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jaykimf
Joined: 24 Apr 2004
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 Posted: Wed Feb 04, 2009 8:35 pm Post subject: |
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Suddenly, everything old is New Deal again. Reagan is out; F.D.R. is in. Still, how much guidance does the Roosevelt era really offer for today�s world?
The answer is, a lot. But Barack Obama should learn from F.D.R.�s failures as well as from his achievements: the truth is that the New Deal wasn�t as successful in the short run as it was in the long run. And the reason for F.D.R.�s limited short-run success, which almost undid his whole program, was the factthat his economic policies were too cautious.
About the New Deal�s long-run achievements: the institutions F.D.R. built have proved both durable and essential. Indeed, those institutions remain the bedrock of our nation�s economic stability. Imagine how much worse the financial crisis would be if the New Deal hadn�t insured most bank deposits. Imagine how insecure older Americans would feel right now if Republicans had managed to dismantle Social Security.
Can Mr. Obama achieve something comparable? Rahm Emanuel, Mr. Obama�s new chief of staff, has declared that �you don�t ever want a crisis to go to waste.� Progressives hope that the Obama administration, like the New Deal, will respond to the current economic and financial crisis by creating institutions, especially a universal health care system, that will change the shape of American society for generations to come.
But the new administration should try not to emulate a less successful aspect of the New Deal: its inadequate response to the Great Depression itself.
Now, there�s a whole intellectual industry, mainly operating out of right-wing think tanks, devoted to propagating the idea that F.D.R. actually made the Depression worse. So it�s important to know that most of what you hear along those lines is based on deliberate misrepresentation of the facts. The New Deal brought real relief to most Americans.
That said, F.D.R. did not, in fact, manage to engineer a full economic recovery during his first two terms. This failure is often cited as evidence against Keynesian economics, which says that increased public spending can get a stalled economy moving. But the definitive study of fiscal policy in the �30s, by the M.I.T. economist E. Cary Brown, reached a very different conclusion: fiscal stimulus was unsuccessful �not because it does not work, but because it was not tried.�
This may seem hard to believe. The New Deal famously placed millions of Americans on the public payroll via the Works Progress Administration and the Civilian Conservation Corps. To this day we drive on W.P.A.-built roads and send our children to W.P.A.-built schools. Didn�t all these public works amount to a major fiscal stimulus?
Well, it wasn�t as major as you might think. The effects of federal public works spending were largely offset by other factors, notably a large tax increase, enacted by Herbert Hoover, whose full effects weren�t felt until his successor took office. Also, expansionary policy at the federal level was undercut by spending cuts and tax increases at the state and local level.
And F.D.R. wasn�t just reluctant to pursue an all-out fiscal expansion � he was eager to return to conservative budget principles. That eagerness almost destroyed his legacy. After winning a smashing election victory in 1936, the Roosevelt administration cut spending and raised taxes, precipitating an economic relapse that drove the unemployment rate back into double digits and led to a major defeat in the 1938 midterm elections.
What saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy�s needs.
This history offers important lessons for the incoming administration.
The political lesson is that economic missteps can quickly undermine an electoral mandate. Democrats won big last week � but they won even bigger in 1936, only to see their gains evaporate after the recession of 1937-38. Americans don�t expect instant economic results from the incoming administration, but they do expect results, and Democrats� euphoria will be short-lived if they don�t deliver an economic recovery.
The economic lesson is the importance of doing enough. F.D.R. thought he was being prudent by reining in his spending plans; in reality, he was taking big risks with the economy and with his legacy. My advice to the Obama people is to figure out how much help they think the economy needs, then add 50 percent. It�s much better, in a depressed economy, to err on the side of too much stimulus than on the side of too little.
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http://www.nytimes.com/2008/11/10/opinion/10krugman.html |
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ontheway
Joined: 24 Aug 2005
Location: Somewhere under the rainbow...
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Pluto
Joined: 19 Dec 2006
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| Posted: Thu Feb 05, 2009 9:19 am Post subject: |
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| mises wrote: |
| So, Pluto are you alone in a vast sea of Keynesians at grad school? Or, are some profs/students aware? |
Mostly, yes, but there are a couple of Freedmanites too.
