The Problem With keynesian economics

[DSGE]

Again, you think the Fed should **** everybody in the economy over with excessively tight money just to stick it to the government. So stupid.

excessively tight? Friedman didn't care that base money dropped 6% in 1929 he cared that the peoples money disappeared from their pockets when they had made no poor economic decisions. So, he wanted to print as much as necessary to keep them whole. He wanted to isolate national problems from individual problems.

He actually did care about the money supply falling, because that's the key to nominal stability. Remember his constant money supply growth rules, where a computer would have the money supply grow at a constant rate? That was the key to separating national and individual problems, not letting central bankers make dumb decisions.

 

[DSGE]

The difference between QE and lowering interest rates is that QE is this same process, except

are you saying that either way the same amount of money will make its way into the economy through bank loans

What? I'm saying both are done through creating money and buying government bonds with it. The way that both influence economic activity is by increasing the quantity of base money. And that's what Friedman wanted. Keep printing high powered money until the economy has its desired quantity of high powered money. The fact that interest rates are at zero is irrelevant.

 

[EdwardBaiamonte]

If the zero interest rates were "artificially" low we'd be seeing accelerating NGDP growth and inflation.

wrong wrong wrong. It is obviously artifically low when people must settle for losing money on savings. You have a Nazi like faith in the Fed's manupulative skills. When savings are worth nothing thats points to structural problems, not monetary problems

 

[EdwardBaiamonte]

The difference between QE and lowering interest rates is that QE is this same process, except

are you saying that either way the same amount of money will make its way into the economy through bank loans

What? I'm saying both are done through creating money and buying government bonds with it. The way that both influence economic activity is by increasing the quantity of base money. And that's what Friedman wanted. Keep printing high powered money until the economy has its desired quantity of high powered money. The fact that interest rates are at zero is irrelevant.

are you saying that either way the same amount of money will make its way into the economy through bank loans.

This requires, firstly, a yes or no!!

 

[DSGE]

are you saying that either way the same amount of money will make its way into the economy through bank loans

What? I'm saying both are done through creating money and buying government bonds with it. The way that both influence economic activity is by increasing the quantity of base money. And that's what Friedman wanted. Keep printing high powered money until the economy has its desired quantity of high powered money. The fact that interest rates are at zero is irrelevant.

are you saying that either way the same amount of money will make its way into the economy through bank loans.

This requires, firstly, a yes or no!!

I don't understand the question? There's no "same amount of money". I don't know what you're talking about. But you understand how the Fed works right? You get how it lowers interest rates? You know what on Open Market Operation is?

 

[DSGE]

If the zero interest rates were "artificially" low we'd be seeing accelerating NGDP growth and inflation.

wrong wrong wrong. It is obviously artifically low when people must settle for losing money on savings. You have a Nazi like faith in the Fed's manupulative skills. When savings are worth nothing thats points to structural problems, not monetary problems

It's nothing to do with faith. It's a very basic necessary implication. If the Fed are trying to keep interest rates below equilibrium, we get accelerating NGDP growth and inflation. That's just obvious. If it weren't the case, then the Fed could assure permanent full employment by keeping the interest rates low. But they can't do that. The result is accelerating inflation.

 

[Widdekind]

government accountants already have a term for "G plus transfers & subsidies"; that government involvement in the economy is counter-cyclical, increasing during down-turns. Somehow the US tax structure is such, that during a recession, taxes actually increase (exactly wrong ?!)

Y = C+I+G+NX

"Government current expenditures" = G + (transfers + subsidies)

"Government consumption expenditures & gross investment" = G

"GCE - GCEGI" = (transfers + subsidies)​

 

[DSGE]

government accountants already have a term for "G plus transfers & subsidies"; that government involvement in the economy is counter-cyclical, increasing during down-turns. Somehow the US tax structure is such, that during a recession, taxes actually increase (exactly wrong ?!)

Y = C+I+G+NX

"Government current expenditures" = G + (transfers + subsidies)

"Government consumption expenditures & gross investment" = G

"GCE - GCEGI" = (transfers + subsidies)​

What are you doing? Of course all that stuff is going to look counter-cyclical; you've divided it all by GDP, which falls in a recession. You need to be looking at the real detrended series, not divided by GDP.

If you want to do something actually interesting, look at the real detrended series for government expenditures - which we expect to be counter-cyclical because of automatic stabilizers - then try and separate it into real detrended government purchases and real detrended transfer payments + subsidies. See whether there's significant counter-cyclical government purchases or whether it all comes from automatic stabilizers.

 

[Widdekind]

Of course all that stuff is going to look counter-cyclical; you've divided it all by GDP, which falls in a recession...

