Sunday, February 07, 2010

Like "Keynesian Theory"? Then Practice ALL of It

I've always had my doubts about Keynes' theory; but perhaps it was not Keynes' theory itself, but the malpractice thereof which has poured Milorganite all over his name. Allen Meltzer of Carnegie-Mellon would like to set some things straight.

Keynes wanted deficits to be cyclical and temporary. He wouldn't have been in favor of efforts to raise tax rates in a recession to eliminate deficits. He viewed that as suicidal. He was opposed to the idea that governments should balance the budget during a downturn, and advocated running short-term deficits to spur the economy.

The type of stimulus he advocated was very specific. He said it should be geared towards increasing private investment. He viewed private investment, as opposed to big government spending, as the source of durable job creation. He also said that the deficits should be self-liquidating, so that the increased economic activity caused by the stimulus inevitably generated a combination of extra tax revenues and lower unemployment payments. With higher revenues and lower outlays, the deficit would disappear.

But, but, but, surely ObamaNomics is an exercise of Keynesian policy!!

He would roll over in his grave if he could see the things being done in his name. Keynes was opposed to large structural deficits. He thought that they chilled rather than stimulated the economy. It's true that we're stuck with large deficits now. The goal should be to reduce them, not to take on new spending that makes them worse.

Today, deficits are getting bigger and bigger with no plan to significantly lower them. Keynes understood what the current administration doesn't understand that the proper policy in a democracy recognizes that today's increase in debt must be paid in the future.

Well, it WILL be 'the future.' Around the same time as when the Himalayan glaciers melt*, maybe.

Keynes didn't favor at any time that I know spending to increase consumption. He didn't want that, and in fact he believed that was taken care of by the marketplace.

Keynes wanted to increase employment by smoothing the amount of investment through the up and down parts of the business cycle. He knew that recessions cause a decline in investment, and that the fall in investment caused unemployment to rise. So he wanted the government to stabilize investment through a recession

That's why the Democrats call spending-on-my-pals-in-the-Gummint "investment," silly! Just call it "investment" or "jobs" and the sheep will be happy....

But Keynes had his Statist moments:

He thought government planning of investment was the best way to reduce risk for private companies and lower interest rates to spur investment

Gummint cannot plan 'investment' any better than anyone else. Either 'private investment' is desirable, (as noted above), or Gummint planning. Maybe Gummint indicators....maybe.

A critical passage: of the leading Keynesians, Franco Modigliani, developed a theory of consumption stating that temporary tax cuts are mainly saved or used to reduce debt. Milton Friedman, the ultimate champion of free markets, independently developed an alternative model that came to the same conclusion. The temporary reductions under Carter, George W. Bush and Obama were all failures, since people spend more only when they're confident their take home pay will rise permanently.

It's been mentioned by thinking people that ObamaNomics' tax-law changes (which will increase taxes on everyone, including church mice and their children) are a deterrent to investment. Keynes, Modigliani, and Friedman would seem to agree.


It's unbelievable that a man whose main theme was to smooth investment comes to be the proponent of redistributing income away from the people and companies who do the investing.

My advice on the stimulus plan was, don't do it. Let's look at the plan. First, a lot of the money was used to reduce the deficits of state and local governments by increasing the federal debt. It was simply money transferred from the federal government. The economic multiplier effect was zero.

Well. It was statistically improbable that Keynes could have been so wrong about so many things, so I'm glad this article was published.

The statistical improbabilites actually reside in the (D) Party.

(Note to Rahmsputin: you should have called your fellow (D)s "f&^^%%$ statistical improbabilities.")

*As amended recently to comport with reality.


J. Strupp said...

Keynes would have been in favor of temporarily extending the Bush tax cuts. Hopefully the administration will do this. I think they will.

The current deficits are not sustainable. No one disagrees with this. But attempting to balance the budget now is simply insane. Keynes would agree I'm sure. The problem is that the average tea party person (and GOP leadership for that matter) has no idea why it's necessary (and to our advantage) to deficit spend in a liquidity trap. They just can't comprehend this concept.

In hindsight, Keynes would have probably promoted a much BIGGER stimulus package in the short term with legislation instituting a paygo system at some point in the future. This would keep inflation expectations under wraps and allow stimulus to have it's intended results.

....and that's what we should do. You and I know that neither side is capable of acheiving this.

P.S. the comment about transfer payments to states to shore up budget shortfalls is just wrong. For the sake of time I'm just going to say it's wrong, wrong, wrong and stop there.

Dad29 said...

You speculate that Keynes would have gone larger, the Carn/Mell guy says not so.

You argue that the Feds didn't (in effect) 'shore up State budgets,' where it is CLEARLY the case that they did so. Roadbuilding dollars ARE State budget dollars. School dollars ARE State/Local dollars.

As to PAYGO, we can agree. But Keynes says "reduce spending."

So does Paul Ryan, you know.

J. Strupp said...

My comment read a bit wrong regarding state budgets. I agree that the FEDS shored up state budgets was that we didnt' have dozens of states in the union contracting spending during a time when we needed to spend more. My point was that this move was much more important than your link states. The multiplier was NOT zero. This is wrong.

J. Strupp said...

BTW, Paul Ryan says reduce spending. Fine.

But Paul Ryan has a tax revenue problem which is why he asked the CBO to assume revenues to be 19% GDP when scoring his "road map". You know damn well his tax reform isn't going to come close to generating that kind of tax revenue. His tax policy is what worries me because it's going to heavily involve the same ol' supply side mumbo jumbo that fell on it's face 5 years ago.

J. Strupp said...

whoa it's been more than 5 years hasn't it. Time flies.