Obama Gives Keynes His First Real-World Test

http://www.npr.org/templates/story/story.php?storyId=100018973&ft=1&f=1001

by budu3 • 17 years ago

43 60 17 years ago

avdempsey2• 17 years ago

Given the headline I expected more of an argument about how Obama's stimulus plan is Keynesianism's first "true" test.

Really the argument amounts to this: 1. FDR didn't really try Keynesianism until he was forced to during WWII (the 30s didn't count). Too little Keynes. 2. The whiz kids of the 60s took Keynes too seriously. 3. The ~$650 billion Obama wants to spend follows directly from Keynes's formula. Goldilocks Keynes.

Not particularly rigorous, but the link to the "Marginal Revolution" blog might be fruitful. http://www.marginalrevolution.com/

russell• 17 years ago

Richard Nixon said, "I am a Keynesian." Obama is no better than in second place (in Keynsianism :-).

_b8r0• 17 years ago

To be fair, Richard Nixon also said 'I am not a crook' and that turned out to be untrue.

mattmcknight2• 17 years ago

I find the assumption that the WWII spending helped us. As in "Then, finally, geopolitical events took over, and World War II forced Roosevelt to spend as much money as Keynes wanted. " In fact, our exports ramped up because the industrial capacity of the rest of the world was destroyed. Our economic golden era following the war was driven by exports- first selling military equipment to the UK, and then other industrial goods after the war as we were the one of the only places making anything. The money we gave to other countries to rebuild was spent on a lot of American goods.

It's really the Chinese who are trying that approach, lending us money to buy their exports and then hopefully collecting the interest later (except we keep borrowing more money to pay the interest). At some point (now?) this starts to fall apart. One way is that we have massive inflation so that our future debts aren't worth much.

pragmatic• 17 years ago

One point about Keynes theory that if I remember correctly goes something like spend in bad times cut back in good times.

Keynes is overused much like prescription antibiotics.

"Prescribing Keynesianism to some politicians is like prescribing crack to a coke addict. In the 1970s, the patient hit rock bottom. The U.S. had high unemployment, and the Keynesian solution stopped working. The national government spent and spent, but unemployment only got worse. Then came inflation, something Keynesians had no answer for."

The problem is we have been borrowing and spending like crazy both publicly and privately. We've had the accelerator pushed to the floor, how do we go faster now?

Keynes (again as I remember) recommended these fixes for short term problems. Our problem is systematic over spending.

Obama et al. are prescribing aspirin because they believe the patient has a hangover, when the country really needs chemotherapy for debt cancer.

The bad debt that has accumulated needs to be accounted for, losses have to be taken, companies need to go into bankruptcy (which is often reorganization, not necessarily going out of business.)

We can't "cheat" our way out of this with Keynes.

avdempsey2• 17 years ago

The article cites this as the essential feature of Keyne's theory that Obama is calling for: government spending should make up the difference between national capacity for economic output, and the current projected level of economic output.

Paraphrasing the article: the US economy has a $15 trillion capacity, but the lack of effective demand has reduced our projected output to $14 trillion. By spending $650 billion we can make up that difference in output with the help of Keynesian multipliers.

I certainly sympathize with the parent. For the last three months I canvassed for Greenpeace pushing a reinvestment in renewable energy. One gentleman whose door I knocked on was skeptical (way more than just this one guy, door-to-door canvassing amidst recession is a great job if you enjoy getting kicked in the nuggets 100 times/day). He speculated the green movement was just another attempt to sell a newly packaged bubble to the American people.

So are we foolish to pursue this short-term fix? Is the reinvestment plan fairly characterized as a short-term fix?

To the first question I can at least express the hope that this investment will leave us with something inherently useful: much needed improvements to our infrastructure. We've been riding the wave of cheap energy from the petrochemical revolution for the last 100 years (thanks Steve Jobs Playboy article) and that is certainly appearing to mainstream America as a habit to kick.

To the second question, maybe it will help to explore the long term consequences of not meeting our productive capacity. By analogy we can consider the consequences of not meeting our capacity to educate. Imagine if America lost an entire year of engineering graduates. A short fall in capacity may result in a long-term compounded drop in overall engineering output.

radu_floricica• 17 years ago

Completely off-topic, but for a few years now I thought Greenpeace was... how should I put it in a polite way? Too passionate to be taken seriously. I take it it's not really so?

anamax5• 17 years ago

> By spending $650 billion we can make up that difference in output with the help of Keynesian multipliers.

Only if the multiplier is significnatly greater than 1. One of Obama's advisors made her bones showing that the multiplier for govt spending tended to be around 1 at and that the multiplier for tax cuts was around 1.5 both at current levels.

"at current levels" is important. If the multiplier is always greater than 1, the right thing to do is to have an infinitely large stimulus because the return will likewise be infinite. Does anyone believe that would happen?

DanielBMarkham• 17 years ago

Favorite Keynes quote, "In the long run, we'll all be dead"

Methinks the long run has finally arrived. Keynes and pals, as he predicted, are gone.

