In early 2007 how many Keynesian economists or commentators were forecasting the worst housing crisis since the Great Depression? How many were forecasting a major credit crunch and the wipeout of the financial sector? Not very many. By August 2007 the US government was following Keynesian/interventionist monetary policy, engaging in the first of an aggressive series of rate cuts to try to prop up the economy. Most other governments followed suit by 2008, even the ECB eventually joined in. Furthermore, from early 2008 a policy of intervening to prop up failed financial firms was followed. Now it's April 2009 and most of the world's major economies are committed to massive monetary and fiscal stimulus. And yet, so far the results have been absolutely atrocious. There are two possibilities for all this intervention, either it works or it fails. My question is very simple - at what point do proponents of intervention concede that they have failed? We all know that if the economy rebounds strongly in 2009 and 2010 that the interventionists will say "see? It worked". So, to be fair and balanced, what set of circumstances would show that intervention had failed? If 2009 is bad and 2010 sees no recovery either? In Japan they tried textbook Keynesian policies for 19 years in a row (since 1990) and the result was 2 decades of stagnation and wealth destruction, funded by debt that spiralled to well over 100% of GDP. Even the Keynesians admit that was a royal failure. So what about the West? If we see no strong recovery within the next year or two, will they also admit that the 2007-09 monetary and fiscal stimuli were also a failure? Will they admit the free market approach to the macro-economy was right?
You had the "free market approach" at work for about 48 hours in the middle of September when Paulson let Lehman goto hell as he thought markets were properly prepared. Within 72 hours they did a 180 and bailed out AIG, injected a couple hundred billion in all major US & UK banks, bailed out money market funds, Hypo Real and Eastern Europe. Unfortunately, the Austrian lobbyists achieved exactly the opposite of their goal by asking politicians to let the market "take care of things". How ironic. Who knows, had they shut up and let the interventionists have their way... maybe after a while the Austrians would have a better political standing with their arguments and finger pointing.
Stick to the topic please, rather than indulging in politician-style debating tricks. It's a very simple question - what outcome for the economy would falsify the belief that a heavy interventionist approach is the right approach?
There's a basic point about truth-seeking and intellectual honesty here. When you say the world is a certain way, then to be honest and accountable you must put your beliefs to the test - you must have a point at which, if the world does not conform to your analysis and predictions, then you concede your beliefs were wrong. Agreed? After all, one of the cornerstones of scientific thinking is that your beliefs must be falsifiable, and preferably testable. Otherwise you end up like those dogmatic thinkers who believe the earth was flat, the earth was the centre of the universe, alchemy worked etc etc. You have frequently accused non-intervenionist supporters of being dogmatic, so I assume you are well aware of the dangers of dogma and unfalsifiable faith-based ideologies, and reject that kind of thinking. Macroeconomics is infamous for never having controlled experiments, there isn't much we can do about that. But I would say that the current recession offers a chance to test one of the main schools of thought in how to respond to a slump. Let's just make sure we agree on the premises here. I think it is clear that almost all the major economies are following a heavy interventionist approach - they are following loose monetary policy with very low interest rates, even quantitative easing in several cases. They are deficit spending aggressively. They are bailing out not only banks but also insurers/closet-derivative hedge funds (AIG) and even automakers. They are indulging in record borrowing to fund counter-cyclical public spending. And they are trying to co-ordinate this into a worldwide effort. To me, that appears to be textbook Keynesianism and interventionism. Do you agree? So, given that the world is following these policies, we need to ask is this a fair test of them? I would say yes - there is only really one policy that people are following, it is Keynesian intervention. This is either faith-based pseudo-science (in which case it is wrong by default) or it is a testable policy which can and must be judged on its observed results. If it is the latter, then the results will be observed and the policy will stand or fall based on the success or failure of those results. Do you agree? If you agree we are following these policies, and if you agree that the policies should therefore be judged by the results that we observe, then basically you agree with the premises of my first post. All that then remains is to spell out what results would constitute a success, and what results would constitute a failure. Reasonable people can disagree on the exact nature of the "test", but we must have at least some standards for judging the results, otherwise we are turning it into an unfalsifiable theory. Do you agree? Bear in mind that I have no crystal ball - so for all I know it could be a roaring success and we bounce back in 2009 and boom in 2010 onwards thanks to these policies - obviously, as an intellectually honest person, I would then concede that the Keynesian approach had been a success at dealing with a heavy recession. I would change my mind because the facts would have disproved my belief. So my question to you and other Keynesian interventionists is very simple - are you prepared to hold yourself to the same standard? Will you let your beliefs be changed by the facts, if they turn out to prove your beliefs wrong? Your favoured policies are being tried - so if they fail, will you accept that they failed the test of the real world, and subsequently change your mind? You don't even have to accept the free market approach, you just have to abandon your belief in the Keynesian/interventionist approach if the results suck. If you accept that, which IMO is the only reasonable way to think about this, then all there is to discuss is what results would constitute success and what would constitute failure. Which is what I asked in the first place - do you care to answer?
