The Problem With keynesian economics

[EdwardBaiamonte]

Stop acting like a child and produce the citation. If you refuse to cite it, you're admitting you're wrong.

ok if I do produce it please tell me exactly what you will say. Thanks

If you produce the citation, and I check it out, and it has Friedman saying that the Depression was caused by the Fed not following the rules of the gold standard, I'll say "you were right Edward, Friedman thought the Depression was caused by the Fed not following the rules of the gold standard."

Im surprised at how little little you know Friedman. I'll look it up for you, but tomorrow. I feel its my duty to educate the earnest younger generation

 

[DSGE]

Just making sure we're clear. Can't look at the money supply, have to look at the money supply offset for velocity,

yes very clear, as velocity increases when, for example, people trade out of houses or stocks or after listening to FDR or BO, prices go down. Have I got that right?

Velocity decreases when people trade out of houses or stocks and want to hold more of their wealth as money instead. And prices will decrease, following a decrease in velocity, if the money supply isn't expanded sufficiently to offset it.

 

[EdwardBaiamonte]

Same thing happened in Japan, which is why, if you recall, Friedman suggested large amounts of QE.

well that is a mystery to me honestly. He wanted them to buy bonds on the secondary market which the government would get, in effect , for more bridges to no where. I don't recall ever reading about how Friedman would have increased the money supply in the Great Depression, do you, assuming you agree thats what he wanted to do?

 

[DSGE]

ok if I do produce it please tell me exactly what you will say. Thanks

If you produce the citation, and I check it out, and it has Friedman saying that the Depression was caused by the Fed not following the rules of the gold standard, I'll say "you were right Edward, Friedman thought the Depression was caused by the Fed not following the rules of the gold standard."

Im surprised at how little little you know Friedman. I'll look it up for you, but tomorrow. I feel its my duty to educate the earnest younger generation

Well I've read A Monetary History, and you clearly haven't. By the way, just to be clear, I totally agree that the Fed wasn't following the rules of the gold standard. That's made clear in a chapter of A Monetary History which talks about how the Fed hoarded gold in 1930 and let the base fall by about 6%. No argument there. But my point is that not letting the base fall 6% wouldn't have prevented broad money falling by a third. The Fed would have needed to print more money than the gold standard would have allowed (as is made clear by the current depression, which required massive QE to only meagre effect).

 

[DSGE]

Same thing happened in Japan, which is why, if you recall, Friedman suggested large amounts of QE.

well that is a mystery to me honestly. He wanted them to buy bonds on the secondary market which the government would get, in effect , for more bridges to no where.

The government wouldn't get more money for bridges.

Think about this: should the Fed not lower interest rates if required? It makes borrowing cheaper for the government (and everybody). Should they neglect their responsibility to ensure monetary stability just to stick it to the government? Of course not. The Fed's sole responsibility should be management of the money supply, whatever size may be needed; not sabotaging government borrowing at the expense of the entire economy. The size of the government's budget needs to be constrained by the voters, not by the Fed.

I don't recall ever reading about how Friedman would have increased the money supply in the Great Depression, do you?

The same way as always. Increasing the rate of growth in the monetary base by buying assets.

 

[EdwardBaiamonte]

Just making sure we're clear. Can't look at the money supply, have to look at the money supply offset for velocity,

yes very clear, as velocity increases when, for example, people trade out of houses or stocks or after listening to FDR or BO, prices go down. Have I got that right?

Velocity decreases when people trade out of houses or stocks and want to hold more of their wealth as money instead. And prices will decrease, following a decrease in velocity, if the money supply isn't expanded sufficiently to offset it.

dear, I didn't say anything about wanting to trade and hold. On bad news on a stock, volume goes way up as price falls, for example!!

 

[DSGE]

yes very clear, as velocity increases when, for example, people trade out of houses or stocks or after listening to FDR or BO, prices go down. Have I got that right?

Velocity decreases when people trade out of houses or stocks and want to hold more of their wealth as money instead. And prices will decrease, following a decrease in velocity, if the money supply isn't expanded sufficiently to offset it.

dear, I didn't say anything about wanting to trade and hold. On bad news on a stock, volume goes way up as price falls, for example!!

... Well that's what velocity is. Monetary velocity is about how much of their wealth people want to hold as liquid money.

 

[EdwardBaiamonte]

The government wouldn't get more money for bridges.

why not?????? Who would buy a house if they could not unload it at any time. What would happen to price of new car if a used car had no value?

Think about this: should the Fed not lower interest rates if required?

no idea what your subject is

 

[EdwardBaiamonte]

The same way as always. Increasing the rate of growth in the monetary base by buying assets.

well there is the helicopter method, QE, and interest rates.

