“So, in conclusion, ‘Ideas, knowledge, art, hospitality, travel – these are things which should in their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible and above all let finance be primarily national.”

–Keynes, quoted in Skidelsky 2009, p.187

Writing for The Hill, I explain why Keynesian-style stimulus does not work. In addition, I note that the so-called stimulus was just an excuse for pork-barrel spending. But my concluding point, excerpted below, is that the White House goofed politically by making specific claims about the good things that ostensibly would happen by increasing the burden of government spending:

The only surprise was that the White House was foolish enough to make specific claims of the good results that supposedly would flow from all the pork-barrel spending. In part, this is the absurd notion of claiming 600,000-plus “jobs saved or created” when total employment actually has fallen by more than 3 million. But the bigger mistake was claiming that the faux stimulus would keep the unemployment rate from rising above 8 percent and that failure to squander $787 billion would cause the jobless rate to climb to 9 percent. The politicians got their wish, yet now the unemployment rate is above 10 percent. Brilliant.

my best friend for the next 24 hours

Hello Best Friend (John Maynard Keynes), please be nice to be more the next 24 hours and the rest of my life since I’ll be learning your concepts, graphs and wise words. But, at least please be nice to me tomorrow okie dokie?

Thank you bestfriend

Dans ce dossier, inspiré du livre “Where Keynes went wrong” de Hunter Lewis, je traite des principales idées de Keynes. La première partie traitait des taux d’intérêt, la seconde partie traitait de l’épargne, la troisième partie traitait de la bourse et de l’investissement et la quatrième partie traitait des récessions. Cette cinquième partie se veut une sorte de conclusion à ce dossier.

Nous avons vu au cours de ce dossier les principaux aspects du keynesiannisme, tel que Keynes le décrivait.

Keynes était conscient que le marché était un moyen efficient d’allouer le capital dans l’économie, mais il croyait que lorsque laissé à lui-même, le marché menait invariablement à une situation sous-optimale où le taux de chômage est trop élevé. Keynes préconisait donc que les “experts” du gouvernement manipulent le marché pour le ramener dans le droit chemin. Comme le disait Keynes, “il n’y a rien de mauvais dans le marché qu’un peu de rafistolage ne pourrait arranger”. 

La nouvelle mode des keynesiens est d’utiliser le marché de façon à atteindre les objectifs progressistes. Comme je le mentionnais dans un billet précédent, les théories de Keynes plaisent aux politiciens, parce qu’elles leur permettent de dépenser à leur guise au nom de la stimulation économique et d’avoir l’air d’un héro lorsque la reprise économique finit par se pointer. Comme les politiciens adorent dépenser notre argent, il est normal qu’ils aient accordé autant d’importance à Keynes. Le keynesiannisme justifie l’existence de gros gouvernements financés par des taxes élévées et de l’inflation.

Le problème de nos jours est que les théories de Keynes sont partouts: chez les Républicains comme chez les Démocrates, en Europe autant qu’au Canada. Cette fallacieuse alchimie économique basée sur de simples intuitions règne sur le monde depuis que Keynes l’a présentée aux politiciens et elle a déjà fait son lot de dommages sur le niveau de vie de beaucoup d’individus; bulle après bulle, récession après récession. Au cours de l’histoire, les remèdes keynesiens ont eu deux résultats: ils ont soit fait en sorte de prolonger la récession et de mener à une reprise lente ou ils ont reparti l’économie sur une base tellement instable qu’elle a servi de base à la prochaine crise économique.

Prenons par exemple le Japon qui a été un exemple marquant de l’échec des théories de Keynes. Le gouvernement a amené les taux d’intérêt à zéro, il a secouru les banques et il a dépensé sans compter en s’endettant; comme Keynes l’aurait souhaité. Suite à la bulle de la fin des années 1980s gonflée par de la création excessive de monnaie, l’économie s’est retrouvé en récession et ne s’en est jamais vraiment remise; c’est pourquoi on parle de “la décennie perdue du Japon”. Évidemment, nos amis keynesiens ont une explication toute simple: le gouvernement n’en a pas fait assez, il aurait dû dépenser plus, imprimer plus de monnaie et secourir les banques plus tôt dans la crise. Avec un déficit de 160% du PIB en 2007 et un endettement astronomique, il est pathétique de prétendre que ce n’était pas assez. Malheureusement, les États-Unis et la plupart des pays industrialisés appliquent présentement cette recette empoisonnée et les résultats sont jusqu’à maintenant identiques.

Comme le mentionne Hunter Lewis à la fin de son livre, souhaitons qu’un jour, Keynes aura une place auprès de Marx, Mao et tant d’autres qui ont prôné une utopie qui ne fait pas le poids face à la réalité du monde.

Siempre me ha impresionado mucho las personas que dicen que hay que refundar el capitalismo. Y me sorprende precisamente, porque creo que no ha existido nunca el liberalismo. A raíz de esto, precisamente, un día, por la tarde-noche, me encontré con un blog que propugnaba la democracia socialista como alternativa a ese hipotético capitalismo (El nombre del blog es: La historia del día). No dude en ponerle el siguiente comentario que transcribo, y espero, si es el caso, que les suponga una ayuda para reflexionar sobre el tema:

¿Qué post-capitalismo? ¿Acaso ha habido capitalismo?
En mi humide opinión, creo que nunca ha habido capitalismo, o liberalismo (que así se llama si nos referimos al ámbito económico). El liberalismo se define por la poca o excasa intervención del aparato del Estado en el mercado, o en la sociedad… ¿Hemos tenido poca o excasa intervención acaso en los últimos años? y ¿en los últimos cien años? y ¿en toda la historia? La respuesta es muy clara y concreta: NO. ¿Qué liberalismo (capitalismo) hemos tenido si hasta la bolsa está intervenida? ¿Qué liberalismo si hasta te cobran impuestos por los juegos lúdicos? ¿Qué liberalismo si muchos países ofrecen unas barreras aduaneras avergonzantes? ¿Qué liberalismo si nuestro mercado laboral está muy sujeto, pero mucho, a las normas dictadas por el Estado?
Es bastante claro lo que subyace en el fondo: EL LIBERALISMO (CAPITALISMO) NO HA EXISTIDO NUNCA.
Pero esto no sólo en economía: En España, por ejemplo, no hay liberalismo ni en la justicia (el gobierno de los jueces, por citar tan sólo un caso, es elegido por el Parlamento), ni en las aúlas (el Gobierno adoctrina en su ideología), etc…
Por otra parte, la historia ya ha demostrado múltiples veces, que el socialismo no es la alternativa. Yo apostaría, de una manera seria y decidida, por un sistema liberal.

“The democracy will cease to exist when you take away from those who are willing to work and give to those who would not.”

~Thomas Jefferson

Glenn Beck-11-19-09-A

Glenn Beck-11-19-09-B

Glenn Beck-11-19-09-C

Glenn Beck-11-19-09-D

Glenn Beck-11-19-09-E

Glenn Beck-11-19-09-F

Glenn Beck 20091118 Part 1/4

Glenn Beck 20091118 Part 2/4

Glenn Beck 20091118 Part 3/4

Glenn Beck 20091118 Part 4/4

“A wise and frugal government, which shall leave men free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned – this is the sum of good government.”

~Thomas Jefferson

Background Articles and Videos

To Create Jobs, Voters Say Cut Taxes and Stop Spending

“…As the policy debate has unfolded in Washington this year, voters have consistently believed that tax cuts would do more than increased government spending to stimulate the economy and create jobs. Now that the nation’s unemployment rate has reached 10.2%, voters continue to hold that view.

The latest Rasmussen Reports national telephone survey shows that 62% believe tax cuts are a better way to create jobs and fight unemployment. Only 21% believe that additional stimulus spending is a more effective tool. Earlier this year, as the first stimulus package was being debated in Congress, 62% of voters wanted the plan to have more tax cuts and less spending.

