Hayek v. Keynes

[American X]

Throwdown:

Fear the Boom and Bust (http://www.youtube.com/watch?v=d0nERTFo-Sk&feature=related)

Hayek, of course, wipes the floor.

[94GRAD]

I thought this was going to be about Selma Hayek and her BUST. Damn!

[Strange Brew]

Throwdown:

Fear the Boom and Bust (http://www.youtube.com/watch?v=d0nERTFo-Sk&feature=related)

Hayek, of course, wipes the floor.

Great stuff AMEX. Ah Keynes, gov't stimulus = increased demand = prosperity. Sounds like the underpants gnome theory to me. Where his theory falls apart is that for the gov't to, ahem, "stimulate" the ecomony it must raise money through either increased taxes or printing money.

Both are inefficient. In the first case of increased taxes the gov't is taking money from the private sector economy, running through its offices and giving back to "the people" (gov't chosen winners not the more efficient economic drivers) at a lower rate than it took it out of the private sector in the first place. End result, more money in gov't. Less money in private sector all equals a shrinking private economy and a bloated Fed.

Case two: print more money for "stimulas" is just dumb. While it does flood the system with cash it does not increase the real value of the money or the purchasing power of the people as prices go up through inflation. People just have more pieces of paper that are worth less than what that piece of paper was worth before the Fed fired up the printing presses.

Unless of course you're into price controls which only decreases supply of goods and the total GDP anyway. For a live, happening now case study, see Hugo Chavez. That Keynsian genius just reduced the value of his country's currency by half. Great for his social programs, horrible for importing supplies for manufacturing as any goods needed for production (Venezuela's only real natural resource is oil) will have doubled in cost. Thus, more gov't dependence and less private production of wealth.

Sorry for the rant but I like this kind of stuff. Please feel free to rip me apart if you disagree.

[bobbiemcgee]

http://img.listal.com/image/172653/400full.jpg
I thought this was going to be about Selma Hayek and her BUST. Damn!

[JimmyTwoTimes37]

I thought this was going to be about Selma Hayek and her BUST. Damn!

That was my thought as well...Needless to say I was disappointed.

Bobbie's picture helped. Here's another one

http://stoppopculture.com/wp/wp-content/uploads/2009/04/salma-hayek-cleavage.jpg

[SixFig]

Talk about BUST

heeeeyoooo!!!!

This is actually a good way to teach economics to kids. Kind of a School House Rock for the new Millennium.

[Snipe]

Just when you thought you haven't seen anything...rapping economists. Whew.

I actually follow one of the producers, Russ Roberts at the blog Cafe Hayek (http://cafehayek.com/).

[American X]

Friedrich Hayek's The Road to Serfdom has recently been #1 on Amazon.

Somehow Snipe is responsbile.

[Strange Brew]

Friedrich Hayek's The Road to Serfdom has recently been #1 on Amazon.

Somehow Snipe is responsbile.

Not unless Snipe is really Glenn Beck (not that much of a stretch I guess). Beck did a show on the book a week or two ago and the book has been on back order since then. It was a really great episode of his show.

[smileyy]

Where his theory falls apart is that for the gov't to, ahem, "stimulate" the ecomony it must raise money through either increased taxes or printing money.

I thought the theory was that the government borrowed during these periods, and paid back during economic growth periods.

Basically, the simple (and thus possibly misleading) theory I understand is that the government has to counteract consumer behavior.

During recessions, consumers stop spending, reducing flow in the economy, producing depressions. Stimulus during recessions is designed to prevent the shift into depression.

During economic expansion, consumers spend more, accelerating the expansion until a bubble is formed. During these periods, it behooves the government to recover revenues spent in the prior recession, or in anticipation of the next recession.

All of this ignores that we may be over-borrowed to effectively borrow more, or sufficiently past the point where government stimulus is effective.

[GuyFawkes38]

I thought the theory was that the government borrowed during these periods, and paid back during economic growth periods.

