John Maynard Keynes and Larry Summers, Naked

 

Steve Forbes, arguing in the current issue of Forbes that Keynesianism is now coming under a final, and mortal, intellectual assault:

[G]overnment efforts to “temper” the “ups and downs” of business cycles will be regarded as preposterous and hubristic.  We’ll no longer have the spectacle of a Larry Summers, President Obama’s outgoing Director of the White House National Economic Council and Assistant to the President for Economic Policy, overtly declaring the Keynesian axiom that if consumers don’t spend on a scale satisfactory to such economic commissars as himself then the government must seize their assets and spend them for them.

The government, seizing our assets to do our spending for us.  Really, that’s as pointed and accurate a one-sentence description of Keynes as I’ve ever come across.  Beautiful.

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  1. Profile Photo Member
    @

    It’s worse than that– they are actually seizing future generations’ labor to spend for today’s “needs,” that is, for a short-term economic bump at the expense of long-term prosperity, just to reinsure their re-election.

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    @Pilgrim

    Couldn’t get past the headline. I am trying to eat lunch here in the east

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    @

    Was Keynesianism not declared dead in the 70s and 80s? Keynesianism is a zombie; its prone to revivals.

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    @MelFoil

    Steve Jobs knows how to take $1-billion, and turn it into $10-billion. The US Congress knows how to take $1-trillion, and turn it into $10-billion, of “stimulus.” Please God, let Steve Jobs just keep his money, and let HIM invest it.

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    @SteveManacek

    Michael, above, is right. By 1980, virtually EVERYONE agreed that Keynesianism was a dead end, and by the time Reagan and Volcker tamed inflaton and reignited economic growth a few years later, Milton Friedman was the reigning god, not only on the Right but almost everywhere except in the few remaining precincts of the hard-core Left. Even Ivy League economics departments were largely monetarist. But Keynesianism is like opium to the political class. The lure of power — to centralize, to control, to mandate, to spend — is simply too great to be resisted indefinitely. The addict may stop using for a while, but he is stll an addict.

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    @PeterRobinson
    Steve Manacek: Keynesianism is like opium to the political class. The lure of power — to centralize, to control, to mandate, to spend — is simply too great to be resisted indefinitely. The addict may stop using for a while, but he is stll an addict. · Jan 6 at 9:40am

    True, true, too sorrily true. What I loved, though, was Forbes’s formulation: When we’re not spending enough, the government seizes our assets to spend them for us.

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    @RobertKelly

    If deficit spending actually went into real economic activity and not into growing government AND taxes were cut, we certainly would have seen stimulus. Keynes actually talked about this, but in practice, it never happens this way. Government can’t help itself. We need a national 12 step program to beat the addiction.

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    @
    Peter Robinson

    Steve Manacek: Keynesianism is like opium to the political class. The lure of power — to centralize, to control, to mandate, to spend — is simply too great to be resisted indefinitely. The addict may stop using for a while, but he is stll an addict. · Jan 6 at 9:40am

    True, true, too sorrily true. I just loved Forbes’s formulation: When we’re not spending enough, the government seizes our asset and spends them for us. · Jan 6 at 9:49am

    You may recall, Peter, that Bill Clinton put it almost exactly that way when he noted that he “…might have raised your taxes a little too much…” and went on to say that sure, he could give it back but “…you might not spend it the right way.”

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    @Kervinlee

    Why are not all savings tax exempt? Isn’t that how capital formation to invest and grow the economy takes place? Oh, right, I forgot – people with their own money doing with it as they see fit are the “greedy rich.” Can’t have that!

    Down with Keynes, up with Friedman.

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    @EJHill

    If you gathered up the entire political class in DC, slipped them an injection of sodium Pentothal

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    @EJHill

    If you gathered up the entire political class in DC, slipped them an injection of Sodium Pentothal and asked them the following question, what do think the percentages would be:

    Is the primary purpose of the tax code to A) Raise revenue or B) Control the populace into doing what you want them to do?

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    @InaPickle

    If Keynes’ one liner for stimulus is: “the gov’t should seize our assets to do our spending for us,” what would Milton’s one liner be?

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    @

    Milton Friedman’s monetarism is not a solution to Keynesianism. People forget that Friedman was an advocate of central banking and of the Federal Reserve.