Given a different choice today, 51% believe canceling the rest of the stimulus money would create more jobs while 32% say spending the money would be the better approach to job creation. These findings are consistent with earlier polling. Most Americans say that, generally speaking, increased government spending is bad for the economy.  Earlier this year, before the unemployment rate had reached its current highs, 45% wanted to cancel the rest of the stimulus spending while just 36% disagreed. …”

http://www.rasmussenreports.com/public_content/business/economic_stimulus_package/november_2009/to_create_jobs_voters_say_cut_taxes_and_stop_spending

EDITORIAL: National debt projections should be wake up call for our lawmakers

“…This week both the White House and nonpartisan Congressional Budget Office issued reports painting a bleak portrait of our economy, not just for ourselves, not just for our children but for our grandchildren. The stunningly grim $9 trillion, 10-year national debt forecast, as far as we’re concerned, would seem to preclude any further discussions about adding yet another trillion or so dollars for health care reform, especially if it includes a public option. A recent poll indicates more than half of our nation opposes such legislation, especially if it means more debt.

While much of the deficit spending the next few years is caught up in recent spending such as the American Recovery and Reinvestment Act approved under President Barack Obama and earlier Wall Street bailouts approved under President George W. Bush, consider this: Much of the debt piling up after 2013 involves the rising costs inherent in Social Security, Medicare and Medicaid as baby boomers retire to their expected rewards.

How on earth can this be the time to add another entitlement program? Does anyone really believe the government’s claim that health care reform will pay for itself, especially when Social Security, Medicare and Medicaid almost certainly will force an overhaul of those programs and/or significantly higher taxes for most Americans? …”

http://www.wacotrib.com/opin/content/news/opinion/stories/2009/08/27/08272009wactopeditorial.html

An $800 Billion Mistake

“…As a conservative economist, I might be expected to oppose a stimulus plan. In fact, on this page in October, I declared my support for a stimulus. But the fiscal package now before Congress needs to be thoroughly revised. In its current form, it does too little to raise national spending and employment. It would be better for the Senate to delay legislation for a month, or even two, if that’s what it takes to produce a much better bill. We cannot afford an $800 billion mistake. …”

“…The problem with the current stimulus plan is not that it is too big but that it delivers too little extra employment and income for such a large fiscal deficit. It is worth taking the time to get it right.”

http://www.washingtonpost.com/wp-dyn/content/article/2009/01/28/AR2009012802938.html

Peter Schiff on Budget Deficit National Debt and Economic Crisis

United States of Amercia Government

http://www.usa.gov/Agencies/Federal/Executive.shtml

http://www.federalbudget.com/

 http://www.scribd.com/doc/3015540/US-Budget-Deficit-or-Surplus-1960present

http://blog.heritage.org/2009/03/24/bush-deficit-vs-obama-deficit-in-pictures/

Record-High Deficit May Dash Big Plans

$1.4 Trillion in Red Ink Means Less to Spend On Obama’s Ambitious Jobs, Stimulus Policies

http://www.washingtonpost.com/wp-dyn/content/article/2009/10/16/AR2009101602388.html

http://www.brutallyhonest.org/brutally_honest/2009/11/obama-tripled-the-national-deficit-his-first-year-in-office.html

http://online.wsj.com/article/SB125119686015756517.html

http://www.whitehouse.gov/omb/assets/fy2010_msr/10msr.pdf

http://blog.heritage.org/2009/07/29/which-chart-best-exposes-obamacares-true-impact-on-the-deficit/

http://keithhennessey.com/2009/06/22/orszags-health-spending-gap/

I.O.U.S.A. Bonus Reel: Social Security+Medicare Projections

I.O.U.S.A.: Byte-Sized – The 30 Minute Version

http://www.youtube.com/watch?v=O_TjBNjc9Bo

Stop Spending Our Future – The Crisis

$78.8 Trillion; United States Debt Obligations exceed world GDP; Monetary Collapse Looming?

Obama; Spending us into Oblivion. Why? – How do we pay off this Debt? – Glenn Beck Explains

Has the White House Gone Nuts?

MarketTamer.com: Credit Market Debt

U.S. National Debt Clock Real Time

http://www.usdebtclock.org/

CURRENCY COLLAPSE: Why The Government Won’t Act

CURRENCY COLLAPSE: Why The Government Won’t Act Part 2

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John Maynard Keynes

What in the heck is John Maynard Keynes doing in a self-described Republican blog?  Growing up in a fiercely Republican household, I learned quickly to equate Dr. Keynes’ name with socialism.  However, I have since learned that this is not exactly accurate.  The primary tenet of socialism is the public ownership of the “means of production,” which Keynes did not advocate.  In these times of big government and massive bailouts there are important distinctions to be drawn. 

Animal Spirits, published last year, coincidentally around the time of the financial system’s collapse, expounded on for nearly 200 pages, and I found myself disagreeing with a great deal of it.  However it did outline an important point that goes right to the heart of our capitalist system and to the role of governance. 

Keynes actually accepted Smith’s “classical theory” of the economy–private property, free markets, and the “invisible hand.” His goal was to find a way to minimize market corrections.  “Market correction” is a technical term that doesn’t really convey the depth of human misery that such disruptions can cause[1].  So he tried to find the flaw in the classical theory that would explain such disruptions.  What he found was the definition of humans as “rational actors” within the system.

Now anyone who has ever watched daytime television should realize that human beings are not always rational.  They are highly neurotic, and can be self-destructive, self-aggrandizing, lazy, immoral, shortsighted etc.  All these things are arguably quite natural; so he labeled them “animal spirits” to point out that they come from the more base instincts within our nature[2].

Humans are rational most of the time, this is probably because of our need for socialization; we tend to act in ways that benefit others as well as ourselves.  The trick is to institute rules that maintain a free, open and democratic society, while protecting society from these base instincts.  When viewed as such, it is really not much different from our criminal justice system.  The authors sum up this particular part of Keynes theory:

“Keynes’ claim about how animal spirits drive the economy brings us to the role of government.  His view of the government’s role in the economy was very much like what we are told in the parenting advice books.  On one hand, they warn us not to be too authoritarian.  The children will be superficially obedient, but when they become teenagers they will rebel.  On the other hand, these books tell us not to be too permissive.  In this case they have not been taught to set proper limits for themselves.  The advice books then tell us that appropriate child rearing involves a middle road between these extremes.  The proper role of the parent is to set limits so that the child does not overindulge her animal spirits.  But those limits should allow the child independence to learn and be creative.  The role of the parent is to create a happy home, which gives the child freedom but also protects him from his animal spirits[3].”

Clearly Keynes was not afraid of using government proactively.  This is where I think Republicans should draw the line; as far as government is concerned, a little bit goes a long ways.  Democrats tend to look to the government for all the answers; Republicans believe in using  the government only as a last resort.

When I studied Keynes at the University of Arizona in the late 70’s, what I was really taught was fiscal policy, the velocity of money and the multiplier effect.  These are the real meaty parts of the theory; the ones that academics like to chew on because they can be used to create elaborate mathematical models.  Those models tend to lend credibility to a theory.

The Keynes’ multiplier effect, boiled down, amounts to financial leverage (debt), and has been used to varying degrees by every President since Herbert Hoover.  With Keynesian fiscal policy (AKA deficit spending), investment in the economy comes from the public sector.  This “investment” can take many forms.  In a perfect world, government would be extremely careful using this powerful tool, but our process tends to be rather messy.  A key difference between the 1930’s and now is that the governments of Britain and the United States were credit worthy back then.  Poor fiscal policies by prior administrations during economic booms have led us to the brink of insolvency, and here’s the kicker, the worse offending administrations between the Roosevelt and Obama were Republicans, quite frankly it was the conservative icons Ronald Reagan and George W. Bush.  Looking at the last 30-year boom cycle, it is nearly impossible to determine what affect such policies had on the booms themselves, but it could have been considerable.  Regardless, with public debt very quickly approaching yearly GDP, what is clear is that government is not as credit worthy today as it was back then[4].

