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Are You Stimulated Yet?
Posted by: Dale Franks on Wednesday, January 28, 2009

So,President Obama's stimulus bill has now passed the House on a party-line vote (Good!) in which the only people to cross the aisle were 11 Democrats, to vote against it. So, it's on to the Senate where we can probably expect the wonderfulness of bipartisanship to, again, fail to appear.

Pres. Obama wanted strong bipartisan support, they say. If so, then when being counseled about what should be in the bill by Republican House honcho John Boehner, he probably shouldn't have turned a dead-eyed stare at Rep. Boehner, and wised off with, "I won."

That's right. You won. And now, you own the stimulus package.

Good luck with that.

Because, as most clear-thinking people realize, the stimulus bill won't stimulate much. The last time we tried this, in the 1930s, we managed to reduce the nation's unemployment rate to...17%.


Fortunately for FDR, he had an agent waiting in the wings to rescue the economy from the Great Depression: Nazis. I mean, if you want to reduce unemployment, it's helpful to be able to put 12 million people in uniform.

Obama doesn't have any Nazis handy.

On the bright side, we will now have a fascinating experiment to see if Lord Keynes' original ideas have any merit. And you, my friends, get to be the test subjects.

Looking over the bill, I'm not sanguine about the results. mainly, that's because since Keynes' first came out with "The General Theory" in 1936, we've had 80 years of experience with how it actually works, and the original ideas of Lord Keynes have had to undergo a restructuring in light of that experience, and to account for the Monetarist and Austrian criticisms to which it was subjected.

Out of that experience rose the Neo-Keynesian School, which I basically subscribe to, in that I beleive that:

1) Macroeconomics arises from microeconomic foundations.
2) Information is, in many cases, asymmetrical, which rules out perfect competition.
3) Monetary policy should aim at macroeconomic stabilization, and not to produce short-term economic gains (at the price of increased inflationary expectations).

I suppose I should also note that I am a Neo-Keynesian only because we have a fiat currency. If we didn't...well, that would be another story.

In any event, Keynesianism was, I thought, killed in the 1970s by stagflation, just as the original ideas of Monetarism were killed in the 1980s and 1990s by the decoupling of inflation and the money supply.

We will now have a fascinating experiment to see if Lord Keynes' original ideas have any merit. And you, my friends, get to be the test subjects.Neo-Keynesianism is basically an attempt to sythesize what we know works from the original ideas of Keynes, Classical economics, and the Monetarist ideas of Milton Friedman.

What we are trying to do now, though, is a return to the original Keynesianism, that I thought pretty much everyone had agreed was basically unworkable in the real world. Even Paul Krugman seems now to have rejected his own academic work, which was broadly Neo-Keynesian, and abandoned his academic arguments that government intervention, even in cases of market failure, was more harmful than helpful.

As far as the stimulus bill goes, it appears "we are all Keynesians now".

We should know better.

Increasingly, it looks as if the Austrians were mainly right in their criticisms of a fiat currency—the regular economic shocks and deflations of the 19th century under the gold standard notwithstanding.

Unfortunately, going back on the gold standard may not be all that practical at this point.

Although it can be done, it might be a painful process. In 1926, when Winston Churchill was Chancellor of the Exchequer, the British government returned to the gold standard, after abandoning in the emergency of World War I. It resulted in massive deflation, and lots of unpleasant economic hardship.

I suspect the main problem with that move was that they tied the pound to the pre-war standard of £4.83 per ounce, rather than taking into account the inflationary effects of the war-era spending, but it still gives one pause.

And, there is one other thing that gives one pause, as well, which is the economic record of boom and bust cycles during the 19th century, when we were on the gold standard.

Once you return to the gold standard, the money supply becomes relatively inflexible. The amount of money you have depends upon the amount of gold you have, and it is next to impossible to match the money supply with the demand for money over the short term.

But if the stimulus bill fails spectacularly, I expect the gold bugs will come crawling out of the woodwork.
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