Interest rates is by far the best since then the money is disciplined by capitalist constrants. So I don't understand by Friedman, of all people, would
have picked Qe for Japan when it is so famous for a 200% debt and 10000 bridges to no where and no recovery.

 

[EdwardBaiamonte]

Velocity decreases when people trade out of houses or stocks and want to hold more of their wealth as money instead. And prices will decrease, following a decrease in velocity, if the money supply isn't expanded sufficiently to offset it.

dear, I didn't say anything about wanting to trade and hold. On bad news on a stock, volume goes way up as price falls, for example!!

... Well that's what velocity is. Monetary velocity is about how much of their wealth people want to hold as liquid money.

"The velocity of money (also called velocity of circulation) is the average frequency with which a unit of money is spent on new goods and services produced"

 

[DSGE]

The government wouldn't get more money for bridges.

why not?????? Who would buy a house if they could not not unload it at any time. What would happen to price of new car if used car had not value?

You can unload it anyway. It's the deepest and most liquid market in the world and everybody wants Treasuries right now because they're so safe. You don't need the Fed buying them in order to be able to unload them later.

Besides, short term interest rates are stuck around zero. The Fed can't increase the government's ability to issue bonds because they can't push yields any lower (except by making unconditional promises regarding the future path of interest rates).

Think about this: should the Fed not lower interest rates if required?

no idea what your subject is

The point is obvious if you'd continued reading. The Fed's responsibility is monetary stability, not sabotaging government borrowing. If the interest rate needs to fall, the Fed should lower it, irrespective of the fact that it'll make borrowing easier for the government. It's the voters' job to constrain budgets, not the Fed's.

 

[DSGE]

The same way as always. Increasing the rate of growth in the monetary base by buying assets.

well there is the helicopter method, QE, and interest rates.

Interest rates is by far the best since then the money is disciplined by capitalist constrants. So I don't understand by Friedman, of all people, would
have picked Qe for Japan when it is so famous for a 200% debt and 10000 bridges to no where and no recovery.

Ah, no man. The helicopter method (direct household credits) isn't available for the Fed. That's not legal.

And the Fed doesn't "set interest rates". The Fed has the one special tool available to it: it's the only thing allowed to issue base money. The Fed doesn't order banks to use certain interest rates. It buys government bonds with created money (or sells them) until the Fed Funds rate is at the desired level.

It's special tool is changing the quantity of base money, which it does buy buying government bonds in the open market. If interest rates are at zero, they can't fall any further. But that doesn't change anything, the Fed can still keep creating money and buying bonds.

 

[DSGE]

dear, I didn't say anything about wanting to trade and hold. On bad news on a stock, volume goes way up as price falls, for example!!

... Well that's what velocity is. Monetary velocity is about how much of their wealth people want to hold as liquid money.

"The velocity of money (also called velocity of circulation) is the average frequency with which a unit of money is spent on new goods and services produced"

Yes. That's equivalent to what I said. It's inversely proportional to the demand for money.

 

[itfitzme]

What ever are you talking about?

Bush II did a great job with it, lowering taxes and increasing spending which drove investments in MBS and a housing bubble.

Fiscal stimulus means Government, or Public, investment, by borrowing money (G-T > 0). Did Government borrow, to invest into housing markets?

Fannie-Mae, backed by the US Government (and low centrally-set interest-rates), lent into housing markets; and then was bailed out. Even if you accept that the bail-out represents, ultimately, the US Government borrowing, into deficits, to dump money into mortgage markets; then, even so, that would be Government speculating, not Government investing.

Fiscal stimulus = Public investing,
!= Public speculation (on asset price bubbles)

At the end of this post are a number of articles and presentations on fiscal multipliers.

As I am to understand this, the underlying basis of Keynesian theory is that changes in government fiscal policy have an effect on national output that is a multiple (not necessarily greater than one) of the dollars introduced by the fiscal policy. There are two basic fiscal policy categories, the tax multiplier and the spending multiplier. Of course, there is more than one tax and more than one type of spending type.

"An initial increase in government spending, decrease in taxes, or an increase in transfer payments, causes a multiplier effect as it moves through the economy." - http://academic.kellogg.edu/mckayg/macro/presentations/MacroPresentation11top5revised.ppt

The nature of fiscal multipliers can be used to restore the economy to full employment. Direct government spending in investment is one way. It is not the only way.

Another way is simply to lower taxes and let the markets do what they may with the monies. An increase in government discretionary spending also falls under the heading of fiscal policy and has a multiplier effect. Government defense spending has been shown to have a multiplier of as high as 1.5.

At the end of the Clinton admin, the US economy saw a slight recession. Also, employment began to fall off. In 2001, the US government implemented a phase in of lower taxes. At the same time, the government increased spending. In 2003, the 2001 tax policy was accelerated. The combination of increased spending and lower taxes resulted in a budget deficit. The Treasury department covers the deficit by selling t-bills. GDP increased, primarily on the housing market as demand for MBSs drove the mortgage market and real estate investment.