But here’s the clincher.  The bubble with the housing industry could have been avoided had the government performed better in its role as regulator (i.e. parent).  The fact that it didn’t is directly related to the fact that the protections that were in place by the late 1940’s were eroded starting in the early 1980’s.  Once the financial institutions failed, President Bush and Congress had no choice but to bail them out.  Ironically, now we have public ownership of several financial institutions and an insurance company, something that Keynes never wanted but Marx and Engle predicted! 

Finally, it is important to consider the message we have sent to Wall Street.  There is much talk about not letting it happen again.  However, just like our children, the gang that brought the system to the brink of collapse knows when we are just talking.  Without real reform, what is their motivation to change their behavior?

[2] Other economists have lists of causes for market dysfunction; however, they always seem to return, at their core, to human irrationality.  Consider such things as short-term profit taking (taking advantage of unequal information between buyer and seller), externalities (primarily environmental degradation), crime, and reflectivity (a sort of conventional wisdom that tends to cause things like irrational exuberance).  Even Smith was concerned with this part of human nature and also published “The Theory of Moral Sentiments” prior to the “Wealth of Nations.”

[3] Akerlof and Shiller, Animal Spirits, Princeton University Press, page ix (preface).

[4] Private debt started growing around the same time.  Private debt is really a bigger part of the problem, and holds the recovery back.  Given a more rational economy, lenders would not have allowed such precipitous debt accumulation.

Dans ce dossier, inspiré du livre “Where Keynes went wrong” de Hunter Lewis, je traite des principales idées de Keynes. La première partie traitait des taux d’intérêt, la seconde partie traitait de l’épargne, la troisième partie traitait de la bourse et de l’investissement, et la quatrième partie traite des récessions.

Keynes était d’accord avec le fait que les booms économiques génèrent de mauvais investissement, mais il prêchait que “c’est mieux que pas d’investissement du tout”. Keynes ne croyait pas que les récessions puissent au moins avoir l’utilité de “nettoyer” l’économie des industries/entreprises qui utilisent mal leurs ressources et de rediriger ces ressources vers les bonnes industries/entreprises (autrement dit, il ne croyait pas en la destruction créatrice).

Selon Keynes, aussitôt que des signes avant-coureurs d’un ralentissement économique se manifestent, le gouvernement doit mettre en branle un plan d’action radical pour intervenir et ramener l’économie en croissance (au plein-emploi). Il importe peu que ces dépenses gouvernementales soient vraiment utiles ou non, l’important est de dépenser cet argent le plus vite possible, de préférence dans les infrastructures. De toute façon, grâce au fameux concept keynesiens qu’est le “multiplicateur”, chaque dollar dépensé par le gouvernement durant une récession est multiplié plusieurs fois par l’économie.

Keynes croyait que le libre-marché n’arriverait pas à sortir l’économie de la récession par lui-même et que l’économie atteindrait un équilibre sous-optimal (avec un taux de chômage trop élevé). Il croyait que les salaires ne devaient ni baisser, ni augmenter durant les récessions. L’un réduirait le pouvoir d’achat des travailleurs, l’autre serait mauvais pour le “climat d’affaires” en réduisant les profits. La solution consiste à créer de la monnaie pour générer de l’inflation. Cette hausse des prix permettra aux entreprises de maintenir les salaires tout en faisant du profit. À cet égard, la déflation doit être évitée à tout prix; c’est du poison pour l’économie.

Finalement, Keynes préconisait que la banque centrale et le gouvernement agissent comme prêteurs de dernier recours pour le système bancaire, de façon à éviter les faillites bancaires. Ainsi, la banque centrale devrait fournir de la liquidité aux banques autant qu’elles en ont de besoin et ce à un taux très bas (non-punitif contrairement à ce que suggérait Walter Bagehot).

Réfutation:

Lorsque les “booms” économiques inflationnistes se mettent à dérailler, le marché lève le voile sur tous ces mauvais investissements financés par de la dette artifiellement abordable (facilitée par la création de monnaie) et l’économie frappe un mur. Contrairement à ce que Keynes pensait, on ne peut artificiellement maintenir l’économie en boom perpétuel sans créer d’énormes distorsions sur les marchés. À cet égard, les récessions viennent corriger ces distorsions et permettent à l’économie de repartir sur une base plus solide. Plus l’inflation a été sévère durant le “boom”, plus récession sera sévère.

En voulant éviter les récessions à tout prix, les théories de Keynes ne font que les prolonger, font en sorte que la reprise sera plus faible et que prochaine crise sera plus grave. L’interventionnisme keynesiens n’a-t-il pas échoué durant la Grande Dépression des années 1930s, prolongeant celles-ci jusqu’à la Deuxième Guerre Mondiale? Et que dire de la “décennie perdue” du Japon suite à la bulle des années 1980? Et de la bulle immobilière que nous venons de traverser, résultat inévitable de l’ère Greenspan (qui n’a pas laissé la récession de 2000-01 suivre son cours et qui l’a étouffée par une inflation démesurée, laquelle a gonflé une immense bulle immobilière). L’historique du keynesiannisme est en fait parsemmé d’échecs et d’inflation. La recette n’a jamais fonctionné et a toujours mené à des “booms and busts“, c’est-à-dire de violents cycles économiques.

En ce qui a trait au fameux multiplicateur keynesien, ce concept fallacieux dont les Paul Krugman de ce monde font encore la promotion, c’est une théorie économique fondamentalement erronée. Voici la formule:

       DY = 1 /(1-c) *  DI

où I est l’investissement fait par le gouvernement, c est la propension marginale à consommer (le pourcentage de chaque dollar qui est dépensé par les gens plutôt qu’épargné) et Y le revenu qui en résulte.

Ainsi, si la propension marginale à consommer est de 90%, le multiplicateur est de 10 fois, donc chaque dollar investi par le gouvernement est multiplié par 10 dans l’économie. Mais qu’arrive-t-il si la propension marginale à consommer augmente à 100% (i.e. les gens n’épargent plus)? Le modèle tombe à l’eau! D’ailleurs, aucune étude n’a clairement démontré l’existence de ce multiplicateur dans la réalité. Prenons par exemple celle de Christina Romer, présidente du Council of Economic Advisors sous Barrack Obama, qui a estimé le multiplicateur à 1.57x. D’autres études estiment qu’il est bêtement de 1x alors que d’autres l’estiment inférieur à 1x. Pour une réfutation complète du multiplicateur (qui serait trop longue pour ce billet), cliquez ici.

La meilleure façon de contrer une récession est de laisser le marché suivre son cours. Nous n’avons qu’à penser à la Dépression de 1921 aux États-Unis, où ni le gouvernement, ni la Federal Reserve ne sont intervenus. Cette dépression s’est résorbée d’elle-même, sans interventionnisme étatique. C’est d’ailleurs pourquoi les partisans de Keynes refusent à tout prix d’en parler! Par contre, les néo-keynesiens ont abandonné l’idée farfelue de Keynes selon laquelle un chômage élevé persisterait indéfiniement dans un libre-marché, sans intervention gouvernementale pour sortir de la récession (voir Modigliani et Patinkin). Une autre “intuition” de Keynes déconnectée de la réalité…

Quand aux salaires, le gel de ceux-ci a généralement comme impact de prolonger les récessions (nous n’avons qu’à comparer la Grande Dépression des années 1930s où les salaires furent gelés, à celle de 1921 où les salaires ont baissé drastiquement). La flexibilité du marché du travail est un élément essentiel pour sortir l’économie d’une récession et réduire le chômage. Les entreprises peuvent ainsi réduire leurs coûts (sans nécessairement mettre des travailleurs à pied), préserver leurs flux monétaires et rester en opération.

La déflation quant à elle n’est pas mauvaise en soit. C’est d’ailleurs un phénomène tout à fait naturel et sain: lorsque la productivité s’améliore, on fait plus avec moins, ce qui permet aux prix de baisser sans affecter les marges. Des prix plus bas signifie que le pouvoir d’achat et le niveau de vie de la population a augmenté et que de la vraie richesse a été créée. L’autre déflation, celle causée par la destruction de monnaie due au remboursement des dettes, est simplement le fruit d’une création excessive de monnaie qui a mené à de mauvais investissements, à du gaspillage de ressources et à un niveau d’endettement insoutenable. Ce réajustement est un mal nécessaire pour purger le système de toute cette dette et de toute cette monnaie artificielle, mais malheureusement, nos gouvernements veulent à tout prix l’empêcher en créant de la monnaie.