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    @DavidLimbaugh

    Peter, I was intrigued by Dr. Sowell’s comment in your outstanding UK podcast that Keynesian economics was still somewhat useful in providing tools, even if disastrous in its prescriptions — or words to that effect. So, I inferred that as to the tools or methods part, Keynes’ contribution survives. But I don’t think too many people consider the tools when they invoke the term “Keynesian.”

    I will also tell you this, while Keynesian economics has now been thoroughly repudiated, it was still very much the rage when I minored in econ between 1971 and 1975. And while I have no firsthand knowledge of this, I bet econ textbooks still teach, as dogmatic, that there is a necessary tradeoff between unemployment and inflation (the Phillips Curve), wholly ignoring the fulfilled supply-side promises of producing economic growth without appreciable inflation. But I could be wrong; it’s been a while since I’ve been in school.

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    @
    Peter Robinson: Any current economics students care to weigh in? Do they still teach Keynes as the received economic wisdom?

    In academia, Keynes is still the man to whom we owe our gratitude for having spared the world of countless contractions similar to the Great Depression. Both fiscal and monetary Keynesianism are under attack but the latter has better withstood the onslaught than the former. Academics and economists are more prone to criticizing government spending as dictated by its fiscal policies than to rebuking the Fed’s monetary policy. However, much of the debate in academia centers on the details of Keynesianism, not the essentials. Economists will reprimand those responsible for fiscal policy, but will merely disapprove of the way in which it was conducted and not reject the essence of the policy, e.g., “the administration should have spent $100 billion on x instead of y.” My old professor’s big disagreement with Bush and Paulson was that they failed to bailout Lehman! What many academics will fail to understand is that spending on either x or y represents a waste of tax dollars.

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    @MBF
    Michael Labeit: Milton Friedman’s monetarism is not a solution to Keynesianism. People forget that Friedman was an advocate of central banking and of the Federal Reserve. · Jan 6 at 10:44am

    I am certainly not an economist, so bear with my simpleton understanding of Friedman’s view. Did he not advocate, essentially, a fixed algorithm at the FED instead of the whims of The Bernanke? Specifically, the monetary supply would be a function of economic growth and not subject to political pressures. Isn’t that more or less what happened for two decades starting in the early 80’s, and didn’t that result in some fairly robust wealth creation?

    Or am I way off here? I’ve read Free To Choose and seen a lot of the Friedman YouTube videos, but am definitely not claiming to be an expert or to speak for the Great Man.

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    @

    A prescriptive tenet of monetarism is that the money supply should be manipulated in accordance with economic growth. Friedman believed that the Fed should engage in “price stabilization.” This would require the Fed to keep the price level constant by manipulating the money supply. The problem with this approach is that it assumes that such price changes are bad. Money is a good like any other; its “price” or purchasing power is determined by the supply of and demand for it and such determination should occur because it represents the will of the market. In a free market, prices fall over time as production costs fall and competition ensues. Price stabilization would put a stop to this.

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    @JosephEagar

    In “The Appropriate Use of Monetary and Fiscal Policy for Internal and External Stability”, Robert Mundell lays out why Keynesianism only works under fixed exchange rates.

    History has proved again and again; deficit spending vents through an appreciated currency, and eventually ends in devaluation–there is no net benefit.

    Mundell was still a Keynesian at the time (1961 I think); he was a proponent of keeping fixed exchange rates because then governments could use Keynesian policies.

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    @JosephEagar
    Michael Labeit: A prescriptive tenet of monetarism is that the money supply should be manipulated in accordance with economic growth. Friedman believed that the Fed should engage in “price stabilization.” This would require the Fed to keep the price level constant by manipulating the money supply. The problem with this approach is that it assumes that such price changes are bad. Money is a good like any other; its “price” or purchasing power is determined by the supply of and demand for it and such determination should occur because it represents the will of the market. In a free market, prices fall over time as production costs fall and competition ensues. Price stabilization would put a stop to this. · Jan 6 at 2:02pm

    Tell that to victims of deflationary expectations in Japan, or during the Great Depression.

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    Joseph Eagar

    Michael Labeit:

    A cleansing process? Of what? Modern central banks use extensive communication so private actors expect a certain price level increase–to avoid malinvestment. This isn’t the 1970s.

    You are confusing balance of payments inflows with central bank credit. Central banks cannot control long-term interest rates (without causing hyperinflation).

