

Obama Gives Keynes His First Real-World Test - budu3
http://www.npr.org/templates/story/story.php?storyId=100018973&ft=1&f=1001

======
pragmatic
One point about Keynes theory that if I remember correctly goes something like
spend in bad times _cut back_ in good times.

Keynes is overused much like prescription antibiotics.

"Prescribing Keynesianism to some politicians is like prescribing crack to a
coke addict. In the 1970s, the patient hit rock bottom. The U.S. had high
unemployment, and the Keynesian solution stopped working. The national
government spent and spent, but unemployment only got worse. Then came
inflation, something Keynesians had no answer for."

The problem is we have been borrowing and spending like crazy both publicly
and privately. We've had the accelerator pushed to the floor, how do we go
faster now?

Keynes (again as I remember) recommended these fixes for short term problems.
Our problem is systematic over spending.

Obama et al. are prescribing aspirin because they believe the patient has a
hangover, when the country really needs chemotherapy for debt cancer.

The bad debt that has accumulated needs to be accounted for, losses have to be
taken, companies need to go into bankruptcy (which is often reorganization,
not necessarily going out of business.)

We can't "cheat" our way out of this with Keynes.

~~~
avdempsey
The article cites this as the essential feature of Keyne's theory that Obama
is calling for: government spending should make up the difference between
national capacity for economic output, and the current projected level of
economic output.

Paraphrasing the article: the US economy has a $15 trillion capacity, but the
lack of effective demand has reduced our projected output to $14 trillion. By
spending $650 billion we can make up that difference in output with the help
of Keynesian multipliers.

I certainly sympathize with the parent. For the last three months I canvassed
for Greenpeace pushing a reinvestment in renewable energy. One gentleman whose
door I knocked on was skeptical (way more than just this one guy, door-to-door
canvassing amidst recession is a great job if you enjoy getting kicked in the
nuggets 100 times/day). He speculated the green movement was just another
attempt to sell a newly packaged bubble to the American people.

So are we foolish to pursue this short-term fix? Is the reinvestment plan
fairly characterized as a short-term fix?

To the first question I can at least express the hope that this investment
will leave us with something inherently useful: much needed improvements to
our infrastructure. We've been riding the wave of cheap energy from the
petrochemical revolution for the last 100 years (thanks Steve Jobs Playboy
article) and that is certainly appearing to mainstream America as a habit to
kick.

To the second question, maybe it will help to explore the long term
consequences of not meeting our productive capacity. By analogy we can
consider the consequences of not meeting our capacity to educate. Imagine if
America lost an entire year of engineering graduates. A short fall in capacity
may result in a long-term compounded drop in overall engineering output.

~~~
radu_floricica
Completely off-topic, but for a few years now I thought Greenpeace was... how
should I put it in a polite way? Too passionate to be taken seriously. I take
it it's not really so?

------
avdempsey
Given the headline I expected more of an argument about how Obama's stimulus
plan is Keynesianism's first "true" test.

Really the argument amounts to this: 1\. FDR didn't really try Keynesianism
until he was forced to during WWII (the 30s didn't count). Too little Keynes.
2\. The whiz kids of the 60s took Keynes too seriously. 3\. The ~$650 billion
Obama wants to spend follows directly from Keynes's formula. Goldilocks
Keynes.

Not particularly rigorous, but the link to the "Marginal Revolution" blog
might be fruitful. <http://www.marginalrevolution.com/>

~~~
russell
Richard Nixon said, "I am a Keynesian." Obama is no better than in second
place (in Keynsianism :-).

