Dana Milbank of the Washington Post wrote this weekend that critics of Keynesianism are somewhat akin to those who believe the earth is flat. He specifically cites the presumably malignant influence of the Cato Institute.
Keynes was right, and in this case it’s probably for the better: Keynes didn’t live to see the Republicans of 2010 portray him as some sort of Marxist revolutionary. …These men get their economic firepower from conservative think tanks such as the Cato Institute… What’s with the hate for Maynard? Perhaps these Republicans don’t realize that some of their tax-cut proposals are as “Keynesian” as Obama’s program. There’s a fierce dispute about how best to respond to the economic crisis — Tax cuts? Deficit spending? Monetary intervention? — but the argument is largely premised on the Keynesian view that government should somehow boost demand in a recession. …With so much of Keynesian theory universally embraced, Republican denunciation of him has a flat-earth feel to it. …There is an alternative to such “Keynesian experiments,” however. The government could do nothing, and let the human misery continue. By rejecting the “Keynesian playbook,” this is what Republicans are really proposing.
Milbank makes some good points, particularly when noting the hypocrisy of Republicans. Bush’s 2001 tax cuts were largely Keynesian in their design, which is also one of the reasons why the economy was sluggish until the supply-side tax cuts were implemented in 2003. Bush also pushed through another Keynesian package in 2008, and many GOPers on Capitol Hill often erroneously use Keynesian logic even when talking about good policies such as lower marginal tax rates.
But the thrust of Milbank’s column is wrong. He is wrong in claiming that Keynesian economics works, and he is wrong is claming that it is the only option. Regarding the first point, there is no successful example of Keynesian economics. It didn’t work for Hoover and Roosevelt in the 1930s. It didn’t work for Japan in the 1990s. It didn’t work for Bush in 2001 or 2008, and it didn’t work for Obama. The reason, as explained in this video, is that Keynesian economic seeks to transform saving into consumption. But a recession or depression exists when national income is falling. Shifting how some of that income is used does not solve the problem.
This is why free market policies are the best response to an economic downturn. Lower marginal tax rates. Reductions in the burden of government spending. Eliminating needless regulations and red tape. Getting rid of trade barriers. These are the policies that work when the economy is weak. But they’re also desirable policies when the economy is strong. In other words, there is no magic formula for dealing with a downturn. But there are policies that improve the economy’s performance, regardless of short-term economic conditions. Equally important, supporters of economic liberalization also point out that misguided government policies (especially bad monetary policy by the Federal Reserve) almost always are responsible for causing downturns. And wouldn’t it be better to adopt reforms that prevent downturns rather than engage in futile stimulus schemes once downturns begin?
None of this means that Keynes was a bad economist. Indeed, it’s very important to draw a distinction between Keynes, who was wrong on a couple of things, and today’s Keynesians, who are wrong about almost everything. Keynes, for instance, was an early proponent of the Laffer Curve, writing that, “Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget.”
Keynes also seemed to understand the importance of limiting the size of government. He wrote that, “25 percent taxation is about the limit of what is easily borne.” It’s not clear whether he was referring to marginal tax rates or the tax burden as a share of economic output, but in either case it obviously implies an upper limit to the size of government (especially since he did not believe in permanent deficits).
If modern Keynesians had the same insights, government policy today would not be nearly as destructive.
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Keynesian creates bubbles and of course bursts. It also breaks the discipline of real money because they counterfeit or steal from the future economy to stimulate the present. Good times roll and they keep spending. The bill always comes due.
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ILuvBrazilBabes, I am not going to reply in such an extensive fashion, only to point out that Austrians acknowledge that the recession is triggered by contraction of credit and money supply, but prior (mid-20s, from 2001-2005) to that contraction money supply is artificially expanded and that is were the booms come from.
Don’t know what is your exposure to Austrian theory, but it seems to me that you ought to look more deeply into it before calling it deeply flawed. Rothbard’s “America’s Great Depression” (http://mises.org/resources/694/Americas-Great-Depression) is a good one. I’ll stop here before I get in over my head 🙂
Mr Paul Vahur:
I am myself ultra libertarian, I used to be a classical liberal but readings as Mr Dan Mitchell blogs were crucial in converting me to ultra libertarianism, I state that so you know I am no keynesian.