See whether there's significant counter-cyclical government purchases or whether it all comes from automatic stabilizers.

vaguely, earmarked "transfer taxes" fall below payments during recessions, but typically exceed transfer payments during expansions. Presumably, transfers include unemployment benefits, for which workers apply during downturns. Then, everybody pays back into those funds during expansions (?).

Meanwhile, "normal" taxes plummet during recessions, whereas budgeted government purchases don't fall until a year or so later; thus, during downturns, "normal" taxes fall below budgeted purchasing.

Vaguely, then, during recessions, total taxation falls; government purchasing wades on; transfers rise (evidently from deficits?).

 

[Rshermr]

What? I'm saying both are done through creating money and buying government bonds with it. The way that both influence economic activity is by increasing the quantity of base money. And that's what Friedman wanted. Keep printing high powered money until the economy has its desired quantity of high powered money. The fact that interest rates are at zero is irrelevant.

are you saying that either way the same amount of money will make its way into the economy through bank loans.

This requires, firstly, a yes or no!!

I don't understand the question? There's no "same amount of money". I don't know what you're talking about. But you understand how the Fed works right? You get how it lowers interest rates? You know what on Open Market Operation is?

Great discussion. I am staying out of this one, you folks have a good handle on the issues.
Oh, by the way, I am not talking about ed. He is in way over his head. Takes a while for him to see that he is making a fool of himself.

 

[EdwardBaiamonte]

If the zero interest rates were "artificially" low we'd be seeing accelerating NGDP growth and inflation.

wrong wrong wrong. It is obviously artifically low when people must settle for losing money on savings. You have a Nazi like faith in the Fed's manupulative skills. When savings are worth nothing thats points to structural problems, not monetary problems

It's nothing to do with faith. It's a very basic necessary implication. If the Fed are trying to keep interest rates below equilibrium, we get accelerating NGDP growth and inflation. That's just obvious. If it weren't the case, then the Fed could assure permanent full employment by keeping the interest rates low. But they can't do that. The result is accelerating inflation.

the Fed has been doing exactly what you want but their forecasts about where the economy was were always wrong so they did too little. Things were always much worse than they thought.

Rates are 0 so they are obviously artificially low!!! The solution isn't to whipsaw the economy with a $10 trillion balance sheet and then deflate it back to 1.5 trillion when the dam breaks. The solution is fix the liberal influences on the economy. Damn, China switched to capitalism to revive its economy, not NGDP targeting!!

 

[DSGE]

wrong wrong wrong. It is obviously artifically low when people must settle for losing money on savings. You have a Nazi like faith in the Fed's manupulative skills. When savings are worth nothing thats points to structural problems, not monetary problems

It's nothing to do with faith. It's a very basic necessary implication. If the Fed are trying to keep interest rates below equilibrium, we get accelerating NGDP growth and inflation. That's just obvious. If it weren't the case, then the Fed could assure permanent full employment by keeping the interest rates low. But they can't do that. The result is accelerating inflation.

the Fed has been doing exactly what you want

Nope. No they haven't.

Rates are 0 so they are obviously artificially low!!!

Idiot. Okay since you're so adamant about going back to being a moron, I'm gonna stop talking to you. Though your brief period of lucidity was refreshing.

 

[EdwardBaiamonte]

It's nothing to do with faith. It's a very basic necessary implication. If the Fed are trying to keep interest rates below equilibrium, we get accelerating NGDP growth and inflation. That's just obvious. If it weren't the case, then the Fed could assure permanent full employment by keeping the interest rates low. But they can't do that. The result is accelerating inflation.

the Fed has been doing exactly what you want [/QUOTE]

Nope. No they haven't.

then you're using perfect hindsight to pretend your forecasts were better than theirs

 

[EdwardBaiamonte]

Rates are 0 so they are obviously artificially low!!! [/quote]

Idiot. Okay since you're so adamant about going back to being a moron, I'm gonna stop talking to you. Though your brief period of lucidity was refreshing.

OK I guess you're right, 0% interest rates are actually artificially high!

 

[Widdekind]

government accountants already have a term for "G plus transfers & subsidies"; that government involvement in the economy is counter-cyclical, increasing during down-turns. Somehow the US tax structure is such, that during a recession, taxes actually increase (exactly wrong ?!)

Y = C+I+G+NX​

What are you doing? Of course all that stuff is going to look counter-cyclical; you've divided it all by GDP, which falls in a recession.​

first, i got confused, between government expenditures, and tax revenues.

second, in recessions, nominal spending (GDP) falls more than any form of government spending (G, transfers + subsidies, G + transfers + subsidies). Looking at raw nominal data, for total expenditures & total revenues, total government deficits increase through recessions, and only decrease again after recoveries, as total tax revenues fall during downturns (no surprises), whilst total expenditures bowl on through, before budgets are revised quarters to years later.

