Showing posts with label Keynesianism. Show all posts
Showing posts with label Keynesianism. Show all posts
Keynes was really a Conservatiive
Keynes Was Really A Conservative
Bruce Bartlett, 08.14.09, 12:00 AM EDT
Conservatives continue to decry the $787 billion stimulus package enacted in February. At best, they think it accomplished nothing because the additional federal borrowing took as much out of the economy as the stimulus put in. At worst, the deficits and enlargement of government will lead to slower growth and inflation not too far down the road.
Those on the right have been making this same argument ever since British economist John Maynard Keynes popularized the idea of using budget deficits to stimulate growth in his 1936 book, The General Theory of Employment, Interest and Money. For this reason, Keynes, even more so than Karl Marx, is the principal bête noire of free market economists. They believe governments should never do anything to counteract economic downturns. Consequently, they must implicitly believe that all recessions are the result of massive and simultaneous failures by private businesses and workers who must therefore bear all the costs of adjustment. By opposing government intervention, free market economists are saying that it either made no mistakes or should do nothing to fix those it may have made.
What Keynes understood is that governments bear primary responsibility for recessions. In really severe downturns, such as we suffered in the 1930s and are suffering today, government action is essential to turn the economy around; the private sector simply can't do it on its own. He also understood that democratic societies cannot long tolerate high levels of unemployment. At some point, people will jettison capitalism for some sort of socialism, which would threaten democracy as well.
Full article here
A Conservative Case for Keynesianism?
The most serious blow to the world economic system after 1973 was the dismantling of the post-WWII Keynesian system that gave us the golden age of capitalism (1945–1973). This attack on the post-war consensus in economics occurred in the 1970s and 1980s when monetarism and then revived New Classical macroeconomics came to dominate the economics profession and public policy. Of course, conservatives like Reagan and Thatcher were leaders in that neoclassical assault. The post-1979 era has been one of neoliberalism, globalization and neoclassical economics. And look how that era has ended: with world-wide financial meltdown and the globe on the verge of depression. Keynesianism pulled us back from the brink.
By contrast, the previous post-WWII economic system was that of the mixed economy with financial regulation, Keynesian macroeconomic management, and even nationalized industries in some countries. Certain versions of the mixed economy – particularly those in social democratic countries in Europe – have probably been the most successful, efficient and humane economic systems humankind has ever devised, systems that have increased wealth tremendously by delivering high employment and maximal use of resources.
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Keynesianism
KEYNESIANISM
The Failure of Keynesian Politics
by Alex Tabarrok on February 16, 2011
Let's accept for the sake of argument the truth of Keynesian economics. It is now clear that Keynesian politics has failed. But don't take my word for it. Here's Paul Krugman on thegreat abdication:
…without saying so explicitly, the Obama administration has accepted the Republican claim that stimulus failed, and should never be tried again.
What’s extraordinary about all this is that stimulus can’t have failed, because it never happened. Once you take state and local cutbacks into account, there was no surge of government spending.
If that sounds familiar let's remember that by their own admission Keynesians believe that Keynesian politics also failed during the Great Depression. Again, Paul Krugman on the New Deal:
…you might say that the incomplete recovery shows that “pump-priming”, Keynesian fiscal policy doesn’t work. Except that the New Deal didn’t pursue Keynesian policies. (emphasis in original).
So we have had two major cases that massively favored Keynesian economics but Keynesian politics failed both times. Not that this should be surprising, Keynes himself told us that his theory was more suitable to totalitarian regimes:
The theory of aggregated production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire.
More recently, other people (including Paul Krugman as I recall although I can't find a good link) have said similar things about the chaos of democracy versus the Chinese government's ability to stimulate at will.
Now I will take a large degree of laissez-faire and the chaos of democracy over authoritarian political and economic regimes any day. I assume most Keynesians would as well. Thus, if we can't count on massive increases in government spending during a recession to mop up problems ex-post shouldn't we all, Keynesians and otherwise, be spending more time thinking about ex-ante alternatives to Keynesian politics?
What are the alternatives to Keynesian politics? Greater regulation to prevent crises from occurring is a legitimate response, although one that I wouldn't necessarily buy into in all particulars. Along the same lines, increasing wage, price and real flexibilities (e.g. relocation flexibility and public and private savings flexibility) would benefit us in future recessions. Automatic stabilizers such as unemployment insurance are one area that has worked quite well. What other areas can be automatized? Funding for states? How about an automatic payroll tax cut tied to the unemployment rate? (fyi, Keynes favored the latter).
More generally, we can probably get more agreement today on policies that will operate tomorrow than we can get agreement today on today's policies or agreement tomorrow on tomorrow's policies.
Full article here
The Failure of Keynesian Politics
by Alex Tabarrok on February 16, 2011
Let's accept for the sake of argument the truth of Keynesian economics. It is now clear that Keynesian politics has failed. But don't take my word for it. Here's Paul Krugman on thegreat abdication:
…without saying so explicitly, the Obama administration has accepted the Republican claim that stimulus failed, and should never be tried again.
What’s extraordinary about all this is that stimulus can’t have failed, because it never happened. Once you take state and local cutbacks into account, there was no surge of government spending.
If that sounds familiar let's remember that by their own admission Keynesians believe that Keynesian politics also failed during the Great Depression. Again, Paul Krugman on the New Deal:
…you might say that the incomplete recovery shows that “pump-priming”, Keynesian fiscal policy doesn’t work. Except that the New Deal didn’t pursue Keynesian policies. (emphasis in original).
So we have had two major cases that massively favored Keynesian economics but Keynesian politics failed both times. Not that this should be surprising, Keynes himself told us that his theory was more suitable to totalitarian regimes:
The theory of aggregated production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire.
More recently, other people (including Paul Krugman as I recall although I can't find a good link) have said similar things about the chaos of democracy versus the Chinese government's ability to stimulate at will.
Now I will take a large degree of laissez-faire and the chaos of democracy over authoritarian political and economic regimes any day. I assume most Keynesians would as well. Thus, if we can't count on massive increases in government spending during a recession to mop up problems ex-post shouldn't we all, Keynesians and otherwise, be spending more time thinking about ex-ante alternatives to Keynesian politics?
What are the alternatives to Keynesian politics? Greater regulation to prevent crises from occurring is a legitimate response, although one that I wouldn't necessarily buy into in all particulars. Along the same lines, increasing wage, price and real flexibilities (e.g. relocation flexibility and public and private savings flexibility) would benefit us in future recessions. Automatic stabilizers such as unemployment insurance are one area that has worked quite well. What other areas can be automatized? Funding for states? How about an automatic payroll tax cut tied to the unemployment rate? (fyi, Keynes favored the latter).
More generally, we can probably get more agreement today on policies that will operate tomorrow than we can get agreement today on today's policies or agreement tomorrow on tomorrow's policies.
Full article here
Keynesianism
Keynes: The Government Should Help Out the Economy
John Maynard Keynes, a British economist and financial genius who lived from 1883 to 1946, also examined capitalism and came up with some extremely influential views. They were, however, quite different from those of Karl Marx and, for that matter, Adam Smith. In 1936, he published his General Theory of Employment, Interest, and Money. We will examine Keynes's theories later. They mainly involve people's propensity to spend or to save their additional money as their incomes rise, and the effects of increases in spending on the economy as a whole.