    The price level has doubled 16 times in the past century. Yet aside from the 1930s deflation, we’ve done just well. Our economy produced cars, airplanes, computers, the internet–all with a gradually rising price level.

    The Fed’s artificial credit expansion is bad for the economy . It reduces interest rates and increases the quantity of credit demanded, giving rise to a whole slew of firms in the marketplace. The Fed’s credit expansion is not contingent upon an increase in actual savings, so its a sham. Price deflation reduces prices back to their actual market levels and liquidates businesses that are dependent upon the Fed’s credit expansion, i.e., businesses that fail ultimately to satisfy consumer demand.

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    @
    Joseph Eagar

    Michael Labeit:

    The price level has doubled 16 times in the past century. Yet aside from the 1930s deflation, we’ve done just well. Our economy produced cars, airplanes, computers, the internet–all with a gradually rising price level.

    It wasn’t until the hot money flood of the early 2000s that developed nations got in trouble. Asian savings did far more damage then the Fed.

    We’ve done well, but have been accompanied by the needless business cycle ever since. I don’t buy the Asian savings argument (or any savings or underconsumption argument) when it comes to explaining recessions. My alternative argument is in my link.

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    @

    Joseph, if a central bank or government institution expands the supply of credit by fiat, then price deflatoin is a necessary measure to cleanse the market of bogus and fraudulent price increases. Businesses that are created as a result of artificial credit expansion will not satisfy consumer demand, hence they must be liquidated so that scarce resources can actually be allocated to productive undertakings instead.

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    @JosephEagar
    Michael Labeit: Joseph, if a central bank or government institution expands the supply of credit by fiat, then price deflatoin is a necessary measure to cleanse the market of bogus and fraudulent price increases. Businesses that are created as a result of artificial credit expansion will not satisfy consumer demand, hence they must be liquidated so that scarce resources can actually be allocated to productive undertakings instead. · Jan 6 at 6:37pm

    A cleansing process? Of what? Modern central banks use extensive communication so private actors expect a certain price level increase–to avoid malinvestment. This isn’t the 1970s.

    You are confusing balance of payments inflows with central bank credit. Central banks cannot control long-term interest rates (without causing hyperinflation).

    The price level has doubled 16 times in the past century. Yet aside from the 1930s deflation, we’ve done just well. Our economy produced cars, airplanes, computers, the internet–all with a gradually rising price level.

    It wasn’t until the hot money flood of the early 2000s that developed nations got in trouble. Asian savings did far more damage then the Fed.

    Seems to me nothing much happened when it was mild and predictable.

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    @
    David Limbaugh: I will also tell you this, while Keynesian economics has now been thoroughly repudiated, it was still very much the rage when I minored in econ between 1971 and 1975. And while I have no firsthand knowledge of this, I bet econ textbooks still teach, as dogmatic, that there is a necessary tradeoff between unemployment and inflation (the Phillips Curve), wholly ignoring the fulfilled supply-side promises of producing economic growth without appreciable inflation.

    Austrian economics is experiencing a permanent recrudescence, but the Phillips Curve is still taught. I should note that its the Keynesian approach to monetary policy that gives some the impression that the Phillips Curve provides an accurate description of reality. When the Fed expands the supply of credit via open market purchases, it creates artificial economic growth that is accompanied by temporary low unemployment (which is made possible by the acquisition of labour with the credit distributed by the Fed). Naturally, the credit expansion and the spending that it prompts simultaneously cause price inflation. Hence, unscrupulous economists will be lulled into believing in the claim that unemployment and price inflation are necessarily inversely correlated, when in fact both can and do occur simultaneously.

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    @PeterRobinson
    David Limbaugh: While I have no firsthand knowledge of this, I bet econ textbooks still teach, as dogmatic, that there is a necessary tradeoff between unemployment and inflation (the Phillips Curve), wholly ignoring the fulfilled supply-side promises of producing economic growth without appreciable inflation. But I could be wrong; it’s been a while since I’ve been in school. · Jan 6 at 10:55am

    Edited on Jan 06 at 10:57 am

    When I studied economics at Oxford the year after Margaret Thatcher became prime minister, David, the Phillips Curve was still being taught–although, to their credit, my tutors made certain I understood it had become controversial.

    Any current economics students care to weigh in? Do they still teach Keynes as the received economic wisdom?

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