Finalement, la présence de la banque centrale comme prêteur de dernier recours crée un risque moral important pour les citoyens. Cette “fausse sécurité” permet et encourage la prise de risque excessive et mène inévitablement à des crises financières comme celle que nous avons récemment connue. L’expression “too-big-to-fail” et les “bailouts” existent depuis fort longtemps et tirent leurs origines, entre autres, du keynesiannisme. Cette promesse de sauvetage du gouvernement est malsaine et encourage les banques à étirer l’élastique au maximum.

Marathon Pundit has the top 10 ways that Obama and the Democrats stimulated the economy with government spending.

Number 6 is my favorite:

6.    $6 MILLION FOR A SNOWMAKING FACILITY IN THE 15th SNOWIEST CITY IN THE COUNTRY:
A $6 Million Snowmaking Facility In Duluth, Minn.”
(“The Challenge In Counting Stimulus Returns,” The Wall Street Journal, 10/27/09)
(Top 101 Cities With The Highest Average Snowfall In A Year (Population 50,000+))

Number 9 is also hilarious:

9. $3.4 MILLION FOR A TURTLE TUNNEL IN FLORIDA: A $3.4 Million ‘Ecopassage’ To Help Turtles Cross A Highway In Tallahassee, Fla.”
(“The Challenge In Counting Stimulus Returns,” The Wall Street Journal, 10/27/09)

Click here for the rest. They all have references – these are not made-up.

If you want to understand why government spending caused our unemployment rate to rise to 10.2% and higher, then check out this post in which I talk about two Harvard University economists who lay it out in plain English, and contrasts George W. Bush and Barack H. Obama on job creation. Hint: Obama is not winning, and he’s not winning on deficits, either.

by Roger Koppl

Two recent posts on this blog (here and here) raise the issue of animal spirits and where macro is headed.  I’ve recently completed a draft manuscript saying we are headed for “BRACE” economics.  I say the “New Interventionist Economics” will be characterized by five features:

Bubbles

Radical Uncertainty

Animal Spirits

Complexity Dynamics

Extra-Market Control

(giving the BRACE acronym).

My paper includes a look at two contributions to the recent conference asking “What’s Wrong with Modern Macroeconomics?” namely, those of Kirman and De Grauwe.  The conference has been discussed at Mark Thoma’s Economist’sView.  I think the Kirman and De Grauwe papers represent the likely direction of macroeconomics.  I provide some evidence in my paper that central bankers are in the market for this sort of thing.  I quote Janet Yellen pushing for a scary form of discretion, by the way.  (See page p. 25 of my paper or page 13 of her talk.)

I think there is room to criticize both the analytics and the policy conclusions of the new interventionists.  On the analytical level, I think we should push comparative institutional analysis harder than the new interventionists seem to be doing.  On the policy level, think we have to push hard on epistemics.  On that score, I think K. Vela Velupillai’s “computable economics” could be very helpful, especially this result.  I give a user-friendly reviews of computable economics here and here.  Getting the history of the Great Recession right is also important.  In this regard I would like to see more attention paid to Peart & Levy’s point that the housing bubble was, in part at least, expert induced.

Andrew Kliman: Contradictions of Capitalist Value Production: Internal, Inevitable, Insuperable

Alan Freeman: How Did 1929 End?

Radhika Desai: The Demand Problem in the Current Crisis

David Calnitsky: Capitalist Competition, Self-Organization and Crisis

Brendan Cooney: Crisis, Value and Marx’s Order of Operations

This is video from a roundtable on the economic crisis held during this year’s Rethinking Marxism conference in Amherst Mass. Each panelist’s presentation stands on its own so they need not be viewed in any specific order.  A brief bio proceeds each video as well as my own short summary of their argument. This is merely to help viewers decide what to watch and to give some brief context for the uninitated. The paper which my own talk is based on will be linked beneath my video.

Andrew Kliman is a professor of economics at Pace University in New York. He is a leading figure in the Temporal Single System Interpretation (TSSI) which seeks to refute various claims of inconsistency within Marx’s value theory. His book “Reclaiming Marx’s Capital” is an important work in the field. I have discussed these ideas in my video “What Transformation Problem?”. I have posted an interview with Kliman from April of 2009. The TSSI also has important implications over debates as to the validity of Marx’s theory of the Tendency of the Rate of Profit to Fall. Kliman has just completed some important empirical research into the origins of the current crisis which claims that the profit rate has been falling since the 1940’s and that this long-term decline in profit rate sets the context for understanding this crisis. Kliman’s paper for the Rethinking Marxism conference connects the theory of the falling rate of profit to the contradiction within the commodity form itself, between the use-value and exchange value of a commodity. He then meditates on the political implications of such an understanding of capitalist crisis.

AlanFeeman works as an economist for the Greater London Authority and is currently a visiting professor at the University of Manitoba. He and Andrew Kliman edit the journal “Critique of Political Economy”. He and panelist Radhika Desai co-edit the book series “The Future of World Capitalism”. Freeman is an influential figure in the TSSI field. You can find his papers at his website. In this talk Freeman extends his critique of contemporary marxist academia into a critique of the way in which the concept of an economic “law” is understood. Seeking to distance Marx from positivist conceptions of law Freeman invites us to think about the way in which free will and human action are brought to the foreground during a crisis, requiring great, potentially violent, exogenous acts in order to restore capital accumulation. As far as I know Freeman has not published any papers on this topic yet though you can hear him speaking about similar matters at his Left Forum talk. If you write to him he might be able to send you a finished draft of this paper.

Radhika Desai is professor of political studies at the University of Manitoba. As well as fore-mentioned collaborations with Alan Freeman, she is author of “Slouching Towards Ayodhya: From Congress to Hindutva in Indian Politics” and “Intellectuals and Socialism: ‘Social Democrats’ and the Labour Party”.  Interested viewers might check out her article Neoliberalism Self-Destructs and her inteview on Against The Grain on the topic of imperialism. Desai is a defender of Keynes and sees him as presenting a more radical critique of capitalism than is usually acknowledged. See Desai and Freeman’s “Keynes and the Crisis” for more on this angle. Her paper in this panel follows in that spirit, arguing that a full understanding of this crisis is not possible without addressing problems of effective demand. The relevance of the demand problem is much debated among Marxists so viewers may want to pay extra attention to her argument.

David Calnitsky is a graduate student at the University of Wisconsin-Madison. He is one of the people behind the fantastic website “Radical Perspectives on the Crisis” which I highly recommend. Calnitsky’s paper was a critique of the “Monthly Review school” and their theory of crisis. This is a theoretical tradition associated with Paul Baran and Paul Sweezy and their notion that in the 20th century capitalism entered a monopoly stage which differed in key ways from the competitive capitalism of Marx’s time. Monopoly prices meant that the law of value did not hold in the same way and that capitalism’s crisis came, rather than from a falling rate of profit, from long stagnation caused by underconsumption. Calnitsky’s paper deals less with a critique of underconsumption and more with a critique of the notion of monopoly used by the Monthly Review school.

Brendan Cooney is the handsome author of this blog. The text of my paper is here.

