John Maynard Keynes & Obama's upcoming plan...

I posted this on the United States section but it also belongs in an econmic thread.

What affects America certainly affects us in Canada. Obama and his regime keep inisisting in spending, a stimulus again, because they are believers of John Maynard Keynes philosophy of government intervention in the marketplace, to spend funds, even if they have to borrow big, during a recession.

The Old ‘Not Enough’ Excuse - Victor Davis Hanson, National Review
True believers in government spending can never be proved wrong.

To newly inaugurated Barack Obama and his prime-the-pump technocrats, the logic seemed so simple. America’s problem was a struggling economy. The solution was to spread around even more borrowed government money. The result would be a return to prosperity.

But after nearly three years and $4 trillion in borrowed “stimulus,” things have only gotten worse. Unemployment is stuck at 9.1 percent. Consumer confidence is approaching a record low.The stock market is tanking. National debt is increasing at a rate of $4 billion a day. Economic growth has almost vanished. America’s creditworthiness has been downgraded. The housing market is still depressed. Food and fuel prices are skyrocketing. In response, only 26 percent of the public expresses confidence in the president’s handling of the economy.

Apparently, as even the president himself recently confessed, government cannot so easily manufacture “shovel-ready” jobs. But it did far better at scaring cash-hoarding businesses into a historic hiring paralysis with nonstop talk of higher taxes, more national debt, more regulations, them vs. us class-warfare rhetoric, threatened government shutdowns of private plants, and higher-priced energy.

Obama is still promising to borrow more for “infrastructure” and “jobs.” Despite nearly $15 trillion in federal debt, the administration apparently wants to defy the rules of logic and do more of what made things worse in the first place, under the euphemism of “investments.” American popular culture has coined all sorts of proverbial warnings about such mindless devotion to destructive rote: “Don’t flog a dead horse,” “If you are in a hole, stop digging,” and “Insanity is doing the same thing over and over and expecting different results.”

No matter: The administration still adheres to the logical fallacy that the toxic medicine cannot be proven to be useless or harmful, because there was supposedly never enough of it given. And the proof is that the worsening patient is still not quite dead.

The same fallacy arises over the rioting in Britain and the flash mobbing in American cities. With food stamps, housing subsidies, unemployment insurance, disability payments, and general assistance at all-time highs in the affluent West, why did looters target mostly high-end stores? Was the criminality really due to a lack of government investment and public caring — or was it perhaps the result of too much coddling and dependency? Yet some observers are talking of renewed “investments,” not of pruning back the destructive programs that seemed to facilitate an angry underclass in robbing electronics and boutique-clothing stores.

That there is never enough spending is a seductive fallacy because it never requires any empirical proof: If millions of those supported by the state have lost their self-reliance and self-initiative, perhaps it is because millions supported by the state were not supported well enough, and so in response, some resorted to stealing things they could not afford.

Consider also the current government-sponsored notion of “millions of green jobs” — a siren call that Obama and “green-jobs czar” Van Jones voiced to lift the economy and transition America over to sustainable, affordable energy. But tens of billions of wasted dollars later, electricity and gas prices are at near-record levels. The attempt to make subsidized green power competitive by cutting back on fossil-fuel exploration while trying to shut down coal plants and stop gas pipelines has only made energy prices climb and further burdened American households.

Meanwhile, hundreds of billions in green subsidies created neither much new energy nor many new jobs. But the massive handouts did provide a lot of public money in sweetheart deals to administration-friendly companies that either went broke, outsourced jobs to China, or hired the unemployed at insane costs, sometimes at $2 million per worker.

Yet despite the dismal record, President Obama is still touting the same-old, same-old, 2008 “millions of green jobs” mantra, apparently on the fallacious notion that massive subsidies to government-supported plants like Evergreen Solar in Massachusetts and Johnson Controls in Michigan have not worked too well — only because there were not enough costly investments.

As we witness the financial insolvency of blue-state America, the monetary meltdown in southern Europe, and the criminality breaking out among some members of the Western underclass, logic suggests that massive state deficits not only did not bring a promised utopia, but ensured chaos.

But for those who are invested materially and psychologically in the religion of never-ending government borrowing and spending, there is always the true believers’ excuse of “not quite enough.”

