Does Government Spending Boost the Economy?
At the Freeman I take on the recent Business Insider article. An excerpt:
Edwards seems to think that the above chart shows at least a correlation between government spending and economic growth. After all, he wrote that the BEA chart “seems to show that government has a pretty straightforward effect on GDP.” But as Scott Sumner pointed out in amusement when he saw the article, the chart does nothing of the kind.
Look carefully at the legend. The various colored rectangles are different components of government spending. Specifically, the rectangles indicate how the change in each component — positive or negative — relates to the change in overall GDP. The black line is not GDP growth, but is instead the sum of the various components of government spending. In short, Matt Klein at the FT is telling us that if we take the BEA’s word for how much each component of government spending contributed to GDP growth in each quarter, then we can stack those numbers on top of each other and even add them up! Contrary to Edwards, the FT chart doesn’t “show” anything at all, except that the BEA each quarter announces how much various components of government spending contributed to, or subtracted from, GDP growth.
And:
The exact opposite happened with the so-called sequester. For example, the firm Macroeconomic Advisers, using a Keynesian model, predicted that the spending cuts would knock 1.3 percentage points off of second quarter 2013 growth, and 0.6 percentage points off of third quarter 2013 growth. Here’s what really happened:
It’s the mirror image of the Keynesians’ stimulus blunder. The economy grew faster with the sequester than the Keynesians said would occur without the “drag” of the spending cuts. In the case of the Obama stimulus, their excuse was, “Wow, the economy was worse than we realized, good thing we got that deficit spending in there, inadequate though it was.” In the case of the sequester, their response would have to be, “How about that, the economy was stronger than any of us realized. We dodged a bullet, since the sequester dragged down growth so much.”
Perfect examples that Keynesianism is just as a priori as AE, with the difference they’d hate to admit it.
It is not a priori. An “a priori” proposition is one that is necessarily true and known without reference to experience or empirical evidence.
No Keynesian is saying that basic ideas of Keynesian theory are known as a priori true without reference to experience or empirical evidence.
On the contrary, we know that, say, the propositions of Post Keynesian theory are true with a high degree of probability because we have a great deal of empirical evidence to support this.
E.g., the view that changes in aggregate employment and production are driven to a very high degree by aggregate demand is confirmed by the way that firms mostly change their quantities of goods produced and employment in response to demand for output, and not, generally speaking, their prices when demand changes.
Keynesianism as a whole is an idea which is not proven and can never be proven empirically and is only true with a “high degree of probability” for people who want to believe it.
As you can see, proponents of the theory, supposedly true with a high degree of probability, can be wrong by miles, and it doesn’t change a thing. But we all know how the arguments go well enough already, so let’s stop here and just disagree.
With this data point I have got my bias confirmed for today, I am sure you find data points to satisfy your own.
“Newton’s Laws of Gravity as a whole is an idea which is not proven and can never be proven empirically and is only true with a “high degree of probability” for people who want to believe it.
As you can see, proponents of the theory, supposedly true with a high degree of probability, can be wrong by miles, and it doesn’t change a thing. But we all know how the arguments go well enough already, so let’s stop here and just disagree.
With this data point I have got my bias confirmed for today, I am sure you find data points to satisfy your own.”
9,81m/s²
https://www.youtube.com/watch?v=E43-CfukEgs
Very nice video of reproducable science.
As I showed, your content-free objection applies as well to Newton as Keynes.
Delphin, you showed nothing. Did you even read your own link?
“By 2012 several papers by different groups, all reanalyzing the thermal radiation pressure forces inherent in the spacecraft, showed that a careful accounting of this could explain the entire anomaly, and thus the cause was mundane and did not point to any new phenomena or need for a different physical paradigm.”
But if you think that the behavior of stones and humans is fundamentally the same, I am sure you can tell me an equivalent number for human behavior as I did for gravity.
Since we are at this true to a high degree probability idea. Just another not quite unimportant data point:
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/04/forward%20guidance.JPG
Skylien
Of course I showed your argument is absurd. I was showing that your statement about Keynesian theory applies exactly to Newtonian gravtitational theory. That is the acme of a falsfiable and scientific theory. Therefore your assertion that Keynesianism is non-scientific and non-falsifiable collapses.
Imagine I present an argument that I say proves you do not exist. If you can show that the same argument proves I do not exist, you’ve shown my argument to be be a bad one.
Delphin, I can play that game to: No sorry you showed nothing, except your inability to grasp the actual argument made. But I saw in the recent past already that this is not your strong point anyway.
I will spell it out for you one more time. As you nicely linked to this gravitation link which showed how people in a quantifiable science act: They see an error in their prediction, find out what it is, how big it is, and (if they don’t make a mundane calculation error like a typo) will never be wrong on that account again. *1
Let’s take the Keynesian prediction of GDP or Fed’s fund (please click the link, this really speaks for itself!). They are wrong, are not able to find out why, no matter what are not able to quantify it, so they just make lame excuses, and will therefore be wrong in the future because of this SYSTEMATICALLY, again and again and again…
<i."As you can see, proponents of the theory, supposedly true with a high degree of probability, can be wrong by miles, "
There are some few wrong predictions about the movement of real output, but we have so many other movements that confirm Keynesian predictions and Keynesian theory.
Also, nobody ever claimed that one can predict movements of real output with 100% certainty anyway.
If the prediction is wrong, then Keynesian theory is structured to lead to the conclusion that the stimulus was insufficient. In other words, Keynesian theory remains true no matter what.
Untrue. If all or the majority of instances where stimulus occurred were only ever followed by recession, investment and consumption collapse or stagnation, then that would clearly falsify Keynesian theory.
LK, well, if you would see demand failures/busts to be caused by former stimulus just with a time lag then that would be the case, wouldn’t it?
But since you rule this out, and think this is just caused by the market out of itself with no connection to former stimulus you are necessarily defining away the very possibility to be wrong.
You appear to be saying that stimulus leads to Austrian business cycles. However, the ABCT is false for empirical reasons.
Also, if you seriously think that stimulus leads to Austrian business cycles, then logically you are also committed to the view that in fact it does cause a rise in private investment and leads to an economic boom (even if **under your theory** you think it is an “unsustainable” one).