John Maynard Keynes is one of the famous economists of all times. His theories brought significant changes in economics life. Even today many years after his most important book The General Theory of Employment, Interest and Money (1936) [Wikipedia.org], people still use his theories. Of course there are many ideas and arguments that maybe Keynes was wrong at the some point. But anyway there is one group which will always believe in him. This group is called as Keynesian school of macroeconomic thought. I will discuss more about their opinion what is economic recession and its remedy. Recession is something that is not expectable in every country economics and every country tries to find way how to avoid that unpleasant thing. I will discuss how Japan tried to apply Keynesian theory to stimulate its economy.
Firstly, we need to find more about recession. In macroeconomics recession is presented as decrease in country’s Gross Domestic Product (GDP) or in other words negative economic growth, at least in two quarters of the year [Wikipedia.org]. Some economist use a bit different definition of recession, they think recession is 1.5% rise in unemployment within 12 months [Wikipedia.org]. The opposite to recession is economic boom. The main idea of Keynes is that equilibrium income [Ye] can be not necessarily the same as full-employment income/output [Yfe]. Increasing production to full employment level would usually be the desirable goal. Equilibrium income is occurs when total income/output is the same as total desired expenditure on that output (which is not necessary in full-employment level). In order to raise the equilibrium level of income (GDP) to the full employment level, there will need to be an increase in aggregate spending. Any differences between full employment and equilibrium level of production can cause deflationary or inflationary gaps but it is not really related with recession, because only big deflationary gap can lead to recession. Because income and expenditure match together, that means aggregated demand (AD) and aggregated supply (AS) are equal and leakages are equal to injections, if income is bigger than aggregated expenditure it means that AS is bigger than AD and this means that economy is recession. According Keynes if there is a fall in aggregated demand then there will be a fall in Real GDP. The effect on Real GDP depends upon the slope of the aggregated supply curve if the economy is close to full capacity lower AD would only cause a small fall in Real GDP [Economicshelp.org]. If there was fall in AD it can cause fall in employment level because companies may need less workers to satisfy lower demand. Bigger unemployment can make AD to fall again because workers who lost their job will start to save more. So unemployment can be one of causes of recession. Another one is government decision to reduce their expenditure this reason decrease consumption. Both these two causes will reduce number of economic activity, because people and government will spend less. Increased savings and reduced consumption automatically leads to drop in marginal propensity to consume (b). Another reason of recession can be increase in taxes, because it will rise marginal propensity to taxes(t). Finally, need to talk about overseas sector, if country spends much more on imported goods than gets revenue from exported goods it will make marginal propensity to import (m) very high so this can be another cause of recession according Keynesian school of macroeconomic thought. According Keynes theory consumption multiplier (k) is equal to k=1/((1-b)+bt+m) , so if country reduce b and increase t and m (it is not essential to do all three things together) country will reduce consumption multiplier significantly. Very low multiplier will mean that country gets very small income in monetary amount compared with outcome. Income will still be bigger but very slightly. So all this mean that increase in GDP will be very small. Very small increase in GDP means recession. A key feature in determining the rate of economic growth is the level of consumer and business confidence. If confidence was high then higher interest rates may not reduce demand. However if confidence is low and people fear they may be made unemployed, then they will start spending less, causing AD to fall (or increase at a slower rate). Therefore this shows that expectations are very important and it is possible for “people to talk themselves into a recession” [Economicshelp.org]. According Keynesian school of macroeconomic thought recession can be remedied by increase in government spending and decrease in taxes. According them this must help to force people to consume and stop to save. So by this aggregated demand have to reach aggregated supply and income have to reach aggregated expenditure again and when they become equal recession is history. This theory Keynes created in time of Great Depression than he was criticising theory of classical economists which said that government have to do nothing and any decrease in GDP is just temporary event. To sum up this paragraph, we can say that in order to avoid recession, according Keynesian school of macroeconomic thought AD must be equal AS, if AD falls government must increase their spending and lower taxes in order to force people to consume.
2)Keynes theory is not really difficult and it is not hard to understand what according him government have to do in order to fight against recession in country’s economic. But we need to find more how his theory works in real life. Japan, USA and Germany, countries mentioned in article Was Keynes Wrong, tried his theory in practise than they had economic problems. I will try to find out how it works in real life due my research about Japan economic crisis.
First of all let see what happened with Japan economics in 1985-2000 time period. After the September 1985 Plaza Accord, the yen’s appreciation hit the export sector hard, reducing economic growth from 4.4 percent in 1985 to 2.9 percent in 1986 [Mises.org]. The government attempted to offset the stronger yen by drastically easing monetary policy between January 1986 and February 1987 [Mises.org]. During this period, the Bank of Japan cut the discount rate in half from 5 percent to 2.5 percent [Mises.org]. Following the economic stimulus, asset prices in the real estate and stock markets inflated, creating one of the biggest financial bubbles in history. The government responded by tightening monetary policy, raising rates five times, to 6 percent in 1989 and 1990. After these increases, the market collapsed [Mises.org]. The Nikkei stock market index fell more than 60 percent—from a high of 40,000 at the end of 1989 to under 15,000 by 1992 [Mises.org]. It rose somewhat during the mid-1990s on hopes that the economy would soon recover, but as the economic outlook continued to worsen, share prices again fell [Mises.org]. The Nikkei fell below 12,000 by March 2001. Real estate prices also plummeted during the recession—by 80 percent from 1991 to 1998 [Mises.org]. Real GDP during the 1990s stagnated, rising only from 428,826 billion yen in 1990 to 469,480 billion yen by the end of 2000 [Mises.org]. Growth has been negative since 1998. The unemployment rate rose from 2.1 percent in 1991 to 4.7 percent at the end of 2000 [Mises.org]. Although the unemployment rate may seem low by international standards, the rise to 4.7 percent is significant in Japan [Mises.org]. From all this story we can easy find out that Japan was in deep recession in that time period.
Let see what steps the government of Japan made in order to stop recession in its economic crisis. Between 1992 and 1995, Japan tried six spending programs totalling 65.5 trillion yen and cut income tax rates during 1994 [Mises.org]. This step had to increase b and decrease t and rise consumption multiplier but it did not work successfully. Another step was in January 1998, Japan temporarily cut taxes again by 2 trillion yen [Mises.org]. Another step which according Keynes must help to force people to consume. Then, in April of that year, the government unveiled a fiscal stimulus package worth more than 16.7 trillion yen, almost half of which was for public works [Mises.org]. Government increased their spending so that had to increase marginal propensity to consume, this did not help too. Again, in November 1998, another fiscal stimulus package worth 23.9 trillion yen was announced [Mises.org]. Simular step to previous one, maybe with same expectations, but again no changes to good side. A year later (November 1999), yet another fiscal stimulus package of 18 trillion yen was tried. Finally, in October 2000, Japan announced yet another fiscal stimulus package of 11 trillion yen [Mises.org]. Two more stimulus packages but no effect to good at all, seems Keynes theory did not work on Japan economy. Overall during the 1990s, Japan tried 10 fiscal stimulus packages totalling more than 100 trillion yen, and each failed to cure the recession [Mises.org]. Unbelievable injections which must help to rise marginal propensity to consume and consumption multiplier, so simple Keynes theory unfortunately seems that is not very effective and did not worked successfully in real Japan life. What the spending programs have done, however, is put Japan’s government in poor fiscal shape. The “on-budget” government spending has caused public debt to exceed 100 percent of GDP (highest in the G7), and even more debt is apparent when the “off-budget” sector is included [Mises.org].
To sum up that what happened to Japan and all story of that crisis I want to say that Keynes theory is to simple for so big economic tragedy as was in Japan, in such example must be much more factors taken together than just marginal propensity to consume, marginal propensity to taxes and marginal propensity to import. There are many more causes of recession which are not mentioned in Keynes theory. In my opinion Japan had to follow Keynes theory but do not forget other factors and try different ways to remedy from recession. Exactly that lead them to success. Good use of Austrian theory finally stopped recession in Japan.

The White House recently began claiming that the “Recovery Act” had “created or saved” 640,000-plus jobs. This turns out to have been a political mistake, in part because even sympathetic reporters understand that the “jobs saved” measure allows for creative accounting. But the White House also erred by providing (supposed) details about the jobs that were created. This made it very easy for reporters and other curious people to do a bit of fact checking, which has generated a spate of stories showing that the White House’s numbers are wrong, even using make-believe methodology. The Washington Examiner has put together a very useful interactive map which links to many of the news reports debunking the Administration’s fraudulent numbers.

For a refresher coures in “stimulus” issues, here is the Center for Freedom and Prosperity’s three-part series on Keynesianism, stimulus, and growth.