I read very carefully most of the first part of the Hazlitt book refuting Keynes and in my humble opinion (IMHO) there are some errors in Hazlitt book: For instance both the aggregate supply function and the aggregate demand function are imaginary quantities that only exist in the minds of entrepreneurs but Hazlitt says that the aggregate supply function is NOT an expectation, Hazlitt takes literally what Keynes says in some part of the text but clearly before in the text Keynes said the aggregate supply function was too an expectation and later he reiterates that it do is an expectation. So here there do is a Hazlitt error IMHO.
REAL supply curves and REAL demand curves can intersect but I do not think Keynes imaginary curves in the minds of entrepreneurs can intersect because for them to intersect in the way REAL supply and REAL demand curves intersect entrepreneurs need to have not only supernatural mind reading powers but they need too to have supernatural telepathic powers. Since clearly entrepreneurs do not have those supernatural powers then Keynes curves do not intersect as he alleges and I think this simple fact destroys Keynes whole edifice of pseudoscience. Of course expectations are an important factor in determining how much employment an entrepreneur will offer, but there is no “imaginary” aggregate supply and no “imaginary” aggregate demand curve intersecting as Keynes alleges.
But obviously you do not need this fundamental flaw to destroy Keynes huge edifice of pseudoscience, as Hazlitt IMHO corectly shows there are tons of other things that destroy Keynes pseudoscience.
Hazlitt says chapter 6 of Keynes book is nonsense while Keynes defintions of investment and consumption IMHO is so far the only part of the book that makes sense. There is an error in Keynes “User cost” since Keynes substracts TWICE the income of other entrepreneurs, but apart that error I think Keynes is right in those definitions. Hazlitt does not analyze in deep chapter 6.
I would love to deeply discuss here Keynes “General Theory” and Hazlitt refuttal of Keynes, I hope there will be someone to discuss here.
The demonization of savings by Keynes is total nonsense. The multiplier is total nonsense. But I will make a long post to poster “Mr Keynes” in this board explaining in detail why Keynes IMHO is utter nonsense, and Hazlitt is esentially right but there are some important things were I think Hazlitt is wrong .
Eventough I am ultra libertarian I see very deep flaws in pro-libertarian “austrian” theory. There was no “loose money” before the Great Depression as Austrians claim, just the exact opposite happened, there was “tight money”: Since it is much riskier to lend to a corporation at a 30 year interest rate than to lend overnight then long term rates -for instance the 30 year AAA bond rate- must be much higher than the super short term rate, a higher rate is need to offset the risk of lending at such long terms like 30 year terms.
But in the 1928s money was so “tight” that the discount rate -the ultra short term rate fixed by the FED- was actually higher than the 30 year AAA bond rate ! ( the longest term interest rate!)! In 2007 money was so “tight” too that the fed funds rate -again, an ultra short term rate- was higher than the 30 year AAA bond rate!
In other words, before EVERY recession there was an inverted yield curve or a quasi inverted yield curve which means that short term rates were so high that they were higher or almost as high as long term rates !. The 10 year treasury rate is usually used to allege if there actually is an “inverted yield curve”
Before EVERY recession since Great Depression there was been such “tight” money. “Tight” money is simply MASSIVE INTERVENTION IN PRICES BY CENTRAL BANKS: Prosperity brings a natural increase in prices but central bankers usually intervene; they take away GIGANTIC HUMONGOUS quantities of money in order to impede the natural -which may be temporary- rise in prices that prosperity brings and doing so they trigger recssions and turn prosperity into a recession. They take away such gigantic quantities of money that ultra short term rates may end up being near as high or higher than very long term interest rates bringing an “inverted yield curve” or a quasi inverted yield curve. They kill credit and investment doing so and the eventual appreciation of currency may cause problems.
Go to the Federal Reserve database http://research.stlouisfed.org/fred2/ and you will see that I am right. Make a graph of the 10 year treasury rate GS10 and the fed funds rate FEDFUNDS and you will see. Before the 1938 recession there was too “tight” money but surprisingly it showed little in interest rates. There were massive tax increases at that moment so maybe the money was no so “tight” but taxes were crucial in creating that “recession within a depression”.
“Tight money” triggers the crisis, then politicians and bureaucrats with massive spending, massive regulations and massive taxation -i.e., with MASSIVE increase in their power and control over peoples lives- turn mild recessions into severe recessions or Great Depressions.
I think Hayek deep misunderstanding of the causes of the Great Depression gave credibility to Keynes pseudoscience.
Sadly some prominent Supply Siders -like Arthur Laffer- made the claim that today there was no housing bubble in the USA. That is a HUGE error for us supply siders and we cannot make another such big error. That gave credibility to keynesians like Krugman and Roubini and to austrians.
