Free Markets, Free People

Is Keynesianism finally dead?

By that I mean the belief that massive public deficit spending is the cure for an economic recession/depression?

It should be. And that’s the argument going on in at the G20 meeting in Toronto. The US is urging Europe and the rest of the world to “pump it up”. The rest of the world, rightly in my estimation, is resistant to the plea. The WSJ reviews why for us, using the US’s experience as the case study:

Like many bad ideas, the current Keynesian revival began under George W. Bush. Larry Summers, then a private economist, told Congress that a “timely, targeted and temporary” spending program of $150 billion was urgently needed to boost consumer “demand.” Democrats who had retaken Congress adopted the idea—they love an excuse to spend—and the politically tapped-out Mr. Bush went along with $168 billion in spending and one-time tax rebates.

The cash did produce a statistical blip in GDP growth in mid-2008, but it didn’t stop the financial panic and second phase of recession. So enter Stimulus II, with Mr. Summers again leading the intellectual charge, this time as President Obama’s adviser and this time suggesting upwards of $500 billion. When Congress was done two months later, in February 2009, the amount was $862 billion. A pair of White House economists famously promised that this spending would keep the unemployment rate below 8%.

Seventeen months later, and despite historically easy monetary policy for that entire period, the jobless rate is still 9.7%. Yesterday, the Bureau of Economic Analysis once again reduced the GDP estimate for first quarter growth, this time to 2.7%, while economic indicators in the second quarter have been mediocre. As the nearby table shows, this is a far cry from the snappy recovery that typically follows a steep recession, most recently in 1983-84 after the Reagan tax cuts.

The chart in question:

2.7% is not good, especially when most of the spending is government spending. Or said another way – this isn’t a great advertisement for over a trillion dollars spent to “stimulate” the economy.

And, as you see here – for the money, job creation has been absolutely abysmal, except for government jobs.

Now couple all of that with the awful news about house sales this past month (down 33%) and it would appear, economically, that the “stimulus” has essentially failed in its dual role of stimulating economic and job growth, wouldn’t you say?

Yet it seems the spin doctors in the administration want to pretend otherwise and, by the way, hook the rest of the world on their public spending addiciton. Thankfully, at least for their citizens, most of the rest of the world isn’t buying into the scheme. We, however, are stuck with the world’s most profligate spendthrifts in the guise of the Obama administration and the Democratic Congress.

We are told to let Congress continue to spend and borrow until the precise moment when Mr. Summers and Mark Zandi and the other architects of our current policy say it is time to raise taxes to reduce the huge deficits and debt that their spending has produced. Meanwhile, individuals and businesses are supposed to be unaffected by the prospect of future tax increases, higher interest rates, and more government control over nearly every area of the economy. Even the CEOs of the Business Roundtable now see the damage this is doing.

That’s a long way of saying the anticipation of raised taxes to pay off this unprecedented and massive assumption of public debt is keeping businesses on the sidelines and the business atmosphere unsettled. They’re not about to expand their businesses until they have a much better handle on what it will cost them to do so. That’s why, for what little recovery is taking place, it is mostly a jobless one.

Most who understand at least rudimentary economics knows that some “stimulus” from government spending, coupled with other government actions, such as tax cuts for individuals and businesses, may have a beneficial effect in times of recession. The stimulus funds get money in circulation and the tax cuts encourage businesses to expand and hire.

What we’ve seen is nothing but “stimulus” – no tax cuts, no incentive for businesses to come off the side lines. Additionally we’ve seen attacks on the business community, calls for much more draconian regulation and new mandates imposed by legislation such as health care reform.

The result has been a seemingly perpetually unsettled business atmosphere that has provided absolutely no incentive for companies to expand or hire.

What we should have all taken from this is that government “stimulus” funded by massive public debt isn’t the answer we were led to believe it was and, when it is all that is done, is more of a problem than any sort of a solution. All the “stimulus” has managed to accomplish is the promise of large tax increases to pay down the debt it created.

The other service it hopefully has rendered is to prove defective the once cherished Keynesian belief that government can spend us out of recessions.



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42 Responses to Is Keynesianism finally dead?