The larger significance of Keynes's work lies in the view he put forth about the role of government in a capitalist economy. Keynes was writing during the Great Depression. It's worth noting at this point that in the United States unemployment reached about 25 percent and millions of people had lost their life savings as well as their jobs. Moreover, there was no clear path out of the depression, which led people to seriously question whether Smith's invisible hand was still guiding things along. Was this worldwide collapse of economic activity the end of capitalism?
Keynes believed that there was only one way out, and that was for the government to start spending in order to put money into private-sector pockets and get demand for goods and services up and running again. As it turns out, President Franklin D. Roosevelt gave this remedy a try when he started a massive public works program to employ a portion of the idle workforce. However, the United States entry into World War II rendered this a less than pure experiment in government spending. The war effort boosted production to extremely high levels (to make guns, ammunition, planes, trucks, and other materiel) while simultaneously taking millions of men out of the civilian workforce and into uniform.
EconoTalk
Keynesian economics is an approach to economic policy that favors using the government's power to spend, tax, and borrow to keep the economy stable and growing. A Keynesian is an economist or other believer in Keynesian economics.
The validity and desirability of Keynes's prescription for a sluggish economy—using government spending to prime the pump—are still debated today. Again, we will look at the theory and practice of what came to be known as Keynesian economics later.
Many other economists of note advanced theories and otherwise added to the body of knowledge in the science. We will look at their ideas as they arise in our examination of economics. However, Adam Smith, Karl Marx, and John Maynard Keynes (later Lord Keynes) are widely recognized as the most influential—Smith because he founded and formalized the science of economics, Marx because he challenged capitalism and had such a forceful impact on society and politics, and Keynes because he prompted new practices as well as new theories in the world of economic policy. Keynes also played a key role in the founding of the International Monetary Fund and in other political economic measures taken at the end of World War II.
Full article here
John Maynard Keynes, a British economist and financial genius who lived from 1883 to 1946, also examined capitalism and came up with some extremely influential views. They were, however, quite different from those of Karl Marx and, for that matter, Adam Smith. In 1936, he published his General Theory of Employment, Interest, and Money. We will examine Keynes's theories later. They mainly involve people's propensity to spend or to save their additional money as their incomes rise, and the effects of increases in spending on the economy as a whole.
The larger significance of Keynes's work lies in the view he put forth about the role of government in a capitalist economy. Keynes was writing during the Great Depression. It's worth noting at this point that in the United States unemployment reached about 25 percent and millions of people had lost their life savings as well as their jobs. Moreover, there was no clear path out of the depression, which led people to seriously question whether Smith's invisible hand was still guiding things along. Was this worldwide collapse of economic activity the end of capitalism?
Keynes believed that there was only one way out, and that was for the government to start spending in order to put money into private-sector pockets and get demand for goods and services up and running again. As it turns out, President Franklin D. Roosevelt gave this remedy a try when he started a massive public works program to employ a portion of the idle workforce. However, the United States entry into World War II rendered this a less than pure experiment in government spending. The war effort boosted production to extremely high levels (to make guns, ammunition, planes, trucks, and other materiel) while simultaneously taking millions of men out of the civilian workforce and into uniform.
EconoTalk
Keynesian economics is an approach to economic policy that favors using the government's power to spend, tax, and borrow to keep the economy stable and growing. A Keynesian is an economist or other believer in Keynesian economics.
The validity and desirability of Keynes's prescription for a sluggish economy—using government spending to prime the pump—are still debated today. Again, we will look at the theory and practice of what came to be known as Keynesian economics later.
Many other economists of note advanced theories and otherwise added to the body of knowledge in the science. We will look at their ideas as they arise in our examination of economics. However, Adam Smith, Karl Marx, and John Maynard Keynes (later Lord Keynes) are widely recognized as the most influential—Smith because he founded and formalized the science of economics, Marx because he challenged capitalism and had such a forceful impact on society and politics, and Keynes because he prompted new practices as well as new theories in the world of economic policy. Keynes also played a key role in the founding of the International Monetary Fund and in other political economic measures taken at the end of World War II.
Full article here
Keynesianism Pt. 4
According to Keynesian theory, some individually-rational microeconomic-level actions — if taken collectively by a large proportion of individuals and firms — can lead to inefficient aggregatemacroeconomic outcomes, wherein the economy operates below its potential output and growth rate. Such a situation had previously been referred to by classical economists as a general glut. There was disagreement among classical economists on whether a general glut was possible. Keynes contended that a general glut would occur when aggregate demand for goods was insufficient, leading to an economic downturn. Losses of potential output due to unnecessarily high unemployment is the result. Producers then react defensively (or reactive) making decisions that damage macroeconomics.
Most Keynesians advocate an active stabilization policy to reduce the amplitude of the business cycle, which they rank among the most serious of economic problems. Government policies can be used to increase aggregate demand, thus increasing economic activity, reducing unemployment and deflation. For example, when the unemployment rate is very high, a government can use a dose of expansionary monetary policy.
Keynes argued that the solution to the Great Depression was to stimulate the economy ("inducement to invest") through some combination of two approaches: 1: A reduction in interest rates, and 2: government investment in infrastructure. Investment by government injects income, which results in more spending in the general economy. This in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.
A central conclusion of Keynesian economics is that, in some situations, no strong automatic mechanism moves output and employment towards full employment levels. This conclusion conflicts with economic approaches that assume a strong general tendency towards equilibrium. In the 'neoclassical synthesis', which combines Keynesian macro concepts with a micro foundation, the conditions of general equilibrium allow for price adjustment to eventually achieve this goal. More broadly, Keynes saw his theory as ageneral theory, in which utilization of resources could be high or low, whereas previous economics focused on the particular case of full utilization.
The new classical macroeconomics movement, which began in the late 1960s and early 1970s, criticized Keynesian theories, whileNew Keynesian economics has sought to base Keynes' ideas on more rigorous theoretical foundations.
Some interpretations of Keynes have emphasized his stress on the international coordination of Keynesian policies, the need for international economic institutions, and the ways in which economic forces could lead to war or could promote peace.
Full wiki article
Most Keynesians advocate an active stabilization policy to reduce the amplitude of the business cycle, which they rank among the most serious of economic problems. Government policies can be used to increase aggregate demand, thus increasing economic activity, reducing unemployment and deflation. For example, when the unemployment rate is very high, a government can use a dose of expansionary monetary policy.
Keynes argued that the solution to the Great Depression was to stimulate the economy ("inducement to invest") through some combination of two approaches: 1: A reduction in interest rates, and 2: government investment in infrastructure. Investment by government injects income, which results in more spending in the general economy. This in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.
