The Keynesian Dead End: Spending our way to prosperity is going out of style.

[Grim17]

This article shouldn't come as a suprise to many.

The Keynesian Dead End
Spending our way to prosperity is going out of style.

Today's G-20 meeting has been advertised as a showdown between the U.S. and Europe over more spending "stimulus," and so it is. But the larger story is the end of the neo-Keynesian economic moment, and perhaps the start of a healthier policy turn.

For going on three years, the developed world's economic policy has been dominated by the revival of the old idea that vast amounts of public spending could prevent deflation, cure a recession, and ignite a new era of government-led prosperity. It hasn't turned out that way.

Now the political and fiscal bills are coming due even as the U.S. and European economies are merely muddling along. The Europeans have had enough and want to swear off the sauce, while the Obama Administration wants to keep running a bar tab. So this would seem to be a good time to examine recent policy history and assess the results.

The Keynesian Dead End - WSJ.com

 

[samsmart]

This article shouldn't come as a suprise to many.



The Keynesian Dead End - WSJ.com

You're absolutely right. The government cannot continue spending money on all this government debt. So the U.S. should end the 4 wars it's currently fighting, slash the defense budget dramatically, and start focusing more on domestic issues rather than foreign wars. I'm glad conservatives finally see the sense in all this.

 

[RightinNYC]

You're absolutely right. The government cannot continue spending money on all this government debt. So the U.S. should end the 4 wars it's currently fighting, slash the defense budget dramatically, and start focusing more on domestic issues rather than foreign wars. I'm glad conservatives finally see the sense in all this.

Iraq, Afghanistan,....?

 

[jking948]

We are in a confusing economic time right now. No one can say that Keynesian economics has worked because it hasn't, the opposite has happened, it has failed miserably. However to fix our economy we can't simply adopt a system of tax and spending cuts. I realize it is the polar opposite to Kenesianism but the issues are very similar in that it may not create economic growth. In my mind war spending(Iraq, Afghanistan) needs to be slowly removed, the military triad needs to be removed to a dyad, a value-added tax needs to be instituted, a higher tax on the wealthy(small, lets say 36-38%, amount but still higher), reduce government spending, and lower interest rates to increase public participation. I realize it isn't perfect and it probably wouldn't help all that much, but in my young mind this is how I imagine the best way to slowly lead to economic recovery.

P.S.: I don't have that much education(only a senior in highschool) in terms of the theories of economics, so I realize I may be way off, if I am I would love to understand why so thank you

 

[samsmart]

Iraq, Afghanistan,....?

...Global Terror and Drugs.

 

[samsmart]

We are in a confusing economic time right now. No one can say that Keynesian economics has worked because it hasn't, the opposite has happened, it has failed miserably.

One could argue that it's not the case that Keynesian economics hasn't worked, just that it's been misapplied.

One of the tenets of Keynesian economics is that during a major economic crisis the government should spur the economy using it's debt because the government is the only organization large enough and stable enough to do so. This is why Democrats are advocates of stimulus spending using the power of the government debt.

However, the U.S. government is already deeply in debt, but not due to a financial crisis. Instead, it is due to spending to pay for the wars in the Middle East. This was done by the Republicans as an alternative to raising taxes in order to pay for the war. The GOP wanted to vastly increase government spending without raising taxes to pay for them so voters would not have their standards of living changed and thus be relatively unaffected by the costs of the wars.

This was because the GOP did not foresee the economic fall that would result from the housing and credit booms finally busting. Now that we are in a real economic crisis, we do not have the power of government debt to prop us up. It had already been used by the Republicans to fight the wars in the Middle East.

Now, I don't see any thing we can do besides start cutting government services while increasing taxes. Defense spending is our nation's major expenditure, and only the wealthiest can pay the taxes necessary to pay down the government debt without losing their standard of living.

Maybe if we had better politicians in power who properly applied Keynesian theory instead of using it to get elected, we wouldn't be in this mess.

However to fix our economy we can't simply adopt a system of tax and spending cuts. I realize it is the polar opposite to Kenesianism but the issues are very similar in that it may not create economic growth. In my mind war spending(Iraq, Afghanistan) needs to be slowly removed, the military triad needs to be removed to a dyad, a value-added tax needs to be instituted, a higher tax on the wealthy(small, lets say 36-38%, amount but still higher), reduce government spending, and lower interest rates to increase public participation. I realize it isn't perfect and it probably wouldn't help all that much, but in my young mind this is how I imagine the best way to slowly lead to economic recovery.

No, we shouldn't have any more tax cuts. We should have some spending cuts, but we should increase taxes on certain sectors of our economy. We're just going to have to in order to pay down enough of our government debt to gain more faith in the power of our nation's credit.

P.S.: I don't have that much education(only a senior in highschool) in terms of the theories of economics, so I realize I may be way off, if I am I would love to understand why so thank you

Sir, I think you have a better intuitive grasp of economics than many of our elected officials do.

 

[jujuman13]

...Global Terror and Drugs.

I equate Afghanistan war as being a war against Global Terror.

With respect to what you call the war on Drugs, no US Government has or will in future have the guts to deal with it in the only truly effective way.
Until such time as having possession of a certain percentage of any drug is legalized and if anyone found to possess more than the legal amount receives an automatic death sentence, the drug problem will never be solved.
Additionally to that i would suggest that the Government through local pharmacies take over drug distribution and sale. This would automatically remove drug gangs and drug cartels.

 

[the makeout hobo]

I equate Afghanistan war as being a war against Global Terror.

