And I'm with you on what you just said. But with one caveat : Someone needs to rethink Keynes, in a serous way, to make any kind of future reliance on his theory plausible in an era of mega debts and mega financial institutions That is, what works at one scale may not work at all, at another scale. A bird can fly if it is 15 ounces, or 150 pounds, but it is impossible for bird architecture to get much larger than that. There are plenty of 500 pound land based animals but no 500 pound birds. PS Someone needs to do likewise with laissez faire. In some situations it works like a charm, in others it does not work at all. Billy ======================================================= 12/20/2011 9:55:53 A.M. Pacific Standard Time, [email protected] writes:
I agree with Samuelson, “For the record, I supported Obama's stimulus -- though disliking some details -- and, under similar circumstances, would again. The economy was in a tailspin; the stimulus provided a psychological and spending boost. But how much is less clear.” Without the Bush/Obama stimulus, albeit ineptly administered at times, we would be in a much worse situation now. About the time of the maximum stimulus activity we had a few months of economy-wide deflation. A terrifying situation if it would have continued and escalated beyond the dramatic drop in real estate value. Our national deficit would be much worse now if we had suffered a depression-level drop in revenue due to much more massive unemployment and wage decreases. I agree that the our gigantic personal and government debt loads alter any application of Keynesian theories, but I don’t automatically reject all Keynesian thought. Chris From: [email protected] [mailto:[email protected]] On Behalf Of [email protected] Sent: Tuesday, December 20, 2011 10:35 AM To: [email protected] Cc: [email protected] Subject: [RC] [ RC ] Why Keynesian Economic Theory is Increasingly Untenable Washington Post December 19, 2011 Bye-Bye Keynes? By _Robert Samuelson_ (http://www.realclearpolitics.com/authors/?author=Robert+Samuelson&id=14456) "Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist." -- John Maynard Keynes, 1936 WASHINGTON -- The eclipse of Keynesian economics proceeds. When Keynes wrote "The General Theory of Employment, Interest and Money" in the mid-1930s, governments in most wealthy nations were relatively small and their debts modest. Deficit spending and pump priming were plausible responses to economic slumps. Now, huge governments are often saddled with massive debts. Standard Keynesian remedies for downturns -- spend more and tax less -- presume the willingness of bond markets to finance the resulting deficits at reasonable interest rates. If markets refuse, Keynesian policies won't work. Countries then lose control over their economies. They default on maturing debts or must be rescued with loans from friendly countries, the International Monetary Fund (IMF), government central banks (the Federal Reserve, the European Central Bank) or someone. There are other reasons why Keynesian policies might fail or be weakened. But they pale by comparison with the potential veto now posed by bond markets. Ironically, the past overuse of deficits compromises their present utility to fight high unemployment. There is no automatic tipping point beyond which a country's debt -- the sum of past annual deficits -- causes bond markets to shut down. But _Greece_ (http://realclearworld.com/topic/around_the_world/greece/?utm_source=rcw&utm_medium=link&utm_campaign=rcwautolink) , Portugal and Ireland have already reached that point, with gross debt in 2011 equal to 166 percent, 106 percent and 109 percent of their national incomes (gross domestic product), according to IMF figures. Heavily indebted _Italy_ (http://realclearworld.com/topic/around_the_world/italy/?utm_source=rcw&utm_medium=link&utm_campaign=rcw autolink) and _Spain_ (http://realclearworld.com/topic/around_the_world/spain/?utm_source=rcw&utm_medium=link&utm_campaign=rcwautolink) could lose access to bond markets. Thankfully, the _United States_ (http://realclearworld.com/topic/around_the_world/united_states/?utm_source=rcw&utm_medium=link&utm_campaign=rcwautolin k) is not now in this position. Interest rates on 10-year Treasury bonds hover around 2 percent; investors seem willing to lend against massive U.S. deficits. Just why is unclear. It's not that U.S. budget discipline is noticeably superior. Economists Pedro Amaral and Margaret Jacobson of the Cleveland Federal Reserve recently compared U.S. budget performance against that of the weak European nations. In 2012, the American budget deficit is projected at 7.9 percent of GDP; Greece's is 6.9 percent; Italy's 2.4 percent. In 2012, U.S. government borrowing -- the deficit plus renewing maturing debt -- is estimated to be 27 percent of GDP; Greece's is 24 percent; Ireland's 19 percent. On the plus side, the U.S. debt-to-GDP ratio is smaller than Europe's worst. Also, a "safe haven" effect -- reflecting the size of the U.S. economy and past political stability -- contributes to America's good fortune. Considering this, some economists urge more "stimulus." In a paper, Christina Romer -- former head of President Obama's Council of Economic Advisers -- argued that scholarly studies support the administration's view that its $787 billion stimulus in 2009 cushioned the recession. Another big stimulus "would be very helpful ... to really create a lot of jobs." I am less sure. For the record, I supported Obama's stimulus -- though disliking some details -- and, under similar circumstances, would again. The economy was in a tailspin; the stimulus provided a psychological and spending boost. But how much is less clear. As Romer notes, estimating the effect is "incredibly hard." For example, the Congressional Budget Office's estimate of added jobs from the stimulus ranged from 700,000 to 3.3 million for 2010. Suppose a new stimulus -- beyond renewal of the payroll tax cut -- did succeed at significant job creation. By piling up more debt, it would still risk aggravating a larger crisis later. There is no long-term plan to curb deficits. Americans seem to think they're invulnerable to a bond market backlash. Economist Barry Eichengreen, a leading scholar of the Great Depression, is dubious: "Given low interest rates and the still-weak U.S. economy, it will be tempting for the U.S. government to continue running deficits and issuing additional debt. At some point, however, investors will recognize this behavior for the Ponzi scheme it is. ... If history is any guide, this scenario will develop not gradually but abruptly. Previously gullible investors will wake up one morning and conclude that the situation is beyond salvation. They will scramble to get out. Interest rates in the United States will shoot up. The dollar will fall. The United States will suffer the kind of crisis that Europe experienced in 2010, but magnified." Governments have ceded power to bond markets by decades of shortsighted behavior. The political bias is to favor short-term stimulus (by lowering taxes and raising spending), which is popular, and to ignore long-term deficits (by cutting spending and raising taxes), which is unpopular. Debt has risen to hazardous levels, undermining Keynesian economics as taught in standard texts. Were Keynes alive now, he would almost certainly acknowledge the limits of Keynesian policies. High debt complicates the analysis and subverts the solutions. What might have worked in the 1930s offers no panacea today. -- Centroids: The Center of the Radical Centrist Community <[email protected]> Google Group: http://groups.google.com/group/RadicalCentrism Radical Centrism website and blog: http://RadicalCentrism.org