But that is **precisely** what Murphy trying to deny: Murphy is implying that stimulus does not lead to a boom.
“the ABCT is false for empirical reasons.”
You just don’t see that it is here exactly where the dog chases his own tail.
Stimulus is not just government spending, and government spending is not always stimulating even from a Keynesian perspective, right (e.g. directly tax financed)? And ABCT refers more to the kind of stimulus created by increasing the money supply and lowering interest rates by a central bank. So you are not telling Bob’s argument in a correct way, else Bob would have to deny ABCT himself. The argument is a bit more complicated than you make it seem now.
The context of this discussion is stimulus via deficit-financed increases in government spending (e.g., public works spending) with interest rate cuts.
According to Austrians, these policies should induce a false ABC boom.
But Bob is strongly implying above that stimulus does not lead to increased private investment and falling unemployment.
This is a bizarre, incoherent contradiction even with Austrian theory and you have not explained it.
You are right I have not explained how Bob thinks about debt financed government spending. Yet I am sure that Bob would not deny the stimulating power of reducing interest rates by a central bank.
Well for my part, I am not sure in how far (only) deficit spending does stimulate the economy (of course in my view to a false boom that is bound to burst at some point), and in how far it isn’t able to do it.
I guess it strongly depends on how the people perceive the possibility that this spending doesn’t lead to either a direct or indirect default (= high inflation) in the rather nearer future of the government. The debt level seems to be important therefor. A government with no debt is very likely to be able to stimulate an economy by deficit spending, a government with very high debt (like Japan) isn’t.
So I think it CAN do BOTH, stimulate and stifle economic activity! And so it is perfect for any economist to pull out those data points favouring his viewpoint.
I am curious, do you think that my view, even if you think it is wrong, is at least consistent?
The problem is that with an actual science you could find out what the variable was that was not taken into account, how big it was and next time you would account for it, and then you are correct. Period.
Just as it happened in the nice example Delphin linked to above:
http://en.wikipedia.org/wiki/Pioneer_anomaly
But for Keynesians this is not possible. They always guess, run victory laps if it turns out to be true or close enough saying “see how empirical we are”, but have easy excuses if it doesn’t, not acknowledging the methodological problems they have.
The Austrian axioms are self evident and empirical. No one even bothers to refute their truth. On the other hand, Keynesianism is simply a made-up hoax. Unless the market fails [and/or it has or lacks “momentum” that can allegedly be applied externally], it doesn’t require “stimulus” or something to “fix” it. The market does not fail. The statists desperately try to avoid discussing the fact that they have not and cannot show that it does. Absent “market failure”, there is no requirement for violent intervention which remains just that and nothing more.
From “In Defense of ‘Extreme Apriorism’”
By Murray N. Rothbard:
Whether we consider the Action Axiom “a priori” or “empirical” depends on our ultimate philosophical position. Professor Mises, in the neo- Kantian tradition, considers this axiom a LAW OF THOUGHT and therefore a categorical truth a priori to all experience. My own epistemological position rests on Aristotle and St. Thomas rather than Kant, and hence I would interpret the proposition differently. I would consider the axiom a LAW OF REALITY rather than a law of thought, and hence “empirical” rather than “a priori.” But it should be obvious that this type of “empiricism” is so out of step with modern empiricism that I may just as well continue to call it a priori for present purposes. For (1) it is a law of reality that is not conceivably falsifiable, and yet is empirically meaningful and true; (2) it rests on universal inner experience, and not simply on external experience, that is, its evidence is reflective rather than physical7; and (3) IT IS CLEARLY A PRIORI TO COMPLEX HISTORICAL EVENTS. p. 6 Emphasis added, especially to the phrase “complex historical events”.
http://mises.org/document/139/Defense-of-Extreme-Apriorism-In
State them. Be precise.
The creation of all capital.
A successful entrepreneur has to be right about the timing of the demand for the finished goods which he produces.
[Unless the government grants monopoly privileges to some companies, such as utility, road, and bank companies, as well as Unions. But that is violent intervention.]
The farther from the finished good the production process is, the more complex is that event, and they can all only be explained by reference to the acting individuals pursuing the satisfaction of their own preferences (the Action Axiom).
Are these supposed to be the axioms? Precisely stated?
A quote that demonstrates how Rothbard was a third rate philosopher and nobody needs take his epistemological ramblings seriously.
The axioms of Austrian theory aren’t simultaneously both empirical and “not conceivably falsifiable”. One so-called axiom — the disutility of labour axiom — is clearly falsifiable.
Even Mises admits this:
“The disutility of labor is not of a categorial and aprioristic character. We can without contradiction think of a world in which labor does not cause uneasiness, and we can depict the state of affairs prevailing in such a world …. Experience teaches that there is disutility of labor. ” (Mises 1949: 65).
“Experience teaches that there is disutility of labor. ” (
Not according to Bob Murphy’s eyewitness reports of after-death labor.
For the confused onlooker, when Delphin says “eyewitness report” he actually means, “Bob talked about seeing a guy make an argument about what the Bible says happens in heaven.”
So, you have even LESS evidence than I credited you with. I apologize for any confusion my generosity may have caused.
Today’s grade at deflecting my point: C-
Clever, but no cigar.
He didn’t deflect your point: actually, his first comment was to challenge you to state explicitly what the axioms are.
His second point was a just a side comment to me, not to you.
Yes. And I am taking bets on whether I get a precise statement of the axioms or just “Man acts”.
I am planning to respond. Today and tomorrow are being taken up by a funeral.
The Axioms are:
[Responding to LK at “comment-1419536”]
“… his first comment was to challenge you to state explicitly what the axioms are.”
In Defense of “Extreme Apriorism”
http://mises.org/library/defense-extreme-apriorism
“Setting aside the fundamental axiom for a moment, the empirical postulates are: (a) small in number, and (b) so broadly based as to be hardly “empirical” in the empiricist sense of the term.”
