I'm not saying Keynesian Economics works or not, nor do I claim to be an economics expert. But how do you explain this: World War 2 got the economy going because the government spent tons of cash on the war effort (building tanks, planes, etc etc). Obviously this created thousands of jobs, and got people spending again etc. etc. In your post you admit that in 1945 when spending decreased the economy did not crash. So how come the government can't spend that same money as it did during World War 2 right now, without the world war, and have the same effect on the economy? This is a question I've never heard answered by anti-Keynesian economists. Again, I do not claim to know if Keynesian economics works or not, but the question above needs an answer to sway me either way.
Keynesian is Fascism. Mussolini defined fascism as being a partnership between the state and corporations. "his own words" Keynes provided the means for such an thing to happen in our "free world" to save the "free market".
I propose the following metrics just as one (probably over-simplified) possibility. Pick 2 "start dates", perhaps July 2007 and Aug 2008. Keynesian Intervention score = % GDP Fed government deficit + % GDP change in central bank net assets. Take the highest score during the time period measured. Recovery metrics: how many months from the start date does a) # of non-farm employees is higher than the high of the start date and b) stock market priced in gold hits new high compared to the start date. Do this for the major countries over the next few years, see if there are any patterns.
Because without the war there is not 50 - 60 million less people competing for the same set of resources. There is not all the wasted material and bombed out cities that need to be rebuilt. Historically, a massive die off relieves pressure on competition for finite resources, an example would be the black death in europe allowing more serfs to own their own lands and hasten the end of the feudal system. "In Western Europe, the sudden shortage of cheap labour provided an incentive for landlords to compete for peasants with wages and freedoms, an innovation that, some argue, represents the roots of capitalism, and the resulting social upheaval "caused" the Renaissance, and even the Reformation. In many ways the Black Death and its aftermath improved the situation of surviving peasants, notably by the end of the 15th century. In Western Europe, labourers gained more power and were more in demand because of the shortage of labour. In gaining more power, workers following the Black Death often moved away from annual contracts in favour of taking on successive temporary jobs that offered higher wages.[22] Workers such as servants now had the opportunity to leave their current employment to seek better-paying, more attractive positions in areas previously off limits to them.[17] Another positive aspect of the period was that there was more fertile land available to the population; however, the benefits would not be fully realized until 1470, nearly 120 years later, when overall population levels finally began to rise again." http://en.wikipedia.org/wiki/Consequences_of_the_Black_Death#Social_and_economic_effects Also, while the war may have been stimulative for America it was also partially due to the fact that the rest of the developed world had served as the battleground and had quite literally blown itself up. America ended up dominating some businesses, like movie making as a direct result of the destruction of European studios. As a result the effects of the stimulation were more magnified in the non-ruined US. Just my 2 cents...
Yeah, Bastiat is very cool. Elegant, simple, clear. I'm going to make the [very large] assumption that Cutten is serious about wanting an objective analysis that will make him money. So... The way the world works is pretty simple. Some poor place finds a way to make some rich place pay for its work. Back in the day, when I still had hair, Venice made cute little mosaic crap out of bits of broken glass, and sold it to the rich folks in Constantinople. This wee bit of initiative got northern Italy going, which got first France and then Antwerp/Rotterdam/Amsterdam/Bruges into the game via salt fish and textiles, which bled over into London and the rest of England, through the same route: salt fish and textiles, and before you could say boo you had a whole network of small to large (for their times) cities trading with each other for all kinds of stuff. Inevitably, this led to stagnation, as they fell prey to their version of "special interests/unions", the guilds and their apprentice system. Then the Portuguese rounded the Cape, the Spanish, jealous, sent Columbus the other way to try to quite literally get around them, and everything got shook up, again. With the New World, the peasants who missed the post-Black Death opportunity found a second chance in the Americas. The northeast US and Canada were rocky, relatively infertile compared to the Caribbean isles and the southern US, and had, in the areas first settled, relatively little in the way of precious metals, and so had to rely on their own sweat to keep from starving. Longer-term, they overtook their rich southern neighbors, and have wound up far richer in the present day as a result. But those riches came from risktaking, and inevitably risktaking folks tend to overreach from time to time. This is one of those times. You can either let everything fall apart and put it back together after, or you can pump billions and billions in to keep things afloat until the cycle turns. Both sides have a point in their arguments, but not for the reasons they think. If you pump billions and billions into an economically stagnant place, you won't get much. Do the same with a place that has people with the experience to put that money to work, and the results will be spectacular. The Marshall Plan lifted up the industrial areas of Europe: northern Italy, northern France, Belgium, western and northern Germany, and the southern UK. It didn't make southern Italy, the south of France, or Scotland more competitive internationally, though, because it couldn't. A place is either competitive or it's not. But because of national borders and politics, you can't target the money to where it will do the most good. You have to spray everyone with currency, knowing that a lot of it will miss the folks who will make the best use of it. This has nothing to do with Austrian or Keynesian economics, except that the latter at least acknowledges that you have to spend money. They still have no idea about where spending it will do the most good because their analysis omits the crucial point that you have to spend it where it will work. Literally where it will work. So, you have to waste a lot of money to satisfy politics. This is what causes the post-stimulus inflation. So yes, after this season of scarcity and poverty you will have wealth and, unfortunately, inflation. Because there is politics to consider. You have to keep the folks in the stagnant places from rebelling while you throw the money at the people in the competitive and risktaking places. No getting around it.