Basically, the simple (and thus possibly misleading) theory I understand is that the government has to counteract consumer behavior.

During recessions, consumers stop spending, reducing flow in the economy, producing depressions. Stimulus during recessions is designed to prevent the shift into depression.

During economic expansion, consumers spend more, accelerating the expansion until a bubble is formed. During these periods, it behooves the government to recover revenues spent in the prior recession, or in anticipation of the next recession.

All of this ignores that we may be over-borrowed to effectively borrow more, or sufficiently past the point where government stimulus is effective.

The bad thing about Keynes and his theory is his complete disregard for the supply side of the equation (to Keynes it's all demand, as your explanation shows).

The housing market collapsed. Should we reinflate it? A lot of Keynesians would argue yes. There is insufficient demand in a sector that employed a lot of people who are now unemployed. We should extend and enlarge housing tax credits and bail out fannie and freddie and command them to pursue policies which increase home ownership.

But maybe the economy is trying to tell us something. Maybe a smaller percentage of our GDP should go into housing. Maybe more of it should go towards education, health care, manufacturing, etc... Maybe the supply side of the equation matters.

[smileyy]

Thanks for the explanation -- I don't know that I agree (or not), but that perspective is useful.

[xudash]

Solid contributions from everyone so far, even the textual material.

[bobbiemcgee]

http://placesyoudontbringababy.com/wp-content/uploads/2009/10/little-kid-smoking-cigarette-copy21.jpg

http://www.fugly.com/media/IMAGES/Drunk/beer-baby.jpg

I'm pretty sure Snipe said he was a libertarian

[Lamont Sanford]

I thought this was going to be about Selma Hayek and her BUST. Damn!

I thought the same thing too! Damn cocktease thread!

[GuyFawkes38]

I worry about US debt. It probably means in the future taxes will go up and benefits reduced.

But one thing I'm not worried about is inflation. And people who tend to obsess about inflation tend to be absolutely crazy. They have less faith in markets than any socialist.

This long video I stumbled upon, while making a few good points, is ridiculous in a lot of ways:

http://www.youtube.com/watch?v=eb1n1X0Oqdw&feature=player_embedded#!

I worry that even libertarian hopes like Ron and Rand Paul use too much crazy inflation rhetoric.

[Strange Brew]

I thought the theory was that the government borrowed during these periods, and paid back during economic growth periods.

Basically, the simple (and thus possibly misleading) theory I understand is that the government has to counteract consumer behavior.

During recessions, consumers stop spending, reducing flow in the economy, producing depressions. Stimulus during recessions is designed to prevent the shift into depression.

During economic expansion, consumers spend more, accelerating the expansion until a bubble is formed. During these periods, it behooves the government to recover revenues spent in the prior recession, or in anticipation of the next recession.

All of this ignores that we may be over-borrowed to effectively borrow more, or sufficiently past the point where government stimulus is effective.

Correct me if I'm wrong but I believe that even Keynes believed that Gov't should not employ the concept of stimulas if it was forced to borrow the funds to do so....Like I said, I could be way off on this rational.

[GuyFawkes38]

Correct me if I'm wrong but I believe that even Keynes believed that Gov't should not employ the concept of stimulas if it was forced to borrow the funds to do so....Like I said, I could be way off on this rational.

He definitely advocated fiscal spending using debt.

[GuyFawkes38]

woot inflation!!!! This seems reasonable:

http://www.nytimes.com/2010/09/19/business/economy/19view.html?_r=1&ref=business

Keynes wanted fiscal expansion. That can permanently increase the size of government.

But he was onto something. Encouraging optimism is important. Even hardcore libertarian Milton Friedman was in favor of inflationary policies during economic downturns.

The problem is that AARP is politically strong and selfish and wants no part of an inflationary policy, despite most experts agreeing that's what we need.