…
“What are these propositions? We may consider them in decreasing order of their generality: (1) the most fundamental — variety of resources, both natural and human; from this follows directly the division of labor, the market, etc.; (2) less important, that leisure is a consumer good. These are actually the only postulates needed. Two other postulates simply introduce limiting subdivisions into the analysis. Thus, economics can deductively elaborate from the fundamental axiom and postulates 1 and 2 (actually, only postulate 1 is necessary) an analysis of Crusoe economics, of barter, and of a monetary economy. All these elaborated laws are absolutely true. They are only applicable in concrete cases, however, where the particular limiting conditions apply.”
…
“When we analyze the economics of indirect exchange, therefore, we make the simple and obvious limiting condition (postulate 3) that indirect exchanges are being made. It should be clear that by making this simple identification we are not “testing the theory”; we are simply choosing that theory which applies to the reality we wish to explain.
“The fourth — and by far the least fundamental — postulate for a theory of the market is … that every firm aims always at maximizing its psychic profit. This may or may not involve maximizing its money profit. Often it may not, and no praxeologist would deny this fact.”
—
This Playlist is also worth a look:
Lessons [about the logic of Praxeology]
[www]https://www.youtube.com/playlist?list=PLEE9A33593A261433
lol… People like you claim that all the axioms are totally irrefutable or “not conceivably falsifiable”.
And yet Mises did not even think that the disutility of labour axiom (“leisure is a consumer good”) is “not conceivably falsifiable” and he was clearly right:
“The disutility of labor is not of a categorial and aprioristic character. We can without contradiction think of a world in which labor does not cause uneasiness, and we can depict the state of affairs prevailing in such a world …. Experience teaches that there is disutility of labor. ” (Mises 1949: 65).
So THESE are the axioms then?
1.there exists a variety of resources, both natural and human
2. leisure is a consumer good.
A fan of Krugman should be able to detect the difference between “the disutility of labour axiom — is clearly falsifiable” and “The disutility of labor is not of a categorial and aprioristic character.”
“It is not a priori. An “a priori” proposition is one that is necessarily true and known without reference to experience or empirical evidence.”
That is exactly what Keynesianism is as practised.
No matter what happens to the empirical outcomes, Keynesian theory is structured as remaining true. If the economy slumps after Keynesian activity, then Keynesian theory is claimed as correct, and that the economy was worse than Keynesians expected, and would have been even worse if it weren’t for Keynesian activity. If the economy booms after Keynesian activity, then Keynesian theory is claimed as correct, and that the economy boomed because of Keynesian activity.
Keynesian theory is never accepted as falsified no matter what happens. That is an a priori theory by definition.
“No Keynesian is saying that basic ideas of Keynesian theory are known as a priori true without reference to experience or empirical evidence.”
Hahaha, they don’t have to! People don’t have to realize or admit that they are wrong, before the things they say are in fact wrong.
What a weak response.
“On the contrary, we know that, say, the propositions of Post Keynesian theory are true with a high degree of probability because we have a great deal of empirical evidence to support this.”
It doesn’t matter what the economic data shows. Keynesian theory is structured as true no matter what happens after. Of course it would be believed as having “a high degree of probability”!
Did you know that Austrian theory is 100% consistent with every past historical data ever observed?
“E.g., the view that changes in aggregate employment and production are driven to a very high degree by aggregate demand is confirmed by the way that firms mostly change their quantities of goods produced and employment in response to demand for output, and not, generally speaking, their prices when demand changes.”
Tautology.
“Keynesian theory is never accepted as falsified no matter what happens”
Rubbish. If we found evidence that in all or the vast majority of cases that after government stimulus worked its way through the economy it never was followed by rising private sector investment and consumption and falling unemployment, then that would strongly contradict and falsify Keynesian theory.
However, what we do observe is that in the vast majority of cases government stimulus is followed by rising private sector investment and consumption and falling unemployment, and we have clear further empirical evidence for why this happens: aggregate demand for output drives production and employment.
“If we found evidence that in all or the vast majority of cases that after government stimulus worked its way through the economy it never was followed by rising private sector investment and consumption and falling unemployment, then that would strongly contradict and falsify Keynesian theory.”
No it wouldn’t. It would just lead to the conclusion that all those past stimuluses were insufficient. That the reason private sector investment did not rise is because the government stimulus was not large enough.
That is how you have interpreted every single recession in world history. You have never, not once, ever blamed falling private sector investment on over Keynesian stimulus. It has always, without question, been the fault of too little stimulus.
“However, what we do observe is that in the vast majority of cases government stimulus is followed by rising private sector investment and consumption and falling unemployment, and we have clear further empirical evidence for why this happens: aggregate demand for output drives production and employment”
That does not matter one iota in Keynesian theory. Keynesian theory does not have a single argument for how Keynesian stimulus during recessions might make the recession as compared to no stimulus.
Keynesian theory is a priori from top to bottom. No empirical outcomes can falsify it. If in the vast majority of cases stimulus was followed by continued falling private investment, then the answer MUST be insufficient stimulus. That is how Keynesian theory is constructed.
There is nothing in Keynesian theory that leaves open the possibility that Keynesianism stimulus during recessions might make the economy worse, nor why it would make it worse, nor when a recession should be fixed by only private investors and consumers.
You do not understand Keynesian theory either!
““E.g., the view that changes in aggregate employment and production are driven to a very high degree by aggregate demand is confirmed by the way that firms mostly change their quantities of goods produced and employment in response to demand for output, and not, generally speaking, their prices when demand changes.””
“E.g., the view that chickens hatch from eggs is confirmed by the way that all observed chicken reproduction involves chickens hatching eggs”
According to M_F, no, that can’t be true, because its “tautological”. lol
The chicken and egg “riddle” has already been solved by evolutionary biologists ages ago.
Get with it. These piss poor analogies only continue to reveal the vacuity of Keynesianism.
I am not talking about how chickens evolved. I am talking about how chickens as a existing species always reproduce by hatching from eggs, and we know this as synthetic a posteriori knowledge from empirical evidence.
But, according to your absurd ramblings, a basic statement like mine above can’t be believed because it is “tautological.” That is absurd.
You have no response and will continue to have no response because you are intellectually bankrupt.
Glad you agree that your prior use of the chicken and egg analogy to justify your conflation of the causal relationship between investment and consumption, was flawed all along.