A central conclusion of Keynesian economics is that, in some situations, no strong automatic mechanism moves output and employment towards full employment levels. This conclusion conflicts with economic approaches that assume a strong general tendency towards equilibrium. In the 'neoclassical synthesis', which combines Keynesian macro concepts with a micro foundation, the conditions of general equilibrium allow for price adjustment to eventually achieve this goal. More broadly, Keynes saw his theory as ageneral theory, in which utilization of resources could be high or low, whereas previous economics focused on the particular case of full utilization.
The new classical macroeconomics movement, which began in the late 1960s and early 1970s, criticized Keynesian theories, whileNew Keynesian economics has sought to base Keynes' ideas on more rigorous theoretical foundations.
Some interpretations of Keynes have emphasized his stress on the international coordination of Keynesian policies, the need for international economic institutions, and the ways in which economic forces could lead to war or could promote peace.
Full wiki article
Keynesianism Pt.3
Can Nothing Be Done?
Or why is no one talking about balanced budget expansion?
If governments believe that they cannot add to government debt and deficits, does that mean nothing can be done? Absolutely not. A temporary increase in government spending financed by an increase in taxes will still raise demand. First year economics undergraduate students will know about the balanced budget multiplier of one: every £1 spent by the government will lead to £1 extra demand, because what consumers lose with lower taxes they gain through higher income. Readers of Michael Woodford (2011) will know that we get exactly the same multiplier with much more sophisticated consumers, if real interest rates are fixed. (I try and explain why here.) So it does not matter what sort of consumers we have, the tax increase comes out of saving, and so demand and output rises by the full extent of the spending increase. (For those who think lower savings will mean lower investment, seehere.)
The news is better still if interest rates are stuck at the zero lower bound. Higher demand and output will imply some increase in inflation, and any increase in expected inflation will reduce real interest rates, further stimulating activity. The size of the multiplier will be above one.
So there is something we can do with fiscal policy, without increasing government debt. Why does hardly anyone talk about this? (One exception is Robert Schiller.) I suspect the problem is as follows. Those favouring stimulus think debt is not a constraint, and know that there are many reasons why a fiscal expansion financed by issuing more debt will be even more expansionary that one financed through taxes. So why argue for second best? But why do those who do think debt is a constraint not welcome this alternative possibility of raising demand? The reason is obvious: a tax financed fiscal expansion requires taxes to rise.
The problem is not an economic one. The distortionary effects of temporarily higher taxes are likely to be small relative to the resources wasted and permanent damage caused by high unemployment. (See Chris Dillow as well as Jonathan Portes on this.) The problem is political, particularly for countries with right of centre governments. However, just because something may be politically difficult should not stop the argument being made.
Once we get on to this territory, then there is further ground to explore. As well as tax financed government spending, we could think about tax and transfer switches that would stimulate demand. The marginal propensity to consume out of a benefit increase is likely to be quite high, whereas that out of reducing the tax relief on pension contributions for high earners would be pretty small. (Remember any tax switch need only be temporary.) Redistributing money from the old to the credit constrained young would also be likely to raise demand: raise child benefit by increasing death duties, for example. Some companies are not that short of cash at the moment: how about tax incentives to encourage them to invest today rather than tomorrow. The idea that there is no alternative to doing nothing about rising unemployment could not be further from the truth. If governments find objections to all these ideas, one might begin to suspect that there are other motives at work.
Full article here
Or why is no one talking about balanced budget expansion?
If governments believe that they cannot add to government debt and deficits, does that mean nothing can be done? Absolutely not. A temporary increase in government spending financed by an increase in taxes will still raise demand. First year economics undergraduate students will know about the balanced budget multiplier of one: every £1 spent by the government will lead to £1 extra demand, because what consumers lose with lower taxes they gain through higher income. Readers of Michael Woodford (2011) will know that we get exactly the same multiplier with much more sophisticated consumers, if real interest rates are fixed. (I try and explain why here.) So it does not matter what sort of consumers we have, the tax increase comes out of saving, and so demand and output rises by the full extent of the spending increase. (For those who think lower savings will mean lower investment, seehere.)
The news is better still if interest rates are stuck at the zero lower bound. Higher demand and output will imply some increase in inflation, and any increase in expected inflation will reduce real interest rates, further stimulating activity. The size of the multiplier will be above one.
So there is something we can do with fiscal policy, without increasing government debt. Why does hardly anyone talk about this? (One exception is Robert Schiller.) I suspect the problem is as follows. Those favouring stimulus think debt is not a constraint, and know that there are many reasons why a fiscal expansion financed by issuing more debt will be even more expansionary that one financed through taxes. So why argue for second best? But why do those who do think debt is a constraint not welcome this alternative possibility of raising demand? The reason is obvious: a tax financed fiscal expansion requires taxes to rise.
The problem is not an economic one. The distortionary effects of temporarily higher taxes are likely to be small relative to the resources wasted and permanent damage caused by high unemployment. (See Chris Dillow as well as Jonathan Portes on this.) The problem is political, particularly for countries with right of centre governments. However, just because something may be politically difficult should not stop the argument being made.
Once we get on to this territory, then there is further ground to explore. As well as tax financed government spending, we could think about tax and transfer switches that would stimulate demand. The marginal propensity to consume out of a benefit increase is likely to be quite high, whereas that out of reducing the tax relief on pension contributions for high earners would be pretty small. (Remember any tax switch need only be temporary.) Redistributing money from the old to the credit constrained young would also be likely to raise demand: raise child benefit by increasing death duties, for example. Some companies are not that short of cash at the moment: how about tax incentives to encourage them to invest today rather than tomorrow. The idea that there is no alternative to doing nothing about rising unemployment could not be further from the truth. If governments find objections to all these ideas, one might begin to suspect that there are other motives at work.
Full article here
Keynesianism
Consumption smoothing and the balanced budget multiplier
In some of the debate following this post, and then this, there often seems to be a big distinction drawn between models based on consumption smoothing, and the old fashioned balanced budget Keynesian multiplier. Even Paul Krugman felt it necessary to say that he ‘never said a word about the balanced budget multiplier’. Now of course the models are different. However I want to suggest that in the context of fiscal expansion in a recession caused by demand deficiency, the balanced budget multiplier story can be retold in a manner consistent with consumption smoothing.
The most basic model of consumption smoothing involves two periods. Let period 1 be a demand deficient recession, and so output is determined in a Keynesian manner by aggregate demand. Period 2, which is much longer, is Classical, and nothing changes in period 2. (If having a two period model of unequal lengths is a worry, think of period 2 as being divided into a large number of sub-periods of equal length to period 1, but where every sub-period is Classical.) We keep monetary policy neutral by assuming the real interest rate is constant. Optimising consumers will then spend a fixed proportion of their permanent income in period 1: that is consumption smoothing. Let’s call this proportion c, which could be quite small. There is no investment, and the economy is closed.
