16 thoughts on “The Limits Of Keynesianism”

  1. I thought Japan demonstrated the limits of Keynesianism twenty years ago when infinite stimulus produced exactly squat in the way of GDP growth.

    The multiplier is a fraction; possibly negative.

  2. Actually, Keynesianism would work if (1) you’re in a normal business cycle recession; and (2) the Democrats practiced it the way Bush W. did; with tax cuts.

    Keynesianism does not require the government increase spending, only that it increase deficits. You can do that by holding spending flat and cutting tax rates so low that tax revenues also fall. As the Reagan Era and our quick recovery from the 2001 recession showed, that can work.

    But this isn’t a normal business cycle recession anyway, so the whole Keynesian model is misapplied. This recession is one part negative wealth effect (from the losses in the global housing market), and one part loss of confidence in the ability of sovereigns to honor their debt.

    There’s really nothing you can do about the losses in the housing market, except that which J. P. Morgan (the man, not bank) did to banish the Panic of 1907 – write down your losses, back the solid investments, and move on with life.

    Now if only Congress would allow the housing market to write down its losses …

    As for restoring confidence in sovereigns … let’s just say that running a deficit in the ~12% of GDP range, and racking up unfunded liabilities in the $2 trillion range, isn’t going to help.

  3. I remember the good old days, in the late 70’s and early 80’s. Japan was the boogey man back then, poised to kick out economic ass. The big government types here were particularly taken with Japanese central planning. I remember with what awe they pointed to the fact that Japan had a 250 year plan. I wonder if the last 20 was part of it.

  6. I think part of the problem was that the Japanese politicians of 1990 weren’t the tough technocrats of the post-war era. Sure, that sort of decay of competence is one of the features of central planning. But I do wonder what would have happened, if the MITI of say 1960 had been in charge in 1990.

  7. Borrow money FROM WHOM? The real global money supply is finte. What’s left?

    Al beat me to it. Absent actual wealth to borrow, all that’s left is to be done is to counterfeit and steal.

  8. Actually missed an alternate line.

    “The real global money supply is finite.”

    Yes. But the fake money supply isn’t.

  9. “Question for Krugman:

    Borrow money FROM WHOM? The real global money supply is finte. What’s left?”

    Commodore Decker . . . he had the right idea . . . with that shuttlecraft . . . he just didn’t have enough . . . power

  10. Following the logic of the typical leftist Keynesian (who has probably never actually read Keynes) it leads to my Ultimate Leftist Keynesian Recovery Plan (TM)

    Step 0. “Stimulus” is spending, and spending requires “spreading the wealth”

    Step 1. Realease all prisoners from all jails and put all police on a permanent vacation.

    Step 2. These prisoners go on a rampage of wealth transfer (called “stealing” by us less-educated, racist right wingers)

    Step 3. The huge amounts of wealth transfered to the prisoners, and their shopping spree on drugs, prostitution, and XBox games will stimulate the economy.

    You might say that meanwhile, real businesses close up shop because everything that hasn’t already been stolen soon will be and there’s no way to make money. But this is a just your racist thinking affecting your view of the minority prison population.

    Get it? If you don’t see wealth generation as the solution, and the only important thing is spending, how is my super excellent solution wrong?

  11. You might say that meanwhile, real businesses close up shop because everything that hasn’t already been stolen soon will be and there’s no way to make money. But this is a just your racist thinking affecting your view of the minority prison population.

    Businesses are always whining about the little burdens they are asked to take. What will happen is that business will adjust as necessary and any costs will be more than compensated by the huge surge in economic activity that a sound leftist policy generates.

  12. You can do that by holding spending flat and cutting tax rates so low that tax revenues also fall. As the Reagan Era and our quick recovery from the 2001 recession showed, that can work.

    Federal tax revenues in 1989 were roughly double tax revenues of 1981.

  13. What will happen is that business will adjust as necessary and any costs will be more than compensated by the huge surge in economic activity that a sound leftist policy generates.

    My Spidey senses are picking up maximum snark.

    One of the fundamentals of human economic behavior that escapes the pages of the Krugmanomicon is basic supply/demand theory. You can’t expand an economy by increasing the cost of production. If you could, the Luddites would have been right to bust the steam looms. The clothing industry had centuries to adjust to the prevailing business costs. Things were working just fine without all that gadgetry.

    I bet that last sentiment would go over great at a steampunk forum 🙂

  16. I don’t know, I kind of look at deficit spending as a sort of opt-in tax mixed with a reverse lottery – strange people lending the government money at lower than market interest rates at higher than market risk. If they want to lend the government money instead of investing or spending it, whatever, their loss.

    The real issue is Social Security – where the government is deciding that the best investment for the entire countries’ retirement fund is (wait for it) the government. Surprise!

    In reality, there is never a smart time to invest in treasuries – think about it, the rate is always lower than what you could get for a CD, and the risk is identical to a CD! Just be sure to spread the cash around to keep the balances under $250K…

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