In China, … growth that is sustainable will require a very substantial shift from external to domestic demand, from an investment and export-intensive growth to growth led by consumption.

Timothy Geithner

Det är alltså hållbarare att slösa än att spara. Jonathan Swift hade inte kunnat säga det bättre än finansminister Geithner.

Absurditeter

Economic modelling is rubbish, as is the entire field of econometrics. That’s no new insight on my part, but it’s worth repeating, just as it is worth repeating that astrology is rubbish. Too many people still believe in it, and too many people still make important decisions because of it.

It was more than fair to question Nancy Reagan’s sanity when it turned out that she consulted astrologers, and that the rulers of Myanmar are mad is only underscored by their use of astrology to make political decisions. But our leaders are no less mad, really, when they listen to econometrists instead.

The founding joke of econometrics is the concept of GDP, for which we have to thank nobody else but John Maynard Keynes, the Great and Wonderful Wizard of Oxbrigde. Why it is a joke, you ask? Well, look at it: GDP, according to Modern Economics, is

Y=C+I+G+(X-M)

where Y stands for GDP, C for consumption, I for investment, G for government expenditure, X for exports, and M for imports. There is so much wrong with the underlying assumptions of this formula that entire books can – and have – been written about it. But, even if we accept the basic premises, there is still plenty to laugh about when you realize that according to this formula

100C+100I+100G+(100X-100M) = 1C+1I+298G+(100X-100M)

Like astrologers, most econometrics professors and professionals find a lot of weasel words and confusing lingo to wiggle their way out of this, but there’s just no escaping the fact that this makes absolutely no sense whatsoever.

Then there are, of course, little details such as that to an econometrist 100 mobile phones @ $100 each represent the same amount of wealth as 10 rotary phones @ $1,000 each. I could go on and on, but I think anybody with a quant of common sense and logic can think of thousands of more examples.

But why GDP may be the founding joke, the great Cosmic Joke of Econometrics is

ε

What’s that? Well, thanks to Wikipedia, I don’t have to explain it myself:

A simple example of a relationship in econometrics from the field of labor economics is:

Economic theory says that the natural logarithm of a person’s wage is a linear function of (among other things) the number of years of education that person has acquired. The parameter β₁measures the increase in the natural log of the wage attributable to one more year of education. It should be noted that by using the natural log we have moved away from a simple linear regression model and are now using a non linear model, in this case, a semi-log y model. The term ε is a random variable representing all other factors that may have direct influence on wage. The econometric goal is to estimate the parameters, β₀ and β₁ under specific assumptions about the random variable ε. For example, if ε is uncorrelated with years of education, then the equation can be estimated with ordinary least squares.

In other words, the natural logarithm of a person’s wage is a linear function between things we know, and things we don’t know, and random factors we never thought of, resulting in people with higher education making more money than those without, except when they don’t.

Vulgo: ε stands for ‘shit we make up as we go’, and that pretty much sums up econometrics as a ‘science’. How is that any better than astrology?

I media specializzati riferiscono cifre sulla massa monetaria (money supply), ogni giorno. Fino agli anni Settanta, durante l’era di John Maynard Keynes (1883-1946), parlare di “pecunia” e di credito bancario non era di moda nelle pagine di competenza. Si parlava più che altro di GNP (Gross National Product) e di politica fiscale, spese, entrate e deficit. Banche e massa monetaria erano generalmente ignorate. Tuttavia, dato che i keynesiani non avevano la cura per l’inflazione, cominciò a essere chiaro, anche ai keynesiani, che qualcosa era storto. Quindi, la massa monetaria diventò oggetto importante.

Il problema è che la persona media rischia di rimanere confusa davanti alle varie definizioni della massa monetaria.
Che cosa significano tutte quelle M? M1A, M1B fino a M8? Qual è la vera cifra della massa monetaria, se nessuna cifra da sola può esserlo?
E – domanda nodale – perché i depositi bancari sono inclusi nelle varie M come parte fondamentale della massa monetaria?

Tutti noi sappiamo che i dollari e gli euro cartacei, emessi oggi rispettivamente dal Federal Reserve System e dalla European Central Bank – ed esclusivamente da queste banche centrali – sono denaro. Precisamente sono valuta legale (legal tender) per qualunque debito, pubblico e privato.
Ma perché i conti correnti (checking account) sono considerati denaro?
Non dovrebbero essere considerate denaro soltanto le banconote (dollari ed euro cartacei) che coprono questi conti correnti?

Se i conti correnti sono parte della massa monetaria, allora le banche creano denaro. Sono fabbriche che producono denaro. Denarifici.
Ma le banche non dovrebbero semplicemente “canalizzare” i risparmi che noi gli prestiamo per riprestarli agli investitori e ai consumatori che prendono in prestito?
Se le banche prendono i nostri risparmi e li prestano, come possono creare denaro?

Il profano non ha ragione di sentirsi frustrato se non comprende. Gli economisti del 19° secolo si sono combattuti per stabilire se o in quale senso le banconote private (oggi illegali) o i depositi fossero o non fossero parte della massa monetaria. David Ricardo (1772-1823) e i ricardiani della Currency School persero l’occasione di approdare all’hard money in Inghilterra, perché non avevano mai interiorizzato i depositi bancari come parte della massa monetaria.
I depositi bancari, come le banconote, erano parte della massa monetaria.

postliberalia oeconomica 4funky

“Peace treaty”: Paris, 1919; (Nov. 14, 2009)

I watched a documentary on the French channel TV5 this Thursday, Nov. 12, 2009. The documentary was relating and commenting on the five months that dragged on before the most lousy “peace treaty” was finally signed to end WWI.  The chiefs of the main 5 nations who won in the First World War sat around in Paris to discuss how to partition the world.  The government chiefs were: USA (Wilson), Britain (Lloyd George), France (Clemenceau), Italy, and Japan.  Germany had ceased fire; the Kaiser, “Emperor Guillaume”, is settled in the Netherlands.  Turkey is declared defeated as ally to Germany.

Every delegation from all over the world, when allowed, was given 10 minutes to expose his case and demands.  Ho Chi Minh (from Viet Nam) was refused an appointment; he will later defeat the French in 1954 and then the US forces in 1973. Wilson wanted to discuss establishing a world organization of State of Nations to prevent further military escalations; the other four leaders were trying hard to convince Wilson that they are not against this idea but there are more urgent matters to resolve at this junction.  The four other leaders wanted to redraw world’s borders; cartographers spent 5 months redrawing borders.  Wilson wanted the people to decide and vote for their destiny; the other four leaders tried hard to educating Wilson on pragmatic procedures.

In the meantime, Communism was spreading everywhere in Europe and the USA; the “Spanish flu” had decimated 20 millions in Europe and America (it was called the “Spanish flu” simply because it was the Spanish press that divulged this scourge that States were trying to keep under cover.  Soldiers were returning from the war front at the pace of 100,000 each month; I see one-legged soldiers hoping around in a baseball game and their companions laughing and having good time. Soldiers were returning home to experience famine, miseries, and desolate institutions to taking care of business.

The world’s “five leaders” are smoking cigars and pipes and looking mightily serious. Lloyd George wanted 300 billions in gold for war reparation from Germany; his financial counselor, the famous Keynes, is steadfastly suggesting agreeing on 10 billions for material damages on the ground that Germany could barely pay even that amount; Lloyd George had plenty of time to get practical at this stage.  Wilson does not want any reparations and the other four leaders are fuming because it was not the US that lost millions of dead and injured soldiers and civilians in the war. Clemenceau wants to recover the Alsace and Loraine in addition to La Sarre region, rich in goal production, in Germany to exploit for 15 years in war reparation.  The Italian President just wants a port on the Adriatic Sea as an advanced post to check any resurgence of hostility but he is adamantly refused his wish.