— Victor Davis Hanson is a classicist and historian at the Hoover Institution, Stanford University, and the author, most recently, of The Father of Us All: War and History, Ancient and Modern.

 

Very basic ignorance of economics. What would have occurred without the stimulus? Victor Davis Hanson is a classicist and, as a classicist, I look forward to some content

 

Even with Europe moving away from socialism, Obama pushes on.

Replaying the same old speech, partially because he is trying to relive the glory days during the campaign, partially because he hasn't a clue. Neither do his hen house full of academics.

The stimulus was as was the UAW bailout, was to pay back the unions. Even Obama underestimated how slow the public unions are to process the paper to put the private unions to work.

As far as support for the stimulus, the Hayek / Keynes rap video I posted shows the government needs to do something to fix the problem (to show they are "in control"). Hayek says to let the markets fix themselves, Keynes tells them what they want to hear - just spend money (government is good at that). If you think you're in power, who do you listen to?

Not all of this mess is Obama's fault ("it was Bush's fault" stopped working in mid 2010). A lot of institutional disfunction is a result of the feedback loop between government power (regulation and tax loop holes) and special interest greed. Obama is a quick study on the power of politics, despite his rant about special interest and lobbyist - he has filled his office with people that will owe him favors for the rest of his life.

Obamacare has passed, he has shoveled money into the unions, the economy is on a Cloward Piven tragectory - his job is done.

Time for a vacation.

 

Nothing socialist about either the US or Europe. They follow a neo-liberal agenda, with a capitalism form that exaggerates market concentration and therefore macroeconomic instabilities

The Austrians have no coherent theory of the firm, or any sophisticated apppreciation of behavioral economics. The idea that they are capable of understanding macroeconomic result is a ludicrous as the new classicals and their misappropriation of rational expectations

 

There seems to be a bit of begging the question here. We can't possibly know what the outcome to any particular situation would be if we had not taken a particular course of action.

The Keynesian can forever argue, unchallenged that "things would have been much worse if we hadn't done this" knowing full well that the statement can't be refuted. While those of us that remain skeptical worry about first, the moral hazard created by the bailouts and the long term impact of winners and losers in the market being chosen, not by consumers but by bureaucrats.

 

Hello,

Please note the following equation:

GDP = government spending + private consumption + gross investment + (exports − imports)


If we temporarily increase GDP, will that increase employment in the short run?

If employment is increased in the short run, in response to the temporary increase in GDP, will that temporary employment actually increase GDP a second time...

to a new level beyond that which was achieved by the first burst of temporary government stimulus?

...so when the temporary stimulus goes away, we will have more jobs which are self-sustainable, even though all the stimulus ended?

IS THAT CORRECT?

Ok. Good.


So....

Have we gone too far? Have we spent so much money that JM Keynes has become a madman monster, broken his chains and is now pummeling America's nuts?

Well...

What would be the indicator of that? High inflation? Right now?! Well I hope nobody thinks that core inflation below 2% is high. JM Keynes the psychopath would recommend something like 4% or more during a high unemployment-low aggregate demand recession like ours.


(Also, I hope nobody thinks that the price of food and gas going up has anything to do with the money supply or monetary policy. Food is high because of a drought and probably some sort of climate something something. Oil is high because John "Rambo" Mccain didn't suicide bomb Momar Kadafi quickly enough.

These prices are referred to as "headline inflation" because they show up in the news and people think it's the government's fault but, in this case it is not. If Obama followed Lysenkoism and set fire to Libya's oil reserves, then food and oil prices would be our fault.)


But no, Inflation is below 2%. Disagree?



What about our expectations of inflation in the future? I bet those expectations are through the roof! Wall Street is all like "oh snap I bet there's gonna be some stuff goin down in the future. Obama's gonna hire Stalin to be the economic dictator and inflation will be all way super high!"

How do we measure people's expectations of future inflation? What a random question! Well guess what, there is an extremely accurate way to predict that:

The return rate on treasury bonds. They are super low. What the hell does that mean?

That means if someone wants to loan money to the US government, the US government will pay that loan back in the future, and they will give a very small amount of money on top of that. The interest rate on those bonds is very low.