~~~
iuguy
To be fair, Richard Nixon also said 'I am not a crook' and that turned out to
be untrue.

~~~
paddy_m
Nixon was a keynesian and a statist. I'm not calling him a statist becuase of
what he did in watergate.
<http://en.wikipedia.org/wiki/Richard_Nixon#cite_note-66>
<http://en.wikipedia.org/wiki/Richard_Nixon#cite_note-76> (moved us off of the
gold standard, giving the government complete control over our currency)
[http://en.wikipedia.org/wiki/Richard_Nixon#cite_note-
Hetzel2...](http://en.wikipedia.org/wiki/Richard_Nixon#cite_note-
Hetzel2008_p92-72) (implemented price controls on agricultural products)
[http://en.wikipedia.org/wiki/Richard_Nixon#cite_note-.2770s_...](http://en.wikipedia.org/wiki/Richard_Nixon#cite_note-.2770s_180-137)
(established the EPA) <http://en.wikipedia.org/wiki/Richard_Nixon#cite_note-
pbs2-69> (established OSHA)

Nixon was far from what I or most people would consider a classical.

------
markessien
All this spending - will it not cause inflation? And considering the weakness
of the dollar, will the inflation not cause further weakness? And when
American goods become so cheap, considering that most manufactured goods are
imported, will this not cause an exodus of capital?

I really don't know, since I have no real understand of global economics.

~~~
thomaspaine
There's a much bigger fear of deflation rather than inflation at the moment.
Also, the dollar has actually been relatively strong since the financial
crisis because there's been a large increase in the demand for safer assets,
ie cash and treasury bills. A weakening dollar would probably be better for
the economy as goods manufactured in America would be cheaper abroad, leading
to an increase in net exports.

I don't quite follow the reasoning of cheap American goods -> exodus of
capital.

~~~
profgubler
The problem with deflation is what is going to happen afterwards. My guess is
hyperinflation. Once prices get so low, you will have a lot of people coming
back into the market that have been hording dollars. Once they get back into
the market you will have to many dollars chasing to few goods, since the world
has slowed production.

I really agree with you. That is why deflation is scary, it will likely lead
to hyper-inflation.

~~~
shader
As far as I know, deflation cannot cause inflation. Maybe the governments
response to deflation (print money!) can cause inflation, but the destruction
of value and the reduction of the money supply cannot cause the overvaluation
of assets or an expansion in the money supply, except through government
action.

Of course, it is true that hyper-inflation, if it happens, will happen
quickly. People will be, as you say, hoarding their cash because of
uncertainty. But when they become confident enough to borrow from the banks
again, and the large reserves they have been stockpiling hit the fan, it is
quite possible that people will quickly notice the change in money supply, and
react by trying to get rid of their money too. Which would set off hyper-
inflation. But this hyper-inflation is not caused by deflation, but rather by
inflation, which people may not notice because of their presently high
hoarding rate.

------
rml
The problem I have with the idea of "managing the economy" is that we might
not even know what that phrase actually means. I often read "economy" and
translate that as "runaway complexity." I sense this complexity in a system of
such magnitude, involving so many interacting systems, and so many individual
actors (many of which are computer programs at this point, I think) that it
simply cannot be grasped by any single human mind, no matter the training or
intelligence. This is just my sense of this; am I wrong? Someone here, please
educate me.

~~~
corentin
Do you know what your neighbours want? What they like and dislike, what they
want for their children, and so on?

Now, do you think a genius would know? And if he knew, would he know better
than them?

You can "run the economy" (that is, rule other people) to achieve _your_ goals
(e.g. if you are a pharaoh and want your own pyramid) but you just can't go
against people's will to help them achieve their own goals.

~~~
rml
I agree with you inasmuch as an economy is about people, but what if it isn't
about people so much as some larger "thing" (an incomprehensible interaction
of systems, perhaps?) that individuals, and even governments, have to
deal/interact with? What if that's just as true for the so-called global
"elites" as for the rest of us? I suspect that it is. I think that what you
say about people controlling other people is accurate; I just think it's only
a small percentage of the data we have to account for.

~~~
Calamitous
If it isn't about people, who or what could it possibly be about? What other
data are you looking for? What do you think is moving the money around? The
economy isn't some magical system that randomly shuffles dollar bills around,
it's people and businesses buying things.

------
Tichy
I wish him luck, but it seems like a really big gamble to me :-( Going the
Keynes route seems relatively uninspired - isn't that what all governments
like to do, because it gives them an excuse to spend large?