” In the case of the Obama stimulus, their excuse was, “Wow, the economy was worse than we realized, good thing we got that deficit spending in there, inadequate though it was.” In the case of the sequester, their response would have to be, “How about that, the economy was stronger than any of us realized. …”
There is nothing contradictory about this.
You cannot predict the future with certainty, nor with respect to movements of real GDP or its private components with objective numeric probability scores.
You can of course make predictions that carry an epistemic probability.
However, you focus on just two instances, as if they aren’t plenty of examples of how government stimulus causes a strong recovery.
Who said there was any contradiction? In fact, both examples illustrate how consistently wrong Keynesian prognostications were in these two events where the only way to save face is invoking the “heads I win, tails you lose” argument (or what would be a more humble and honest approach — there are too many moving variables to make such declarative predictions in the first place). And yes, they are only two instances, but two of the more significant public policy initiatives in the past 5 years (’09 stimulus, ’13 sequester) where many economists made bold claims. It’s one thing to make incorrect predictions. Obviously, this can’t be done with certainty. It’s another thing for a predicted outcome to turn out opposite of what actually happened, in which case, it should be back to the drawing board.
This is strange. I haven’t hit my hand with a hammer and it doesn’t hurt! I must a lot stronger than I thought!
-Name six. And avoid the fallacy refuted above by Bob.
Oh, and if you focus entirely on monetary stimulus, then why complain about gov’t spending cuts?
Off hand:
(1) New Zealand’s use of Keynesian stimulus in the 1930s:
http://socialdemocracy21stcentury.blogspot.com/2011/09/keynesian-stimulus-in-new-zealand.html
(2) Japan’s use of Keynesian stimulus in the 1930s:
http://socialdemocracy21stcentury.blogspot.com/2011/01/keynesianism-in-america-in-1940s-and.html
America’s use of stimulative fiscal policy in the
(3) recession from November 1948 to October 1949
(4) the recession from 1953 to 1954
(5) the recession from 1957 to 1958
all discussed here:
http://socialdemocracy21stcentury.blogspot.com/2011/01/keynesianism-in-america-in-1940s-and.html
(6) Reagan’ s use of Keynesian fiscal stimulus in the 1980s
(7) Australia’s use of fiscal stimulus 2008-2009
(8) South Korea’s use of fiscal stimulus 2008-2009
(9) Norway’s use of fiscal stimulus 2008-2009
LK, U.S. Federal deficits in 2009, 2010, 2011, and 2012 were greater as a percentage of GDP than any of the Regan deficits. The 1950s deficits were pocket change, and, by this standard, you should use the Bush tax cuts as an upstanding example of fiscal stimulus (there was also sizable monetary stimulus under Greenspan at the time). So, why was the Reagan recovery so much more robust than the Obama one, as you have admitted? The Reagan recovery was also associated with much greater (relative) monetary stimulus. Norway is an oil-based economy; the rise in oil prices was more important than anything else there. If fiscal stimulus could work in Japan in the 1930s, why doesn’t it work in modern Japan? For New Zealand, you simply state that one thing happened at the same time as another; you provide no evidence that the fall in unemployment was a result of fiscal stimulus.
(1) “U.S. Federal deficits in 2009, 2010, 2011, and 2012 were greater as a percentage of GDP than any of the Regan deficits. “
So what? Just comparing the size of the deficit in different recessions does refute anything I said.
(2) It does not matter that 1950s deficits were smaller. Why? Because recessions back then were much more mild, and did not require huge stimulus.
(3) So, why was the Reagan recovery so much more robust than the Obama one, as you have admitted?
Because the 2008-2009 was much more severe: the worst since the 1930s and Obama’s stimulus should have been much larger.
(4) On Norway, no, demand for oil collapsed in 2008-2009.
(5) Stimulus did prevent a severe recession in Japan and help them escape their lost decade by about 2003-2006.
(6) I already have presented evidence many times that increasing aggregate demand increases private sector investment, employment and consumption.
On Norway, oil demand recovered in 2009. It collapsed in 2008. Norway is heavily dependent on oil exports; perhaps as much as Russia.
Also, how may fiscal stimulus be falsified?
E.H.,
It appears the definition of Keynesian stimulus can cover virtually anything. He claims the recovery from the 1953-54 recession is an example of successful stimulus even though government spending was actually cut in FY1954 (the fiscal year in which the recession occurred) and again the following year.
1) I’m certainly not an expert on New Zealand, but I don’t really understand your example. Your own chart shows that unemployment already fell substantially in the years before the “stimulus”- from 51,549 in 1932 to 36,890 in 1936, despite the fact that government spending was actually lower in 1936 than in 1932.
2.) Your link doesn’t even mention anything about Japan. Was this a mistake?
3.) “recession from November 1948 to October 1949″
Federal Spending in constant 2009 dollars (billions)
FY 1945- 1113.0 (41.0% GDP)
FY 1946- 657.5 (24.2% GDP)
FY 1947- 367.4 (14.4% GDP)
FY 1948- 299.1 (11.3 % GDP)
FY 1949- 404.5 (14.0 % GDP)
FY 1950- 423.1 (15.3 % GDP)
4.)”the recession from 1953 to 1954”
FY 1952- 674.8 (18.9% GDP)
FY 1953- 705.9 (19.9% GDP)
FY 1954- 635.5 (18.3% GDP)
FY 1955- 594.1 (16.8 % GDP)
I don’t know that either of these really fit your narrative that well.
5.) “the recession from 1957 to 1958”
Spending did increase somewhat during these two years, so you could make an argument. Still, adjusted for inflation, total federal outlays were lower when Eisenhower left office than when he took office.
6.) Reagan lowered marginal tax rates across the board. I don’t really see this as some sort of temporary, counter-cyclical policy. Also, spending growth slowed down during these years compared to previous years, and if I’m not mistaken, a relatively large portion of the spending increases came from net interest payments.
These deficits were also much smaller than in the recent recession. If the 1980’s are an example of Keynesian counter-cyclical policy, then the Bush/Obama years are a much more extreme example.
