It wouldn't shock me if people use SAS for aircraft design. Store and create all the statistics on maintenance issues over a fleet of planes over a decade or more. That sounds like the kind of thing one would use SAS for.
First off the amount of regulations increased. The level of enforcement fell off a cliff. Particular types of regulations were enforced but they were very narrow. Also these problems happened under Clinton as well.
As investment with traditional banking Wachovia ring a bell?
keynesian economics postulates that you can drag a country out of a depression through spending, in order to discourage "idle money", the idea is to keep money circulating rather than "horded."
The problem is that money is representative of work already done, things already produced.
Be careful here. This is a major difference between Austrian economics and Keynesian. For Keynes money is just a medium of exchange, in terms of what is available it is just goods not "work already done".
BY using government intervention to stimulate demand, you aren't stimulating production, you're causing inflation.
I think you mean monetary intervention, otherwise you are arguing the government doesn't act like any other player in the system.
That is of course the idea- prices increase enough to make producing that product worth while...
No that is not the idea. The idea is that real prices on the product are essentially flat while real prices on components particularly labor decrease. That is it reduces the friction in structural adjustments. In other words it is easier for some wages to rise than for some wages to fall, so if the "free market" needs to shift wages around the there will be less friction in an inflationary environment.
Now on to the hypothysis that intervention on the part of the state can help things along- how is this theoretically done? *jobs through government projects- to do what?
Public investment projects. Things like: roads, electricity grid, airports, IT infrastructure like fiber optics or government software, durable military goods.
*adjust inflation rates... higher rates to control inflation, lower to make the cost of loans artificially low... the problem is that interest rates are representative of the risk of the borrower- higher rates discourage all but near emergency loans, low rates encourage less productive tasks be financed through loans. why don't the feds lower the rates all the time to encourage the creation of wealth through investment/expansion via loans all the time?
There are 3 components to a interest rate:
1) Base rate on short term money 2) Duration risk (i.e. the yield curve is sloped upwards, the borrower not having to renew has to pay more) 3) Default risk
When the Fed sets the short term interest rate they are setting rate 1. That is a risk free rate.
1) deflation is the "enemy" it encourages saving and discourages wasteful spending
Excluding trade, there cannot be net savings in an economy.
it causes excessive inflation, the large increase in the supply of money devalues it, destroying wealth.
How is wealth destroyed? It is transferred from one person to another perhaps but the "stuff" in the economy remains the same and the productive capacity remains the same.
As for the biology metaphor, if you want to think of the economy as a body; then deflation is a heart attack and Keynesianism is chest compressions.
Hold on. I'll agree with you on average. But there is an issue here:
Assume because of a non economic factor that company A has a cost of capital of 5% and B a cost of capital of 10%.
Then most likely B has all sorts of internal investment opportunities which would yield 6-9% available. Assume that factor were to go away. Even if B did a bad job and picked suboptimal investments (say the 7% investments) and A did a perfect job picking only 5% investments B could still allocate capital more efficiently.
In the USA we have had an excess of private investment capital, and a shortage of public investment capital because of Republican policies. That means the government doesn't need to be as good to still generate return in this environment.
The reason I wanted to ignore trade is that trade has nothing to do with under stimulation.
We have a floating currency so trade deficit = balance of payments defecit There is no wealth to siphon off. The only thing you can do with dollars is: save them invest them back in the US buy US stuff buy US labor
That is right now people want lots of little green pieces of paper and trade labor/goods for it. That's a plus for the economy as a whole though it can be quite destructive to individuals. We are talking in Keynesian terms so we look at the economy as a whole.
1) Keynes does not require the aggregates to be constant I don't know Rothbard got that idea. They can be any function with bounded variation
2) Our means of statistical collection have improved quite a bit since the 1930s the things Rothbard is saying we can't determine we do determine quite accurately on a regular basis.
3) Rothbard is incorrect regarding Keynes and employment & wages. He is correct if you assume 0% productivity growth i.e. no investment.
Carter administration was the end of the period where monetary stimulus was being applied during inflationary recessions. Keynes would have advocated something similar to what Volker did. So I'd score this was as pro Keynes. What it contradicted was neo-Keynesian ideas about having to use Keynesian means in inflationary recessions.
Window fallacy -- Not a Keynesian concept
Japan's failed attempt to spend out of recession -- They didn't kill the deflation problem via. monetary stimulus. Also Keynes didn't advocate worthless public works projects. Things like direct equity injections would have been better.