~~~
newt0311
"isn't that what all governments like to do, because it gives them an excuse
to spend large?"

Well, if you are talking about irresponsible governments full of bureaucratic
self-serving idiots (which would be most modern governments), then yes. That
is what all governments do.

------
nazgulnarsil
I recommend checking out Keynes' opus The General theory of Employment
Interest and Money. If it seems too daunting skip straight chapter 24 for a
more general take before diving into the rest.
[http://www.marxists.org/reference/subject/economics/keynes/g...](http://www.marxists.org/reference/subject/economics/keynes/general-
theory/ch24.htm)

If that first sentence doesn't strike you as odd go back and re-read Mind the
Gap by Paul Graham.

~~~
rms
What do you think the fundamental flaw of capitalism is? The wording is a
little odd, but capitalism by its very nature has a tendency to concentrate
capital in the hands of the few.

~~~
nazgulnarsil
Why is that a bad thing? Successful companies in the free market are
successful because they have given people something they want for a voluntary
exchange of capital. These companies turn around and develop more products
that people want.

Why do you seek a flaw in capitalism? Capitalism simply means the voluntary
exchange of goods and services. The alternative is non-voluntary exchange i.e.
you are forced.

If you don't know why privately controlled means of production are good you
have a lot of reading to do. Might I point you to the Cato Institute or Ludwig
Von Mises Institute (google for free literature). Or for a more popular
example check out Friedman's bestsellers.

For the ugly and fast version: Would you put up with wal-mart taking $40 from
your paycheck every month and telling you that you can come get a gallon of
milk every week for "free"?

first you should be free to choose whether you want milk or not and whether to
support it with your money.

second you have no way of knowing if you're overpaying because you have no
idea what price milk would sell for if several companies were competing for
your business.

thirdly you have no recourse if the quality of the milk goes down. you can try
to sue wal mart..good luck with that. You might claim that people are still
free to go buy other milk, but any other company selling milk is at a huge
disadvantage. People have to pay that $40 a month regardless, so most figure
they might as well get the milk out of it. competitors milk could cost half of
what wal-mart charges, $20 a month. But from the perspective of the citizen
that "private milk" costs $60 a month since they have to pay the $40
regardless.

In this scenario wal-mart has you as a captive customer. Before it made money
by convincing you to buy milk from it with high quality and a low price. Freed
of having to convince you to buy it wal-mart doesn't have to care much about
customer service or product quality.

This is essentially the scenario of state owned goods and services. you're
assuming that the central planner can come up with a better solution than lots
of entrepreneurs taking a crack at it.

~~~
rms
My lament against capitalism doesn't propose a solution. There are no
alternatives.

~~~
nazgulnarsil
but people think there are. people think of things like income inequity as a
flaw. it's not a bug, it's a feature. You want income allocated to those who
show themselves fit to efficiently use resources to produce more things that
people want. If someone is 1000 times more productive than me there is some
kind of problem if they aren't making 1000 times as much money.

Going with the other issue: unemployment at least has some legs to stand on as
it has been suggested that there just aren't enough low skilled jobs for all
of the low skilled people to do since most low skill work has been either
automated or increased in efficiency to the point where 1 person can do
something 1000 used to do.

~~~
daydream
Of course there are alternatives to capitalism. Or, more accurately, there
will be something that will succeed it, sometime in the future.

If history has taught anyone anything, it should be that civilizations are not
static. I very seriously doubt that democracy and capitalism will be the
predominant foundations of society 1,000 years in the future.

When will the "next big thing" come? I have no idea, nor does anyone else. But
to say that there are no alternatives to capitalism, and to imply that there
never will be, is shortsighted.