The government now increases government spending by G in period 1 only, and taxes rise by the same amount in period 1. The ‘direct’ or ‘first round’ effect is that consumption in period 1 falls by less than G, because the impact of higher taxes on consumption is smoothed via permanent income. That is as far as I needed to go in my ‘Mistakes’ post to make the point I wanted to make. However it is obviously not the end of the story, because higher output implies higher income. What happens to output eventually (call the answer Y)? Well consumption rises/falls by Y-G times the fixed proportion c, so we solve Y=G+c(Y-G), which of course implies Y=G, a multiplier of one. This is not only the same result as given by the Keynesian balanced budget multiplier, but the mechanics are identical. Consumption does not change at all: higher period 1 income offsets the higher taxes. We do not need to worry about any knock on effects in period 2, because permanent income ends up unchanged. So the simple Keynesian balanced budget multiplier need not be considered some ancient fossil that we are forced to teach undergraduate students, but a simple expression of what consumption smoothing implies in a particular context.
We could get to the same result using consumption smoothing alone, by noting that consumption in period two is tied down by (classical) Y and permanent G. Second period consumption and the Euler equation then fixes period 1 consumption, as real interest rates are unchanged by assumption. So any change in government spending in period 1 leads to an equal increase in output.
Woodford, in section 2 of the paper noted by Krugman and myself, does something with similarities to this, but with more elegance. My period 2 becomes the steady state, a steady state in which (given the usual assumptions) the real interest rate equals the rate of time preference. With real interest rates fixed at this value in all periods, consumption is equal in all periods, so any temporary change in government spending leads to an equal temporary change in output. We get a multiplier of one. With this benchmark, it is then intuitive to see how the multiplier will fall if real interest rates are not constant but rise. Equally, if we are at a zero lower bound, the multiplier will be greater than one because higher output generates inflation, which reduces real rates.
In some of the debate following this post, and then this, there often seems to be a big distinction drawn between models based on consumption smoothing, and the old fashioned balanced budget Keynesian multiplier. Even Paul Krugman felt it necessary to say that he ‘never said a word about the balanced budget multiplier’. Now of course the models are different. However I want to suggest that in the context of fiscal expansion in a recession caused by demand deficiency, the balanced budget multiplier story can be retold in a manner consistent with consumption smoothing.
The most basic model of consumption smoothing involves two periods. Let period 1 be a demand deficient recession, and so output is determined in a Keynesian manner by aggregate demand. Period 2, which is much longer, is Classical, and nothing changes in period 2. (If having a two period model of unequal lengths is a worry, think of period 2 as being divided into a large number of sub-periods of equal length to period 1, but where every sub-period is Classical.) We keep monetary policy neutral by assuming the real interest rate is constant. Optimising consumers will then spend a fixed proportion of their permanent income in period 1: that is consumption smoothing. Let’s call this proportion c, which could be quite small. There is no investment, and the economy is closed.
The government now increases government spending by G in period 1 only, and taxes rise by the same amount in period 1. The ‘direct’ or ‘first round’ effect is that consumption in period 1 falls by less than G, because the impact of higher taxes on consumption is smoothed via permanent income. That is as far as I needed to go in my ‘Mistakes’ post to make the point I wanted to make. However it is obviously not the end of the story, because higher output implies higher income. What happens to output eventually (call the answer Y)? Well consumption rises/falls by Y-G times the fixed proportion c, so we solve Y=G+c(Y-G), which of course implies Y=G, a multiplier of one. This is not only the same result as given by the Keynesian balanced budget multiplier, but the mechanics are identical. Consumption does not change at all: higher period 1 income offsets the higher taxes. We do not need to worry about any knock on effects in period 2, because permanent income ends up unchanged. So the simple Keynesian balanced budget multiplier need not be considered some ancient fossil that we are forced to teach undergraduate students, but a simple expression of what consumption smoothing implies in a particular context.
We could get to the same result using consumption smoothing alone, by noting that consumption in period two is tied down by (classical) Y and permanent G. Second period consumption and the Euler equation then fixes period 1 consumption, as real interest rates are unchanged by assumption. So any change in government spending in period 1 leads to an equal increase in output.
Woodford, in section 2 of the paper noted by Krugman and myself, does something with similarities to this, but with more elegance. My period 2 becomes the steady state, a steady state in which (given the usual assumptions) the real interest rate equals the rate of time preference. With real interest rates fixed at this value in all periods, consumption is equal in all periods, so any temporary change in government spending leads to an equal temporary change in output. We get a multiplier of one. With this benchmark, it is then intuitive to see how the multiplier will fall if real interest rates are not constant but rise. Equally, if we are at a zero lower bound, the multiplier will be greater than one because higher output generates inflation, which reduces real rates.
Keynesian, monetarist and supply-side policie
Keynesian, monetarist and supply-side policies: an old debate gets new life
by M. Niederjohn Scott, William C. Wood
Debates over how to promote a healthy economy are pervasive once more, after decades when it seemed such debates had been put to rest. The market meltdown of 2008 ended a long string of years in which monetary policy reigned supreme. Monetary policy is the regulation of money and the banking system to influence economic variables. Its adherents, the "monetarists," had faced little challenge as they de-emphasized the role of fiscal policy, defined as the control of taxes and spending to influence economic variables.
Activist use of fiscal policy was inspired by the work of British economist John Maynard Keynes. Keynesian fiscal policy--out of fashion with economists and policymakers for decades--has enjoyed a stunning revival under President Obama's new economic policy team. The size of the stimulus package started at $825 billion, even before congressional add-ons. The final package, after debate and compromise, included a mix of spending on energy, infrastructure, health care, tax cuts, and direct payments to the unemployed and disadvantaged.
The Keynesian theory is simple. Keynes taught that economic downturns are caused by inadequate total demand ("aggregate demand"). His prescription to solve this economic affliction was for government to provide the demand that the private sector wouldn't, even if that required deficit spending. Recent discussions, covered extensively in the media, have focused on the infrastructure spending component of Obama's plan--such policy is right out of the renowned Great Depression-era economist's playbook.
The monetarist theory is also simple. Its intellectual father, eminent economist Milton Friedman, argued that properly regulating the supply of money and the banking system would allow the economy to cure itself when recession set in. His primary case in point was the Great Depression, when a shrinking money supply and bank failures made an economic downturn into a national disaster.
Friedman argued that the Federal Reserve could have stopped the Great Depression by providing banks with more liquidity and stopping the money supply from falling. In fact, Ben Bernanke, the Federal Reserve chairman today, apologized to Friedman in a famous declaration, saying: "You're right. We did it. We're very sorry. But thanks to you, we won't do it again." (1) Indeed, Bernanke's Fed has been supplying liquidity to the banking system in record amounts. The monetarist prescription sees this liquidity as promoting lending, lower interest rates and greater aggregate demand. Unfortunately, the economy has not quickly responded. Unlike the Great Depression--liquidity is not the problem this time. The Federal Reserve's unprecedented actions have assured that banks have plenty of money; they just aren't lending it out, Aggregate demand has remained anemic.
Even as Keynesians and monetarists have debated how to increase aggregate demand, supply-side economists and their political allies have been insisting that demand is typically not the problem. They believe that conventional policies increasing spending will only give small upward bumps to the economy. Their cure, therefore, is tax cuts designed to increase productivity, entrepreneurship, and risk-taking. The resulting increase in aggregate supply, they believe, will lead to economic recovery.