Re: Krugman's "Delano Obama"
How are we going to pay for this stimulus? Where is the money going to come from? |
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Kuros
Joined: 27 Apr 2004
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| Posted: Thu Feb 05, 2009 9:39 am Post subject: |
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| Pluto wrote: |
| mises wrote: |
| So, Pluto are you alone in a vast sea of Keynesians at grad school? Or, are some profs/students aware? |
Mostly, yes, but there are a couple of Freedmanites too.
Re: Krugman's "Delano Obama"
How are we going to pay for this stimulus? Where is the money going to come from? |
Stop asking such questions; don't you know your ideology has been proven wrong??
*rolls eyes at Krugman* |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Thu Feb 05, 2009 10:44 am Post subject: |
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| Pluto wrote: |
| How are we going to pay for this stimulus? Where is the money going to come from? |
And why is nobody (with a large audience) asking this question? |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Fri Feb 06, 2009 8:44 am Post subject: |
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Keynes in action:
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| In Los Angeles, a window repairman secretly went around breaking windows by shooting them with a slingshot. Times are hard and he needed the business. The police caught him and, because he was a private individual instead of a state, now he is in trouble for his attempt to stimulate the economy. |
http://blog.mises.org/archives/009385.asp |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Fri Feb 06, 2009 9:38 am Post subject: |
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| Effective Keynesian fiscal policy requires a virtuous policy maker, capable of credible commitment - that is, commitment capable of resisting the future the siren calls of opportunistic reneging on past commitments. The Obama administration is new and has had but limited opportunity to abuse the trust placed in its promises and commitments. That puts it in a better position that the UK government, which has been in office since May 1997. But many of the top players in Obama�s economic team are strongly identified with the failed policies, regulations and laws that brought us the disaster we are facing. So the amount of credibility capital is severely limited even for Obama. Use it to get credit flowing again. Tax cuts for friends and favoured constituencies, replacing clapped-out infrastructure and even the fight against global warming will have to wait until trust - public credit - is restored. |
http://blogs.ft.com/maverecon/2009/02/fiscal-expansions-in-submerging-markets-the-case-of-the-usa-and-the-uk/#more-428
http://www.nakedcapitalism.com/2009/02/willem-buiter-us-and-uk-as-banana.html |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Sat Feb 07, 2009 8:03 am Post subject: |
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http://www.ft.com/cms/s/0/a861325c-f394-11dd-9c4b-0000779fd2ac.html?nclick_check=1
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Keynes and the triumph of hope over economics
To paraphrase the lawyers� dictum, when the facts are on our side, we pound the facts; when theory is on our side, we pound theory; and when neither the facts nor theory are on our side, we pound Keynes � and to great effect.
Keynes, not coincidentally, had nothing to say about the proper components of fiscal stimulus. This allows him to be cited with great effect by both paternal progressives (who favour government spending) and caring conservatives (who favour middle-class tax cuts).
To be sure, economists have published peer-reviewed technical analyses of the efficacy of government spending and tax cuts. But when nature fails us we console ourselves with Scripture, not science, and when markets fail us we turn to Keynes. His famous quip that �In the long run we are all dead� is a profoundly satisfying justification for borrowing a trillion dollars, right now, never mind that it contradicts an essential insight of our discipline: in the words of Fr�d�ric Bastiat from 1848: �The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen� � in other words, the long run.
One of these good economists was Bastiat�s fellow Frenchman Jacques Rueff, who in a 1947 journal article attacking The Fallacies of Lord Keynes�s General Theory pointed out that governments �have a choice between only two solutions: to allow the apparatus of production to adapt itself to the structure which, by the movement of prices, the will of the consumers tends to impose upon it, or to adapt the desires of consumers by authoritative regulation to the structure of the productive apparatus which we do not propose to change�. And insofar as the government�s �investment programme diverts means of production from the areas where they are more desired to less useful employments, it will reduce the standard of living�.
But Nobel Prize-winner Paul Krugman, who calls today �The Keynesian Moment�, justifies such a trillion dollar investment programme on precisely the Keynesian foundations that Rueff demolished � the claim that money �would otherwise be sitting idle�. When Mr Krugman buys his stimulus bonds, I am curious where the �idle� money will come from. Will he sell stocks? Bonds? Withdraw funds from the banking system? If it is not to come from a cash box, it is not idle, and Mr Krugman can only fall back on the hope that the government will use his funds more productively than businesses can.