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=200
If anything, most of your examples only seem to prove the effectiveness of tax cuts. I don’t think there’s anything uniquely Keynesian about this.
(1) NZ had rising unemployment as the government engaged in fiscal contraction from 1930-1932. NZ did have some export led growth from 1933-1935 but it was clearly not sufficient to cause a proper recovery,
A recovery to full employment only happened after 1935 after stimulus.
(2) Japan link:
http://socialdemocracy21stcentury.blogspot.com/2011/08/takahashi-korekiyo-and-fiscal-stimulus.html
3) and (4): Government increased its spending in the crucial years and ran stimulative fiscal policy. The economy recovered. It does fit my narrative.
(5) So what? you can reduce spending is a boom. Your point is not relevant.
(6) Tax cuts and increased deficit spending constitute Keynesian stimulus and that you don’t even understand this speaks volumes about little you understand about these matters.
1.) The title of your post is “Keynesian Stimulus in New Zealand: 1936-1938.” I simply pointed out that unemployment already decreased substantially in the years before the time period that you yourself identified as “Keynesian Stimulus.”
3) 4) and 5) “Government increased its spending in the crucial years.” Let’s see: The ’53-’54 recession started in July of ’53 and ended in May of ’54. The ’57-58 recession ran from August through April. At this time, fiscal years ran from July though June. Real spending actually declined in FY 1954 and increased by just 1.56% in FY 1958.
Regarding the 48-49 recession, there was an increase in spending immediately following a much larger decrease. You have a decent case here but its far from definitive.
http://www.nber.org/cycles/cyclesmain.html
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=200
5) My point was that federal spending was actually cut during one recession you mentioned and barely increased during the other.
6.) As I said before, there is nothing uniquely Keynesian about lower taxes. You also completely ignored the fact that real spending growth slowed down during this period.
Please understand that LK and Keynesians in general are claiming that governments can self-generate wealth by the simple act of spending. In the Keynesian view, spending is a productive activity that is done not for the sake of the satisfaction of needs through consumption, but as part of a circular action in which people work to create goods and then spend to get those goods off the shelves so that people can work to make more goods.
Exactly. The “economy” is a machine that requires the constant application of external “momentum”. But always by the Keynesians themselves, because they are so much smarter than us average folks.
I do not think this is quite accurate. Here’s another analogy. An internal combustion engine relies on the motion of its pistons to operate. During operation it generates power, some of which is saved in a battery. In some situations the enginc can stall and cease operating. The way to restart it is to force the pistons to move. This can be done by using some of the power generated by the engine, and saved in the battery, to drive the pistons via an electric motor. The engine will not do this spontaneously once stalled. It requires the intervention of the ignition system. No-one suggests the operation of the electric motor, using the stored power of the battery, is what generates power. They claim it restarts the internal combustion cycle.
LK, does either of these analogies fit your argument?
This “partial” need for momentum is just as bogus.
Even your claim for a need of the application of a “partial” external source of “momentum” is completely baseless and wrong.
Internal combustion engines start spontaneously?
Clearly Rothbardtopia is not bound by the evil Keynesian laws of Classical Newtonian physics! hahaha
No. Human action is not like an internal combustion engine. It’s your job to prove that it is. You have not and cannot do that.
Once again you prove you cannot or will not accurately represent what people say.
1) Anderson made a bad analogy of what LK and Keynesisans say. I made a better analogy of what LK says. I am correcting Anderson’s misrepresentation of what others say. The analogy is mine but the substantive content is not, it is LK’s and the Keynesisans’. You cannot see the difference.
2) I said nothing about momentum. My analogy explicitly denies that “power” comes from the electric motor. I was even careful to specify the battery power comes from the operation of the engine.
3. I made no comparison of “human action” to engines. (I can if you insist: neither is a sufficient basis for economics.)
1. Bob Murphy’s study guide to MES has a good list of some of the self evident and common sense implications of the action axiom.
http://mises.org/sites/default/files/Study%20Guide%20of%20Man%2C%20Economy%2C%20and%20State_2.pdf
2. The “economy” is not a machine. Machines move and therefore may have or lack “momentum”. A machine may have “slack”. The economy does not have “slack”. The analogies are bogus.
3. The problems which are the focus of Keynesian “analysis” are in fact the problems caused when moving from direct exchange to indirect exchange using money. Central banking, FRB, fiat money and fiat money loans distort prices and economic calculation. Those relatively simple concepts cannot be allowed to exist in the Keynesian “analysis” which ignores (and must ignore) the historical context of these problems and then falsely blames them on the market.
” The economy does not have “slack”.”
So you do not think that economies sometimes have high unemployment and significant unused excess capacity at plants?
They never have significant unused capital goods?
I guess recessions never happen in bob roddis’s bizarre clownish world.
So you believe every single machine constructed, no matter what it is, and every single laborer, no matter what skill sets they offer, MUST always and without question be used in those particular ways, if not by the free market, then by government?
Really.
No. and irrelevant to my point that roddis’ idea that market economies never have “slack” is manifestly untrue.
Haha, you just rejected your own theory of idle resources and labor only solvable by Keynesian “stimulus”.
False.
Because there will nearly always be frictional and seasonal unemployment in market economies. Low levels of frictional and seasonal unemployment do not require government stimulus or employment programs.
False. The theory of Keynesianism towards recessions is what is unfalsifiable.
“The “economy” is not a machine. “
Nobody said it is literally a machine.
But evidently you are too thick to appreciate metaphorical analogies.
The positive response to such an analogy shows the flaws of Keynesianism.
It is not true that a stalled car always means the solution is for the pistons to be forced to move.
That is the flaw right there. Keyesianism is like a hammer. It is one dimensional, crude, simplisitic, and its advocates cannot help by recommend the same solution every time, even if doing so will actually make the car engine break down even faster.
Keynesianism is like a bad car mechanic who always suggests forcing the crankshaft to move every single time the car stalls.
Keynesianism lacks engineers, good car mechanics, foresight, and knowledge of the subject matter.
Delphin,
You mean you can scientifically describe the whole history of the universe in such detail that you can explain why you ate a sandwich for lunch today?
“LK, does either of these analogies fit your argument?”
