Most politicians don’t know any better. They certainly don’t know any economics. So the same toxic policy mix of Keynesian deficit spending and Monetarist money printing has been implemented around the world since this crisis started four years ago. Just like in any other recession of the past forty years, ever since Nixon cut the last link to gold and fulfilled every interventionist’s wildest fantasy: unlimited paper money under full control of the state! Yeah, baby, no more recessions!
Alas, it is not working, is it?
Rates were cut and the state did not only spent money it didn’t have, as usual, it spent much more money it didn’t have. But the economy did not recover. So more of this policy was implemented. And then, more again. In fact, by any standard, never before in modern times has the economy been ‘stimulated’ more through Keynesian and Monetarist government intervention than over the past four years. Balance sheets of major central banks have tripled, banks have been receiving limitless funds for free and will continue to do so forever, and governments are running deficits the likes of which mankind has only ever seen at the height of major wars, and which are increasingly funded by the printing press.
It is still not working.
You would probably guess that the interventionists of Keynesian and other ilk would be a bit more humble by now. Maybe check a few of those premises in their models? Or maybe start thinking again about those elusive explanations for what’s wrong with the economy in the first place? Are we really suffering from a lack of paper money and government spending? Maybe it is not simply down to all of us being too depressed, morose, and in need of some policy Prozac. Maybe something else is broken.
Alas, no. The academically trained Keynesian economist is too committed to his or her beliefs to let the facts get in the way. Why has policy not worked? Because, wait for it, we have been too timid. We need the same policy. We just need more of it. A lot more.
– from the latest Schlichter File, posted today.
LATER: See also this recent interview with Schlichter.
The problem isn’t Keynesian economic though: the problem is it is only half of the equation and not really followed.
Keynes said consumption and investment really should equal 100% of the economy. When the market drops to the point that neither are able to make up for the shortages of the other, we go into a downward spiral. Government can make up the difference when times are bad economically. When nobody is hiring because orders aren’t coming in, a government jobs program shoots money into the economy and keeps people from going hungry. This is covered in Macroeconomics 101.
(As an aside, it is difficult to say it isn’t the government’s job and the free market will fix the problems when the free market is in a downward spiral and doesn’t know what to do next.
I blame the likes of all the talking heads on TV that throw around terms like Kenyesian economics without really understanding what they mean and why. There’s more to it than just government spending.)
The problem is the politicians didn’t read the rest of the theory which stated when times were good, government should stop spending on all those social programs and let just the investment and consumption parts of the equation again equal 100% of the economy.
Reagan killed the Soviet Union by outspending them. We could provide guns AND butter; they had to choose. The problem is with the USSR in the dustbin of history, nobody took away the credit cards from DC. Times were good in the late 80s and all through the 90s, but Washington just kept spending on social programs we didn’t need. Now that they are needed, they really can’t be afforded.
Say’s Law was fine until we entered the industrialized world and global markets. Say’s Law couldn’t provide an answer out of the Great Depression and Kenyes could. Unfortunately, politicians everywhere just read the part about providing for everyone and realized they could get reelected doing that. They forget to read the part about “only until the economic crisis is over.”
The problem isn’t Keynesian economic though: the problem is it is only half of the equation and not really followed.
Keynes said consumption and investment really should equal 100% of the economy. When the market drops to the point that neither are able to make up for the shortages of the other, we go into a downward spiral. Government can make up the difference when times are bad economically. When nobody is hiring because orders aren’t coming in, a government jobs program shoots money into the economy and keeps people from going hungry. This is covered in Macroeconomics 101.
(As an aside, it is difficult to say it isn’t the government’s job and the free market will fix the problems when the free market is in a downward spiral and doesn’t know what to do next.
I blame the likes of all the talking heads on TV that throw around terms like Kenyesian economics without really understanding what they mean and why. There’s more to it than just government spending.)
The problem is the politicians didn’t read the rest of the theory which stated when times were good, government should stop spending on all those social programs and let just the investment and consumption parts of the equation again equal 100% of the economy.