[murray87]

Meanwhile, some great thinkers would have you believe the recession is over! :confused:

http://finance.yahoo.com/news/Economic-panel-says-recession-apf-2658642411.html?x=0&sec=topStories&pos=main&asset=&ccode=

[Strange Brew]

He definitely advocated fiscal spending using debt.

Actually, Keynes rejected structural gov't debts. He would've argued for stimulus as a starter if the gov't had the money in the first place. No individual with an understanding of economics would consider debting your way to prosperity.

[GuyFawkes38]

Actually, Keynes rejected structural gov't debts. He would've argued for stimulus as a starter if the gov't had the money in the first place. No individual with an understanding of economics would consider debting your way to prosperity.

lots of economists advocate governments to go into short term debt during recessions to spur the economy.

This from wikipedia:


Following John Maynard Keynes, many economists recommend deficit spending to moderate or end a recession, especially a severe one. When the economy has high unemployment, an increase in government purchases creates a market for business output, creating income and encouraging increases in consumer spending, which creates further increases in the demand for business output. (This is the multiplier effect). This raises the real gross domestic product (GDP) and the employment of labour, and if all else is constant, lowers the unemployment rate. (The connection between demand for GDP and unemployment is called Okun's Law.) Cutting personal taxes and/or raising transfer payments can have similar expansionary effects, though which method has a better stimulative economic effect is a matter of debate

from a different wiki article


John Maynard Keynes was one of the first economists to advocate government deficit spending as part of a fiscal policy to cure an economic contraction. In Keynesian economics, increased government spending is thought to raise aggregate demand and increase consumption.

[nuts4xu]

I thought the same thing too! Damn cocktease thread!

Giggity Giggity!

http://www.comewatchme.com/wp-content/uploads/2010/09/36438.jpg

[Juice]

Giggity Giggity!

http://www.comewatchme.com/wp-content/uploads/2010/09/36438.jpg

Talk about a stimulus package! Hi-yo!

[Strange Brew]

lots of economists advocate governments to go into short term debt during recessions to spur the economy.

This from wikipedia:



from a different wiki article

One: Your source is Wiki.

Two: Keynes is fundementally wrong but you're right in that he would have allowed for short term debt spending that would be paid for by the magic of gov't created demand (a joke in itself). Keynes never would've supported demand side spending when structual long term, unsustainable, burdensom debts are already in place.

[GuyFawkes38]

One: Your source is Wiki.

It's fashionable to quote Wikipedia since it's a reference that everyone has access to.

yeah, Keynes believed that government should use deficit spending during the bad times and save during the good times. Of course, history shows that deficit spending leads to more deficit spending even during recoveries.



Two: Keynes is fundementally wrong but you're right in that he would have allowed for short term debt spending that would be paid for by the magic of gov't created demand (a joke in itself). Keynes never would've supported demand side spending when structual long term, unsustainable, burdensom debts are already in place.

I'm not sure about that. I'd bet that Keynes would be on the side of Keynesian economists now, calling for a larger stimulus.

In the short term, Keynesians are solely obsessed with increasing aggregate demand and believe that monetary policy, alone, can't deliver.

[Strange Brew]

It's fashionable to quote Wikipedia since it's a reference that everyone has access to.

yeah, Keynes believed that government should use deficit spending during the bad times and save during the good times. Of course, history shows that deficit spending leads to more deficit spending even during recoveries.



I'm not sure about that. I'd bet that Keynes would be on the side of Keynesian economists now, calling for a larger stimulus.

In the short term, Keynesians are solely obsessed with increasing aggregate demand and believe that monetary policy, alone, can't deliver.

You may be right and if that is the case then Keynes is as economically moronic as the Fabian Keynesians of today.

The main point is that Keynes was wrong. Gov't cannot effeciently effect the free market in a positive manner. After all, name me a Socialist gov't that governs a larger economy than the shackled (TOO MUCH GOV'T INTERVENTION) U.S. free market system.