Not a bad analogy at all.
Investment is a kind of engine that drives a capitalist economy, but it is strongly bound up with demand for output too (where aggregate demand includes both demand for final consumption goods and capital goods, in C, I, G, I-E). Investment and consumption are a kind of chicken and egg phenomenon: you are not going to have one for long without the other.
Investment, as Keynes argued, is strongly dependent on business expectations, which can fail badly sometimes, for many reasons. Sometimes you need government intervention to get the economy going again and restore optimism in business expectations.
The essence of Keynes’ theory is summed up well by Shackle in (of all places!) an “Austrian Economics Newsletter” of 1983:
http://socialdemocracy21stcentury.blogspot.com/2012/12/the-essence-of-keynesianism-is.html
There is no evidence that your silly “business expectations” theory is anything other than business people being oblivious to the fatal price distortions of FRB, funny money and funny money loans. Further, none of those events upon which you rely after 1913 occurred in a period that was not afflicted with price distortions caused by central banks, including central banking hangovers from WWI. Those are not market failures and you cannot locate or identify any.
“There is no evidence that your silly “business expectations” theory etc…”
Since a theory of subjective expectations is part of the best Austrian theory we have further proof you have little idea about actual Austrian economics.
It is true that some lazy and shoddy Austrians or libertarians try to limit pessimistic expectations to the ridiculously narrow “regime uncertainty” concept, but I have already dealt with that here:
http://socialdemocracy21stcentury.blogspot.com/2014/09/regime-uncertainty-austrian-poor-mans.html
As opposed to the Keynesian “free floating” “businessmen are fools” “fill in the blank” “Keynesians are smarter than businessmen” animal spirits?
When exactly were businessmen pessimistic when they should have been optimistic?
I see plenty of businessmen who ought to be pessimistic but are optimistic and running headlong into a buzz saw.
Hey LK, when you are going to locate that antecedent market failure that justifies the Keynesian fix?
As I said in November:
“Market failures are ubiquitous.
The fact that people strongly resent and oppose nominal wage cuts and the failure of most wages to adjust to alleged market clearing levels to clear labour markets is a major failure of real world markets — at least under the economic theory both Austrians and neoclassicals peddle.
Of course, you don’t understand this because you don’t understand basic economic theory.”
http://consultingbyrpm.com/blog/2014/11/liberty-lovers-have-two-years.html#comment-1208743
Government failures, as measured against the pure and perfect government theory, are ubiquitous.
Therefore markets must control government functions, to fix these ubiquitous failures of government as measured against the pure and perfect government theory.
Reduced to pathetic raving and rambling now?
Um, no, Keynesians do not say ““businessmen are fools””.
No, Keynesians do not claim as a class to be “smarter” than business people — if one means by conventional IQ measures.
Oh, and I have already given you massive evidence that markets fail — at least under the definition of market “failure” in your Austrian economic theory.
In vast numbers of cases where nominal wages remain fixed in labour markets where involuntary unemployment persists, and where wages are clearly not adjusting downwards to supposedly clear labour markets, then markets are failing.
In fact, I have just been noting on my blog how the evidence of “market failure” in this sense was already a significant phenomenon in late 19th century America, well before America had a central bank or big government or minimum wage laws:
http://socialdemocracy21stcentury.blogspot.com/2014/12/nominal-wage-rigidity-in-us-and-uk.html
“No, Keynesians do not claim as a class to be “smarter” than business people — if one means by conventional IQ measures”
That isn’t what Roddis is referring to.
Roddis is referring to the Keynesian assumption of businessmen intelligence in the precise area where Keynesian theory claims governments are required to “fix the problems”.
Apparently businessmen are too stupid to be able to fix those problems peacefully. They apparently, according to the Keynesians, are so stupid that they must be coerced with violence so that governments can take control over certain aspects of the economy and implement their smarter more intelligent plans.
“In vast numbers of cases where nominal wages remain fixed in labour markets where involuntary unemployment persists, and where wages are clearly not adjusting downwards to supposedly clear labour markets, then markets are failing.”
You mean government hampered economies are failing.
Yes, agreed, governments do bring about failure. Eliminating the price system for the production system of money makes it impossible for investors to form any market expectations in money.
That is the point of failure. The problem is not investors in the private sector. It is the socialist money that misleads investors.
False.
Keynesian theory does not say individual business people are “stupid” in recessions.
In fact, from the perspective of individual business people, not increasing production and employment when demand for your product is stagnant is intelligent.
False.
Keynesian theory regards businessmen in the market process as too stupid to be able to fix problems of idle capital and labor on their own.
That their lack of intelligence must be replaced by wiser, more intelligent Keynesian doctors who know how to reduce idle capital and labor better than businessmen.
“In fact, from the perspective of individual business people, not increasing production and employment when demand for your product is stagnant is intelligent.”
Thank you for conceding the point. You just said businessmen are stupid from the perspective of Keynesians, where Keynesians are smarter in how to increase wealth given businessmen are stupidly not increasing production and employment in different lines that would find sufficient demand.
You are saying they are not as intelligent in being able to make decisions that will increase output, as compared to Keynesians.
” You just said businessmen are stupid from the perspective of Keynesians, where Keynesians are smarter in how to increase wealth given businessmen are stupidly not increasing production and employment in different lines that would find sufficient demand. “
That lie shows clearly you have no arguments.
It is not stupid for individual business people not to increase production and employment in their firm in a recession when demand is stagnant.
Nor is the fact that business people often will not simultaneously increase production and employment
in a bad recession mean they are stupid.
Any individual in these circumstances would be intelligent not to risk a bad investment when they face uncertainty and the likelihood that it will be a bad decision.
Stimulus as a solution to recession does not mean business people are stupid.
You again just asserted that businessmen are too stupid to be able to increase output on their own. That Keynesians are smarter and know how to increase output.
Businessmen who do not increase production or employment are failing to do so because they are too stupid to be able to find profitable investment opportunities on their own.
And Keynesians believe businessmen are too stupifpd to be able to predict demand, and that they are smarter in knowing what aggregate demand should be so that the stupid businessmen who make bad forecasts, can make profits anyway.