I've got lots of graphs for these. The government revenues and outlays, the housing average price, employment, and the investment portion of the GDP all line up nicely. It is possible that they are all coincidental and it would be nice to be able to differentiate out the details of where the funds flowed in terms of the components of the taxes, outlays, GDP, MBSs, and the housing market.

Curiously, this was a global process, not isolated to the US, with Ireland and other countries experiencing their own housing and MBS booms. This is, of course, not uncommon, for "separate" country markets and economies to all follow the same economic boom simultaneously. The word gets around.

Never the less, and I am pretty sure about this, the ideas behind Keynesian theory of government fiscal multipliers is not limited to just direct government spending on investments. It covers all fiscal policy changes that increase or decrease monies in the economy such that aggregate demand is shifted.

---------------
These are the two fiscal policy presentations that I like the best;

MEASURING_THE_OUTPUT_RESPONSES_TO_FISCAL_POLICY
http://emlab.berkeley.edu/~auerbach/measuringtheoutput.pdf

http://academic.kellogg.edu/mckayg/macro/presentations/MacroPresentation11top5revised.ppt

-------------------------
There is also the following;

Fiscal_Stimulus_in_a_Monetary_Union_Evidence_from_US_Regions
http://www.columbia.edu/~en2198/papers/fiscal.pdf

IMF_Fiscal_Multipliers.pdf_spn0911.pdf
http://www.imf.org/external/pubs/ft/spn/2009/spn0911.pdf

--------------------
(I'm not sure about the three Power Point presentations but have included them anyways.)

http://www.ega.edu/facweb/jwhirl/Fiscal Multipliers.ppt

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

http://www.uwlax.edu/faculty/brooks/eco120/mod8/fiscal.ppt

 

[Widdekind]

the underlying basis of Keynesian theory is that changes in government fiscal policy have an effect on national output that is a multiple (not necessarily greater than one) of the dollars introduced by the fiscal policy.

i think there is another effect -- Fiscal stimulus can thwart deflation. When the private sector stops spending, and starts saving (to pay down debt, from a stock-market crash); then the private sector is de-circulating currency, contracting the money supply, and causing deflation. But government can step in, and borrow all the money piling up in savings; (re-)spend the money, on Public investments; and thereby (re-)circulate currency, so thwarting deflation.

i think your talk about "Fiscal multipliers" would refer to the efficiency with which new government debt translated into new GDP ("how many dollars of new GDP per dollar of new debt").

In 2001, the US government implemented a phase in of lower taxes. At the same time, the government increased spending. In 2003, the 2001 tax policy was accelerated. The combination of increased spending and lower taxes resulted in a budget deficit. The Treasury department covers the deficit by selling t-bills. GDP increased, primarily on the housing market as demand for MBSs drove the mortgage market and real estate investment.

the housing boom affected GDP (new final goods & services), through the construction of new houses. Residential Fixed Investment (a component of 'I') peaked in 2006, and has fallen since. Non-residential Fixed Investment (new machines, new factories) accelerated straight into 2008 -- when US markets "corrected".

 

[Widdekind]

The monetary base, which is what the gold standard is about, did not fall by 1/3. It fell about 6% between late 1929 and late 1930, but then rose quickly. In order to prevent broad money from collapsing, the Fed must have printed extremely large quantities of base money, breaking the rules of the gold standard.

Given the widespread bank-runs, and massive contraction of the (broad) money supply, a 6% "dent" into the base seems unavoidable:

One reason why the Federal Reserve did not act to limit the decline of the money supply was regulation. At that time, the amount of credit the Federal Reserve could issue was limited by the Federal Reserve Act, which required 40% gold backing of Federal Reserve Notes issued. By the late 1920s, the Federal Reserve had almost hit the limit of allowable credit that could be backed by the gold in its possession. This credit was in the form of Federal Reserve demand notes.... During the bank panics a portion of those demand notes were redeemed for Federal Reserve gold. Since the Federal Reserve had hit its limit on allowable credit, any reduction in gold in its vaults had to be accompanied by a greater reduction in credit.

On April 5, 1933, President Roosevelt signed Executive Order 6102 making the private ownership of gold certificates, coins and bullion illegal, reducing the pressure on Federal Reserve gold

FDR devalued USD by (nearly) a factor of two (from $20 per oz. to $35 per oz.). Thus, FDR protected the Fed's gold reserves (prevent withdrawals, and demanding re-deposits); and devalued the USD, allowing the Fed to double the monetary base.