But hope is precisely the platform on which President Barack Obama ran during his campaign. Hope has enabled the president to raise the estimate for the number of jobs his stimulus plan will create from 2.5m to 3m and then to 4m in the space of just a few short speeches. It is the ultimate faith-based initiative. In the spirit of unity he promised to bring to Washington, his proposal comprised 60 per cent new spending and 40 per cent tax cuts, the same proportion as that of Democrats to Republicans in Congress. Yes, we can!
�Thanks be to Heaven, we are thus freed from all this terrifying apparatus of economics,� to paraphrase Rousseau�s fictional Savoyard Vicar. �We have at less cost a more assured guide in this immense labyrinth of human opinions.� |
Fr�d�ric Bastiat was my first exposure to economics. I love this quote: �The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen�
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Economics in One Lesson
by Henry Hazlitt
The Lesson
Economics is haunted by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousandfold by a factor that is insignificant in, say, physics, mathematics or medicine-the special pleading of selfish interests. While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for them plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.
In addition to these endless pleadings of self-interest, there is a second main factor that spawns new economic fallacies every day. This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.
In this lies the whole difference between good economics and bad. The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.
The distinction may seem obvious. The precaution of looking for all the consequences of a given policy to everyone may seem elementary. Doesn't everybody know, in his personal life, that there are all sorts of indulgences delightful at the moment but disastrous in the end? Doesn't every little boy know that if he eats enough candy he will get sick? Doesn't the fellow who gets drunk know that he will wake up next morning with a ghastly stomach and a horrible head? Doesn't the dipsomaniac know that he is ruining his liver and shortening his life? Doesn't the Don Juan know that he is letting himself in for every sort of risk, from blackmail to disease? Finally, to bring it to the economic though still personal realm, do not the idler and the spendthrift know, even in the midst of their glorious fling, that they are heading for a future of debt and poverty?
Yet when we enter the field of public economics, these elementary truths are ignored. There are men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as the way of economic salvation; and when anyone points to what the consequences of these policies will be in the long run, they reply flippantly, as might the prodigal son of a warning father: �In the long run we are all dead.� And such shallow wisecracks pass as devastating epigrams and the ripest wisdom.
But the tragedy is that, on the contrary, we are already suffering the long-run consequences of the policies of the remote or recent past. Today is already the tomorrow which the bad economist yesterday urged us to ignore. The long-run consequences of some economic policies may become evident in a few months. Others may not become evident for several years. Still others may not become evident for decades. But in every case those long-run consequences are contained in the policy as surely as the hen was in the egg, the flower in the seed.
From this aspect, therefore, the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups. |
So, what will be seen is the "stimulus" effect on immediate job creation. What is unseen is the decreased standard of living in the future as a result of deficit spending. |
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ontheway
Joined: 24 Aug 2005
Location: Somewhere under the rainbow...
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| Posted: Sat Feb 07, 2009 8:34 am Post subject: |
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| But the tragedy is that, on the contrary, we are already suffering the long-run consequences of the policies of the remote or recent past. Today is already the tomorrow which the bad economist yesterday urged us to ignore. The long-run consequences of some economic policies may become evident in a few months. Others may not become evident for several years. Still others may not become evident for decades. But in every case those long-run consequences are contained in the policy as surely as the hen was in the egg, the flower in the seed. |
"Today is already the tomorrow which the bad economist yesterday urged us to ignore."
Brilliant.
Thanks for posting this stuff. |
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mises
Joined: 05 Nov 2007
Location: retired
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ontheway
Joined: 24 Aug 2005
Location: Somewhere under the rainbow...
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| Posted: Fri Aug 21, 2009 8:41 am Post subject: |
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This fool-the-market strategy may work temporarily. Its effectiveness must be reflected in oil prices; the Fed needs to target oil prices in its interest rate policy. If oil prices run from current levels, it means the market doesn't believe the Fed. That would force the Fed to raise interest rates quickly which, unfortunately, would trigger another deep recession.
Instead of a V-shaped recovery, we may instead get a W curve. A dip next year, although perhaps not statistically deep, could deliver a profound psychological shock. Financial markets are buoyant now because they believe in the government. The second dip would demonstrate the limits of government power |
- Andy Xie
Smart guy.
FYI. Somewhere, way back 6 months or more ago, I posted my own expectation that we will have a "W" recovery. Of course, the second upward rising slope is likely to be very long and painful if we don't get some serious restructuring and eliminate the socialism that causes our economic problems. |
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Pluto
Joined: 19 Dec 2006
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| Posted: Fri Sep 11, 2009 11:13 am Post subject: |
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Keynes, like the Clap, is the gift that just keeps on giving.