  • Keynesianism will never die because it’s right.  What should die is the false application of part of Keynes’ argument.  He said that when economies go into recession it’s possible that, due to sticky prices and wages, it can become virtually permanent.   You need stimulus at times to start the upward trend.  What Keynes did not want or foresee is the massive deficit spending during boom times, especially under Presidents like Reagan and Bush who expanded deficits during booms.  For Keynes, booms were times to run surpluses and save to stimulate the economy during the next deficit.  If Reagan and Bush had been Keynesians, they’d have run surpluses during the eighties and aughts, and we’d not be in the position we’re in.   Would Keynes have run deficits during a recession when debt was already so high?  I suspect he wouldn’t — Keynes was rather conservative in that regard.  Of course, those who don’t understand economics call any stimulus of the economy “Keynesian.”  The idea one could call Bush Keynesian when he ran deficits during a surplus is almost obscene, that’s the opposite of what Keynes would proscribe.   If only we’d been more Keynesian, then we’d have had fiscal discipline in the last thirty years and not be in this mess.   Our massive debt comes from following monetarist and so-called “supply side” economics which had no concern about debt.  It’s the failure of monetarism and the rejection of Keynesian economics which brought us to this collapse.

    • Sticky prices and wages? That’s nonsense. You need a causation, not just a claim that something is “sticky”.

      In reality what creates long term recession is the government. Regulation, taxation, and a failure to follow rule of law. That results in a banana republic nation, much the way Obama’s policies are driving us.

      • Blame it all on the government? Geez, that’s mindless silliness.  Lack of regulation lead to the collapse on wall street.  Bush had major deficits during a boom (and his wars didn’t help — you can blame government for those needless wars, governments are most dangerous when they turn citizens into murderers).   Markets need the state, they need regulation and rule of law to function.  Otherwise you get corruption, mafia like organized crime, and long term decay.

        • ” Otherwise you get corruption, mafia like organized crime, ”
          As opposed to corrupt and mafia like government.

    • If only we’d been more Keynesian, then we’d have had fiscal discipline in the last thirty years and not be in this mess.   Our massive debt comes from following monetarist and so-called “supply side” economics which had no concern about debt.  It’s the failure of monetarism and the rejection of Keynesian economics which brought us to this collapse.

      And if only cotton candy kittens and unicorns flew out you ass, you could be P.T. Barnum in the 21st Century!

      The idea one could call Bush Keynesian when he ran deficits during a surplus is almost obscene,

      And that is one of those sentences you spin off indicating an open head wound in your past.

      • Yet, Ragspierre, you can’t deny anything I say, you just hurl an insult or two.   My argument stands unrefuted.

        • Your arguments, as is frequently the case, stand unworthy of rebuttal.    With the evidence staring you in the face like a wolf about to remove your throat, you continue to cry for more government.

    • And the reason Keynes’ ideas continue is not due to them being right, it is they are what politicians want: justification for more government.

      What fun would it be for politicians if they followed a hnads off policy? The goal isn’t to end the recession so much as to take credit for ending it. Too bad if the New Deal actually makes the Depression into a Great Depression, too bad if Obama’s policies drive us over 8% unemployment, they don’t care, as long as the get the credit for the good, and can blame others for the bad.

      • OK, Don, you’re more on track here.  Keynes’ ideas have been abused by politicians who invoke them improperly, in ways that would cause Keynes to roll over in his grave.

    • Keynesian has now descended into a reenactment of the Russian Roulette sequences from the “Deer Hunter” .. thrilling but everybody knows it’s going to end badly.

    • Ka-Ching!!   Another 30 peices of silver for the Erb-ster!!!  Can he go even lower still as an Obama shill and try to justify the Obama Administation’s neglect of the border?  Stay tuned. . .

