Ignoring Reality
June 24th, 2010 | Author: JBH
Every once in awhile I troll around the internet for a discussion on economics or politics. One way I do it is by having alerts set up in Twitter that highlight whenever words/phrases such as ‘Ayn Rand’ or ‘free markets’ are used. Just a few days ago, I came across one that was too ripe to pass up. Low hanging fruit. Why do I do this? I’ve come to the conclusion that I’m tired of listening to ignorance. In the past, I would walk away. Now, with the level of ignorance and group think so high, more people need to enter the discussion and elevate it. Headline discussions need to stop and emotionally driven ideas need to be challenged.
What I hope you come away with from the discussion below, is the idea that many people that have strong opinions can not back them up with facts and reason. And when tested, they walk away. So start testing, and maybe they will rise to the challenge, helping to modify your philosophy, or they’ll stop being so free with spreading their opinions as truth. Either way, you win.
But, today, the right wing makes progress almost impossible. They object not only to demand generation through “stimulus,” they also insist on taxation policies that act against demand generation and thus ensure higher deficits. For instance, the right-wing’s attempts to maintain or create new tax reductions for the rich ensure that much of any reduction in federal revenues will go toward increased savings rather than stimulative spending that generates jobs. Rather than “trickle down” from the rich, what we should be relying on is a “gush up” from the poor and middle class who tend to spend a much larger portion of any new revenue than do the rich. What we need is more people buying movie tickets, pizzas, magazines, bus tickets, etc. — not more rich folk increasing their hedge fund investments or buying real estate. The easiest way to get more jobs created is to spend more money. Even though this may temporarily increase deficits as a percentage of GNP, the long term effect will be to increase GNP and thus reduce the deficit. Trying to reduce the deficit today will do nothing other than ensure that GNP growth remains slowed. Thus, “deficit reduction” efforts will, even on their own, result in increased deficits.
Keynes explained this all long ago. We need to find a way to get more Republicans to read what he wrote.
Keynes theory works until the point that government spending crowds out true investment. That is happening now.
BW - It is useful to remember that those Republicans who today claim concern for the deficit once supported Republican President Bush who, days before 9/11, said it was “incredibly positive news” that Republican tax-cut and spend policies were wiping out the Clinton budget surplus — since a return to deficits would halt the growth of the government.
JBH - Mr. BW, I stick by my thought that you do not understand AR from your implication that Greenspan’s actions mimic her thoughts. Given that her economic ideas were drawn from Hayek who did not believe in fiat currency. Also, his writings for AR where against fiat currency, arguing that only a gold standard-type of monetary system could be used for a free society as anything other than that would lead to a corrupt political system.
Keynesian principles have been used by both Democratic and Republican governments so I’m not sure what your argument is concerning your last post. And a point of clarification is needed wrt to Clinton’s surpluses. Even during those surpluses, the national debt grew which implies that government spent more than it collected and that the surpluses were an accounting gimmick at best.Jun 22
JBH - Mr. JS, I think you have neglected the larger drivers to any outsized growth the US experienced in the 50′s. Above-trend population growth, urbanization (which increased productivity), the rebuild of Europe, and Bretton Woods are considered by economists to be the large contributors to the post-WWII economic growth.
I would argue that the major difference between today and the 50′s would be in government involvement and in the increasing number of people that spend money before they have made it (government deficit spending, those with large mortgages, municipal pensions, federal entitlement programs, etc). Government spend as a percent of GDP was in the low/mid 20%’s in the 50′s versus 35% in the 90′s and 00′s (close to 45% in 2010). Given the economic studies that show the money multiplier for private dollars to be over 1.75 and government dollars to be sub 1, the facts point to lower GDP growth. Natural laws are hard to ignore.Jun 22
As Keynes teaches us, investment is largely determined by investor’s expectations concerning future consumption. Also, expectations inevitably too-heavily weight current conditions. Thus, uncertainty concerning consumption in the current period generates uncertainty about consumption in the future and thus lower investment. The way out is to stimulate consumption in the current period which causes investors to be more confident and thus stimulates investment…Jun 22
JBH - Mr BW, I agree with your premise but find it may lack some depth. No business leader I have spoken to or myself (as a capital allocator) would look at the temporary consumption brought on by the recent “Keynesian” policies as anything other than temporary. So, most look with a suspicious eye towards the economic numbers when government has become such a large part of it. It causes investors to wait and see what actual demand is since so much of our planning process is farther out than just one business cycle.