A Germany delegation of over 110 individuals arrives in Paris to deal a peace treaty. The train is made to stop first in Verdun where 450 thousand soldiers on both sides died. This delegation is typing reams of legal papers claiming that they are not the only culprit for starting the war. The vanquishers have no time to read the German side of view: they want Germany to admit that it is the sole bad party and that it had lost the war. The Germans are upset: why discuss a peace treaty if the other party has already made his mind?  The German delegation refused the humiliating peace deal and the war was on the verge of resuming.  The German sank their merchant marine in order not to be captured by the allies. Clemenceau is furious because he could not convince Lloyd George to jointly board these ships to avoid sabotage.

By now, Wilson is totally worn out and more hawkish than even Clemenceau. In the last 5 days before the refusal of Germany to sign the humiliating peace treaty Lloyd George had second thoughts: if Germany is completely humiliated then any demy-god would take power and start another war. Lloyd George also needed to do trade goods with a strong Germany. What Keynes suggested as reasonable reparation of 10 billions in gold is fine with Lloyd; Germany does not need to admit that it lost the war. The problem was how to convince Wilson after manipulating him for five month on pragmatic politics. Wilson is adamant: Germany has to understand that it lost the war; period! Then the German Chancellor resigned and another peace delegation arrived in Paris and signed the treaty in Versailles. Wilson could go home to face major downturns.

The Italian President lost the election and could not attend the peace signing ceremony: Mussolini was on the rise. The American Congress refused the plan of Wilson for establishing the Society of Nations. China and Japan were not satisfied; Japan will invade China in 1935 and capture Korea as a colony.

While the leaders in Paris were discussing dividing the world into mandated colonies Wilson’s concept of people deciding on their future destiny by vote went down the drain as the months eroded his determination into “pragmatic” attitudes. Clemenceau got just what he asked La Sarre. Poland recaptured a region in Germany with the Dantzig port.

The Middle East people want independence from Turkey that lost the war. No problems.  Hussein of Mecca has many children. One of them by the named of Faissal is appointed King to Syria and Lebanon. Another by the name of Abdullah is appointed King to Jordan. A third is appointed King to Iraq, I think: I am confused.  Wilson sent a delegation to gather field intelligence on the wishes of the people. Clemenceau and Lloyd George had another plan: they partition the Middle East between them.  France is to have mandate on Syria, Lebanon, and “Antaquia” in Turkey that Syria claimed to be part of its lands.  England is to have mandate on Iraq, Jordan, and Palestine. There were barely 5,000 immigrant Jews in Palestine at the time.

Clemenceau sent a French army to depose King Faissal and govern his “mandated people”. Mount Lebanon is split from Syria and more lands are attached to Lebanon so that it might have the illusion of agricultural “self-sufficiency”.

by Jerry O’Driscoll

In a previous post, Mario Rizzo reminds us that Keynes was concerned with the volatility of investment.  Keynes was not alone.  By the dawn of the 20^th century, virtually every significant business cycle theorist viewed the volatility of investment as the central theoretical problem.

In the General Theory, Keynes (p. 149) posed the problem as follows: “The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made.” It quickly becomes clear that Keynes means “expectations,” not knowledge.  And investment is not governed by “the genuine expectations of the professional entrepreneur” (p.151).

Long-term valuations become “a game of Snap, of Old Maid, of Musical Chairs” (pp. 155-56).  He then presents what has become known as the Keynesian beauty contest in which investors must guess what other investors will guess.   It is average opinion guessing what average opinion will guess about average opinion to “the fourth, fifth and higher degrees” (p. 156).   For Keynes, how do we break out of these straitjackets?  It is through bouts of “spontaneous optimism” or “animal spirits” (p.161).

Keynes was predisposed to offer psychological explanations for economic behavior.  In Two Philosophies of Money: The Conflict of Trust and Authority, S. Herbert Frankel took note of that propensity. “Keynes was fond of referring to psychological factors but as various writers have pointed out, in particular Professor Gunter Schmolders, his psychology was of the crudest.  It consisted largely in setting up abstract puppets or models of his own very unsophisticated beliefs concerning the motives which cause individuals to act in a certain manner” (p. 127,n27).

Keynes offered little more than pop psychology to buttress his policy prescriptions.  Yet current policy is predicated on animating animal spirits. Keynes had an explanation for how that could come to be: “Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back” (p. 383).

The administration has apparently ditched Keynesian economics in favor of Philistine economics, calling for a domestic spending freeze or even spending cuts in the midst of double-digit unemployment.

The Associated Press has the story here.

Focusing on deficit reduction during a depression did not work for Herbert Hoover in 1932, and I’m at a loss to see why Obama’s economists are embracing spending cuts now.  The article does quote budget director Peter Orszag as saying cutting spending too fast could undermine the recovery, so I can only hope that they do not mean to make these cuts until recovery is well underway.  Given the dim prospects for a rapid recovery, the economy may not be ready to absorb any deep spending cuts for many years to come.

Perhaps a better analogy than Hoover in 1932 is Franklin D. Roosevelt in 1936-37.  At that time the U.S. economy had been recovering for about four years (after bottoming out in early 1933) but was still in depression, with unemployment above 9%.  But FDR, deciding it was time to focus on the budget deficit instead of the economy, cut spending and raised taxes (as the Fed doubled bank reserve requirements to soak up the vast excess reserves out there — which also sounds like a recent conversation), and the economy nosedived.  Had FDR and the Fed been less leery of deficits and excess reserves, the depression might not have lasted until World War II.

UPDATE, 18 November 2009:  Edward Harrison of Credit Writedowns, writing on the Naked Capitalism site, makes a similar argument with a lot more detail.

UPDATE, 21 November 2009: Krugman has an excellent piece on the matter here, and a “wonkier” one on deficits and interest rates here.

By the way, I changed the heading from “Barack Hoover Roosevelt?” to the current one, because FDR is so widely associated with pro-active steps like the Works Progress Administration and other jobs programs, fixing and reforming the banking and financial system, and ending the early-’30s deflation by going off the gold standard.  While his budget-balancing disaster of 1936-37 and his too-small budget deficits in other years show that he was no Keynesian when it came to fiscal policy, I’d be delighted to see Obama commit to policies that created three million relief jobs per year, as FDR did.  The stimulus is creating a fraction of that number, which seems unsurprising considering that the job creation is indirect:  rather than create new agencies to directly employ workers in various projects, the government is handing out money to lucky companies in the hope that they’ll hire people.  The fear of creating new federal government employees seems even stronger than the fear of deficits.

by Mario Rizzo  

I used to think that Ludwig von Mises was exaggerating quite a bit when he suggested that Keynes was not really an economist. One way he did this was to associate Keynes with infamous monetary cranks like Silvio Gesell. The following quotation will give you a flavor of Mises’s opinion:  

“John Maynard Keynes, late economic adviser to the British Government, is the new prophet of inflationism. The “Keynesian Revolution” consisted in the fact that he openly espoused the doctrines of Silvio Gesell. As the foremost of the British Gesellians, Lord Keynes adopted also the peculiar messianic jargon of inflationist literature and introduced it into official documents. Credit expansion, says the Paper of the British Experts of April 8, 1943, performs the “miracle . . . of turning a stone into bread.” The author of this document was, of course, Keynes. Great Britain has indeed traveled a long way to this statement from Hume’s and Mill’s views on miracles.”   

Clearly, Mises under-estimated the power of Keynes’s intellect, his influence on the economics profession, and his ability to change the terms of public debate. Just as clearly Mises was a master of sarcastic mockery.

However, Mises’s mockery had a profound point. It can be simply stated. Keynesianism is not concerned with the allocation of resources and related niceties. One can see this is the policy prescriptions of the stimulators. Just get people back to work. If a market is depressed: Prop it up. Labor, other resource-owners and entrepreneurs need to stop worrying about searching for the appropriate use of resources. Bankers have to stop fretting about to whom they should lend. They should abandon their ultra-restraint. Those who are holding money should invest; they should buy bonds. No need to worry about inflation because the potential output of “stuff” (however it is allocated across industries) is above the actual less-than-full-employment output.  

Where did my microeconomics go? 