Great Depression - Wikipedia, the free encyclopedia

 

[Widdekind]

http://emlab.berkeley.edu/~auerbach/measuringtheoutput.pdf

http://academic.kellogg.edu/mckayg/macro/presentations/MacroPresentation11top5revised.ppt

http://www.columbia.edu/~en2198/papers/fiscal.pdf

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

http://www.ega.edu/facweb/jwhirl/Fiscal Multipliers.ppt

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

http://www.uwlax.edu/faculty/brooks/eco120/mod8/fiscal.ppt

those presentations seem to say, that Taxes (compulsory saving) reduce spending (Aggregate Demand, for quantity Q at price-level P). Inexpertly, Taxes also increase costs. If so, the increasing Taxes simultaneously dis-invigorates AD (AD curve falls), and hampers AS (AS curve rises). Thus, Fiscal policy (not Fiscal stimulus, which is a separate sort of FP) could influence AD & AS, to return the economy, to equilibrium levels of output (sales transactions), by adjusting Taxes:

​

Also, government expenditures have low Fiscal multipliers, because the spending by government (which multiplies) generally only occurs on Taxes taken from other would-be spenders (which would have multiplied), so that there's little net benefit -- you might as well have left the money in the other guy's pocket, and let him spend it, as far as nominal GDP is concerned. But, with the specific case of Fiscal stimulus, funded by borrowing not taxing, the new government spending doesn't offset any existing private-sector spending, so you get higher net multipliers


EDIT:
in the above figures, increasing (decreasing) Taxes will only decrease (increase) private-sector spending (AD). If, in the first figure, the Taxes gained are immediately spent, then public-sector spending (G) increases, offsetting private-sector decreases, "one business suffers higher taxes, another gets a government contract". Or if, in the second figure, the Taxes lost require reducing public-sector spending (G), then any increase in private-sector spending is offset by "cancelled government contracts" from the public-sector. Generally, Fiscal Multipliers are about 1, so the trade-off is more-than-less a complete wash. If so, then, actually, increasing or decreasing Taxes (under balanced budgets) would only re-apportion AD, to-and-from the public & private sectors, but wouldn't do much, to the overall AD curve.

 

[Widdekind]

Since WWII, total government expenditures have nearly doubled, as a fraction of GDP, from 20% to over 35%. Meanwhile, total net taxes have fallen, from 20% to 10% of GDP. Note, total gross taxes have kept pace with total government expenditures; but trillions of dollars are doled out, every year, for personal transfer payments, and corporate subsidies, returning tax dollars back to the private sector. Thus, at present, a quarter of total US spending is "Fiscal stimulus", i.e. (G-T)/Y = 0.25

 

[Widdekind]

The aggregate gross tax-rate is 30%. For every $1.00 spent on new final goods & services (GDP), $0.30 is gross tax, of which $0.15 is welfare (transfers), $0.05 is corporate welfare (subsidies), and $0.10 is net tax. Thus, from before taxes ($0.70), to after taxes ($1.00), prices rise by nearly 50%. That is a significant increase in costs, which raises the AS curve. Moreover, the $3T of wealth re-distribution within the private sector implies, that the new AD & AS curves represent radically different mixes of products (goods & services), that cater towards the tastes of the transfer recipients (health-care services), and away from those of the tax payers: Again, not only does "welfare Capitalism" increase costs, raising the AS curve; but also the mix of products represented along the Q axis is radically transformed:

 

[usmcstinger]

"Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone." John Maynard Keynes

I am constantly fascinated by the right wing fight against success. Success that helped the nation and all its people and not just the privileged. The battle goes on with them and the people have been dead for a long time. Does that not say something about their ideas?

A Review of Keynesian Theory

"Along with Great Britain, President Reagan announced that the U.S. would also follow a monetarist policy. However, this was simply a cover story, meant for public consumption only. In reality, the government's policies were thoroughly Keynesian. Government borrowing and spending exploded under Reagan, with the national debt climbing to $3 trillion by the time he left office. Paul Volcker, Chairman of the Federal Reserve Board, battled inflation during the severe recession of 1980-82 through the Keynesian method of raising interest rates and tightening the money supply. When inflation looked defeated in 1982, he abruptly slashed the prime rate and flooded the economy with money. A few months later, the economy roared to life, in a recovery that would last over seven years. The American experience was in direct contrast to Great Britain's. As a result, most economists abandoned monetarist theory."

Now you are making up quotes and putting people's names on them. How long have you been doing that?

Check: John Maynard Keynes Quotes - BrainyQuote and the second quote was from the link just above it. Can you read? Many of my quotes come from reading, something you'll need to ask mommy about. She can help you with the big words. I would neg rep you if I were a right wing asshole who makes unfounded statements but that would stoop to your level and other clowns. Next time check.

Only an idiot would state "my quotes come from reading". Obviously, you do not understand that you lack any credibility, unless you can provide the sources you read from. However, not all sources are credible. Therefore, you have to be intelligent enough to determine what constitutes a credible source.