You assume that Keynesian economics has failed historically simply because it damages the economy and the middle class. Actually Keynesian economics succeeds very well in the purpose for which it is used - to transfer wealth to the banking industry. As for the question of "when will we know it has failed" to bring about economic recovery. Well, you can never "prove" what would have happened otherwise. It's like a person in the process of being mugged asking, how can I "prove" this reallocation of capital isn't ultimately good for the economy? Theft is just a natural part of society - it benefits some, hurts others, and creates overall inefficiency. The better question is how the individual can adapt.
Great OP! Clearly you disagree with the current fiscal policy. With the best of my very limited understanding of economics, I must say that I agree with you. My faith in free market solutions (like my poorly chosen screen name) has been shaken by the truth that this crisis raises questions about how self regulating free markets really are. Regulatory changes almost always are in response to events, rarely the other way around. I favor George Soro's conclusions about the underlying fundamental at work here. Namely that markets are historical processes which cannot be correctly modeled based on Newtonian concepts like equilibrium. The point being that solutions based on poor understanding lead to poor results. Failure criteria: Economic Stagnation Economic Callapse Hyper-Inflation
the problem all Kenys have is that they forgett part 2: in good times pay back debt made in bad times ))) 2nd: free market would regulate itself. the big problem we had in the last 20 years esp. in USA was to cheep money. Interest rates was too low. Who decided about interest rates? So it was not a free market, because if yes, all the bubble would not be generated. IT WAS NOT A FREE MARKET! If so many dump people asked money to buy 5 houses, everyone having money had asked 10% (15%?) of interest....
It's very simple Kasz - the worth of a job is not that it employs someone. Otherwise you could simply pass a law employing 100% of the population to dig holes and then fill them in again. Bingo - full employment. Tell us what you think might be the drawbacks of this scenario? The value of a job is in what it produces. Building tanks, planes, and employing lots of drill sergeants and recruits is incredibly valuable when you are in a war or about to start one. It is a horrific waste of money and totally unsuitable skills for 98% of people during peacetime when the chance of a major war is remote. For it to make sense for the government to create employment to counter recession (rather than because there are necessary government tasks that need performing), the jobs created have to produce something worth more than what it costs to create the jobs and pay the workers. Otherwise you are taxing/borrowing $1 to create less than $1 worth or product or service. Taking $1 and turning it into 99 cents or less actually increases the depth and length of a recession because it is destroying value. And, if there are private-sector economic activities that can take $1 and turn it into >$1, thus creating value, the private sector will of its own accord engage in those activities because they will turn a profit. There is no reason for the government to do it unless the government can intrinsically do that work better (e.g. police, military, courts, regulators, and possibly but not necessarily certain infrastructure etc). If you take your recommendation to its logical conclusion, why doesn't the government just employ everyone all the time? Then you would have perpetual full employment. The reason is that the government is crap at economic planning, as shown both by theory and over 100 years of experiments with socialism and command economies, and that it does not have an infinite pot of money.