and maybe it would help in some circumstances. But I'm not seeing it for us, we'd be just adding more debt and getting nowhere.

Your presentation is perfect -- except for one thing. Offshoring. The hijacking of American jobs and the transfer of American industry to foreign countries. Ipso facto, Bush was just tossing money into a bottomless pit, which his economic advisors certainly were aware of.

Giving Americans money is not going to create jobs. Our economy has been so badly damaged that the only way to fix it is the way FDR did it, by taxing the rich and using the money to create federal job programs, such as the CCC, the Civilian Conservation Corps. Right now we need a program called the Infrastructure Restoration Corps, which could employ millions and produce a number of thriving industries, which in turn would enable us to rebuild our industrial base and get us back on our feet. Americans need to pick up hammers and shovels and put their minds to rebuilding. And we need to kick Wall Street in the ass.

We need to apply pressure on offshore American industries to bring their factories back home where they are needed. We need to impose tariffs on all imported merchandise. And we need to impose criminal penalties on any American who hires an undocumented foreign worker.

If we are not willing to do these things there is no hope for the future of America as we've known and loved it. Because the end of it is clearly in the cards and is not that far away.

 

[Norman]

You have to remember that Keynesian economics requires sticky wages to work.

If wages are not sticky then it will not work.

Paradox of thrift is also a pretty darned stupid thing. But even that has some basis if wages are sticky I guess.

Still economy does not run on consumption, and keynes knew that. He's theory does not say you can spend your way to prosperity - just out of recession.

I am not sure but the Keynes theories AFAIK are severily lacking in some areas. I think he thought prices would rise and fall even if money supply nor supply changed. (I just loosely remember one old graph of spending out of recession resulting in a new higher price level - I may be wrong). Also his theories do not account for the failure of philipps curve.

Overall, my least favorite school. Monetarism is IMO certainly better.

 

[william the wie]

Keynes and his disciples lacked the math and mechanical tools to analyze an economy for that matter I would argue that the economy is based mostly on Poisson distribution and the 80-20 rule of talent rather than the normal distribution used in models so no model is possible but forget that for a moment. Do politicians understand and know how to implement a Keynesian policy and if so, is such a policy within the realm of the politically possible? I've already said no but some posts seem to have the assumption that this is possible and I would love to see a credible defense of that position.