The rate of return on a TEN YEAR loan to the government as of August 25th, 2011 is 2.23%

That means if you give the government $100 today, they will give you $2.23 per year until it is paid off. (Something like that, I have a degree in economics, not finance).

Keep in mind, these prices are not determined by government mandate. The free market decides what the rate of return ought to be. People are buying these bonds at these super low prices because they WANT TO. It is a GOOD INVESTMENT for them, or so they think.


Now what if they expected inflation to go above 3% at some point in the next ten years? Surely that is exactly what every erudite professor like Michelle Bachmann assumes is already happening, except way worse.

That would mean that they receive 2.23% on their bond return every year, and the value of their money decreases by 3% every year. They would lose money.


Would people buy ten year treasury bonds at near-record breaking low prices if we had serious PROBLEMS with FUTURE INFLATION?

WOULD THEY?!


So, Professors of Economics, who surely already understand everything I just said is a bunch of facts and not opinions at all, what is the problem that we should expect to see with our catastrophically high debt?

I'm surprised nobody is talking about the repeat of history where America dominated the tiny nuts off of Europe post-ww1 and knocked everything out of balance. Actually no I'm not, the media is intellectually bankrupt.

The one thing the media knows is that a number is big. The debt is a big number. Wow it's all like big and could you imagine if a single person was in debt for a quadrillion googleplex dollars! Boy that would be scary!






So what is the alternate plan and how will it work?

Give money to the rich!

What if corporate profits are currently at record highs and they have no motivation to expand into a market with depressed aggregate demand?

Will they hire people because they have extra money from extra tax breaks?

Because they are not hiring people now, since now they have extra money from extra-cheap labor market conditions.

So what is the plan? Trickle down effect, really?

 

If we look at each effected market segment, automotive, housing construction, etc. and provide a stimulus to maintain the pre-crash production levels, we would have avoided the recession.

Not only was the the stimulus too small to do that (would have required at least $4.5T, even allowing for Keynes "multiplier effect"), but the bulk of it wasn't directed at the impacted markets. Yes, you had cash for clunkers and the $8000 loan / turn to gift for home buyers. That did nothing but pull in planned purchases, followed by the expected vacuum.

And, when the government spending stopped, would the market continue on it's own. No.

The housing bubble had run it course, and would have popped without the recession, and the financial meltdown.

Low interest rates, and liar loans increassed the demand, thus price of homes. The price of houses went up, and the cost of money was low (and with a fixed 30 year loan, they knew it would stay low), so people refi'ed and took out HELOC's to pay off credit cards, to buy, buy, buy. For those without enough equity, there were 125% loan to value loans (assuming the prices would go up forever).

When those that wanted to pull money out of their homes had, that extra cash stopped. Those that could afford (not qualify, acutally afford) to buy a more expensive home had bought it. Then home prices plateued. Supply caught up with demand, prices fell. That extra cash dried up.

People also realized they were hugely upside down, and it made more sense to walk away and take the credit hit, than get stuck in a home they would never be able to sell. Foreclosures went up, housing prices fell even further.​

+1
There is a moral hazard any time you have private profit, and public loss. That incudes deposit insurance at banks.

"The Market", like nature, consists of a billion little experiments. Winners build on other winners and learn from losers. A complex dance, rivaled only by nature. It doesn't matter how smart, and untainted by politics, the bureaucrats are, they can't provide the dynamism required.

 

I'm a tad confused, here you seem to say that had we injected funds at the appropraite amounts and distributed it well we could have avoided the recession, while later saying that regardless of the stimulus the bubble was going to burst and the stimulus just delayed this eventuality.

 

I wasn't clear. The transitional phrase was:

And, when the government spending stopped, would the market continue on it's own. No.

We would have had a recession, with an even greater federal debt.

And, would have had more empty houses, depressing housing prices even further. The financial market would have skipped merrily along into a melt down.

 

Ok, very clear now. I saw the collapse of the housing market (for whatever reason you believe it occurred) was just an example of creative destruction and while some folks may be temporarily worse off, we'll be able to reap the benefits eventually.

 

My two sons have. Both bought houses for about half the price in mid-2007.

 

Hey mister that's a great post that might get ignored since you had to wait to get newbie approvals this morning! You sure do sound crazy though.