[Masterofreality]

Four things,

First of all the "stimulus" stimulated nothing. According to all the deep thinker economists, the Recessions allegedly ended in June, 2009 before the first dime of "stimulus" money was spent. Much of the "stimulus" money that was spent disappeared into the black holes of state government budget deficits and to satisfy the teachers unions that no teacher "would be left behind." The rest of the "stimulus" money went to ridiculously unneeded projects like I saw in Atlanta this week- building sidewalks and installing Pole Lamps along Memorial Drive in Dekalb County. This, mind you, is along a road that is 7 lanes wide and is now lined with vacant businesses and buildings. Yep, that concrete sure is putting the private sector back to work. Combine this type of unneeded expenditure in Georgia along with stuff like the ridiculous $400 million that is being proposed to be sent to Ohio for a 38 mph passenger rail line between Cleveland and Cincy, add to that other ludicrous expenditures across the country and you have the reason for a $Trillon plus deficit.

Two, Another part of the government intervention, the auto company bailout, has the supporters claiming that "it put 45,000 autoworkers back to work." Of course, this conveniently ignores the over 60,000 dealership employees who were forced into unemployment when dealer's franchises were pulled for no discernible reason. There has been no explanation for that wrong-headed decision. Meanwhile cars will be sold whether GM or Chrysler are around to sell them or not. Even in a down year, there are 10-11 million vehicles to be sold. Some company will sell them and if they sell them, they will have to build some of them here. Whether or not they will be built by union labor- ahh, there's the rub.

Three, a bill was passed this week to supposedly provide $30billion in loans to small businesses. Two problems. A) The banks don't want to use it because it comes with too many government oversight strings attached. B) Small businesses don't want the money because there isn't enough demand to expand and grow now. Look, I put franchised auto repair shops in business. That is my job. No one that I have in my new franchisee portfolio is having any trouble getting a small business loan right now- as long as they have the proper assets and qualifications. Yep good idea. Let's put another $30 billion out there to people who will probably fail and stick the taxpayers to hold the debt.

Four, Cash for Clunkers was a short term bump, but a long term sales wash at best with more government money thrown down the toilet making it a negative. As the final numbers have come out, all it did was pull demand forward, then visits to the showroom stopped. The car sales last year was a 10.4 million industry. People who needed a car were going to buy one anyway whether there was a government program or not. The sales balanced out in the end- but with more deficit spending that did no long term good.

Paul Krugman, the Socialist columnist for the NY Times who somehow won a Nobel Prize for Economics has been a vocal supporter of more stimulus. My gawd. The money spent has done nothing to help and the long term debt has been added to. Just think if Krugman's suggestion of doubling it would have been taken. Krugman is also a proponent of a national sales VAT tax or raising the income tax level to eliminate the deficit. Preposterous.

How about lowering taxes so people will have more money in their pocket to spend on real stuff? Since consumer spending is the real driver of this economy, that would sure seem to be the best answer along with cutting out the wasteful spending on stupid projects as listed above. Oh, and by the way. Entitlements? Hey, I'm all for totally overhauling Social Security including rasing the age limits- even for a guy like me- if you haven't started taking benefits. We can only afford to do so much. Stop the spending madness. We're only borrowing from China anyway.

[American X]

OOPS!

"(President Obama) realized too late that 'there’s no such thing as shovel-ready projects' when it comes to public works."

Who knew? Oh well, what's a few hundred billion these days?

NYT Magazine - Education of a President (http://www.nytimes.com/2010/10/17/magazine/17obama-t.html?pagewanted=all)

[smileyy]

Countdown to stimulus of American rare earth mining and refining in...3, 2, ...

[madness31]

Keynes is often misunderstood and definitely only approved of short-term defecit spending. The loans should be paid back and a surplus run during the good times.

