Friday, December 30, 2011

Keynes was and always will be wrong

Here we go again. Paul Krugman not only attacks the Law of Cause and Effect (substituting Effect for Cause), but also manages to fracture history a bit. However, given that he has claimed that Ronald Reagan was the architect of business and financial deregulation -- thus confusing Reagan with Jimmy Carter and Ted Kennedy -- it is safe to say that Krugman is not a particularly good economic historian.

Apparently, Krugman believes that governments are not running large enough deficits and are not spending enough money, although much of the spending he is demanding comes from accumulation of massive debt (which Krugman believes later can happily be inflated away). In his own words:
“The boom, not the slump, is the right time for austerity at the Treasury.” So declared John Maynard Keynes in 1937, even as F.D.R. was about to prove him right by trying to balance the budget too soon, sending the United States economy — which had been steadily recovering up to that point — into a severe recession. Slashing government spending in a depressed economy depresses the economy further; austerity should wait until a strong recovery is well under way.
Governments around the world, claims Krugman, could have had us in recovery had they just borrowed and spent enough. Of course, the massive borrowing ONLY could have been financed by central banks, and especially the Federal Reserve System, and the only way such a scheme could have been hatched was the central banks creating "money" from thin air. In other words, Krugman is excoriating governments for not getting their finance arms -- central banks -- to print enough money, as though printing money is the key to economic success.

(If that were true, then the USA should not prosecute counterfeiters but actually encourage them. Maybe Krugman can write a future column on why counterfeiters are an economic blessing and why every household should have its own money printing press.)

Thus, if one is to understand Krugman, the European Central Bank and the Fed should be lending billions of dollars to Greece not so that Greece can use the money to pay its previous debts, but rather to spend itself into prosperity, with the idea that a future Greek economy -- yes, that economy that features bloated government unions and low productivity -- will produce so much wealth that it can pay back the debts or, better still, have the central banks just write off the debt because, after all, it was just funny money in the first place.

However, let us get back to Krugman's Fractured Fairy Tales. According to Krugman, Franklin D. Roosevelt's New Deal government slashed spending after 1936 and THAT was the cause of the recession of 1938 in which the rate of unemployment went to nearly 20 percent, a recession within a depression.

In looking at the numbers from that time, however, I must admit to a very nagging question. Indeed, the federal deficit fell during that time and unemployment rose. However, earlier in that decade, deficits rose and so did unemployment, so to claim that falling deficits would create unemployment is to ignore the earlier record.

It also is true that in that time period, taxes rose and government spending fell, although I remember a year ago Krugman calling for the end of ALL of the "Bush tax cuts," which would have significantly increased the tax bill not only for the wealthiest of American taxpayers, but also for people in lower income groups. Krugman said that if he were president, he would let ALL of the cuts expire and then spend the extra revenue, his words, not mine.

Government spending as a percentage of Gross Domestic Product fell from 10.5 percent in 1936 to 7.7 percent in 1938, and I find it hard to believe that a decrease of less than three percent would be the sole cause of this massive slide back into high unemployment.

You see, Krugman ignores other developments during that time, developments which Robert Higgs chronicled in his paper on the New Deal. Higgs notes that FDR was becoming increasingly shrill in his anti-business rhetoric at this time, and federal legislation aimed at crippling business investment came forth in the latter parts of the 1930s.

Since Krugman seems to believe that federal legislation raising business costs and hostile rhetoric from Congress and the executive branch have nothing to do with business investment (he calls all of this the "Confidence Fairy"), what happened outside of government spending in the late 1930s is completely irrelevant. Yet, as Higgs adptly showed in his paper, that clearly was not the case, and he cites a number of historians to back up his claims.

While I am sure that True Believers would claim the Higgs paper is nonsense, others who actually believe that economic success depends upon wealth that is created, not the amount of money printed, are going to see things differently. Government spending is a very poor substitute for sustainable business investment, and businesses are not going to do long-term investment and capitalization while a hostile government that threatens to confiscate their earnings and dumps trainloads of new and costly regulations on them is in power.

We should not forget that Barack Obama never has had to meet a payroll and never has worked in anything but settings in which at very best, business enterprises existed in order to give campaign contributions to politicians. This is a president who has no idea how an economy works, how entrepreneurs create wealth, and what is needed to bring the economy back from this depression.