    • Scott seems unaware that Keynesian economics has never worked.  It did not work for Japan and it has not worked for us.  If Keynesian economics ever worked, we would constantly be in fat times because we constantly run deficits.  Scott evokes the specter of Bush and Reagan.  Scott keeps falling back on the Keynesian idea of running surpluses in good times.  But, there are no examples of politicians doing that.  Politicians always have more wants than money.  Clinton and Gingrich did not set out to have surpluses.  The revenue from the dot com bubble simply outpaced the amount spent.
      Scott truly jumps the shark when he claims it is the  “failure of monetarism and the rejection of Keynesian economics”.  First, it is the majority of politicians who reject Keynesian economics except as a method to spend money they do not have.  Second, Greenspan could never be accused of following a monetaristic policy.  1% interest rated do not such a policy make.   The 1% interest rates were Keynesian in an attempt to keep the economy rolling by inflating housing and creating a monstrous amount of new money via debt .  When Scott claims that is an example of “monetarism”, he is being absurd and showing he has not even a tenuous grasp on economics or reality.  Monetarism is about the controlled growth of the money supply to address inflation.  Keynesian policy is about the creation of debt and money to produce demand.   Scott needs to get his head of the “Myth of free Markets”.  As I predicted, it has lowered both his IQ and his basic understanding of economics.

      • The interest rates were a “Keynesian attempt?”  That’s just silly, Keynes would not advocate that.  You clearly have a warped view of Keynes’ theory.  You are right that politicians don’t act as Keynes’ theory would say they should, but that’s a failure of the politicians, not Keynes.   What happened is that to get long term booms Reagan first and especially Bush the Younger ran up massive deficits.   Keynes would certainly say that was suicidal and would lead to disaster.
        The real question is whether demand side economics can cause a return to growth when debt levels are so high.   We know that the monetarism of the last few decades has failed (Keynesian approaches were abandoned).   It’s clear de-regulation has failed, no one can deny that without destroying their credibility.   Neo-classical economics (Keynesian) would suggest that you can’t just grow your way out of this level of debt, and that a deep recession is necessary to rebalance.

        • No. it is not silly.  Keynes said “Credit expansion performs the miracle . . . of turning stone into bread”.  Keynes believed that if interest were eliminated then capital would become superabundant.  What is 1% or 0% interest rates, but exactly what Keynes believed?  Remember, low interest rates create money because it is easier to borrow.  That does not differ from government deficit spending which also creates money.  Ergo, very low interest rates and government deficit spending are two sides of the same coin. 

          Now, you are being silly.  Keynesian economics would never say “a deep recession is necessary to rebalance”.  The Austrians would, but just today Krugman went ballistic over the necessity of newer and improved stimulus.  You aren’t saying Krugman is not a Keynesian, are you?

    • “Keynesianism will never die because it’s right.”

      I see that Ott Scerb’s stylistic cadence is catching on.

  • ” What Keynes did not want or foresee is the massive deficit spending during boom times, especially under Presidents like Reagan and Bush who expanded deficits during booms.”
    Reagan always tendered a Balance Budget to Congress.  Congress chose to overspend.  But ironically Democrats tried to turn it around as an election campaign point against Reagan.  I see you continue the mythology.  The growth in the economy from TAX CUTS more than paid for Reagan’s military expansion (more of a restoration actually). So the deficit is on the Congress of that time period.

    • I was working in DC for a GOP Senator in the 80s (when the Senate had a GOP majority, and southern Democrats gave Reagan a working House majority).  I was there when the Reagan White House was saying budget deficits didn’t matter, and compromised with Congress to run ever higher deficits.  Reagan’s policies started this slide, he may have been one of the worst Presidents this country has had — in part because he was so disengaged, and started a path towards economic ruin.  Any growth came from high defiicts — it was like spending on a visa.   We are now reaping the cost of those policies — especially the de-industrialization of the country thanks to Reagan’s choice not to save industry and instead to borrow and spend, relying on foreign imports.

      • I’m starting to like Rags’ theory of an open head wound in your past, Scott.

      • “I was there when the Reagan White House was saying budget deficits didn’t matter, and compromised with Congress to run ever higher deficits.”

         You was dere, Chollie?
        Attending all those cabinet meetings, no doubt.
        My, how impressive.
        It ‘s a pity none of that stuff was covered by any of the media, so noone outside your select circle of political hacks knows about it.

        “southern Democrats gave Reagan a working House majority”


        Tip O’Neil might disagree.