That incredibly blatant lying about my views is quite impressive, really.
This is the point when the true troll in you emerges.
Can’t win an argument – then just lie.
And you also believe businessmen are too stupid to be able to know how to price capital goods and labor so as to make profitable uses of them given their expected demand that increases output.
Stop lying LK. You do actually believe businessmen are too stupid. Saying that their stupidity is an aw shucks they are just doing the only thing they know how to do, and calling it “intelligent”, but then turn around and call for Keynesian activity so as to improve people’s lives, is so transparent it is hilarious that you actually are trying to deny it.
If you didn’t think businessmen were more stupid than Keynesians, then you would not be calling for government to bring about what businessmen won’t do at that time on their own. You would be saying to the government step back and let the intelligent people fix the problems.
Don’t worry, your ultimate Marxism will come out of the closet at some point. Every Keynesian is a Marxist in their deep psyche.
Markets fail because of of a lack of socialism. Keynesianism just tolerates some failures, but deep down regard unfettered capitalism as grotesque.
More lying.
It’s also again pretty impressive how your comment pretty much collapses into bizzare abuse by the end (“your ultimate Marxism will come out of the closet at some point. Every Keynesian is a Marxist in their deep psyche” … lol).
More lying.
Businessmen are smart and intelligent, but they don’t know how to increase output like the Keynesians do. So the Keynesians are super duper smart and intelligent.
That better? Lol!
And what “bizarre abuse”? I was merely writing the intellectual roots of Keynesianism.
Keynesianism is the bastard stepchild of progressivism, which is rooted in communism, which was lead by Marxism.
A truly cretinous diatribe from “Major Freedom,” Anyone who has opened an Economics textbook can see that Keynesianism has nothing to do with Marxism, given that the purpose of a Keynesian stimulus is to enable private enterprise to employ more workers by increasing their revenues and profits. How can Bob Murphy, who has teaches economics to university students, not be embarrassed to have such a brazen ignoramus in his ideological camp?
WTF:
Do you honestly believe that Marx’s theory that capitalism will collapse in on itself due to ever shrinking rates of profit and interest rates, as “fixed” capital accumulates relative to “variable” capital, and Keynes’ theory that capitalism will collapse in on itself from a falling MEC, is a coincidence?
That Keynes advocating for the “euthenasia of the rentier”, to be replaced by “communal saving by the agency of the state; maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce” is a coincidence?
I am not throwing around the term “Marxism” as a replacement for an argument, as if the mere usage of such a term constitutes an insult.
I choose my words carefully.
The argument that Keynesianism is derived from progressivism which is derived from socialism which was popularized by Marxism, is not refuted by the claim that Keynesianism is a way for government to increase private sector activity, I.e. output and employment.
If you ever bothered to read the theory in detail, specifically what it says on why capitalism fails, which is the justification for Keynesian intervention into people’s lives in the first place, you will see many similarities to Marx’s criticisms of capitalism.
And calling for censoring on this blog? How crude.
We employ “business expectations” too. It’s called “regime uncertainty”.
And as Madonna said, “Life is mystery. Everyone must stand alone.”
Here is the problem: Keynesians want us to believe that lots and lots of new government spending will improve ALL “business expectations.” LK takes a general term of “aggregate demand” and then says that it applies directly to demand for specific goods. Sorry. Doesn’t work that way.
I never said that government spending will improve ALL “business expectations.” Yes, there are some few ignorant business people like Anderson who think stimulus is bad for the economy owing to an extremist libertarian ideology.
However, the empirical evidence shows us they are not that significant, and that once **general** expectations become optimistic other business people will follow even if they hold more conservative economic opinions.
Even the majority of the extremely rich voted Democratic in 2008, partly because they thought stimulus would help the overall economy even if taxes increased:
“In the aftermath of the 2008 presidential election, exit polls showed that 52 percent of voters who make $250,000 a year or more voted for Barack Obama. …
In an election in which most voters said the economy was the most important issue, some wealthy individuals who tend to vote with their wallets, saw an Obama presidency as better for their long-term financial interests — and America’s — and were willing to overlook the immediate tax increase that is coming their way.”
http://economix.blogs.nytimes.com/2008/11/11/how-did-rich-people-vote-and-why/
“I never said that government spending will improve ALL “business expectations.” Yes, there are some few ignorant business people like Anderson who think stimulus is bad for the economy owing to an extremist libertarian ideology.”
Yes, there are some few ingorant people like yourself who think stimulus is good owing to an extremist social democracy ideology.
“However, the empirical evidence shows us they are not that significant, and that once **general** expectations become optimistic other business people will follow even if they hold more conservative economic opinions.”
Optimism through misleading, yes. The signals investors observe are not signals that representative of actual consumer preferences constrained to profit and loss, but government created distortions that prevent the needed signals from being observed.
Optimism to you is like an imbecile car mechanic who believes a stalled car can only ever be fixed by forcing the pistons to move, regardless of the long term damage, because to the imbecile, the only thing that is wrong with the car is that the engine is not going through the combustion cycle.
What a continually stalling car needs is not repeated forcing of the pistons, but control be specialists, who are not the morons in Washington who don’t understand a car as much as the engineers.
Even the majority of the extremely rich voted Democratic in 2008, partly because they thought stimulus would help the overall economy even if taxes increase
http://socialdemocracy21stcentury.blogspot.com/2014/09/regime-uncertainty-austrian-poor-mans.html
Hence the well know cyclic Keynesian adage:
Saving yesterday, saving tomorrow, but always spending today!
Delphin, if the Keynesian principle were metaphorically applied to the car engine, then we should believe that forcing the pistons to move is always the correct action to take on a stalled engine. But that is not right, because a stalled engine might be badly damaged through such an action. Maybe the engine needs to be studied and fixed by the specialists who understand cars, not forced to move by ham fisted goons as if the only problem is the lack of the combustion cycle taking place.
Maybe so, maybe not. Does not change the point at issue, which was that Anderson misrepresent his opponents. I am not justifying Keynesian analysis, certainly not on the basis of automobiles, I am trying to understand it, and state its arguments fairly.