Unfortunately, his most influential critic is someone who actually believes that money-printing and government-spending schemes are going to overcome everything else and create prosperity and full employment. Or, to paraphrase the book of I Kings, if Obama wants to bring about economic recovery, he should not chastise us with whips, but rather with scorpions.

45 comments:

Lord Keynes said...

Utter rubbish. Straw man. Historical revisionist. New Zealand improved after the government ran a deficit financed by inflation. ABCT is nonsense. Blah blah blah, bloo bloo bloo.

Lord Keynes said...

"In looking at the numbers from that time, however, I must admit to a very nagging question. Indeed, the federal deficit fell during that time and unemployment rose. However, earlier in that decade, deficits rose and so did unemployment, so to claim that falling deficits would create unemployment is to ignore the earlier record."

What earlier trend are you talking about?

US federal budget and deficits:
Fiscal 1930: $3.320 billion
Fiscal 1931: $3.577 billion
Fiscal 1932: $4.659 billion
Fiscal 1933: $4.598 billion

Fiscal 1930 – $0.7 billion surplus
Fiscal 1931 – $0.5 billion deficit
Fiscal 1932 – $2.7 billion deficit
Fiscal 1933 – $2.6 billion deficit

In fiscal year 1930 (July 1, 1929–June 30, 1930), Hoover ran a federal surplus. Not exactly Keynesianism, is it? In fiscal 1933 total government spnding was cut - the net effect was contractionary

Most of the deficits were caused by collapse of tax revenues.

Now these federal figures are misleading because they dont take account of state and local austerity, but even if we ignore that the only really large increase in the federal budget occured in 1932 - the worst year of banking collapses and the debt delfationary spiral. If we assume a multiplier of 3 (and ignore state and local austerity), Hoover’s spending increase of $1.082 billion dollars might have generated $3.24 billion of GDP in fiscal year 1932. But that was not even remotely enough to stop a collapse in GDP of $17.8 billion dollars.

In fact, when you look at total government spending (state, local and federal) state and local austerity, this counteracted Hoover’s spending increases in 1931 and 1932. In particular, what looks like a large increase in federal spending of $1.082 billion dollars in fiscal year 1932 was reduced to just $0.26 billion by state and local austerity.

http://socialdemocracy21stcentury.blogspot.com/2011/05/herbert-hoovers-budget-deficits-drop-in.html

Lord Keynes said...

"Government spending as a percentage of Gross Domestic Product fell from 10.5 percent in 1936 to 7.7 percent in 1938, and I find it hard to believe that a decrease of less than three percent would be the sole cause of this massive slide back into high unemployment."

Ever heard of the multiplier?

Also, you ignore:

(1) in June 1936, the Revenue Act passed Congress and caused a significant increase in income tax rates, as well as the tax on undistributed profits. The main effect of the tax on undistributed profits was to adversely affect the cost of investment for small and medium-sized firms. There is a reasonable case to be made that this tax increased business uncertainty about profitability of investment.

(2) collection of the Social Security tax began in January 1937, another tax measure contracting private spending power.

(3) The Fed increased Reserve requirements on July 14, 1937 and this went into effect the next month; the second and third increases in reserve requirements were announced on January 30, 1937, and came into effect on March 1 and May 1 respectively. From December 1936, the treasury began to sterilise gold inflows into the United States by using proceeds of bond sales to pay for gold brought to the treasury. From December 1936 to February 1938 the monetary base grew by only 4% while gold stock grew by 15%.

"Since Krugman seems to believe that federal legislation raising business costs and hostile rhetoric from Congress and the executive branch have nothing to do with business investment "

Of course it had some effect on business expectations. Yet, when expansionary fiscal policy introduced again in 1939, the economy grew, investment increased and unemployment fell: precisely as predicted by Keynesian theory.

Lord Keynes said...

"You see, Krugman ignores other developments during that time, developments which Robert Higgs chronicled in his paper on the New Deal. Higgs notes that FDR was becoming increasingly shrill in his anti-business rhetoric at this time,"

Regarding Higgs's paper, what is absurd here is that Keynes did not advocate anti-business rhetoric.