  • Keynes was a brilliant and insightful economic thinker…who did not understand the political process.
    Like many true stars, Keynes’ greatest bane was his acolytes, who (as usual) took his ideas where he was appalled to see them go during his life, and WAY further afterword.
    On of Keynes’ failures in his notion of stimulus spending is failing to see that the governmental spend ratchet only allows spending to go one way.  That is political reality.  Thus, after a spending stimulus, Keynes’ notion fully anticipated a subsequent spending reduction.   These, of course, never come.
    As applied today the fundamental pretext is simply silly; government spends $1.00 (it took from a producer), and that stimulates $1.00 + X in economic activity.  It’s amazing that anyone with a tiny number of working brain cells would buy into that.  That it is a pretext for pure pork spending is evident even to an idiot like Erp.
    The perversion of sound economic policy that Keynes’ ideas became should be dead.  If it isn’t it should be finally and definitively dealt a death stroke by the economic academy.  OR THE PEOPLE.  The only reason it exists at all is because governments were able to wield powers they never should have had, attempting to control entire economies they cannot begin to even understand.  Recessions and depressions were NEVER “Great” until the 20th Century, and the sole reason they became as catastrophic as they have been, both in history and currently, it BIG GOVERNMENT.

    • A little better here, Rags.  But Keynes wasn’t trying to give politicians advice for the long term, he was explaining what was wrong with the economy in the depression — and he was right.  He also was right in the 20s when he criticized the Treaty of Versailles and argued that it set up another war (he was laughed at for that).   He has a theory that is still valid.  You are mistakenly criticizing a theory you apparently don’t understand when the blame is that politicians starting the 80s had policies of borrow and spend even in booms that would have been clearly condemned by Keynesian theory.

  • “Most who understand at least rudimentary economics knows that some “stimulus” from government spending, coupled with other government actions, such as tax cuts for individuals and businesses, may have a beneficial effect in times of recession. The stimulus funds get money in circulation and the tax cuts encourage businesses to expand and hire.”

    I  like to think I understand rudimentary economics, and I disagree. I understand ‘opportunity costs’; that ‘stimulus money will be spent somewhere. Just because it is not being spent by government does not mean it isn’t in circulation. Scrooge McDuck’s vault full of money is fiction, not reality. Gov’t. stimulus spending is more visible, that’s it and thus easier to quantify (and claim credit for), that’s all.

    ” Our massive debt comes from following monetarist and so-called “supply side” economics which had no concern about debt”

    Our massive debt has nothing to do with economics. It is purely political.  

  • It’s so amusing to see something like Erp spinning furiously, pretending they know something about economics and reality.
    Fact is, supply-side economics works every time its tried, which is why it is in ascendancy around the globe.  The mechanism is simple and readily understood; leave the people who produce more of their money, and they have an incentive to produce yet still, and yet more.  They will invest in themselves and other productive people, and in bettering those around them because they have the means.  It also recognizes the amazing genius of “cloud decision-making” (a really big “team”, which all us MBAs know is better than an individual) that we call “markets”.
    The approach Erp and his ILLke prefer takes your and my money, and gives it to “certified smart people” who are only arrogant asses with power.  The record is clear that they make awful decisions about were to put our money, and the net result is DAMAGE and a lowered standard of living for all Americans.

    • Nice fairy tale you’re spinning there Rags, but it is so out of touch with reality that it’s laughable.  So simple, so naive, very cute.   But if you look at the real world, you can’t hold such a simplistic theory, the world doesn’t work that way.

  • It seems to me that the central fallacy of Keynesian economics is the idea that the government has its own money.  As we all most of us many of us some of us know, it doesn’t: it spends money it takes from people, either as individuals or collectively (companies, corporations, etc.).  Thus, the only good that such government spending can do is to try to take money from where there is a genuine surplus and try to spend it in a way that does provide some sort of genuine stimulus, i.e. creates lasting business opportunities.  Government has shown little ability to get either of these things right. 

    In the case of taking genuine surpluses, tax law doesn’t really allow for the sort of carefully targetted, infinitey complex, constantly changing code (though Congress has certainly tried!).  Further, how can one determine who has a real “surplus” of money?  If, for example, I have $10000 in the bank, do I have a surplus that ought to be raided?  But what if I’m trying to save $15000 to start some sort of business project that will not only earn me a living, but also employ other people who otherwise haven’t got a job?