Reagan killed the Soviet Union by outspending them. We could provide guns AND butter; they had to choose. The problem is with the USSR in the dustbin of history, nobody took away the credit cards from DC. Times were good in the late 80s and all through the 90s, but Washington just kept spending on social programs we didn’t need. Now that they are needed, they really can’t be afforded.
Say’s Law was fine until we entered the industrialized world and global markets. Say’s Law couldn’t provide an answer out of the Great Depression and Kenyes could. Unfortunately, politicians everywhere just read the part about providing for everyone and realized they could get reelected doing that. They forget to read the part about “only until the economic crisis is over.”
The economic death spiral is just Keynesian superstition. Keynesian economics should have died in the 70s when the appearance of stagflation invalidated one of its central tenets.
“I don’t understand. I’ve applied over two dozen leaches to this patient and he still isn’t getting better. Quick! Run out and and get me another two dozen leaches!” –
Paul Krugman, et al
Steven Rockwell is correct when he says that Keynesian theory calls for government to stop the spending (actually, run surplusses) when times are good, but the politicians conveniently forget that half of the equation. Unfortunately, the rest of his post is almost entirely wrong.
Keynesian economic thought is precisely the problem, because it is utterly wrong (and Say was right). Demand is never the problem because it is always infinite. Consumption and investment always equal 100% of the economy; that’s a tautology. (As, for that matter, is appealing to “Economics 101”, since all introductory macroeconomics is pure Keynes, thanks to enablers such as Galbraith.) The only “problem” is when the total is less than what the politicians would like it to be. What Keynes saw as a “problem” requiring the heavy hand of government is in reality just the market correcting some imbalance (probably, although not necessarily, caused by government).
Keynes provided a convenient and superficially rational justification for politicians to do what they want to do anyway, but it was never a rational or coherent economic theory. Keynes’ General Theory is merely a collection of warmed-over and logically inconsistent ideas most of which had long been discredited by real economists (Keynes was a poseur). (Read Lewis’ “Where Keynes Went Wrong” for the gory details.) And he certainly never pointed the way out of the Great Depression; if anything, the Keynsian-rooted New Deal exacerbated the problem. Just as it is now exacerbating our current economic malaise.
Thanks to Keynes and his acolytes, what would have been ordinary, short-term corrections, necessary to the health of the system, are now supressed and converted into structural economic flaws. They accumulate until the system can no longer tolerate the stress, at which point a massive blowup occurs. That is precisely where the global economy is now headed. The classic Keynsian nostrums, always “voodoo economics” anyway, are no longer having even their palliative effect. Which doesn’t mean that we won’t continue to try them because, as Schlichter says, most politicians (and, for that matter, most economists) “don’t know any better”. And they’re too invested in that one trick to admit failure, let alone to search for something which might actually work.
Steven Rockwell:
“As an aside, it is difficult to say it isn’t the government’s job and the free market will fix the problems when the free market is in a downward spiral and doesn’t know what to do next.”
Not sure about that. The “free market” is a collective noun to describe the sum total of human interactions via commerce. It is an abuse of language and logic, therefore, to say that a network can “do” something; only individual human actors can think and act. (Sorry for the sermon but this sort of thing is important).
As for the inability of economies in a downward movement to recover unaided by government spending, that just isn’t true. In 1920-21, after WW1, the US and UK economies recovered without any fiscal stimulus; ditto after the end of the Napoleonic War in 1815. The UK economy recovered in 1982 under the sort of austerity policies that are now attacked.
Also, the idea that Say’s Law is rendered invalid by globalisation (ie, free trade) strikes me as questionable, at the very least. I would like to see more explanation for why you hold this view.