So in 2 of the three cases you don't have Keynesianism failing you have it not even being implemented. And one is just some sort of Keynesianism taken to an extreme.
Our economy is not being run in a Keynesian fashion. Starting with Carter we moved away from Keynesian economics and by now we are highly non Keynesian.
1) I disagree about the Republicans doing well. I'm of the opinion that modern Republicans are just go-slow socialists, and modern Democrats are go-fast socialists. It didn't use to be this way, but I think both parties are catering to an ignorant populace that just wants grain out of the public treasury. They just differ on moral issues.
I just meant doing well in terms of the elections. That is Republicans have managed to shift America's balance of investment towards the private sector and create a deficit in public investment.
2) Maybe so, but I don't think it's up to the government to redistribute it. I think that should be left to the private sector.
This is the key point in Keynesianism. The free market is not going to be able to allocation idle resources quickly. There is a demand shortage, so this capacity is quite literally available to a player like the government that operates outside the system "for free".
I agree that the government could invest wisely, but looking at the current balance sheets convinces me that that won't happen. Building roads and other infrastructure is a good use of money, but I'm afraid most of the Keynesian boosters will go towards social programs which won't return the investment.
Do you mean social investment or increased consumption? It sort of sounded like you meant social programs which are consumption not investment oriented. The issue of what is the proper allocation between consumption and investment is tangential to this whole debate about stimulus.
1) I'm not sure what these conditions are.
The conditions under which money is effectively idle are conditions where investment capitol exceeds investment demand. This causes the price of investment to drop (i.e. lower interest rates). Under normal conditions or over long enough terms lower interest rates will create investment demand (i.e. lower prices boost demand). But investment demand is determined by real interest rates for risk so if:
1) People are pricing risk high 2) We have low inflation or worse yet deflation
You can have a situation where nominal interest rates are low but real interest rates for borrowers are high and thus there is a structural investment shortage, the money is sitting idle.
The easy solution is for the government to just borrow that money up and directly invest.
2) If this money is fiat, doesn't that mean it's creating inflation?
It could or deflation. Oversimplifying a lot: too much money in the system as a whole = inflation
too little money in the system as a whole = deflation
Government determines the amount of money in the system.
3) Ok, I'll give you that, but for every fiscal Clinton there are a dozen fiscal Obamas. The balance is way, way out, and I don't think our population has it in them correct it and shun addictive spending.
I agree. And if that were even among top 5 problems right now I'd be in favor of reigning in spending.
Yep. And when we start seeing a problem where large numbers of people want to work shorter hours or take easy jobs (like we had in the 1970s) we can worry about the fact that incentives are now too low.
Are those the sorts of problems we have right now as a society?
I don't think it is a question of allocating all resources or an either/or choice. I think the free market generally does a good job but sometimes doesn't. To pick another example in general the free market for pricing works well creating the right level of output. Sometimes however pricing distortions are harmful so thinks like rationing, high levels of regulation or price controls can be useful.
For example:
rationing: When the cause of the shortage is well known and easy to overcome over the mid-long term. Often the goal is to have the good distributed in a least disruptive fashion to the rest of the economy, which doesn't necessarily correspond with distribution to highest points of demand which is what free pricing would achieve.
regulation: when costs are not born almost entirely by the seller or purchaser. For example environmental impacts of production or disposal.
price controls: Very useful when the government wants output above or below market level. Defense needs can be an example of this.
In other words the free market is a good tool for a society to allocate resources, but it just one of the tools.
1) On the addictive nature, absolutely true. This is a real risk. But right now because the Republicans have done so well for so long our public infrastructure is heavily underfunded so even if there was a binge it would be highly productive.
2) Crowding: Not relevant in a recession. We have idle capacity right now.
I'd object to your assumption that government jobs are "busy work". There is no reason that governments cannot do investment spending, and given their longer time horizon and the underfunding I mentioned might be in a better position to do investment spending.
As for your three problems:
1) Keynes does not assume money in a bank is idle. He argues that money in a bank can be effectively idle under certain conditions.
2) In Keynesian economics money does not "come from somewhere else" because it is fiat. I think what you meant to say was "It ignores the fact that investment the government performs can displace private investment". Now that makes sense, it is however false. Keynes most certainly does not ignore that he has lots of equations which specifically deal with how much displacement will occur.
3) A guy by the name of Bill Clinton raised taxes and reigned in spending.