Not so much an outcome.............govt is both the decease and the cure (this cure is sometimes worse than than the decease). It is interventionism what creates distortions in the economy at aggregate levels.
Falsify the approach according to who? Isn't it a subjective question? At the risk of sounding "political" imo NOTHING will invalidate the intervention approach for the proponents of intervention. My reasoning is simple, they are not the type who generally admit to being wrong in the first place.
Success of monetary policy needs to be measured in a relative basis. Ben Bernanke has run the numbers, in a sample of TWENTY SIX countries in the 1930's, the ones that were off the gold standard and printed currency had better employment, industrial production, more inflation plus dozens of other indicators perform better than the ones the ones in the gold standard. When they got out they usally improved performance The modern equivalent to this is quantitative easing, a more extreme version is QE plus trash talking the currency to induce inflation expectations, which the fed has not engaged in because the core CPI and core PCE havent plummeted yet. Perhaps a way to measure if QE works is looking at the performance of euro countries with other european nations AFTER this is over. Of course I'm assuming Trichet will not go into QE, which is not a good assumption since he very well might As far as fiscal stimulus is concerned, one can complain it creates fiscal problems for the long-run but not as a short-term boost in a deflationary enviroment since it raises velocity of money, increases aggregate demand and helps to reflate. Bottom line is, it all comes down to whether you believe massive deflation is good like Rothbard or if it feeds the collapse like Soros/Fisher
You keep working under the assumption that the intervention is not the actual end but the means. When the intervention is the whole point. This is not about whats best for the economy, at this point even the local village idiot can tell you that much. As I continue to say the economic crisis ended with the passage of tarp 1 when a whole new political mechanism was created where the executive branch was made the defacto CEO of the entire US Financial system. More power then even the FED had previously. Every step since then has been to strengthen and coalesce this unlimited power. This is a political crisis, the economics are the a trojan horse. All the hand wringing and haughty speeches are simply to appease the masses. To Continue to debate the cons of Keynesian interventionism and the statism it is as fruitless and as dated as a progressive in 1924 soviet union pushing for an American style democratic republic.. " hey at what point do we say central plan communism is not working?" asks the commentator in the local soviet paper. You are asking the wrong question in the wrong place. They elites have moved on and we need to see the conclusion of this transformation to its inevitable end. A better question is what politically needs to be done to undo these changes..if it all possible. Sorry to burst your bubble.
They keep us all wrapped in economic thinking so we won't stick up for our constitutional rights... I say, forget the economy, it's going to do whatever it's going to do and anybody, elites included, can be way wrong in figuring it out. Lobby for ALL your constitutional rights, the fourth amendment is trashed by the war on drugs, the first amendment is trashed by political correctness, the second amendment is eroding very slowly in some places... creeping socialism and crime tolerance... I say we use this crisis to shove all that stuff sideways where it don't belong...
I'm not so sure. Maybe we should try to understand where (to who) this money is going to. For what I understand of Keynesian thought, the main reason to increased spending is to raise employment rate and start multiplier effect (see http://www.econlib.org/library/Enc/KeynesianEconomics.html). Seems to me that macroeconomics of bailouts and QE have the same apparent drawbacks (deficit) but is really different, having no real economy pros. Who receive the money? For doing what? Altrough I'm not having a steady economic belief (I cannot find evidence of a complete and correct economic theory), seems to me that the main assumption of Keynesian, the absence of "invisible hand" and so the possible far-from-equilibrium state of economy is highly probable (altrough not surely proven). Simply think about people unemployed. Most of them would accept to learn a new job. Most of them are apt to jobs that will surely produce an output they are willing to consume, if able to. The main point is: their demand is wiped off so there is less demand and so output is adapting to it. But if they work (even on something that SEEMS less in demand, as building roads or bridges or renowing schools) they will consume and by multiplier effect move economic equilibrium to a different -and more higher- point. <BR> But if money injected in the economic system is only used to mantaining unusually high prices of overpriced goods (as RE) or to write in a balance sheet that asset's value is more than what real market value is, this do not create any employment, and I don't know if it can be called "Keynesian policy".