Also, i thought inflation was 3.6%? Does it matter when the "experts" say food and oil prices have only gone up because of temporary droughts and unrest in the middle east? Aren't they just liberals towing the party line?

 

We certainly can empirically test for consistency with theoretical approach. The folk using raw data are either deliberately trying to misrepresent or aren't aware of the need to understand economic result through macroeconomic theory

I would be careful with the use of moral hazard. We don't have a simple redistribution, or damaging, effect reflecting asymmetric information. We have a necessary partial replacement of the invisible hand.

 

Sir,

If my presence here is unwelcome, as my presence is very different from yours, do not hesitate to tell me about that specifically.

I must tell you though, that I have another goal which you may not. I love to entertain our readers. I do not think that you do. Just saying. You are smart and good. but

I also love reading non fiction, on purpose, like you do. People find me boring. *clear throat* they find ME boring.

I will certainly not embark on a devils advocate position against you ever again.

Also- important note- you and I have agreed from the start except protectionism which is pretty gray and fun and we don't ACTUALLY have data for that so therefore we can't really disagree

 

It wasn't a response to you. Indeed, I haven't bothered to read your post on this thread

 

And those creating these tests no doubt are accompanied by their own confirmation bias. I'm not attempting to say we'd have been better off without the stimulus, only that we don't know what would have occurred without it and I'm very slow to adopt a chicken little stance.

Necessary is entirely too confident an adjective to use here. And, as far as I'm aware, I've used the term appropriately here. Too big to fail organizations have no reason not to believe that the federal govt will bail them out again, this wasn't the first time it happened so this time was simply a confirmation of that belief.

If anything it's the lack of asymmetric information that creates this particular moral hazard. If they weren't fully aware that a bailout would come they (AIG etc) would have been more risk averse, but they were insulated from the risk so why not take it?

 

What do you get when the upside is huge, and there is no downside? When you get a huge bonus for a really successful year, and a big bonus for a really bad year?

Reward, WITHOUT RISK, generates really bad behavior.

 

Couldn't agree more, the incentives are all wrong. What private companies pay out bonuses for doesn't matter to me, but using tax dollars to shield mega-corporations from their failures.... that I have a huge issue with.

Regardless, the underlying concept is the same, incentives.

 

A very recent but not very detailed paper on incentives.

 

You underestimate the rigour of the empirical process.

I couldn't disagree more. The reaction was straight-forward rationality for the survival of capitalism.

Moral hazard, in terms of the economic approach, relies on asymmetric information. You're mixing up terms

Neo-liberalism profiteers from risk taking. We can moan about the consequences now, but those that don't like the bail-outs should have been moaning about neo-liberalism. Note that few didn't (and those that did were accused of being Marxist types)

 

Well, how you characterize an action determines your thinking about it. The bail out was not intended to "shield mega-corporations from their failures." Large corporations fail fairly often and nobody cares much. Nobody proposed bailing out Woolworths or Hollywood Video with tax dollars.
And you know why. Their demise had no macro-economic effects. In contrast, the collapse of AIG or GM would have in the context of the Great Recession had enormous economic consequences across the board, producing a domino effect of credit constrictions. In the former case mostly because of the pervasiveness of CDSs, which should have been regulated but weren't due to same ideology of market purity that seems to drive your claim that recapitalizing the company was intended to shield it. It wasn't.

 

Are you a professor, or once was with academia? You mentioned empirical studies and theories, which reminds me of a professor who once said to me: "Indeed, it might work in reality but does it work it theory?"

 

Nope. The missus is an ivory tower type though

I simply acknowledge the need for properly conducted evidence. Those that don't may as well just ask Madame Auring for the answers

 

Here is an interesting video on what motivates us.

http://fora.tv/2010/01/27/Daniel_Pink_The_Surprising_Truth_About_What_Motivates_Us

The answer isn't what you would expect, and the financial industry's reward system proved their finding....

 

Here is the podcast.

http://www.econtalk.org/archives/_featuring/dan_pink/

Here is his book:

[ame="http://www.amazon.com/Drive-Surprising-Truth-About-Motivates/dp/product-description/1594484805"]Amazon.com: Drive: The Surprising Truth About What Motivates Us (9781594484803): Daniel H. Pink: Books[/ame]