Because most of the taxes under the current scheme would go to the very rich. Now if you were to for example give $3k to every man woman and child in the US that would also be $800b and you would get some debt relief and the banks would be liquid. But even lowering taxes on the middle class a few percent while raising them slightly on the rich is so controversial that Obama got called a socialist
Well I'd presume the plan to resolve high debt:gdp in a fiat system is what it usually is. Debt is in nominal dollars while gdp is in real dollars. Inflation can adjust the one while having little effect on the other.
His [the link's] analysis of the M1:M ratio is silly. This probably just represents a drop off of checkable deposits which is a money shortage. If the Federal Reserve were to buy all the debt in the US we might have hyperinflation but we wouldn't have a debt overhang. The link is just plain wrong.
Agree with all you said. Except for one thing, in a recession there is idle capitol. It is not being taken away from other productive uses it is being reallocated from non productive to productive.
The problems we are having are in general a result of deregulation. For example conflicts of interest between the buy side and the sell side of a brokerage. Or conflicts of interest between the investment banking arm of a bank and the traditional arm. Or conflicts of interest between stockholders and bondholders, or executives and boards of directors.
That is precisely the kinds of problems that government "getting in the way" is good at fixing.
First off the governments in some places do actually build roads. But more importantly the shift from governments performing work to governments hiring companies to do work was an efficiency measure called specialization of labor that business engages in as well.
As for the free market allocating resources well, that's precisely the problem it hasn't and it doesn't. It does a fairly good job most of the time and in most instances, but it can do a spectacularly bad job particularly when the people allocating the resources have different incentives from the people whose resources are being allocated. Which is precisely the problem we have in the investment community.
The problem our society is having is because of the culture of corporate corruption that has developed, our corporations are much more wasteful than our governments. I don't think you can show much evidence that government spending isn't producing quite a bit of value per dollar as contrasted with private (particularly large corporate) spending.
Slashdot Mirror
Look at the figures, this is public data. There aren't enough of you paying $25k.
It wouldn't shock me if people use SAS for aircraft design. Store and create all the statistics on maintenance issues over a fleet of planes over a decade or more. That sounds like the kind of thing one would use SAS for.
First off the amount of regulations increased. The level of enforcement fell off a cliff. Particular types of regulations were enforced but they were very narrow. Also these problems happened under Clinton as well.
As investment with traditional banking Wachovia ring a bell?
keynesian economics postulates that you can drag a country out of a depression through spending, in order to discourage "idle money", the idea is to keep money circulating rather than "horded."
The problem is that money is representative of work already done, things already produced.
Be careful here. This is a major difference between Austrian economics and Keynesian. For Keynes money is just a medium of exchange, in terms of what is available it is just goods not "work already done".
BY using government intervention to stimulate demand, you aren't stimulating production, you're causing inflation.
I think you mean monetary intervention, otherwise you are arguing the government doesn't act like any other player in the system.
That is of course the idea- prices increase enough to make producing that product worth while...
No that is not the idea. The idea is that real prices on the product are essentially flat while real prices on components particularly labor decrease. That is it reduces the friction in structural adjustments. In other words it is easier for some wages to rise than for some wages to fall, so if the "free market" needs to shift wages around the there will be less friction in an inflationary environment.
Now on to the hypothysis that intervention on the part of the state can help things along- how is this theoretically done? *jobs through government projects- to do what?
Public investment projects. Things like: roads, electricity grid, airports, IT infrastructure like fiber optics or government software, durable military goods.
*adjust inflation rates... higher rates to control inflation, lower to make the cost of loans artificially low... the problem is that interest rates are representative of the risk of the borrower- higher rates discourage all but near emergency loans, low rates encourage less productive tasks be financed through loans. why don't the feds lower the rates all the time to encourage the creation of wealth through investment/expansion via loans all the time?
There are 3 components to a interest rate:
1) Base rate on short term money
2) Duration risk (i.e. the yield curve is sloped upwards, the borrower not having to renew has to pay more)
3) Default risk
When the Fed sets the short term interest rate they are setting rate 1. That is a risk free rate.
1) deflation is the "enemy" it encourages saving and discourages wasteful spending
Excluding trade, there cannot be net savings in an economy.
it causes excessive inflation, the large increase in the supply of money devalues it, destroying wealth.
How is wealth destroyed? It is transferred from one person to another perhaps but the "stuff" in the economy remains the same and the productive capacity remains the same.
As for the biology metaphor, if you want to think of the economy as a body; then deflation is a heart attack and Keynesianism is chest compressions.
Hold on. I'll agree with you on average. But there is an issue here:
Assume because of a non economic factor that company A has a cost of capital of 5% and B a cost of capital of 10%.