JesseAldridge• 17 years ago

"The bad debt that has accumulated needs to be accounted for, losses have to be taken, companies need to go into bankruptcy (which is often reorganization, not necessarily going out of business.)"

I get the feeling that while this is intuitively the best idea, it is also far riskier. What if allowing the economy to tank sends us into some kind of never before seen death spiral? The stakes here are extremely high and there is much that is not understood. Considering the circumstances, it seems better to take conservative actions which, though they may not be a great solution, at least prevent disaster.

yummyfajitas• 17 years ago

What if massive government spending sends us into some kind of never before seen (1) death spiral?

Fearmongering about the end of the world can cut both ways, but it usually cuts in the direction you were already leaning.

(1) Actually, the "stimulus"-caused inflationary death spiral has been seen before. However, I'm not going to argue that this will or will not happen as a result of the currently proposed stimulus. Fact is, I have no idea.

jacoblyles• 17 years ago

This list of Macroeconomist opinion is interesting:

http://www.ambrosini.us/wordpress/2009/01/political-affiliat...

Seems the professional macro guys are ambivalent about the stimulus.

Of course, the only economists' views that will actually make it into policy will be the Democrat economists.

markessien• 17 years ago

All this spending - will it not cause inflation? And considering the weakness of the dollar, will the inflation not cause further weakness? And when American goods become so cheap, considering that most manufactured goods are imported, will this not cause an exodus of capital?

I really don't know, since I have no real understand of global economics.

anthonyrubin• 17 years ago

Don't fret, neither does anyone else.

thomaspaine2• 17 years ago

There's a much bigger fear of deflation rather than inflation at the moment. Also, the dollar has actually been relatively strong since the financial crisis because there's been a large increase in the demand for safer assets, ie cash and treasury bills. A weakening dollar would probably be better for the economy as goods manufactured in America would be cheaper abroad, leading to an increase in net exports.

I don't quite follow the reasoning of cheap American goods -> exodus of capital.

profgubler• 17 years ago

The problem with deflation is what is going to happen afterwards. My guess is hyperinflation. Once prices get so low, you will have a lot of people coming back into the market that have been hording dollars. Once they get back into the market you will have to many dollars chasing to few goods, since the world has slowed production.

I really agree with you. That is why deflation is scary, it will likely lead to hyper-inflation.

shader3• 17 years ago

There are several major problems with inflation (meaning a vast expansion of the money supply through government spending, resulting in a rise in prices, and a fall in the value of the dollar):

1) That purchasing power went somewhere. Instead of going to what people wanted, though, it will have gone to what the politicians want, which is most likely a waste of resources. At the very best, the investments will be mostly harmless.

2) It doesn't just cause the exodus of capital, it practically is the exodus of capital: by printing money, they devalue all of the cash investments in the United States, thus reducing the amount of investable funds. While the foreign capital may be able to buy more dollars worth of goods per euro, there would be far less local capital to be invested.

3) While in theory the lower value of the dollar would make purchasing American goods more attractive to foreigners, that is often not the case. Just because a currency is cheap doesn't mean that items denominated in that currency are cheap. One example of this which I have experienced recently is the East Carribean Union dollar, which is worth much less than a US$, but where all of the items cost as much or more than they do here. Just because the currency is low in value doesn't mean that goods are actually cheap. Prices can rise to make up the difference, and often do.

However, if the dollar becomes cheaper not due to inflation, but because of our continued trade imbalance then yes, your description of increased exports would be quite accurate. Trade imbalances aren't bad, and they can't last forever. What goes in must come out or accumulate. And in the case of dollars, accumulation causes a relative change in value. Supply and demand and whatnot.

4) Extreme inflation can cause instability, and reduce investor interest. No one wants to invest in Zimbabwe, because they are financially (and in other ways as well) unstable. Inflation is bad because it throws the future into question, and makes people less likely to lend money. If they do it is often at a higher interest rate.

Also, deflation is not nearly as bad as many people think. Yes, dramatic and sudden deflation is just as bad for an economy as dramatic and sudden inflation. But an economy can get used to deflation just as well as it can adjust to inflation. In fact, it is almost a bonus, because it encourages saving, and thus investment and growth. I'm not saying that we should intentionally cause deflation, just that it's not a guaranteed cause of a death-spiral. The United States had a long deflationary period in the 1800s, and it was also one of the longer periods of high sustained growth. This will not always be the case, but there is little reason to be more afraid of deflation than inflation.

rml2• 17 years ago

The problem I have with the idea of "managing the economy" is that we might not even know what that phrase actually means. I often read "economy" and translate that as "runaway complexity." I sense this complexity in a system of such magnitude, involving so many interacting systems, and so many individual actors (many of which are computer programs at this point, I think) that it simply cannot be grasped by any single human mind, no matter the training or intelligence. This is just my sense of this; am I wrong? Someone here, please educate me.

corentin• 17 years ago

Do you know what your neighbours want? What they like and dislike, what they want for their children, and so on?

Now, do you think a genius would know? And if he knew, would he know better than them?