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The Keynesians Were Wrong Again
We won't see a return to growth without incentives for job-creating investment.
From the beginning, our representatives in Washington have approached this economic downturn with old-fashioned, Keynesian economics. Keynesianism�named after the British economist John Maynard Keynes�is the theory that you fight an economic downturn by pumping money into the economy to "encourage demand" and "create jobs." The result of our recent Keynesian stimulus bills? The longest recession since World War II�21 months and counting�with no clear end in sight. Borrowing close to a trillion dollars out of the private economy to increase government spending by close to a trillion dollars does nothing to increase incentives for investment and entrepreneurship.
The record speaks for itself: In February 2008, President George W. Bush cut a deal with congressional Democrats to pass a $152 billion Keynesian stimulus bill based on countering the recession with increased deficits. The centerpiece was a tax rebate of up to $600 per person, which had no significant effect on economic incentives, as reductions in tax rates do.
Learning nothing from this Keynesian failure, which he vigorously supported from the U.S. Senate, President Barack Obama came back in February 2009 to support a $787 billion, purely Keynesian stimulus bill.
Even the tax-cut portion of that bill, which Mr. Obama is still wildly touting to the public, was purely Keynesian. The centerpiece was a $400-per-worker tax credit, which, again, has no significant effect on economic incentives. While Mr. Obama is proclaiming that this delivered on his campaign promise to cut taxes for 95% of Americans, the tax credit disappears after next year.
The Obama administration is claiming success, not because of recovery, but because of the slowdown in economic decline. Last month, just 216,000 jobs were lost, and the economy declined by only 1% in the second quarter. Based on his rhetoric, Mr. Obama expects credit for anyone who still has a job.
The fallacies of Keynesian economics were exposed decades ago by Friedrich Hayek and Milton Friedman. Keynesian thinking was then discredited in practice in the 1970s, when the Keynesians could neither explain nor cure the double-digit inflation, interest rates, and unemployment that resulted from their policies. Ronald Reagan's decision to dump Keynesianism in favor of supply-side policies�which emphasize incentives for investment�produced a 25-year economic boom. That boom ended as the Bush administration abandoned every component of Reaganomics one by one, culminating in Treasury Secretary Henry Paulson's throwback Keynesian stimulus in early 2008.
Mr. Obama showed up in early 2009 with the dismissive certitude that none of this history ever happened, and suddenly national economic policy was back in the 1930s. Instead of the change voters thought they were getting, Mr. Obama quintupled down on Mr. Bush's 2008 Keynesianism.
The result is the continuation of the economic policy disaster we have suffered since the end of 2007. Mr. Obama promised that his stimulus would prevent unemployment from climbing over 8%. It jumped to 9.7% last month. Some 14.9 million Americans are unemployed, another 9.1 million are stuck in part-time jobs and can't find full-time work, and another 2.3 million looked for work in the past year and never found it. That's a total of 26.3 million unemployed or underemployed, for a total jobless rate of 16.8%. Personal income is also down $427 billion from its peak in May 2008.
Rejecting Keynesianism in favor of fiscal restraint, France and Germany saw economic growth return in the second quarter this year. India, Brazil and even communist China are enjoying growth as well. Canada enjoyed job growth last month.
U.S. economic recovery and a permanent reduction in unemployment will only come from private, job-creating investment. Nothing in the Obama economic recovery program, or in the Bush 2008 program, helps with that.
Producing long-term economic growth will require a fundamental change in economic policies�lower, not higher, tax rates; reliable, low-cost energy supplies, not higher energy costs through cap and trade; and not unreliable alternative energy surviving only on costly taxpayer subsidies.
Unfortunately, Mr. Obama seems to be wedded to his political talking points, and his ideological blinders seem to be permanently affixed. So don't expect any policy changes. Expect an eventual return to 1970s-style economic results instead.
Mr. Ferrara, director of entitlement and budget policy for the Institute for Policy Innovation, served in the White House Office of Policy Development under President Reagan, and as associate deputy attorney general of the United States under the first President Bush. |
More Keynes, More Gifts, Great! Keynes also had this funny idea that if interest rates were lowered enough, people would stop saving and start spending; this was done to boost aggregate demand. In the 1930's there was a high savings rate, but today....
Wall Street Journal |
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