Did you read the other day that Dave’s government is planning to “kick start” the economy by spunking a billion pounds on various so-called investments? He deserves to be hung by his thumbs. The idea that an economy as large and diverse as Britain’s can be “kick started” as if it is a motor cycle engine is perverse, and the thought that even if it were possible, a billion pounds would do the trick is risible. As far as I can see, the main purpose of this announcement was to give cover to provide a loan to Sheffield Forgemasters, in a no doubt doomed attempt to keep the cretin Nick Clegg in his Sheffield seat come the next election. If an old lady steals a tin of cat food for poor little Tiddles, she gets taken to court. If a politician steal a billion pounds so as to save his pointless career he’s “kick starting the economy”. Revolution now!
@Steven Rockwell:
On the contrary, I find it quite easy to say that the government shouldn’t do things it isn’t competent to do. Marxists can say that Communism is a good idea, the Soviets just didn’t do it right. Keynesians tell the same story. In addition to the conflicts of interest that the politicians have, and the timing problems, there is the more fundamental problem that investor psychology (aka “animal spirits”) is a recursive game. If Keynes’ theory ever worked in the first place, in so far as it depended on investor psychology, he invalidated it as soon as he published it.
There’s definitely no “downward spiral”. If it looks like that it’s because each round of money printing makes things worse.
And, yes, if you stop the money printing, it will look *even worse* for a while. Investments will fail — but these are investments that were only possible because of artificially cheap credit. Asset prices will fall — but these are assets prices that are being propped up by what amounts to government price fixing.
So politicians’ interpretation of Keynes is wrong *and* Keynes is wrong. “Stimulating” the economy might make the GDP figures look good but all it does is encourage bad investments and artificially inflate asset prices.
“And, yes, if you stop the money printing, it will look *even worse”
The emphasis should be in “look”. A country with 2% growth but getting indebted at 10% of GDP year is worse than a country in a 1% recession and getting indebted at 1% of GDP year.
Growth can’t be at all costs because that isn’t growth.
Somewhere, someday, there will be someone who can convey this message in such a way that ordinary people can finally understand it, and stop falling for these grandiose fallacies spun by pols for the benefit of pols—none of the present turmoil’s causative factors, or past instances, for that matter, are economic in nature.
What we refer to as an economic recession or depression is a political collapse brought about by erroneous political decisions which manifests itself through economic symptoms.
After millenia of struggle at subsitence levels, suddenly, mysteriously, all sorts of innovations in agriculture, industry, trade, medicine, and much, much more, led people in the west to a life beyond the wildest fantasies of our ancestors.
What was the big discovery? the big innovation? the big revolutionary idea that transformed thousands of years of human suffering?
Allowing people to freely pursue their own economic interests without a vast myriad of social and political obstructions and controls which stifled and prevented fresh approaches and new products.
The lord did not have to approve, or the king, or the emperor, or the bishop, or the chief, or the guild, or the local crime syndicate, and on and on and on.
My grandfather’s family could come here from northern europe and buy some land, farm it, raise a family, and prosper until, when my mother was a young girl in the 20’s and 30’s, they could give a $20 gold piece as a birthday present, and provide well for 8 children.
My grandmother’s family could come from central europe, work in the stockyards until they saved up enough, and then open their own butcher’s shop for her father, and later a bakery next door for her mother.
I remember her telling me that her father, who was as strong as a bull, stood and cried as the sign for his shop was put in place, and how proud he was when he could afford to buy the store next door for his wife’s bakery.
What gymnastics would be required today to obtain the political approvals for such simple, yet profoundly important, endeavors? How many barriers have been erected to prevent a man and his wife and their family from realizing their dreams in such a productive fashion?
Our societies have fallen victim to the statists’ wildest dream come true—it is once again being taught, and believed, that those who control the apparatus of the state are wiser, smarter, more compassionate, more just, more benevolent, more everything good; and it is the private citizen who wishes to work and prosper who is dangerous, polluting, greedy, callous, dishonest, and all bad things.
This venomous spook story has ben peddled in earnest for the last century and more, by every venue possible, until now, whenever there is any form of economic distress, the cry goes up, “look to the state, the wise men there will save us!”