To supply-siders, not all tax cuts are equally good. They place their emphasis on the "marginal tax rate," the percentage taxed away from an extra dollar of income earned. A marginal tax rate of 40 percent, for example, would mean that 40 cents of each additional dollar of income would be taxed away, leaving an after-tax reward of 60 cents for the person who earned the dollar. High marginal tax rates kill economic initiative, they believe, and tax cuts that leave marginal tax rates high are useless. As an example, a fixed $500 tax credit to everyone would not affect the after-tax reward of earning an additional dollar of income. It would leave marginal tax rates unaffected and therefore would have no direct effect on promoting aggregate supply.
Full article here
Keynesianism and Political Ideology
Keynesianism And Political Ideology
A phenomenal ask and response from ilyagerner’s blog which was too good not to copy and paste (I have italicized a particular quote that I found very accurate and satisfying):
externalities asked: To get to the heart of events, what do you and other Tumblers think about deficit spending? Or more specifically, as Keynesian spending/saving seems to make sense, what do you think about running a deficit while the sun shines? I know there are lots of arguments for and against and it’s certainly not as simple as saying that governments are like households and must live within their means, but in my comparatively short adulthood it doesn’t seem to have worked out well. What’s your take?
1. Polarization in Everything. I’m of the opinion that the majority of political disagreement about economic theory is driven by ideological convenience. That is, it’s quite possible for Keynesian economics to be complete bunk (though I don’t think so), while the moral argument for an expansive welfare state could be perfectly sound. At the same time, it’s possible for libertarian theories of self-ownership to be correct, while Austrian economics remains irrelevant to understanding how the world works. But in the real world, well-educated/well-informed partisans will adopt economic views that support their prior beliefs, so that liberals are Keynesians (and supporters of loose monetary policy) and conservatives rediscover whatever combination of neoclassical or Austrian thought (inflation hawkery included) is most convenient to their underlying views about society.
In the US, this kind of polarization applies to seemingly unrelated topics like climate change. The veracity of climate science doesn’t hinge on any particular view about government. Libertarianish conservatives might be correct about the ethical case for a nightwatchman state, but global warming will exist independent of that moral “truth.” But here again, views about science are dependent on partisanship, with liberals predisposed to “believe” in climate science and conservatives predisposed to denialism.
Point of this preface is to make clear that while I find New Keynesian economics compelling, this probably has as much to do with prior political commitments as it does any deep study of economics.
Full article here
Economics as Ideology
Economics as Ideology: Keynes, Laski, Hayek, and the Creation of Contemporary Politics
Hoover Attempts to Rationalize the Continuation of the Interventionist-Welfare State
Why do people hold the views that they do, including and especially their political and ideological views? That question has generated a vast library of what has generally come to be called “psychobabble,” wherein the author attempts to “deconstruct” his biographical subject and demonstrate why the subject’s upbringing and social circumstances made him the way he was, including his ideas about the social, political, and economic world in which he lived.
A recent contribution to this genre is Kenneth R. Hoover’s Economics as Ideology. A political science professor at Western Washington University, Hoover wants to find out what made Harold Laski a socialist, F. A. Hayek a proponent of free-market liberalism, and John Maynard Keynes, well, a Keynesian.
Laski was one of the most prominent and influential advocates of socialism in Great Britain in the decades from World War I to the early 1950s. His writings and political activities helped move his country in the direction of central planning and the welfare state. Hoover concludes that Laski’s ideology and politics were driven by a falling out with his businessman father and the Orthodox Judaism of his family. His whole life was supposedly a revolt against the chains and apparent social insensitivity of religious and cultural conservatism.
Keynes was the product of a British intellectual elite and a generation at the beginning of the twentieth century that was determined to break free of Victorian morality. A focus on the pleasures of the moment and a probabilistic theory of uncertainty concerning the future resulted in Keynes discounting many of the long-run consequences from short-run policies. In Hoover’s account, his homosexual adventures as a young man and his failure to father children after he married also made him think a lot less about the future impact of present policies.
Hayek, on the other hand, resented the rules and regulations that come with greater government control of social and economic affairs because of a bad marriage he entered into when he was a young man and a difficult divorce immediately after World War II. Untangling himself from an unwanted marriage, according to Hoover, supposedly is the key to understanding Hayek’s desire for a society with fewer restraints on the choices of individuals.
The difficulty with taking all such psycho-ideological analyses seriously is that they can be used to explain almost anything, and therefore explain nothing. There have been Jews who renounced their religious and cultural ancestry and became classical liberals. There have been free-spirited homosexuals who became social and political conservatives. And there have been people trapped in bad marriages and difficult divorces who became radical socialists.
An equally crucial weakness in Hoover’s book is his failure to come to grips with many of the important issues and arguments that separated these three protagonists in the decades between the two world wars. He gives the clearest analysis when critically evaluating Laski. He shows that Laski could not reconcile a desire for participatory democracy and greater human freedom with his ideal of economic planning. Hoover points out that as the years went by, the argument for centralized government control increasingly replaced Laski’s defense of personal liberty. And he explains that Laski never attempted to seriously grapple with the practical difficulties of centrally planning the production and consumption activities of tens of millions of people.
Full article here
Keynesian economics
Keynesian economics, also called Keynesianism, is an economic theory based on the ideas of an English economist, John Maynard Keynes, as put forward in his book The General Theory of Employment, Interest and Money, published in 1936 in response to the Great Depression of the 1930s. Keynesian economics promotes a mixed economy, where both the state and the private sector play an important role. The rise of Keynesianism marked the end of laissez-faire economics (economic theory based on the belief that markets and the private sector could operate well on their own, without state intervention).
In Keynes's theory, general (macro-level) trends can overwhelm the micro-level behavior of individuals. Instead of the economic process being based on continuous improvements in potential output, as most classical economists had believed from the late 1700s on, Keynes asserted the importance of aggregate demand for goods as the driving factor of the economy, especially in periods of downturn. From this he argued that government policies could be used to promote demand at a macro level, to fight high unemployment and deflation of the sort seen during the 1930s.
A central conclusion of Keynesian economics is that there is no strong automatic tendency for output and employment to move toward full employment levels. This, Keynes thought, conflicts with the tenets of classical economics, and those schools, such as supply-side economics or the Austrian School, which assume a general tendency towards equilibrium in a restrained money creation economy. In neoclassical economics, which combines Keynesian macro concepts with a micro foundation, the conditions of General equilibrium allow for price adjustment to achieve this goal. More broadly, Keynes saw this as a general theory, in which resource utilization could be high or low, whereas previous economics focused on the particular case of full utilization.
Source
Source
Why Believe In Keynesian Models?
A correspondent asks a good question: what evidence makes me believe that Keynesian economics is broadly right, given the relative absence of experience with large fiscal stimulus programs?
I’d answer that question with several points.
First, we’re talking about a model, not just a prediction about the impact of spending increases. So you can ask about the ancillary predictions of that model as opposed to rival models. Anti-Keynesians assured us that budget deficits would send interest rates soaring; Keynesian analysis said they’d stay low as long as the economy remained far from full employment. Guess who was right?