Then most likely B has all sorts of internal investment opportunities which would yield 6-9% available. Assume that factor were to go away. Even if B did a bad job and picked suboptimal investments (say the 7% investments) and A did a perfect job picking only 5% investments B could still allocate capital more efficiently.
In the USA we have had an excess of private investment capital, and a shortage of public investment capital because of Republican policies. That means the government doesn't need to be as good to still generate return in this environment.
The reason I wanted to ignore trade is that trade has nothing to do with under stimulation.
We have a floating currency so
trade deficit = balance of payments defecit
There is no wealth to siphon off. The only thing you can do with dollars is:
save them
invest them back in the US
buy US stuff
buy US labor
That is right now people want lots of little green pieces of paper and trade labor/goods for it. That's a plus for the economy as a whole though it can be quite destructive to individuals. We are talking in Keynesian terms so we look at the economy as a whole.
No you aren't understanding.
Assume have an economy with a debt of 2k at 7%. a gdp of k and 100% growth in GDP (say 97% inflation and 3% real growth).
debt:gdp .57
Year 0: 2k::k = 2
Year 1: 2.14k::2k = 1.07
Year 2: 2.23k : 4k =
etc...
There is just barely enough Federal income tax from low wage earners to get to $800b. There is no way to get that much fairly.
On the other hand if you were to raise the deductions, you could pull a nice chunk of the $800b off fairly.
Good article. Here is how I would counter:
1) Keynes does not require the aggregates to be constant I don't know Rothbard got that idea. They can be any function with bounded variation
2) Our means of statistical collection have improved quite a bit since the 1930s the things Rothbard is saying we can't determine we do determine quite accurately on a regular basis.
3) Rothbard is incorrect regarding Keynes and employment & wages. He is correct if you assume 0% productivity growth i.e. no investment.
Good answers lets address them:
Carter administration was the end of the period where monetary stimulus was being applied during inflationary recessions. Keynes would have advocated something similar to what Volker did. So I'd score this was as pro Keynes. What it contradicted was neo-Keynesian ideas about having to use Keynesian means in inflationary recessions.
Window fallacy -- Not a Keynesian concept
Japan's failed attempt to spend out of recession -- They didn't kill the deflation problem via. monetary stimulus. Also Keynes didn't advocate worthless public works projects. Things like direct equity injections would have been better.
So in 2 of the three cases you don't have Keynesianism failing you have it not even being implemented. And one is just some sort of Keynesianism taken to an extreme.
Our economy is not being run in a Keynesian fashion. Starting with Carter we moved away from Keynesian economics and by now we are highly non Keynesian.
Thank you for a reasonable reply.
1) I disagree about the Republicans doing well. I'm of the opinion that modern Republicans are just go-slow socialists, and modern Democrats are go-fast socialists. It didn't use to be this way, but I think both parties are catering to an ignorant populace that just wants grain out of the public treasury. They just differ on moral issues.
I just meant doing well in terms of the elections. That is Republicans have managed to shift America's balance of investment towards the private sector and create a deficit in public investment.
2) Maybe so, but I don't think it's up to the government to redistribute it. I think that should be left to the private sector.
This is the key point in Keynesianism. The free market is not going to be able to allocation idle resources quickly. There is a demand shortage, so this capacity is quite literally available to a player like the government that operates outside the system "for free".
I agree that the government could invest wisely, but looking at the current balance sheets convinces me that that won't happen. Building roads and other infrastructure is a good use of money, but I'm afraid most of the Keynesian boosters will go towards social programs which won't return the investment.
Do you mean social investment or increased consumption? It sort of sounded like you meant social programs which are consumption not investment oriented. The issue of what is the proper allocation between consumption and investment is tangential to this whole debate about stimulus.
1) I'm not sure what these conditions are.
The conditions under which money is effectively idle are conditions where investment capitol exceeds investment demand. This causes the price of investment to drop (i.e. lower interest rates). Under normal conditions or over long enough terms lower interest rates will create investment demand (i.e. lower prices boost demand). But investment demand is determined by real interest rates for risk so if:
1) People are pricing risk high
2) We have low inflation or worse yet deflation
You can have a situation where nominal interest rates are low but real interest rates for borrowers are high and thus there is a structural investment shortage, the money is sitting idle.
The easy solution is for the government to just borrow that money up and directly invest.
2) If this money is fiat, doesn't that mean it's creating inflation?