When Keynes visited America in 1934, he:

"[sc. Keynes] acknowledged that some aspects of the New Deal had created a crisis of confidence in the business community, but turned this into an argument that the government should increase its emergency expenditure to $400m. a month, while trying to reassure business that 'they know the worst' and discontinuing some aspects of the objectionable policies of the National Recovery Administration.

Skidelsky, R. J. A. 1992. John Maynard Keynes: The Economist as Saviour, 1920–1937 (vol. 2), Macmillan, London. p. 508.

Keynes did not even support the National Industrial Recovery Act (NIRA), and in fact urged Roosevelt to scrap it in his letter of 31 December (1933) published in the New York Times.

RSS Ronald Reagan said...

"...Krugman seems to believe that federal legislation raising business costs and hostile rhetoric from Congress and the executive branch have nothing to do with business investment (he calls all of this the "Confidence Fairy"), what happened outside of government spending in the late 1930s is completely irrelevant."

I've always found quite strange the argument that any public dissatisfaction with the Obama economy is to be explained by opponents "talking down" his economy...But, we're to believe that anti-business rhetoric by the President has no effect on economic performance.

Tom E. Snyder said...

Krugman says the public isn't spending enough so the government should spend more. He also says that the government isn't printing enough so maybe the public should print more.

Woody said...

When I read the frantic, serial defenses from Lord Keynes, I'm reminded of a quote from Ronald Reagan:

"Well, the trouble with our liberal friends is not that they are ignorant, but that they know so much that isn’t so."

Bob Roddis said...

Since the Great Depression was not caused by laissez faire or sound money it is pointless to worry whether or not precise Keynesian policies were followed thereafter. It's enough to know that laissez faire and sound money were not the cause nor were they the attempted cure. The twenties, thirties and forties were an "Austrian Free Zone" and debating someone like LK who has no conception of basic Austrian concepts is a waste of everyone's time.

Bob Roddis said...

Remember when LK went ape-sh** about the Mises quote wherein he thanked the evil Mussolini fascists for saving Italy and Austria from the Pol Pot-like communists? We now have the views of the REAL LORD KEYNES on some interesting subjects:

[Jews] have in them deep-rooted instincts that are antagonistic and therefore repulsive to the European, and their presence among us is a living example of the insurmountable difficulties that exist in merging race characteristics, in making cats love dogs …

It is not agreeable to see civilization so under the ugly thumbs of its impure Jews who have all the money and the power and brains.


http://tinyurl.com/88l4735

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.

http://tmh.floonet.net/articles/foregt.html

This is very relevant when attempting to understand the original source of the Ron Paul Newsletters:

http://tinyurl.com/8xw5zl4

William L. Anderson said...

And, Bob, don't forget Keynes' fetish for young boys. Yeah, the guy was a bit kinky.

Anonymous said...

Dr. Anderson-

I know there are many who visit and read your blog here; but it does occupy a part of my daily infotainment as far as Keynesian fallacies go oops I meant economics. Thank you for the great work and happy happy new year!

Lord Keynes said...

"about the Mises quote wherein he thanked the evil Mussolini fascists "

I was also explicit in pointing out that this pro-facist quote from Mises does NOT discredit his economic ideas, which stand and fall on thir own merits.

"We now have the views of the REAL LORD KEYNES on some interesting subjects:"

Ad hominem fallacy to the rescue! As if this refutes anything said above. As for Keynes' anti-semitism, this is well known.

The sheer level of idiocy here would be as if I tried to refute Anderson by just simply quoting this:

"It may be assumed that races do differ in intelligence and will power, and that, this being so, they are very unequal in their ability to form society, and further that the better races distinguish themselves precisely by their special aptitude for strengthening social co-operation. This hypothesis throws light on various aspects of social evolution not otherwise easily comprehensible. It enables us to explain the development and regression of the social division of labour and the flowering and decline of civilizations. We leave it open whether the hypothesis itself and the hypothesis erected on it are tenable. At the moment this does not concern us. We are solely concerned to show that the race theory is easily compatible with our theory of social co-operation.
....
It may be admitted that the races differ in talent and character and that there is no hope of ever seeing those differences resolved."


Mises, L. von. 1951. Socialism: An Economic and Sociological Analysis (trans. J. Kahane), Ludwig von Mises Institute, Auburn, Ala. pp. 325-326.

I.e., what you accept the argument: So your peddling ideas from Mises the racist scum-bag, huh? Why should we take you seriously?