What seems to trigger bubbles, in the 3 cases that I have examined is “tight” money, not loose money.
If you admit that a bubble starts when a price that was increasing -say- 5% a year suddenly starts increasing -say- 15% a year then you will see that the “bubbles” that I have examined started under “tight” money : The Standard & Poors 1995-2000 bubble started in 1995 with “tight” money, the USA housing bubble started in 1997 with “tight” money and with a justified increase in home prices caused by the elimination of capital gains taxes for tens millions homeowners , the late 1920s Stock Market bubble started with the 1928s “tight” money: Just take a look at a log chart and you will see that the sudden slope increase that in my opinion “shows” a bubble coincides with “tight” money.
Of course “tight” money is usually followed by extreme “loose” money so IMHO people get confused and attribute to “loose” money what “tight” money actually did.
The current housing bubble IMHO was hyper inflated by democrats forcing banks, through the Community Reinvestment Act, to made bad loans and by democrats making the government taking the mortgage risk that usually the private sector bore: If the government takes the risk of course a rational private sector will take crazy risks since “daddy government” will pay the damage.
Hayek, with his bad theories, actually demonized private investment and made possible the predominance of John Maynard Keynes pseudoscience, doing horrifying damage.
Demonizing savings is exactly what Keynes did, if you demonize savings then disastrous pay as you go social security schemes and progressive taxation are “justified” and so an enormous utter destructive and impoverishing increase in politicians oppresive power and control is “justified”.
And a theory that, as the austrian theory, bases itself on “loanable funds” is flawed. I will never get into this until I clearly see the flaws in keynesian bubble theories.
I base myself essentially in Robert Mundell monetary theories which I think are deep down right. I will post some other day showing the big flaws in monetarism and austrian theories. Monetarism has deep flaws but is not utter nonsense as IMHO John Maynard Keynes “General Theory” is.
Best regards
Lord Keynes, your ignorance of the temporal element of “success” is showing.
I don’t think that there can be any reasonable disagreement that massive government intervention, e.g., a stimulus, in an economy will not have some temporary effects, e.g., an alleged recovery (question: for how long?).
However, the statement “there is no successful example of Keynesian economics” means precisely that Keynesian economics is unstable, i.e., it is not successful *long term*. One intervention leads to another in an ever more desperate attempt to control what cannot be controlled. As Rand presciently put it:
“A mixed economy is a mixture of freedom and controls—with no principles, rules, or theories to define either. Since the introduction of controls necessitates and leads to further controls, it is an unstable, explosive mixture which, ultimately, has to repeal the controls or collapse into dictatorship.”
You say:
Regarding the first point, there is no successful example of Keynesian economics.
Your claim is laughable.
Massive Keynesian stimulus has just been implemented in China, in the face of a massive collapse in their export-led growth economy.
The Chinese implemented a $586 billion dollar Keynesian stimulus – and then got a very impressive recovery, so impressive in fact that with growth in Q1 2010 at 11.9%, there is talk that they may need to cool down the economy.
Does that sound like a “failure” to you?
Australia also implemented a large Keynesian fiscal stimulus, which worked very well, and benefited from China’s stimulus as well (which just reinforces how successful Keynesianism is when countries that are large trading partners both do it at the same time.)
And then we have the list of other countries that also used Keynesian stimulus in 2008/2009 successfully: South Korea, Taiwan, New Zealand, Germany, Sweden etc etc.
For details on Germany’s stimulus, see here:
http://socialdemocracy21stcentury.blogspot.com/2010/09/germany-success-of-keynesianism-and.html
Keynes was a bad economist, a sloppy theoretician. There is a good, but long book analyzing General Theory by chapter: Failure of the ‘New Economics’ by Henry Hazlitt. It is hard to take Keynes seriously after that. This is a book Hayek should have written in late 30-ies but never did…
PDF is online here: http://mises.org/resources/3655/Failure-of-the-New-Economics
Free audio book available here: http://mises.org/media.aspx?action=category&ID=214
Ok, but there is still the fact that Keynes wrote, in the introduction to the German version of his General Theory, that totalitarian governments are probably more suitable to his economic theories than Western democracies. Are we to believe that this was a minor lapse of reason, or a general thrust of his thought? It’s quite a glaring indictment of Keynes and Keynesianism, IMHO, and very difficult to reconcile with any kind of “moderate” Keynesianism.
From the Vorwort Zur Deutschen Ausgabe:
“The theory of aggregated production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire.”
http://tmh.floonet.net/articles/foregt.html