Also, there are some features of the approach that can be tested separately. Keynesianism isn’t just about sticky prices, but it does generally assume sticky prices — and there is overwhelming evidence, from a variety of sources, that prices are indeed sticky.
Also also: there’s plenty of evidence that monetary policy can move output and employment — and it’s very hard to devise a model in which that is true that doesn’t also say that fiscal policy can be effective, especially when you’re up against the zero lower bound.
Second, while we don’t have a lot of postwar experience with fiscal stimulus, we do have a lot of experience with anti-stimulus, that is, austerity — and that turns out to be reliably contractionary. Again, it’s hard to think of a model in which austerity is contractionary but stimulus isn’t expansionary.
Finally, there is evidence from fiscal expansions in the 1930s, which actually did lead to economic expansion too.
Source
Keynesianism Pt. 3
I Am Not Your Mirror Image
Russ Roberts tries to debunk my explanation of the reasons to believe in a broadly Keynesian view of the world — and reveals more than he intended.
First, a few points. Roberts treats my statement that we have a lot of evidence on the effects of monetary policy, not so much on fiscal policy, as being somehow slippery. But if you are at all familiar with the reality of macroeconomic policy, you know that there’s an obvious reason: monetary policy, which is set by a small committee without the need to pass legislation, is routinely used as a tool for managing the economy; discretionary fiscal policy isn’t. The classic Romer and Romer study showing that monetary policy matters was based precisely on the frequent use of monetary policy as a deliberate tool:
The central part of the paper is a study of postwar U.S. monetary history. We identify six episodes in which the Federal Reserve in effect decided to attempt to create a recession to reduce inflation.
Six such episodes between 1945 and 1990; there is no comparable profusion of fiscal examples.
Roberts also says, well, I choose some studies of austerity, but others reach different conclusions. Yes — but not all studies are created equal. In fact, the last two years of research on fiscal policy have clarified a lot.
Initially, a lot of credence was given to work like that of Alesina and Ardagna, which tried to identity changes in fiscal policy using mildly fancy time-series analysis — and seemed to find evidence of expansionary contraction. But everyone who looked at that work closely quickly noticed that their supposed episodes of both stimulus and austerity didn’t seem to correspond at all to known changes in policy. When economists started doing studies using the Milton Friedman/ Romer and Romer mthod –that is, using historical information to identify actual changes in policy — the results turned clearly Keynesian.
But the main thing wrong with Roberts’s piece is the assumption that people like me are just mirror images of people like him:
Krugman is a Keynesian because he wants bigger government. I’m an anti-Keynesian because I want smaller government. Both of us can find evidence for our worldviews.
This is wrong on multiple levels. First of all, while conservatives see smaller government as an end in itself, liberals don’t see bigger government the same way. Think about it: while you often see conservatives crow about, say, reducing discretionary spending as a good thing just because the number is down, do you ever see liberals crowing about a rise in spending, never mind what on? Liberals want government to do certain things, like provide essential health care; the size of government per se isn’t the objective.
Second, Keynesianism is not and never has been about promoting bigger government. Outside the US, this is obvious: there have been Tory Keynesians in Britain, the Germans favor both a big welfare state with heavy regulation and balanced budgets. Even in the US, when the political heat isn’t so intense, you find conservative economists promoting quite Keynesian views of stabilization policy — Greg Mankiw is the editor of two volumes on New Keynesian Economics, and the Bushies were quite happy to argue for tax cuts as a way to boost spending.
What is true is that some conservatives in America have always opposed Keynesian thought because they believe it legitimizes an active role for government — but that’s not what Keynesianism is about, and not the reason I or others support it.
Which brings me to the final point. Russ Roberts may choose his economic views because they support his political prejudices. I try not to. Maybe I sometimes fall short — but I try to analyze the economy as best I can, never mind what’s politically convenient, and indeed to bend over backward to avoid believing things that make me comfortable, to avoid turning everything into a morality play that confirms my political values.
Here’s an example: is economic inequality the source of our macroeconomic malaise? Many people think so — and I’ve written a lot about the evils of soaring inequality. But I have not gone that route. I’m not ruling out a connection between inequality and the mess we’re in, but for now I don’t see a clear mechanism, and I often annoy liberal audiences by saying that it’s probably possible to have a full-employment economy largely producing luxury goods for the richest 1 percent. More equality would be good, but not, as far as I can tell, because it would restore full employment.
So I’m trying to figure this thing out, as best I can. If you’re not, we’re not in the same business.
Read more here.
Keynesianism Pt. 2
Russ Roberts had a much-discussed item recently on Keynesian economics, which included an interesting criticism of Paul Krugman: “Krugman is a Keynesian because he wants bigger government. I’m an anti-Keynesian because I want smaller government. Both of us can find evidence for our worldviews.”
I was glad to see Krugman explain just how mistaken this is.
First of all, while conservatives see smaller government as an end in itself, liberals don’t see bigger government the same way. Think about it: while you often see conservatives crow about, say, reducing discretionary spending as a good thing just because the number is down, do you ever see liberals crowing about a rise in spending, never mind what on? Liberals want government to do certain things, like provide essential health care; the size of government per se isn’t the objective.
Krugman added some related points — Keynesianism isn’t about promoting bigger government; conservatives have traditionally supported Keynesian economics; and basing economic views on political prejudices is a bad idea — but it’s this first point that stood out for me. Regular readers probably know we’ve discussed this before, but I continue to believe it’s one of the key observations in American politics, because it’s fundamental to understanding how both sides of the political divide seek to advance their goals — and the nature of the goals themselves.
For the left, political objectives relate to policy ends. We want to expand access to quality health care. We want to lower carbon emissions to combat global warming. We want to reform the lending process for student loans so more young people can afford to go to college. We want to make public investments to create jobs. There are competing ways to get to where progressives want to go, but the focus is on the policy achievement.
What conservatives often find confusing is that the liberal worldview is not about necessarily increasing the size of government or raising taxes; those mechanisms are only valuable insofar as they reach a desired end-point. Whether the government increases or shrinks in the process is largely irrelevant.
For the right, it’s backwards — the ideological goal is the achievement.
Jon Chait had a terrific piece on this several years ago.
We’re accustomed to thinking of liberalism and conservatism as parallel ideologies, with conservatives preferring less government and liberals preferring more. The equivalency breaks down, though, when you consider that liberals never claim that increasing the size of government is an end in itself. Liberals only support larger government if they have some reason to believe that it will lead to material improvement in people’s lives. Conservatives also want material improvement in people’s lives, of course, but proving that their policies can produce such an outcome is a luxury, not a necessity.
The contrast between economic liberalism and economic conservatism, then, ultimately lies not only in different values or preferences but in different epistemologies. Liberalism is a more deeply pragmatic governing philosophy — more open to change, more receptive to empiricism, and ultimately better at producing policies that improve the human condition — than conservatism.
Now, liberalism’s pragmatic superiority wouldn’t matter to a true ideological conservative any more than news about the medical benefits of pork (to pick an imaginary example) would cause a strictly observant Jew to begin eating ham sandwiches. But, if you have no particular a priori preference about the size of government and care only about tangible outcomes, then liberalism’s aversion to dogma makes it superior as a practical governing philosophy.