    In the case of providing lasting stimulus, the government doesn’t even try anymore.  The money is spent on “stimulus” such as direct payments (tax credits, unemployment payments) that don’t last, or else spent on short-term “shovel ready” projects that might provide work for a few months.

    I hope that Keynseian economics is dead, but I think  the WSJ is right: it provides too good an excuse for the Congress to spend and spend and spend.

    • But, see, when you and I decide to spend…or hold…our money, it is “sticky”…or icky…or something…
      Sometimes, HOLDING our money is the only RATIONAL thing to do, as markets clear out the NUMEROUS distortions created by BIG GOVERNMENT (i.e., the recent home finance debacle that was SOLELY the creation of government).
      There are EXCELLENT chart you can obtain, showing how the recession…without the least intervention…would have been over by now.  But, instead, we are headed for a MUCH worse situation…thanks to the notion that “smart people” can control us better than we ourselves.

  • Keneysian who?  G-20 what?  Economics huh?

    Where are the golf courses at?

  • I wanted to come back and address Scott one more time.  Keynesianism is about debt.  Yes, Scott can argue that Keynesianism proposes surpluses in good times, but I remember nothing in the “General Theory” that actually proposes total surpluses should offset total debt.  But, in the unlikely event Scott could find that, it goes against the very nature of politicians to completely offset the debt from stimulus.  So, absent a complete dictator, Keynesian economics could never even be tried, let alone proven right, as Scott claims.
    So, we return to the idea that Keynes and his economics is about debt.  What we have seen the last two years, is a great unwinding of debt (also called deleveraging).    The primary reason the stimulus failed is that increased government debt was was completely overshadowed by the decrease in debt of the consumer and of the total derivatives markets.  Overall, total demand declined because total available money (including debt) declined.  The whole house of cards of increasing debt, worldwide, collapsed.
    Karl Denninger has produced an interesting chart that covers all debt since about 1980.  It is a bit tough to read, but if you puzzle it out, you can see that virtually every class of is declining except Federal debt.  But, those increases in federal debt are overwhelmed by the reduced debt in the total system.
    What that means is that the total demand (or at least the ability to create demand) is dropping too fast for the Keynesian stimulus to matter.  The same think happened in Japan.  That is why all their stimulus failed.
    This has always been the flaw with Keynesian Economics.  It gives way too much credence to government as the agent of demand.  Years of inflating the money supply via cheap credit have now come to a stop.   The net is that our economy and the world’s economies cannot move forward until we work off all this debt and reach a sustainable level of demand and a bearable level of debt repayment.   But, the Fed, the SEC, the FDIC, and our legislators are doing everything they can to hide the pain and hide the unresolved debt.  That is why we have “mark to fantasy” rather than “mark to market”.  Just about every week we get a bank that has failed that $1 billion in liabilities, $1 billion in assets, but will cost the FDIC $800 million to close.  That tells us the assets have not been marked to reality.  Otherwise, it would cost nothing to close the bank.
    The floggings will continue until we handle the debt, either by default, repayment, or a combination of both.

    • Since its the debt that has to come down (consumer and business), would it have been better for the government to explicitly take up the debt load by cutting taxes instead of spending? Most taxpayers would have saved the cash, paid down debt (faster than they normally could have) or spent it.
      Also, isn’t a tax cut in a recession also Keynesian?

      • The concern of the Keynesians is the horrible taxpayers will save the money rather than spending it immediately.  The funny part is government takes years to get much of its actual stimulus spending out the door.  “Shovel ready” sounded good, but we knew it was another Pelosi lie.  At what point will people realize that if Pelosi or Obama tell the truth, it was an error.
        Just before being appointed as an economic adviser, Rohmer and her husband wrote a paper showing tax cuts had a higher multiplier than government spending.  She must have left that paper in California when she went to Washington.
        Obama claims the stimulus provided a tax cut.  That is a lie.  The stimulus provided a one time tax rebate.  People react differently to one time tax rebates tan they do do permanent tax cuts.