The role of the government isn't to create demand during a recession but to lessen the impact of the recession. There are all kinds of problems with the stimulus spending as it did not go to long-term competitive improvements but there is no denying that it did lesson the impact of the recession on the economy. All those teacher, fire fighter and police jobs that didn't get cut during the stimulus spending were that many fewer unemployed. The construction workers working on the unnecessary sidewalks, etc were additional people collecting paychecks and paying on their mortgages.

The government cannot create growth other than by creating an environment that enables businesses to thrive. That includes responsible tax policy and regulation as well as crime control and a transportation network.

The government must get smarter about how they spend their money. Partisan issues must be put aside and good ideas must be pushed forward. Tax rates must go up on millionaires. Corporate taxes must be reduced but subsidies eliminated. Taxes on capital also must be removed but hedge fund commissions must be taxed at an income tax rate. Above all else debt must be paid down during economic expansions which means spending needs to be smarter and more efficient.

Expanding the money supply must also stop. The Federal Reserve is enabling the defecit spending and setting the country up for a collapse.

[Snipe]

Think of all the nuclear power plants would could have bought with that stimulus money. Think about how much closer we could be to energy independence. But we saved the teachers unions from some cuts and paid a bunch of government employees....Sickening.

Government can spend money to help commerce. The National Highway System. The St. Lawrence Seaway. Large dam projects can provide electricty for development and water for people and agriculture.

We could have updated the grid to make it more energy efficient and we could have started building nuclear power plants by the hundreds. Then even if the dollar collapses we would still have the hard assets. You can build a nuclear power plant today that could last a century. It produces electricity. When you are dead and gone it is still working. The Hoover Dam is an asset built a long time ago. It still provides benefits.

Now that we spent all the powder in the keg it will be great to say we paid teacher's unions and government employees when the dollars fails. Our priorities are the problem.

[madness31]

Snipe, not sure if you realize it but I completely agree with you that the spending was done on the wrong projects. I have said over and over that the spending was wasteful because it was not focused on long-term projects. All those things you suggested would have been great projects.

Regardless of bad planning/execution the spending still provided a temporary cushion for the economy. If the economic numbers are to be believed, it aparently got us to a point where businesses have now begun to hire and will pick-up where the government left off. The economic decision was correct but the projects chosen were longer term wealth destroying. This was not a partisan problem as Republicans also got to spend the money on projects that were important to them. It is sad that neither party had enough brain function to think toward the future.

Now it is important to focus on creating efficiencies, cutting defense spending, pushing back SS and reducing benefits, etc. Canada was able to go from the brink to a model of fiscal responsibility so maybe it can happen here. They didn't even have to sacrifice public healthcare.

[Masterofreality]

We could have updated the grid to make it more energy efficient and we could have started building nuclear power plants by the hundreds. Then even if the dollar collapses we would still have the hard assets. You can build a nuclear power plant today that could last a century. It produces electricity. When you are dead and gone it is still working. The Hoover Dam is an asset built a long time ago. It still provides benefits.

Now that we spent all the powder in the keg it will be great to say we paid teacher's unions and government employees when the dollars fails. Our priorities are the problem.

Just think of all of the energy that could be saved by reducing the amount of government offices that are occupied every day- no lights, heat, electricity for supercomputers or ac needed. Darken those offices by reducing the employees and, viola!!

Meanwhile, the current President wants to add to the bureaucracy by installing a whole new layer of departments to monitor this cockamaimie health care bill. More employees, more offices, more energy use.

For all the jabber about "energy dependence", close up those offices and turn off the lights that burn all night in Washington and other government offices for no reason and you'd save a ton.

Government should "cap and trade- off" itself.

[waggy]

Our priorities are the problem.

"Our" priorities are of no concern. The only real priority are votes in the next cycle or two. You pay off unions they take care of you. You steal from the rich and give to the poor, the poor take care of you.


It is sad that neither party had enough brain function to think toward the future.

See above.


Government should "cap and trade- off" itself.