Also, I believe you may be neglecting that revenue (i.e. consumption) is but one part of the equation. Costs need to be considered (for everyone with the possible exception of Google). And costs come in many flavors; cogs, employee costs, regulation, trade protections, taxes, and most importantly, cost of capital. In uncertain times, the cost of capital is adjusted up for the added risk of the unknown. Some economists (including my most favorite, Milton Friedman) have concluded that the depression was lengthened by the continued changing of government policies, thereby making investors sit on the sidelines until forecasting could improve and costs (including taxes) stabilized.
I do see the benefit for Keynesian actions for crisis situations, but not for general economic cycles. Government involvement in times of great distrust for our economic system makes sense to me (guarantee of money markets, purchases of short dated RMBS, stabilizing banks, etc) but the idea that government can spend money that everyone knows is temporary and borrowed to lessen the impact of a business cycle brings distrust into the market. It doesn’t reduce it.
Two questions:
1. If Keynesian policies have been used for the past 15 or so years and yet economic cycle continue and appear to have become more volatile, when should we question the underlying assumptions of Keynes?
2. Do Keynesian policies work just as well when the government has 50% debt/GDP as when it has zero?
JS - 1. Have Keynesian policies have been used for the past 15 or so years, or instead have we been spending on foreign oil, foreign wars, overbuilt housing, and mostly fixed income entitlements, at the expense of domestic infrastructure which needs to be rebuilt almost as much as Europe needed to be in the 1950s?
2. No, they are less effective in proportion to the amount of debt which needs to be serviced with interest payments.
Population growth continues. Productivity growth continues. Breton Woods is a red herring.
Which economic studies show “the money multiplier for private dollars to be over 1.75 and government dollars to be sub 1″? Such figures for government spending vary over orders of magnitude on a per-program basis, and the 1.75 figure here sounds suspiciously like the utterly discredited idea of trickle-down economics.
JBH - Mr. JS, I really do not understand what you mean by your statement “Population growth continues. Productivity growth continues. Breton Woods is a red herring.”
Population growth continues, of course, but the rate changes through time. Demographics is obviously a main driver to economic cycles. Productivity has also been shown to be age dependent as well as generation dependent so, again, I have no clue what your quip is meant to mean.
As to Bretton Woods, do you not think that currency exchange rates have a material impact on relative production costs?
JBH - Keynesian policies were used in the 80′s for the Savings and Loan bailout. and then again throughout the 90′s and 00′s. From my recollection of Keynes, he made no distinction how the money was spent (dig and refill holes I believe he recommended).
Just because you, as an individual, do not agree with how the government spent the money does not entitle you to change the definition of Keynes’ theory.
JBH - But let us go back to the original reason I responded to Mr BW’s post. His statement “Greenspan and other Ayn Rand blinded ideologues are largely responsible for creating the current financial crises” needs to be refined, imo.
1. Greenspan was not following any AR or other free-market principles. He was following cronyism and Keynesian policies. (e.g. throw dollars into the market in 2001-2004 through low rates and lower capital requirements).
2. One can hardly come to the conclusion that the trend of free-markets (i.e. non-government ) principles increased at all in the last 20 plus years. With government run companies making over 50% of home loans, government sanctioned rating agencies telling people that they were AAA when some knowledgeable free market participants knew they were junk, inefficient and large companies being bailout out by government funds, subsidization of commodities leading to pricing bubbles, increasing trade restrictions, etc, it is illogical to conclude that free markets led us to where we are since we were not in a free market.
JBH - Show me how Keynesian policies have not been dominant in the last 15 years, please. As I understand Keynes, it is central government induced spending to replace private sector spend (both consumption and investment).
You do not appear to understand Friedman at all if you think we have been following his suggested path. Refer to point #2 above. Government involvement in private enterprise has been increasing (shown by % of GDP, size of public employee base as well as other facts). For you to be credible in your assertion, you need to provide facts that back it up and reason. Outright statements of opinion presented as fact do not help the discussion.
{silence}
**I have not heard any more from BW or JS after the last comment I made. When having these discussions, I find that the opposing opinion is filled with absolutes that can not be justified with the facts at hand. Reality is ignored. I would recommend all to be willing to enter into discussions with those that believe in socialistic policies and challenge them. We need to challenge each sentence they make and separate opinion versus fact, making them substantiate their opinion with logic and reason. From my limited experience doing this, it typically ends with them walking away, unable to justify their position with anything other than emotion.**