Tel said...

Krugman claims:

"Greece and Ireland that had to impose savage fiscal austerity as a condition for receiving emergency loans — and have suffered Depression-level economic slumps, with real G.D.P. in both countries down by double digits."

But the claim about "double digits" is just blatantly dishonest.

http://www.reuters.com/article/2011/12/16/ireland-economy-growth-idUSL6E7NG1CC20111216

There's the latest figures:

"Ireland's economy contracted by 1.9 percent in the third quarter, far worse than expected"

Well I'm sorry, but 1.9% does not make a "double digits" contraction, that's complete crap. Perhaps Krugman is claiming that this GDP was devalued by 10% inflation, and if that's what he is claiming then let's see his article on why we have 10% inflation.

Anyhow the same article says:

"Ireland's quarterly GDP data are notoriously volatile due to the inclusion of the earnings of Irish-based multinationals and analysts said the country should achieve full-year GDP growth this year, the first since 2007, but below the 1 percent forecast by the government."

So they are achieving growth (not what they had hoped for) and Krugman has latched onto some temporary volatility and can't even make an honest claim about that. This is disgustingly misleading. It's a new low for the man. Any bit of respect I once had for the man has vanished.

Lord Keynes said...

"I.e., would you accept the argument: So "

Bob Roddis said...

As always, we have LK attempting to mislead us. The Mises quote is taken out of context. The context is that if one were to assume significant differences between the races, laissez faire would still remain the optimal system because people can still engage in free exchange and better themselves due to the division of labor.

And we all know that democratic socialism in multi-ethnic societies leads almost invariably to ethnic conflict*:

http://www.stanford.edu/~rabushka/politics%20in%20plural%20societies.pdf

So, who wants poor minorities to live in safety and prosperity and who wants them to live in democratic socialist hellholes?

*plus grinding poverty and barbarism due to a lack of private property rights and sound money.

Lord Keynes said...

Tel said...
"Greece and Ireland that had to impose savage fiscal austerity as a condition for receiving emergency loans — and have suffered Depression-level economic slumps, with real G.D.P. in both countries down by double digits."

But the claim about "double digits" is just blatantly dishonest."


No, it isn't: Krugman is talking about the fall in real GDP/GNP since 2008.

Ireland, Greece, Latvia, Lithuania, and Estonia have had contractions in real GDP/GNP of 10% or more - the definition of a depression. You could have easily verified that by 5 minutes of research on the internet.

E.g., Ireland

http://research.stlouisfed.org/fred2/series/IRLRGDPR

http://www.indexmundi.com/ireland/gdp_real_growth_rate.html

Real GDP has fallen by about 11% since 2008.

Lord Keynes said...

The full quote:

It is necessary to study this form of the race theory and to ask how it stands in relation to the theory of social co-operation which has here been developed.

We see at once that it contains nothing directly inimical to the doctrine of the division of labour. The two are quite compatible. It may be assumed that races do differ in intelligence and will power, and that, this being so, they are very unequal in their ability to form society, and further that the better races distinguish themselves precisely by their special aptitude for strengthening social co-operation. This hypothesis throws light on various aspects of social evolution not otherwise easily comprehensible. It enables us to explain the development and regression of the social division of labour and the flowering and decline of civilizations. We leave it open whether the hypothesis itself and the hypothesis erected on it are tenable. At the moment this does not concern us. We are solely concerned to show that the race theory is easily compatible with our theory of social co-operation.

When the race theory combats the natural law postulate of the equality and equal rights of all men, it does not affect the free trade argument of the liberal school. For Liberalism does not advocate the liberty of the workers for reasons of natural law but because it regards unfree labour—the failure to reward the labourer with the whole produce economically imputed to his labour, and the divorce of his income from the productivity of his labour—as being less productive than free labour. In the race theory there are no arguments to refute free trade theory as to the effects of the expanding social division of labour. It may be admitted that the races differ in talent and character and that there is no hope of ever seeing those differences resolved. Still, free trade theory shows that even the more capable races derive an advantage from associating with the less capable and that social co-operation brings them the advantage of higher productivity in the total labour process.


Mises, L. von. 1951. Socialism: An Economic and Sociological Analysis (trans. J. Kahane), Ludwig von Mises Institute, Auburn, Ala. pp. 325-326.