Cap all of 'em if you want.

[Strange Brew]

The economic decision was correct.

Madness please, the economic decision is based on classroom Econ rather than that of real economic consequences. The Keynsian demand side theory has never worked in practice because it relies on the ideal that Gov't officials can efficiently stimulate an economy. Simply, it works in theory within elite circles but it fails on the street.

Basically it comes down to this: Elected officials with zero business understanding and zero risk are better equiped to make decisions about investements than those whose bread plate depends on the success of their actions.

I would always bet on those that will starve if wrong than those that will accept their check for "trying to make a difference".

[American X]

Hayek v. Keynes: The Rematch (http://www.youtube.com/watch?v=7k7ob438hk0&feature=player_embedded#!)

[wny08]

Snipe, not sure if you realize it but I completely agree with you that the spending was done on the wrong projects. I have said over and over that the spending was wasteful because it was not focused on long-term projects. All those things you suggested would have been great projects.

Just for everyone's benefit, here is a complete breakdown of how ARRA (aka the Stimulus Bill) was allocated:

http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009#Pro visions_of_the_Act

And here is one columnist's recent take on the President's economic policies:

http://opinionator.blogs.nytimes.com/2010/11/02/how-obama-saved-capitalism-and-lost-the-midterms/?src=me&ref=homepage

I know many of you will disagree with it, and it isn't unbiased, but I'm putting it out there because it points out some key facts, including that ARRA saved approximately 3 million jobs.

[Strange Brew]

Just for everyone's benefit, here is a complete breakdown of how ARRA (aka the Stimulus Bill) was allocated:

http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009#Pro visions_of_the_Act

And here is one columnist's recent take on the President's economic policies:

http://opinionator.blogs.nytimes.com/2010/11/02/how-obama-saved-capitalism-and-lost-the-midterms/?src=me&ref=homepage

I know many of you will disagree with it, and it isn't unbiased, but I'm putting it out there because it points out some key facts, including that ARRA saved approximately 3 million jobs.

So we spent 800 billion dollars to "save" 3 million jobs. That's approximately $267,000 per job. Where do I sign up?

[wny08]

So we spent 800 billion dollars to "save" 3 million jobs. That's approximately $267,000 per job. Where do I sign up?

Well, about half of ARRA was not designed to directly create jobs. The tax reductions and jobless benefits were designed to keep demand from disappearing completely (in the form of increased disposable income).

Besides, my point is:

This administration's efforts successfully prevented the economy from tanking in ways not seen since the Great Depression. It was the only thing that avoided a complete cataclysm that would have made 10% unemployment look like child's play.

It's well documented that the Stimulus and Bailout worked (and the Bailout is close to breaking even, by the way). The fate of our country required action. That is how real leaders lead. The Obama and Bush administrations held their noses and did the right thing, despite knowing these measures wouldn't be popular.

Was it risky? Yes. But it worked, and they deserve and command your respect for what they did. It would have been cowardly to follow the course of action advocated by market fundamentalists (which is to say, do nothing).

Economics isn't just some game. I'm not willing to gamble the fate of my country on a theory that is predicated on the notion that all human economic decisions are both well informed and rational. Keynesian economics takes into account the reality that practical economics is an entirely separate realm from the make believe theoretical world of laissez faire fundamentalism.

Exhibit A: American banks spent years chasing short-term profits in such a manner that did not serve their long term best interests or the country's long term best interests. Hence the need for regulation.

Am I calling for govt. intervention in the economy? Hell yes I am, and I make no apologies. Nor should the President.

While I'm on my rant, I'll say one more thing about how I feel. This isn't about liberal or conservative. This is about pragmatism vs. ideology.

[American X]

Fight of the Century:

Hayek vs. Keynes Round Two (http://youtu.be/GTQnarzmTOc)

"So spending’s not free – that’s the heart of the matter
too much is wasted as cronies get fatter."