Conservatives tend to prefer a different approach that decreases the role of government, not to achieve specific ends, but because decreasing the role of government is the specific end.
This, of course, affects nearly every debate in Washington. When it comes to job creation, for example, the task for Democrats is pretty straightforward: let’s do more of what’s been the most effective, and less of what’s been the least effective. Again, it’s about pragmatism and results based on evidence.
For Republicans, it doesn’t work quite that way — they have ideological ideals that outweigh evidence. GOP leaders could be shown incontrovertible proof that the most effective methods of creating jobs and improving the economy are aid to states, infrastructure investment, unemployment insurance, and food stamps, and they’d still refuse. Why? Because their ideology dictates the response.
The left starts with a policy goal (more people with access to medical care, more students with access to college, less pollution, more jobs, less financial market instability) and crafts proposals to try to complete the task. The right starts with an ideological goal (smaller government, more privatization, more deregulation) and works backwards.
These are not parallel ideologies.
Read more here
Keynesianism is just an ideology to hide corruption and political patronage
From The Economist
http://www.economist.com/debate/days/view/283
It used to be the case that most economists agreed on the major policy issues. This consensus was built through a long accumulation of empirical evidence. While any individual contribution can be criticised, it is more difficult to refute a large number all showing the same results. The force of evidence, for example, had convinced the vast majority of economists that fiscal policy was too slow and inefficient to be used in a countercyclical way. This consensus is so old and well-established that it was reflected even in my undergraduate courses when I took them in Italy more than 25 years ago. So what has happened now? Why, all of a sudden do well-respected economists, like my opponent, advocate policies that have little or no empirical support? Why do they invoke interventions they cannot justify on economic principles? Why do they claim we should all be Keynesians? This reaction is not just the result of compassion for the extreme situation we are in right now. Nobody disputes that unemployment subsidies and food stamps should be used massively to alleviate the enormous pain and suffering an increasing number of Americans are experiencing. So the question is not whether to pay idle workers (we pay them anyway), but whether to support them with an unemployment subsidy or to pay them to dig useless holes in the ground and then pay them to cover them up. Unless the project they work on is really valuable, the second strategy seems really silly. Not only are we wasting shovels and trucks in useless projects, but we are also wasting the most valuable resource: human time. While it is terrible to be unemployed, it is still preferable to the status of forced labour. But isn't it exactly what Keynesians want? Of course, there are plenty of valuable projects the government can invest in. With over-congested roads and non-existent public transportation systems, it is not hard to identify a valuable use of public money. But these projects should be argued on their own merits, not as a stimulus. If the government were careful to undertake a cost and benefit analysis of all its projects, their realisation would naturally be countercyclical. When unemployment is high and the cost of raw material is low, a lot of expensive public projects would immediately become very appealing, especially if we incorporate, as we should, that the government's additional cost of employing an unemployed worker is close to zero. Unfortunately, the Obama administration's stimulus package has very little cost and benefit analysis. It was a rush to sneak in the most wasteful projects. In fact, once you buy into the Keynesian logic, it is optimal for a politician to sneak into a stimulus package the most useless projects. The useful ones will be approved anyway. The stimulus justification becomes the best way to sell the unsellable. And since they are by choice the most unlikely projects, they are also the ones less ready and less likely to be implemented any time soon. Even worse, when the stimulus idea removes the budget constraint, it is harder to contain the lobbying pressures. I come from a country where at every recession the government ends up subsidising the national car company. I thought this was corrupt, but unique to Italy. Unfortunately, I am learning this is true in the United States too. The only difference is which the most politically powerful companies are. Is this good Keynesian policy or corrupt policy? I would vote for the latter. Keynesianism is just a convenient ideology to hide corruption and political patronage. To be fair, this is not just a problem of the Democratic party. As Brad DeLong says, the Republicans, who now want to portray themselves as the major defender of fiscal conservatism, were happy to spend and run large budget deficits when they were in power. That Republicans have committed the same crime does not make it less of a crime. Politicians like to spend others' people money when they get to spend it, not when their opponents spend it. They oppose their opponents running a deficit not out of concern for future generations, but out of mere self-interest: their opponents' deficits reduce the amount of money they will be able to spend when they eventually return to power. The most pernicious aspect of Keynesianism is that it provides a moral justification for the party in power to spend our money. That is the reason why we should not be Keynesians now or, for that matter, at any other time.
Full text can be found here
Keynesianism
Electoral Right-Wing Keynesianism: Our System of Political Economy Defined
If you want a term to concisely describe the political economic system of the United States, a useful one might be Electoral Right-Wing Keynesianism. Despite its clumsiness and non-obvious references, the term nevertheless neatly embraces the motives, programs and outlook consistent to BOTH ruling American political parties for several generations with little sign of abatement.
There are differences of course, but the main difference between the two parties is merely this: The Democrats are the Electoral Right-Wing Keynesians who dishonestly deny being right-wing, while the Republicans are the Electoral Right-Wing Keynesians who dishonestly deny being Keynesian.
The Basics: The Keynesian component.
We are all Keynesians now, Nixon accurately said of the political class, including his own Republican party, back in the early 1970s. What did that mean? Officially, it meant that our governmental economic overseers – the elected officials and the Federal Reserve -- essentially believe that government must be ever ready to provide a fiscal stimulus to the economy via aggressive spending. This is to happen by temporarily incurring high debt and even risking inflated currency. And it should be done even within an ostensibly "free" or "liberal" economy. Strictly interpreted – and it usually is not, as we shall see – such steps are supposed to take place only at those times when the economy is hurting. That program is called Keynesianism because it was most influentially advocated in modern times for a modern capitalism-oriented society by British civil servant John Maynard Keynes in the early middle 20th century.
Most would agree that for better or ill the Keynesian system does prevail in most advanced countries including the USA. But how is the American version a "right-wing" variant? How can that be? Isn’t Keynesianism a "left" idea?
Actually, and sorry to many of my fellow libertarians and to American conservatives who deludedly think otherwise, Keynesianism is not an idea sprouting from the conventional left, it is actually more of a centrist concept, with even a rightish tinge at times. It also had arightish purpose in its conception – to save an overall free enterprise system from radical insurrection and subversion in a time of economic collapse.
Nevertheless, because Keynesianism has a “command economy” premise and purpose – i.e. the government directing investment and providing for it via aggressive deficit spending -- it can be considered in general terms more left-leaning than right. And certainly in its purer form, it appeals to the political left-of-center Paul Krugman types.
But still it can have a strong right wing manifestation. And this is what we have in the USA. And it has been "right wing" not just with, nor especially with, Mr. Nixon.
Really? Where else has Keynesianism been a noteworthy right wing idea?
Well, have you ever heard of something called the supply-side economics of Ronald Reagan? Yes? Well, that was one classic form of right-wing Keynesianism.
More basics. Right-wing Keynesianism.