Now the typical Keynesian would probably say: This is the economics of depressions or recessions. Your precious micro will come back into its own when we get out of the slump.  

But wait a minute. One of Keynes’s major points is that investment is volatile. Animal spirits are unpredictable. The news can turn investment demand topsy-turvy. So we are at all times at the brink of a Keynesian world. The needs of aggregate demand can at any moment overturn our “normal” concern with the niceties of resource allocation.  

I hope to say more (in a more precise way) about this in future posts or elsewhere.

Dans ce dossier, inspiré du livre “Where Keynes went wrong” de Hunter Lewis, je traite des principales idées de Keynes. La première partie traitait des taux d’intérêt, la seconde partie traitait de l’épargne et la troisième partie traite de la bourse et de l’investissement.

Selon Keynes, les investisseurs “ne savent rien à propos du futur”.  Ils sont incapables d’adopter un point de vue à long terme. La bourse n’est qu’un casino, mût par les “esprits animaliers”. Elle est contrôlée par les spéculateurs qui créent des “bulles”. Les mouvements boursiers sont d’ailleurs souvent absurdes. Keynes citait l’exemple des compagnies de crème glacée, dont les actions se transigeaient à des prix plus élevés durant l’été qu’en hiver. Si le marché était rationnel, ce ne serait pas le cas (i.e. le prix de l’action reflèterait les perspectives de l’entreprise en tout temps). Keynes nous mentionne ensuite que le marché boursier est futile, puisque lorsque quelqu’un achète des actions existantes sur le marché, l’argent ne va pas directement à l’entreprise, mais dans les poches du vendeur, ça ne stimule donc pas l’investissement.

La solution proposée par Keynes est fort simple: le gouvernement devrait faire lui-même les investissements nécessaires à ramener l’économie au plein-emploi. Le gouvernement peut agir de façon désintéressée, rationnelle et en fonction du long terme, grâce à ses “experts”. Ces investissements doivent être financés par les taxes et impôts.

Réfutation:

Premièrement, pour une fois que Keynes utilise un exemple concret pour illustrer une de ses idées (les compagnies de crème glacée), il fallait qu’il s’avère erronné! Il n’a même pas pris le temps de vérifier les chiffres avant d’affirmer une telle chose. Henry Hazlitt a vérifié et il est totalement faux que les actions des compagnies de crème glacée se transigeaient à des cours plus élevés en été. Keynes était tellement sûr de la véracité de son intuition qu’il n’a même pas cru bon l’appuyer par des chiffres. Ce constat s’applique d’ailleurs à l’ensemble de ses théories.

Deuxièmement, qu’est-ce qui crée les bulles? L’ingrédient indispensable est la liquidité. Que l’on parle de la bulle de 1995- 2000, de celle des années 1920s ou de la bulle immobilière que l’on vient de traverser, le levier financier facilité par de la dette abondante et abordable a toujours été présent durant les bulles. D’où vient cette liquidité? Des banques centrales qui crée de la monnaie à profusion, comme Keynes le prescrivait. C’est ce levier financier qui permet aux investisseurs d’emprunter pour financer d’immenses positions boursières et à d’autres d’acheter plusieurs condos à Miami (sans les habiter), dans le but de les revendre plus cher un an plus tard. Dans un libre-marché, cette irrationnalité liée à la recherche du profit serait contenue, mais dans un marché innondé de liquidités, elle prend une ampleur considérable. Rappelons-nous par exemple du crash de 1929. À cette époque, les gens empruntaient massivement pour investir à la bourse. Lorsque l’élastique a été étiré au maximum, il a cédé; les gens ont dû vendre leurs actions à perte tous en même temps pour rembourser leurs prêts sur marge.

Troisièmement, est-ce que les politiciens ont réellement une vision à plus long terme que les investisseurs? Sont-ils si désintéressés et concentrés sur le bien-être collectif? Permettez- moi d’en douter. Les politiciens cherchent à se faire élire et agissent dans leur intérêt à cet égard. Leur horizon temporel s’arrête à la prochaine élection. Et comme ce n’est pas leur argent qu’ils dépensent, ils sont en conflit d’intérêts. Et qui est Keynes pour nous parler du long terme? N’est-ce pas lui qui a déclaré que “à long terme nous sommes tous morts”! La réalité est que le gouvernement est généralement un bien piètre investisseur.

Quatrièmement, lorsqu’on achète une action à la bourse, on crée de la demande pour ce titre et, par conséquent, on contribue à faire monter le prix. Lorsque le prix d’une action monte, le coût du capital de l’entreprise en question diminue, puisqu’elle pourra en émettre une moins grande quantité pour financer un investissement quelconque (donc moins de dilution pour les actionnaires existants). En revanche, les mauvaises entreprises voient le prix de leurs actions chuter, ce qui restreint leur capacité à en émettre pour financer leur expansion. De cette façon, les bonnes entreprises ont accès plus facilement à du capital que les mauvaises. La bourse n’est donc pas futile; c’est un mécanisme très important pour l’économie, même si l’argent de va pas directement à l’entreprise lorsqu’on achète ses actions existantes sur le marché.

Finalement, on comprend que Keynes utilise ces arguments anti-marché pour justifier des politiques interventionnistes, favorisant les dépenses gouvernementales.  Il nous incite à faire un grand pas vers le communisme (un système que Keynes a souvent décrit en bien) en remplaçant l’investissement privé par l’investissement gouvernemental. Il propose d’enlever le pouvoir au marché, pour le donner aux politiciens, ces supposés “experts”. Il propose de retirer l’argent des mains des individus et entreprises pour le donner au gouvernement qui, évidemment, saura mieux que quiconque quoi en faire pour le bien de tous.

En terminant, Keynes ne prêchait pas par l’exemple à cet égard: c’était un spécualteur invétéré. Il utilisait l’effet de levier en empruntant et investissait dans les actions, les obligations, les ressources et les devises. En 1920, ses emprunts sur marge l’ont mis en faillite, il a dû emprunter de sa famille et ses amis. Suite au crash de 1929, il a perdu 86% de sa fortune. Puis, en 1937, il a perdu 50% de sa fortune, mais l’avait pratiquement regagnée au moment de sa mort. Il était alors multi-millionnaire en dollars d’aujourd’hui.

Political Map of Canada

The problem with the left is that they think that the producers will just keep producing in the face of massive tax hikes and government spending. Sorry, but producers curtail their producing when they get to keep less and less of the fruits of their labor. Dalton McGuinty, the Liberal premier of the province of Ontario, is a prime example of this ignorance of incentives.

Consider this story from the National Post. (H/T Joanne from Blue Like You)

Excerpt:

Falling revenues and a burgeoning $24.7-billion deficit will force Ontario’s Liberal government into a new era of fiscal restraint, provincial Finance Minister Dwight Duncan said yesterday.

[...]According to economic figures released yesterday, Ontario is spending $4.8-billion more this year than it predicted just seven months ago. The increased spending includes $4-billion in auto-sector assistance and an additional $650-million to fund the province’s H1N1 response. Program spending has also risen by $812-million.

Tax revenues, meanwhile, are falling dramatically. They now stand at $5.8-billion less than the government predicted in last spring’s budget. Corporate taxes are $2.65-billion — or nearly one-third — lower than projections, while personal income tax is down $2.43-billion, or 10%.

[...]Conservatives, who have watched as the Liberals raised spending by nearly 60% over their first six years in office, were skeptical about the new pledge of austerity.”Dalton McGuinty is hard-wired to increase your taxes and increase spending,” Conservative leader Tim Hudak said. “The reality is, the only way to get spending under control is to change government.”

[...]One analyst said the province’s massive deficit is heightened by the growing size of Ontario’s health-care sector, expected to account for half the budget by 2015.

Earlier this week I blogged about the Federal Conservative Party of Canada, which gained two seats in the 2009 by-elections, bringing them to 145/308 in the House of Commons. They need 155 to have a majority.

States like New York and California are running into the same taxing and spending problems here at home. Even the Democrat Governor of Ohio Ted Strickland is in trouble, and threatening to cancel scheduled tax cuts.