Inexpertly, total expenditures actually increase, due to UE benefits -- as seen in the raw nominal year-to-year change in total deficit:

Inexpertly, 2001 & 2008 were historically huge total budget deficits​

 

[EdwardBaiamonte]

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

1) its true that liberals will never cut

2) its also true that the main premise of Keynes is mistaken in that it assumes creating demand is creating real demand when really it is merely creating a mal-investment bubble that will burst and further recess the economy.

This is how FDR prolonged the depression for 10 years and became a liberal hero.

 

[Widdekind]

What is the magnitude of this effect compared to the simple maxing out of consumption of goods and the increase of services to the total consumption basket?...

the apparent change in proportions for goods and services has NOT been do the detriment of goods and production. It has been a proportional shift as production of goods has increased while services increased even more so... the service sector has grown considerably by comparison to the modest growth in production of goods.

Inexpertly, the (macro-)economy can be partitioned, into "necessities" ("meat & potatoes", the CPI basket of groceries, non-durable Consumption expenditures); and "surplus production". That "surplus production" is discretionary, and can be "butter, plow-shears & cars" or "guns, swords, and tanks". When government policies "shift" discretionary production in the economy, away from the former, and towards the latter (say); non-discretionary "necessities" are unchanged ("people still need to eat"). Thus, the mathematical Q vector rotates around the "necessities" vector component, which is like a mathematical "axis" of the economy.

Now, over the past half-century, US production of "goods" has grown, but only modestly. Meanwhile, US "services" have grown, profoundly. Thus, the mathematical "trajectory" of the US production Q vector has "veered away" from goods; and towards services:

Hypothetically, the US economy could have "gone straight ahead" towards far more goods, and fewer services, than it actually did do. I.e. the US economy could have evolved, to be at a different point, on its Production Possibilities Frontier (PPF). All of this specific "direction" information, encoded in the Q vector, is lost, when only the overall general magnitude "Q" of aggregate production is plotted, on AD/AS charts.

 

[Widdekind]

total taxes increase costs (of new, final, goods & services) by about a third. And, Unions raise the aggregate wage-level by about 14%; whilst wages account for about half of total expenses paid from total revenues (W/GDP ~ 1/2). Thus, Unions raise final prices by another 5-10%. So, between heavy taxation, primarily for social programs; and wage increases, from social activism; final prices (for new, final, goods & services) are increased, in the US, by about 40% on average. Again, in the absence of taxes & Unions, costs would be about half what they are; or, equivalently, costs are about double what they otherwise would be. The US Aggregate Supply (AS) curve would be down at a price-level near "50".

Firms facing heavy taxation & high labor costs would plausibly be less willing to accommodate concerns about the earth environment, which could be externalized. Likewise, labor Unions plausibly prefer to accrue those costs, to themselves, at the expense of the earth environment. Social activism, through taxes (for social programs) & wages (from Unions) plausibly contributes to the "destruction of earth", by dis-incentivizing environmentalism, by competing for every spare penny businesses would otherwise have on hand, to be environmentally minded. "Surprise..."

 

[Rshermr]

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

1) its true that liberals will never cut

2) its also true that the main premise of Keynes is mistaken in that it assumes creating demand is creating real demand when really it is merely creating a mal-investment bubble that will burst and further recess the economy.

This is how FDR prolonged the depression for 10 years and became a liberal hero.

Wow, ed; Profound. and just like you were supposed to spin it. Your tea party bosses will be so pleased.

 

[Widdekind]

aggregate Ps & Qs

According to Okun's Law, when UE increases by +2%, real GDP (Q) decreases by -4%. According to Phillips Curve, when UE increases by +2%, the Price-level (P) decreases by -1%. Thus, the "Sacrifice Ratio", of decrease in Q, per decrease in P, is about 4:1. Now, that "Sacrifice Ratio" represents the Price Elasticity of Aggregate Demand (~dQ/dP) -- when AD falls, as UE rises, wages (W) & prices (P) fall, along with outputs (Q). Note, that when AD falls, in the short-term, without any shocks to AS; then the AS curve is stationary, whilst the AD curve falls; and so intersection of AD+AS traces along, i.e. traces out, the AS curve. Ipso facto, as Keynesians say, in the short-term, the AS curve is flat(er), having an aggregate elasticity of ~4.

Conversely, to gauge the Price Elasticity of Aggregate Supply, we must consider supply shocks to the AS curve, when the AD curve was stationary. Supply-side inflation occurred with the "stagflation" of the 1970s, most prominently from 1974-75, when inflation (P) increased +5% (above trend), whilst real GDP (Q) decreased -5% (below trend). Ipso facto, the AD curve is steep(er), having an aggregate elasticity of ~1, as suggested in the following figure:

references
N.G.Mankiw. Macroeconomics (6th ed.), p.399