“Reaganomics” engaged in deficit-spending but did so via lowering or restricting taxes to well below unrestrained spending levels rather than by increasing spending. But the result is the same – deficit spending with a stimulus goal. More cash was to be in the hands of business, and to a degree, the consumer. We can call it “right-wing” because instead of Mr. Keynes’ ideas in its pure form, where targeted deficit investments in bad times were to be followed afterwards by balancing the budget in recovery times, the Reaganites sought to hold and reduce taxes permanently and ideologically, justifying this by claiming that the increased but stimulative deficit environment would magically self-correct due to increased economic activity. (Which it didn’t.) And eventually, they implied, the good Reaganites or Republicans would responsibly try to cut spending. (Which they didn’t. Go out and google, for example, the GW Bush prescription drug plan.)
This right-wing view of a magic self-correction without tax increases is not precisely pure Keynesianism, but it is a Keynesianism we can call "right-wing" in that ideologically there are never to be, or almost never to be, tax increases to make up for the stimulative deficit. That is wise conservative "right-wing" political messaging in a country founded on an anti-tax revolution and whose citizens like to keep their wealth.
And it is Keynesian in spirit at its core: Deficit –spending stimulation.
This has continued with the Bush stimulus in 2008. Of course, by not engaging in increased New Deal-style or other jacked up direct public spending investment, or not doing so obviously by restricting payment to the innards of the damaged financial sector, and also not pursing higher taxes later on, the GOPers of the more recent stimulus get away a bit with claiming to not be Keynesian. In the recent stimulus, once out of office, the Republicans verbally embraced the anti-stimulus Tea Party (originally an anti-Keynesian movement against the Bush-GOP stimulus!) and then forgot quickly that they had initiated the stimulus and its deficit financing. (Sort of like the way the Democrats “forgot” they started the Vietnam war once Nixon was in). Formal penance from the 2008 stimulus by the GOP took place in the debt-ceiling debate anyway when the Republicans pretty much rigidly opposed all tax increases designed to cover the deficit spending to which they had heartily contributed.
Meanwhile, the Democrats get to be phony leftists by complaining with compassionate fury that tax cuts are wrong and the rich are getting economic wealth unfairly. But those are ultimately only just words to steal the righteous progressivistic class warrior’s heart away. In the end, it’s "just words" because the Democrats too remain part of the same "right-wing" political economy.
How are they part of the right-wing side? They are by being fundamentally tax averse.
Tax averse? The Democrats? How?
Read more here.
If you want a term to concisely describe the political economic system of the United States, a useful one might be Electoral Right-Wing Keynesianism. Despite its clumsiness and non-obvious references, the term nevertheless neatly embraces the motives, programs and outlook consistent to BOTH ruling American political parties for several generations with little sign of abatement.
There are differences of course, but the main difference between the two parties is merely this: The Democrats are the Electoral Right-Wing Keynesians who dishonestly deny being right-wing, while the Republicans are the Electoral Right-Wing Keynesians who dishonestly deny being Keynesian.
The Basics: The Keynesian component.
We are all Keynesians now, Nixon accurately said of the political class, including his own Republican party, back in the early 1970s. What did that mean? Officially, it meant that our governmental economic overseers – the elected officials and the Federal Reserve -- essentially believe that government must be ever ready to provide a fiscal stimulus to the economy via aggressive spending. This is to happen by temporarily incurring high debt and even risking inflated currency. And it should be done even within an ostensibly "free" or "liberal" economy. Strictly interpreted – and it usually is not, as we shall see – such steps are supposed to take place only at those times when the economy is hurting. That program is called Keynesianism because it was most influentially advocated in modern times for a modern capitalism-oriented society by British civil servant John Maynard Keynes in the early middle 20th century.
Most would agree that for better or ill the Keynesian system does prevail in most advanced countries including the USA. But how is the American version a "right-wing" variant? How can that be? Isn’t Keynesianism a "left" idea?
Actually, and sorry to many of my fellow libertarians and to American conservatives who deludedly think otherwise, Keynesianism is not an idea sprouting from the conventional left, it is actually more of a centrist concept, with even a rightish tinge at times. It also had arightish purpose in its conception – to save an overall free enterprise system from radical insurrection and subversion in a time of economic collapse.
Nevertheless, because Keynesianism has a “command economy” premise and purpose – i.e. the government directing investment and providing for it via aggressive deficit spending -- it can be considered in general terms more left-leaning than right. And certainly in its purer form, it appeals to the political left-of-center Paul Krugman types.
But still it can have a strong right wing manifestation. And this is what we have in the USA. And it has been "right wing" not just with, nor especially with, Mr. Nixon.
Really? Where else has Keynesianism been a noteworthy right wing idea?
Well, have you ever heard of something called the supply-side economics of Ronald Reagan? Yes? Well, that was one classic form of right-wing Keynesianism.
More basics. Right-wing Keynesianism.
“Reaganomics” engaged in deficit-spending but did so via lowering or restricting taxes to well below unrestrained spending levels rather than by increasing spending. But the result is the same – deficit spending with a stimulus goal. More cash was to be in the hands of business, and to a degree, the consumer. We can call it “right-wing” because instead of Mr. Keynes’ ideas in its pure form, where targeted deficit investments in bad times were to be followed afterwards by balancing the budget in recovery times, the Reaganites sought to hold and reduce taxes permanently and ideologically, justifying this by claiming that the increased but stimulative deficit environment would magically self-correct due to increased economic activity. (Which it didn’t.) And eventually, they implied, the good Reaganites or Republicans would responsibly try to cut spending. (Which they didn’t. Go out and google, for example, the GW Bush prescription drug plan.)
This right-wing view of a magic self-correction without tax increases is not precisely pure Keynesianism, but it is a Keynesianism we can call "right-wing" in that ideologically there are never to be, or almost never to be, tax increases to make up for the stimulative deficit. That is wise conservative "right-wing" political messaging in a country founded on an anti-tax revolution and whose citizens like to keep their wealth.
And it is Keynesian in spirit at its core: Deficit –spending stimulation.
This has continued with the Bush stimulus in 2008. Of course, by not engaging in increased New Deal-style or other jacked up direct public spending investment, or not doing so obviously by restricting payment to the innards of the damaged financial sector, and also not pursing higher taxes later on, the GOPers of the more recent stimulus get away a bit with claiming to not be Keynesian. In the recent stimulus, once out of office, the Republicans verbally embraced the anti-stimulus Tea Party (originally an anti-Keynesian movement against the Bush-GOP stimulus!) and then forgot quickly that they had initiated the stimulus and its deficit financing. (Sort of like the way the Democrats “forgot” they started the Vietnam war once Nixon was in). Formal penance from the 2008 stimulus by the GOP took place in the debt-ceiling debate anyway when the Republicans pretty much rigidly opposed all tax increases designed to cover the deficit spending to which they had heartily contributed.
Meanwhile, the Democrats get to be phony leftists by complaining with compassionate fury that tax cuts are wrong and the rich are getting economic wealth unfairly. But those are ultimately only just words to steal the righteous progressivistic class warrior’s heart away. In the end, it’s "just words" because the Democrats too remain part of the same "right-wing" political economy.
How are they part of the right-wing side? They are by being fundamentally tax averse.
Tax averse? The Democrats? How?
Read more here.
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