You can "run the economy" (that is, rule other people) to achieve your goals (e.g. if you are a pharaoh and want your own pyramid) but you just can't go against people's will to help them achieve their own goals.

rml2• 17 years ago

I agree with you inasmuch as an economy is about people, but what if it isn't about people so much as some larger "thing" (an incomprehensible interaction of systems, perhaps?) that individuals, and even governments, have to deal/interact with? What if that's just as true for the so-called global "elites" as for the rest of us? I suspect that it is. I think that what you say about people controlling other people is accurate; I just think it's only a small percentage of the data we have to account for.

cchooper3• 17 years ago

"Managing the economy" is not what Keynesianism is really about. It's about correcting a specific flaw in capitalist economies (the existence of multiple inefficient equilibrium positions). The idea is that once you correct that specific flaw, the economy will run itself better.

To look at it another way: Keynes argued that no one can manage the market, including the market itself. But that doesn't mean it can't be managed better than it is.

jwb1192• 17 years ago

Like all policies, you have to look at the downside risk.

IMO, the downside of a Keynesian solution is MASSIVELY larger than an chicago school type solution. You have the government taking on huge quantities of debt, no guaranteed cure for unemployment, and a risk for massive inflation..

Tichy• 17 years ago

I wish him luck, but it seems like a really big gamble to me :-( Going the Keynes route seems relatively uninspired - isn't that what all governments like to do, because it gives them an excuse to spend large?

newt0311• 17 years ago

"isn't that what all governments like to do, because it gives them an excuse to spend large?"

Well, if you are talking about irresponsible governments full of bureaucratic self-serving idiots (which would be most modern governments), then yes. That is what all governments do.

nazgulnarsil5• 17 years ago

I recommend checking out Keynes' opus The General theory of Employment Interest and Money. If it seems too daunting skip straight chapter 24 for a more general take before diving into the rest. http://www.marxists.org/reference/subject/economics/keynes/g...

If that first sentence doesn't strike you as odd go back and re-read Mind the Gap by Paul Graham.

rms4• 17 years ago

What do you think the fundamental flaw of capitalism is? The wording is a little odd, but capitalism by its very nature has a tendency to concentrate capital in the hands of the few.

nazgulnarsil5• 17 years ago

Why is that a bad thing? Successful companies in the free market are successful because they have given people something they want for a voluntary exchange of capital. These companies turn around and develop more products that people want.

Why do you seek a flaw in capitalism? Capitalism simply means the voluntary exchange of goods and services. The alternative is non-voluntary exchange i.e. you are forced.

If you don't know why privately controlled means of production are good you have a lot of reading to do. Might I point you to the Cato Institute or Ludwig Von Mises Institute (google for free literature). Or for a more popular example check out Friedman's bestsellers.

For the ugly and fast version: Would you put up with wal-mart taking $40 from your paycheck every month and telling you that you can come get a gallon of milk every week for "free"?

first you should be free to choose whether you want milk or not and whether to support it with your money.

second you have no way of knowing if you're overpaying because you have no idea what price milk would sell for if several companies were competing for your business.

thirdly you have no recourse if the quality of the milk goes down. you can try to sue wal mart..good luck with that. You might claim that people are still free to go buy other milk, but any other company selling milk is at a huge disadvantage. People have to pay that $40 a month regardless, so most figure they might as well get the milk out of it. competitors milk could cost half of what wal-mart charges, $20 a month. But from the perspective of the citizen that "private milk" costs $60 a month since they have to pay the $40 regardless.

In this scenario wal-mart has you as a captive customer. Before it made money by convincing you to buy milk from it with high quality and a low price. Freed of having to convince you to buy it wal-mart doesn't have to care much about customer service or product quality.

This is essentially the scenario of state owned goods and services. you're assuming that the central planner can come up with a better solution than lots of entrepreneurs taking a crack at it.

jordanf• 17 years ago

First real-world test? Look at Japan in the 1990s. How soon we forget history...and repeat it.

jwb1192• 17 years ago

I don't think Japanese monetary policy in the 1990's really qualifies as Keynesian..

They had a zero % interest rate and pioneered the concept of quantitative easing, but the theory underlying the policy wasn't exactly based on being able to manage growth through government spending

thomaspaine2• 17 years ago

from an article on japanese fiscal policy in the 90s:

"In the end, the September 1995 stimulus package did add significantly to economic growth in 1996. Not only was the actual real GDP growth of 3.6 significantly higher than the 0.9 percent recorded in 1995, it was at least 0.9 percent higher than the growth forecasted for 1996 by all of the major international institutions and the financial consensus...This stimulative effect can largely be attributed to the fiscal package, although the decline in the yen also stemmed the decline in net exports (by -1 percent of GDP in 1995 and by -0.4 percent in 1996)...There was actually no other source of positive impetus to the Japanese economy in late 1995 and early 1996 that can be identified except discretionary fiscal policy."

here's the rest: http://www.marginalrevolution.com/marginalrevolution/2008/12...

llimllib• 17 years ago

> Organized public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organisation (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle.

-John Maynard Keynes

bokonist• 17 years ago

Japan tried Keynesian policies. The result was the infamous lost decade: http://www.heritage.org/research/economy/bg2222.cfm

Obama Gives Keynes His First Real-World Test

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