~~~
nazgulnarsil
who said anything about democracy? If democracy was an efficient form of
governing a large complex system you would have seen corporations adopt it and
become more competitive.

like I said before, the alternative to a free exchange of goods is a forced
exchange of goods. I don't see how to improve on this. capitalism isn't a
system in the same way socialism is. It's just what naturally happens when
violence is made less profitable than free exchange.

~~~
cchooper
Every political and economic system of every kind involves both free and
forced exchange of goods. For example, in a system of property rights, if a
person is considered to violate someone else's property rights then they will
be punished, possibly through forced appropriation of their goods.

Capitalism vs. socialism is not an example of free exchange vs. force, but of
two different standards of when force is appropriate.

~~~
nazgulnarsil
right, but centrally planned economies don't naturally occur in the same way
that free exchange does. It is contrary to reason that if I make something and
my neighbor makes something and we decide to trade that a third party _must_
be involved by law who will take a percentage of the value of the exchange.
You can make the argument that by providing the legal framework that makes
non-violent exchange possible (police, contract law) as well as the
infrastructure that facilitated our exchange (roads) that the third party
deserves a small piece.

This would be a devastating argument. _If_ I had a choice in the matter. In a
free market system of courts and transportation I would pay a fee for use.
This is fair. But to tithe a percentage of my productivity regardless of how
much or little I make use of said system seems fraudulent.

~~~
cchooper
What does it mean for a human-constructed system to be 'natural'? In most
tribes of the world, the income of one person is not considered the property
of that person, but is divided according to customs about the distribution of
wealth in that society. Tribal communities are about as close to 'natural'
behaviour as you can get, so what is unnatural about it?

I also don't understand the term 'contrary to reason'. How can a set of
conventions be rational or irrational? They can be beneficial, harmful, fair,
unfair, moral, immoral etc, but how can they be contrary to reason?

Also: taxation is as much a part of capitalism as it is a part of socialism,
especially taxation for expenditure on police and law.

------
jacoblyles
This list of Macroeconomist opinion is interesting:

[http://www.ambrosini.us/wordpress/2009/01/political-
affiliat...](http://www.ambrosini.us/wordpress/2009/01/political-affiliations-
of-modern-macroeconomists/)

Seems the professional macro guys are ambivalent about the stimulus.

Of course, the only economists' views that will actually make it into policy
will be the Democrat economists.

------
bokonist
Japan tried Keynesian policies. The result was the infamous lost decade:
<http://www.heritage.org/research/economy/bg2222.cfm>

------
jwb119
Like all policies, you have to look at the downside risk.

IMO, the downside of a Keynesian solution is MASSIVELY larger than an chicago
school type solution. You have the government taking on huge quantities of
debt, no guaranteed cure for unemployment, and a risk for massive inflation..

------
jordanf
First real-world test? Look at Japan in the 1990s. How soon we forget
history...and repeat it.

~~~
jwb119
I don't think Japanese monetary policy in the 1990's really qualifies as
Keynesian..

They had a zero % interest rate and pioneered the concept of quantitative
easing, but the theory underlying the policy wasn't exactly based on being
able to manage growth through government spending

~~~
thomaspaine
from an article on japanese fiscal policy in the 90s:

"In the end, the September 1995 stimulus package did add significantly to
economic growth in 1996. Not only was the actual real GDP growth of 3.6
significantly higher than the 0.9 percent recorded in 1995, it was at least
0.9 percent higher than the growth forecasted for 1996 by all of the major
international institutions and the financial consensus...This stimulative
effect can largely be attributed to the fiscal package, although the decline
in the yen also stemmed the decline in net exports (by -1 percent of GDP in
1995 and by -0.4 percent in 1996)...There was actually no other source of
positive impetus to the Japanese economy in late 1995 and early 1996 that can
be identified except discretionary fiscal policy."

here's the rest:
[http://www.marginalrevolution.com/marginalrevolution/2008/12...](http://www.marginalrevolution.com/marginalrevolution/2008/12/japanese-
fiscal.html)

------
llimllib
> Organized public works, at home and abroad, may be the right cure for a
> chronic tendency to a deficiency of effective demand. But they are not
> capable of sufficiently rapid organisation (and above all cannot be reversed
> or undone at a later date), to be the most serviceable instrument for the
> prevention of the trade cycle.

-John Maynard Keynes