With respect to what you call the war on Drugs, no US Government has or will in future have the guts to deal with it in the only truly effective way.
Until such time as having possession of a certain percentage of any drug is legalized and if anyone found to possess more than the legal amount receives an automatic death sentence, the drug problem will never be solved.
Additionally to that i would suggest that the Government through local pharmacies take over drug distribution and sale. This would automatically remove drug gangs and drug cartels.

It could easily be argued that execution for having too much weed or whatever could violate the "no cruel and unusual punishment" amendment

 

[jking948]

Now, I don't see any thing we can do besides start cutting government services while increasing taxes. Defense spending is our nation's major expenditure, and only the wealthiest can pay the taxes necessary to pay down the government debt without losing their standard of living.

Maybe if we had better politicians in power who properly applied Keynesian theory instead of using it to get elected, we wouldn't be in this mess.

Thank you for the explanation, I now realize I didn't understand before and after reading your post and doing some further research I believe I understand Keynesianism better. As you said though the only way out of the mess we are in now, because of a mix of Keynesianst(even if it may work the fact is that for a period of time it failed) and the fact that NO politician could predict the "pop" of the housing bubbles, is to decrease spending and increase taxes.

I believe trickle-down in theory is an amazing idea, but that is where it ends, when it is applied it doesn't work. Its not because people are greedy, but the fact is if you own a big business and got tax cuts the first thing you are going to do wont be donate to charity or hire 5 new workers. It will be either saving the extra money you have gained, or investing it in stocks. That is what I view as happening right now at least.

Sir, I think you have a better intuitive grasp of economics than many of our elected officials do.

Thank you very much, and if it means anything, I would like to thank you again for your explanation.

 

[The Uncola]

Where the hell were all of you "fiscal conservatives" when George W Bush and his Republican Congress were spending like drunken sailors on leave with a pocket full of credit cards?

Oh, that's right...

... blowing up other nations and killing uncounted of thousands of people is something you can ALWAYS seem to find the funds to do.

 

[Renae]

Education with pictures! For all you "Slash defense spending" types that think that's where the waste is:

2005

2007

Coulldn't find one for 09, and now I'm off for some breakfast... but I'll leave you this as food for thought:

 

[The Uncola]

Education with pictures! For all you "Slash defense spending" types that think that's where the waste is:

2005

2007

Coulldn't find one for 09, and now I'm off for some breakfast... but I'll leave you this as food for thought:

Poppycock.

What your pretty little "pictures" don't show, is the hundreds of billion$ that the BushCheney Warcorp HID as "off budget" expeditures.

Figures lie, and liars figure.

 

[Kushinator]

We are in a confusing economic time right now. No one can say that Keynesian economics has worked because it hasn't, the opposite has happened, it has failed miserably.

Depends on how you look at it and what you know of Keynes. Keynesian stablization policies are intended for just that, stablization. It is not about acheiving economic growth (that would be pro growth policies, quite different in intentions than what Keyns had in mind).

However to fix our economy we can't simply adopt a system of tax and spending cuts. I realize it is the polar opposite to Kenesianism but the issues are very similar in that it may not create economic growth. In my mind war spending(Iraq, Afghanistan) needs to be slowly removed, the military triad needs to be removed to a dyad, a value-added tax needs to be instituted, a higher tax on the wealthy(small, lets say 36-38%, amount but still higher), reduce government spending, and lower interest rates to increase public participation. I realize it isn't perfect and it probably wouldn't help all that much, but in my young mind this is how I imagine the best way to slowly lead to economic recovery.

What you have yet to consider is how spending cuts affect demand. Spending cuts accompany job losses for the most part, which can only exaserbate the issues of the moment. While i am open to the idea of a VAT in the absence of a federal income tax, such a scenario is just a dream. Tax cuts (regardless of spending reduction) could be seen as a sign of fiscal irresponsibility by creditors, of which can spill over into credit markets forcing the cost of longer term issuance to skyrocket. The key is shoring up demand.

To give you a head start, Keynes once famously said:

But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

 

[Renae]

Poppycock.

What your pretty little "pictures" don't show, is the hundreds of billion$ that the BushCheney Warcorp HID as "off budget" expeditures.

Figures lie, and liars figure.

Social Spending > Military. Until you can admit that, you will never be taken seriously.

 

[RightinNYC]

Poppycock.

What your pretty little "pictures" don't show, is the hundreds of billion$ that the BushCheney Warcorp HID as "off budget" expeditures.

Figures lie, and liars figure.

Thankfully, Obama put an end to that shameful practice, bringing the war and Social Security (among other things) back on-budget.

Fannie, Freddie Kept Off Budget, Dividends Counted (Update2) - BusinessWeek

FOXNews.com - Obama Administration Makes Emergency Funding Request for Teachers

 

[Lord Tammerlain]

Thankfully, Obama put an end to that shameful practice, bringing the war and Social Security (among other things) back on-budget.

Fannie, Freddie Kept Off Budget, Dividends Counted (Update2) - BusinessWeek

FOXNews.com - Obama Administration Makes Emergency Funding Request for Teachers

Fannie and Freddie are a somewhat unique case as their debts are sopposed to be covered by the homeowners who took out the mortgage. So putting the entire 5 trillion onto the US gov balance sheet would be misleading. Puttiing the expected bad debt would reasonable

 

[obvious Child]

This article shouldn't come as a suprise to many.

The Keynesian Dead End - WSJ.com

Huh. Tools that work aganist normal recessions failed to cure a financial/liquidity recession?

Is that suppose to be news?

Obama employed the same tricks as Reagan and Bush. Except that Reagan and Bush didn't have a financial/liqudity based recession. I'm not going to bother asking people for tools aganist a financial/liqudity recession. I know you don't get it.

The problem with what Europe wants is it condemns itself to virtual no growth. That might be alright with virtual no population growth, but that will not work for America.