    • Actually, you’re pretty much using Keynesian theory to explain the problem.   Keynes lived in a day of far more limited government, he wasn’t advocating massive spending and certainly not massive debt.  He made his money in currency speculation, he knew the dangers of debt.

      • Keynes made and lost his fortune and then made another one.  I am pretty sure that if he had lived longer, he would have lost and then made another fortune.

  • I see That I am uneeded here, you have all easily picked apart Erb’s silly thesis.  One more thing remains to be said. It was not Keyenes’ followers who perverted his theory, it was he himself.
    He was so excited to be asked for advice by both the British government and the New Deal he told them a lot of nonsense about how deficits don’t matter, and that tax increases would actually help because it got wealth “flowing”.  The result was a decade long depression that could have been over in three to four years without idiotic socialist meddling.

  • RBS tells clients to prepare for “monster” money printing by the Federal Reserve
    As recovery starts to stall in the US and Europe with echoes of mid-1931, bond experts are once again dusting off a speech by Ben Bernanke given eight years ago as a freshman governor at the Federal Reserve.
    Entitled “Deflation: Making Sure It Doesn’t Happen Here”, it is a warfare manual for defeating economic slumps by use of extreme monetary stimulus once interest rates have dropped to zero, and implicitly once governments have spent themselves to near bankruptcy.
    The speech is best known for its irreverent one-liner: “The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost.”

  • Keynesian philosophy doesn’t work for the same reason any other economic philosophy doesn’t work: we never apply it fully and in a practical manner.  Yeah, we ramp up deficit spending during a recession, just like Keynes advised.  But then we do not cut spending when the economy returns to a healthy state.  The Austrian system is never fully applied either, and thus it doesn’t get a chance to work.
    Until we cut spending and eliminate deficits in order to reduce the debt (as opposed to talk of reducing deficits) there is no economic theory that will work.  I don’t see very many voices in government that are serious about cutting spending.  There is no shortage of lip service to fiscal responsibility, but there is no effort made at actually working towards a surplus so that the debt can be reduced.  Why are we talking about competing economic philosophies when government isn’t really following any of them?

  • Theories are aids to understand reality.  No theory is perfect, ideological approaches to reality tend to be abused and lead to over simplistic analysis.   People interpret reality to fit their theory.  That happens with Keynesian, Austrian, and any kind of economic theory.  The best approach is to recognize the strengths and weaknesses of all, NOT fall victim to irrational ideological thinking (again: ideology is always a vast over-simplification of reality that can only explain part of the picture) and instead focus on pragmatic problem solving.  That is what is required now — ideology is the easy way out (like Rags’ simplistic claims above).   Alas, reality defies any ideology.

  • Scott, didn’t anyone tell you that it’s not polite to impose your diarrhea on other people? Sure, it’s just verbal diarrhea in this case, but still.

    And this “argument unrefuted” stuff just makes you look desperate. Unlike wind-up toys like you, real people get tired of making the same detailed arguments against you over and over, only to have you wave them aside with your “I declare it to be so” style of smug condescension.

    Now go back to your office and get on with indoctrinating the students who are saddled with you. The adults around here would like to have a conversation without constantly being interrupted by utter nonsense.

  • As a way of rebooting an economy that’s fallen into a recessionary drift, Keynesian spending does not work and never has worked. It did not work during the Great Depression and it isn’t working now. The Stimulus bill has slowed and even thwarted the economic recovery and done nothing but inflate the ranks of government employees, while millions of private sector jobs are gone. Did nothing for the productive side of the economy.

    One reason that Keynsian spending does not work is because that sort of liquidity goes right to the least productive elements within the economy, those interests or those parts of interests that are involved in rent-seeking. There’s no real capital formation involved and the myth is that simply spending money in itself can “stimulate.” It stimulates Dead-Calm, which is precisely what the Great Depression was.

    Stop taxing capital coming and going and let the smart money confidently follow the investments it likes, lower taxes in general, shrink rather than grow the totally non-productive government sector, and stop trying to regulate real enterprise into the dust while GSEs like Fannie and Freddie are gorged with spending and distort the market.