It could or deflation. Oversimplifying a lot:
too much money in the system as a whole = inflation
too little money in the system as a whole = deflation
Government determines the amount of money in the system.
3) Ok, I'll give you that, but for every fiscal Clinton there are a dozen fiscal Obamas. The balance is way, way out, and I don't think our population has it in them correct it and shun addictive spending.
I agree. And if that were even among top 5 problems right now I'd be in favor of reigning in spending.
The statistics show the exact opposite. Median income is higher among democrats.
Further, considering that the government is NEVER as efficient at allocating capital as the private market is
Do you have any evidence for that?
Yep. And when we start seeing a problem where large numbers of people want to work shorter hours or take easy jobs (like we had in the 1970s) we can worry about the fact that incentives are now too low.
Are those the sorts of problems we have right now as a society?
I don't think it is a question of allocating all resources or an either/or choice. I think the free market generally does a good job but sometimes doesn't. To pick another example in general the free market for pricing works well creating the right level of output. Sometimes however pricing distortions are harmful so thinks like rationing, high levels of regulation or price controls can be useful.
For example:
rationing: When the cause of the shortage is well known and easy to overcome over the mid-long term. Often the goal is to have the good distributed in a least disruptive fashion to the rest of the economy, which doesn't necessarily correspond with distribution to highest points of demand which is what free pricing would achieve.
regulation: when costs are not born almost entirely by the seller or purchaser. For example environmental impacts of production or disposal.
price controls: Very useful when the government wants output above or below market level. Defense needs can be an example of this.
In other words the free market is a good tool for a society to allocate resources, but it just one of the tools.
You would have to replace where the payroll taxes would have gone to: social security, medicare, unemployment insurance....
But yeah I'd have no problem with that.
Thank you for a reasonable post.
1) On the addictive nature, absolutely true. This is a real risk. But right now because the Republicans have done so well for so long our public infrastructure is heavily underfunded so even if there was a binge it would be highly productive.
2) Crowding: Not relevant in a recession. We have idle capacity right now.
I'd object to your assumption that government jobs are "busy work". There is no reason that governments cannot do investment spending, and given their longer time horizon and the underfunding I mentioned might be in a better position to do investment spending.
As for your three problems:
1) Keynes does not assume money in a bank is idle. He argues that money in a bank can be effectively idle under certain conditions.
2) In Keynesian economics money does not "come from somewhere else" because it is fiat. I think what you meant to say was "It ignores the fact that investment the government performs can displace private investment". Now that makes sense, it is however false. Keynes most certainly does not ignore that he has lots of equations which specifically deal with how much displacement will occur.
3) A guy by the name of Bill Clinton raised taxes and reigned in spending.
Because most of the taxes under the current scheme would go to the very rich. Now if you were to for example give $3k to every man woman and child in the US that would also be $800b and you would get some debt relief and the banks would be liquid. But even lowering taxes on the middle class a few percent while raising them slightly on the rich is so controversial that Obama got called a socialist
Well I'd presume the plan to resolve high debt:gdp in a fiat system is what it usually is. Debt is in nominal dollars while gdp is in real dollars. Inflation can adjust the one while having little effect on the other.
His [the link's] analysis of the M1:M ratio is silly. This probably just represents a drop off of checkable deposits which is a money shortage. If the Federal Reserve were to buy all the debt in the US we might have hyperinflation but we wouldn't have a debt overhang. The link is just plain wrong.
Agree with all you said. Except for one thing, in a recession there is idle capitol. It is not being taken away from other productive uses it is being reallocated from non productive to productive.
The problems we are having are in general a result of deregulation. For example conflicts of interest between the buy side and the sell side of a brokerage. Or conflicts of interest between the investment banking arm of a bank and the traditional arm. Or conflicts of interest between stockholders and bondholders, or executives and boards of directors.
That is precisely the kinds of problems that government "getting in the way" is good at fixing.
First off the governments in some places do actually build roads. But more importantly the shift from governments performing work to governments hiring companies to do work was an efficiency measure called specialization of labor that business engages in as well.
As for the free market allocating resources well, that's precisely the problem it hasn't and it doesn't. It does a fairly good job most of the time and in most instances, but it can do a spectacularly bad job particularly when the people allocating the resources have different incentives from the people whose resources are being allocated. Which is precisely the problem we have in the investment community.
The problem our society is having is because of the culture of corporate corruption that has developed, our corporations are much more wasteful than our governments. I don't think you can show much evidence that government spending isn't producing quite a bit of value per dollar as contrasted with private (particularly large corporate) spending.