Keynes is wrong, not because of some misunderstanding, nor some incompletion, nor because of some intricacy of economic theory that he doesn’t get quite right.
He is wrong because he requires political people to make political decisions which are economically viable across a vast and complex economic landscape which they do not understand, cannot comprehend, and are utterly unable to manage.
The genius of freedom is not that people just get to do what they want, but that they can concentrate on what they do best without constant distractions and barriers preventing them from acting on their own best judgement.
Some succeed, some fail, many do some of each, but a free individual engaging in commerce with other free people can never coerce everyone else around them to cover up and pay for their failures.
Only the politicians and their lackeys, the ones that Keynes relies on for so much wisdom and far-sighted management skills, can do that.
Insanity.
Good point, luckylucky, and another factor to consider is that the measurement of GDP itself is fundamentally dishonest. GDP is supposed to be “the market value of all final goods and services produced within a country in a given period.” Yet as presently calculated it includes government spending. Government produces nothing, so how can its forced transfer of money from one sector of the economy to another be rationally assigned any incremental value? If anything, it should be a negative factor in GDP calculation.
No Steven Rockwell – it would not matter, in relation to how to react to a slump, if government ran a fiscal surplus in good times.
Increasing government spending in time of a credit money bubble bust would still be a BAD thing to do.
Keynesians (like Chicago school people) claim to be “empirical” and denounce evil Austrian School people as slaves of abstact logic. But they are not really empirical at all.
The Keynesians (Samuelson and the rest of them) predicted a terrible slump after World War II – especially if government spending was cut.
Well in the United States the so called “don nothing Congress” vastly cut government spending – and the economy boomed.
Did Keynesians hold their theory to be refuted?
Of course not – and Samuelson’s wrote a book (full of Keynesian absurdities) that was made the number one selling textbook in the universties.
“Well there was pent up demand and…..”
Oh yes – what about the 1921 credit money bubble bust?
Warren Harding’s Administration reacted to that by CUTTING government spending (by some 25%). And the economy (in defiance of Keynesian dogma) quickley recovered.
What do Keynesians have to say in the face of that example? How do they defend their ideology?
Perhaps we should move from empirical examples to economic logic.
What did Lord Keynes say created slumps?
Surely, Mr Rockwell, a man (John Keynes) who told everyone want to do in the face of a slump must have had a really good explination for how they are caused.
Accept (as writers such as Ludwig Von Mises, W.H. Hutt, Henry Hazlitt and now Hunter Lewis in “Where Keynes Went Wrong” have pointed out) Keynes had no real idea at all.
The best he could come up with was to talk vaguely about “confidence” or “animal spirits”.
Yes – Keynes did not have a clue what caused a bust, and when this was pointed out to him all he could do was come up with some sneering personal comment (the correct response to such comments would have been to punch Keynes in the face, but unfortunatly Keynes was presented with civilized men who did not respond to personal attacks in such a way – so Keynes was accepted as a “genius” who “won the debate”).
So what does cause an economic bust?
The phony credit money bubble “boom” that always comes before it.
That is why human beings talk of “boom-busts”.
Want to prevent a bust?
Do not have a credit money boom.
Fund investment from real savings – not from the Central Bank (or private bank) book keeping tricks.
And how do you get out of a bust?
By allowing prices and wages to adjust to reality – to back to where the economy really is (away from the fantasy of the credit bubble economy).
Government spending more money (whether financed by the printing press – or in any other way) is just an an effort to deny reality.
In the end it always failed.
Indeed, in the long term, in makes things WORSE than they would otherwise have been.
“In the long run we are all dead”.
Said a man who died in 1946.
Now – IT IS THE LONG RUN.
Oh – by the way, the modern Chicago School people do not have a clear explination of what causes a slump either. In the end they start engaging in prattle about “confidence” (and so on) as well – listen to Mr Osbourne and co talk.
So it is not really “the Austrian School explination versus other explinations”.
As there are no real other explinations.