That is not what they are claiming. They are claiming that government spending (if done properly) will spur others to generate wealth. For instance, if the government gave you $50,000 to start a business, what you create might be worth more than the original $50,000. They aren’t claiming that two government employees can hand $1,000,000 and a diamond ring back and forth to generate new wealth.
Check Sumner’s explanation of that chart… the claim is exactly that government spending adds to GDP, nothing more nothing less.
GDP = C + I + G
How can anyone doubt what is true by definition?
“Check Sumner’s explanation of that chart… the claim is exactly that government spending adds to GDP, nothing more nothing less.”
Are you blind?
GDP = C + I + G + (X − M)
That includes private C, I and (X − M).
“Please understand that LK and Keynesians in general are claiming that governments can self-generate wealth by the simple act of spending. In the Keynesian view, spending is a productive activity that is done not for the sake of the satisfaction of needs”
If I understand you correctly, you clearly have no idea what you are talking about. Your ideas about Keynesianism are risible straw man caricatures.
I already addressed this nonsense years ago:
http://socialdemocracy21stcentury.blogspot.com/2011/05/william-l-anderson-flunks-keynesian.html
Actually that was an accurate assessment.
Yeah, that explains the broken windows.
The window itself is assigned no intrinsic value, but the spending involved in repair contributes to growth. After the window is fixed up again, we have exactly the same window we started with, but the economy is bigger now.
Keep breaking and repairing the same window fast enough and we get massive economic growth.
I do not think that breaking windows is an appropriate nor constructive way to grow an economy. Thanks for the straw man nonsense.
It is a metaphor. Gee whizz LK, like you just threw up on that other poster for not appreciating a metaphor that you agreed works for Keynesianism.
“It is a metaphor.”
No s***, sherlock. As is my use of the words “breaking windows” — to mean that I reject the idea that deliberate destruction of property merely to create economic activity is an appropriate or constructive way to grow an economy.
Hahaha, BS.
You are not obligated to point out that you don’t believe that breaking windows grows economies.
If you knew it was a metaphor, then you would have gotten the point.
So show me how Keynesian theory balances the trade off of losses to private property, against GDP supposedly boosted by government spending.
Here’s a practical example for you to apply the theory: Abenomics in Japan deliberately devalued the Yen as part of their QE and 2% inflationary policy. The consequence of a devalued Yen is that some business viable under the higher Yen has gone bankrupt, unable to adjust quickly enough to the changes, thus a “broken window”. Japanese who were saving for retirement have found in real terms their savings are devalued, thus loss of private property.
How has Abe judged the trade-off here? How is the “greater good” compared to individual personal losses?
That you think devaluing the yen is equivalent to “breaking windows” only demonstrates how confused and incoherent you are.
Any free market system could and world at times result in a currency devaluation supposedly “robbing” people of the value of money. Does this prove that market systems are just “breaking windows”? lol
Apart from which devaluing the yen is good for Japanese exporters, by making their goods more competitive and most likely increasing their income and their employment of Japanese people.
Business going bankrupt is equivalent to broken windows, as I clearly explained.
Business going bankrupt is equivalent to broken windows, as I clearly explained.
http://www.bloomberg.com/news/2014-12-05/japanese-corporate-bankruptcies-linked-to-weak-yen-at-record.html
Someone lost what they worked for there. Do you comprehend?
http://www.wsj.com/articles/BL-JRTB-18170
I guess whoever was selling that food to Japan also lost out, given that their customers cannot afford to buy any more.
From your article:
“While some small firms struggle to pass on higher costs of imported materials to customers, large exporters are reporting higher profits and the total number of corporate failures is in decline.”
And crucially:
“The broader trend in corporate failures in Japan is down. The total number of bankruptcies declined 14 percent from a year earlier in October, to 794 cases, a 15th straight monthly drop, Teikoku Databank said. “
Oops. That stuffs up your narrative.
Yes, the weak yen policy appears to have hurt **some** smaller firms, but larger ones are earning record profits and.failure rates are “in decline”.
The failure of some smaller, less competitive businesses is the trade off for the increased exports, record profits for larger firms and a broad trend of falling corporate failures.
Should have read that article before running your mouth off, tel.
And, finally, that policy measure is in no way like deliberately destroying some property just to create some spending to replace it.
If currency depreciation is the equivalent of “breaking windows” then any free market system where de-centralised private actions result in a falling currency must be “breaking windows” too.
Every economy will naturally have bankruptcies, things have to change because the world is changing.
The general trend in bankruptcy has been going down since 2009 (i.e. before Abenomics), and we can argue about whether that peak in 2009 was a natural economic event, or the indirect effect of government meddling… but that’s another issue.
What I’m talking about here is bankruptcy directly caused by government policy… in effect taking the assets of one group of people (usually smaller business) and transferring wealth to another group of people (usually larger business with more influence amongst the policy makers). Keynesians just stare at Aggregate Demand, the person who lost everything doesn’t even show up on the radar. If it doesn’t effect the aggregate it therefore didn’t happen, doesn’t exist.
Broken windows are great if you happen to be in the glazier business, but if instead you are trying to make a living tending a greenhouse, might as well just give up. Over time the economy ends up with lots of glaziers and no greenhouses… not because of any good reason, just because government policy forced it that way.
My original question was to show me how Keynesian economics balances this trade-off, and since you have been unable to answer this, you have effectively pointed out that it doesn’t balance it. Doesn’t even consider it.
Tel,
LK is really just trying to say that because theft and tornadoes can destroy people’s wealth in a free market, we cannot claim that politicians doing so in a statist economy is destroying wealth.
He is unable or unwilling to understand that inflation from government is not a devaluation that can be comparable to increases of the money supply in a free market because in the latter people are legally permitted to NOT use any money that devalues too much.
I meant to put those axioms down here so they would be more readable. Oops.
Bob, don’t forget the effect QE might have had on the economy in 2013
It’s interesting that none of the usual suspects actually disputed anything Bob said in the article.
Just pointing it out.
Zanotti and Cachanoski 2014 should clear up the arguments about a priori in AE. They show that Machlup’s interpretation of Mises is better than Rothbard’s. It’s a far more nuanced view.