Mises is perfectly clear:

(1) "It may be assumed that races do differ in intelligence and will power, and that, this being so, they are very unequal in their ability to form society, and further that the better races distinguish themselves precisely by their special aptitude for strengthening social co-operation"

(2) "It may be admitted that the races differ in talent and character and that there is no hope of ever seeing those differences resolved"

(3) "We leave it open whether the hypothesis itself and the hypothesis erected on it are tenable. At the moment this does not concern us."

In (3), he leaves it open whether modern science supports (1), and does not concern himself with it for the purposes of his discusion in this context.

Bob Roddis said...

And, of course, whether or not "science" someday demonstrates a genetic reason for racial differences is completely irrelevant to how essential it is that each person have their individual natural rights respected by others and the state.

Of course, to effectuate the Keynesian policies, we must eviscerate long held common law and Constitutional notions of private property, the primary bulwark against genocide and pillage. We can think of it as a natural law that LK would deny that such rights even exist.

Bob Roddis said...

The Republic of Ireland has a population of 4,581,269 people. For 2008, Ireland had revenues of 43 billion and spent 55.7 billion Euros. For 2009, they had revenues of 35.3 billion and spent 60.0 billion. For 2010, they had revenues of 36.2 billion and spent 55.0. As the Imperious LK has pronounced:

Today, very few countries have had a depression in the proper sense of a contraction in real GDP/GNP of 10% or more. The only nations where this has happened are countries like Ireland, Greece, Latvia, Lithuania, and Estonia, in which savage austerity has been pursued and Keynesianism rejected.

See more here:

http://tinyurl.com/8y5uwko

Lord Keynes said...

"For 2009, they had revenues of 35.3 billion and spent 60.0 billion. For 2010, they had revenues of 36.2 billion and spent 55.0."

Deficits per se do not tell whether fiscal policy is expansionary. This is ignorance of the highest order.

Year Budget (billions of euros)
2007 50.9
2008 55.7
2009 60.0
2010 55.0
2011 51.9

From 2009 to 2011, there was been a 13.5% cut to government spending.

E.g., there was a deficit in 2010 and 2011, but with cuts in total spending (plus taxes increases and local austerity) the net effect of fiscal policy is highly contractionary.

As for the 2009, you ignore the fact that taxes were RAISED in that year: contractionary fiscal policy. This will have offset 4.3 billion increase in spending. Factor in Ireland local government cuts, and I doubt whether the net effect of fiscal policy in 2009 wa seven stimulative.

Even if it was mildly stimulative (like some of Hoover's deficits), this would have been far too small to do anything about the 13.7 billion dollar GDP collapse in 2009.

Woody said...

When I read the frantic, serial defenses from Lord Keynes, I'm reminded of a quote from Shakespeare:

"The lady doth protest too much, methinks." -- Hamlet, Act III

Bob Roddis said...

LK explains the essence of a Keynesian mind:

It is entirely possible to have a high deficit and highly contractionary fiscal policy, as Ireland demonstrates.

Relevant factors:

(1) fiscal impact of your local and (if they exist) state governments
(2) whether discretionary increases in spending have occurred or whether deficits were just maintaining spending at current levesl as tax revenues collapse
(3) whether taxes have been raised
(4) whether the overall net effect is expanionary or contractionary


A normal person would try to figure out why they had invested so much $$$$ in lines of production for stuff that people really didn't want and then figure out what people really do want and at what price.

Bob Roddis said...

Another of my comment reruns:

I think it’s an abuse of the English language to call the Irish situation “austerity”. “Austerity” comes from the word “austere” which means:

1. Severe or stern in disposition or appearance; somber and grave: the austere figure of a Puritan minister.

2. Strict or severe in discipline; ascetic: a desert nomad’s austere life.

3. Having no adornment or ornamentation; bare: an austere style.


Keynesian policies have plunged these nation into depression and despair. While they may have not followed the Keynesian “cure" of massively more unpayable debt and money dilution than they did engage in, calling these policies “austerity”, or “savage austerity” is outrageous.

I still say that we merely need to get average people to understand that our unpayable debt and price inflation are purposeful government policies rammed down their throats by these lunkhead Keynesians. If we want to get technical, we can explain that Keynesianism as a form M√ľnchausen syndrome by proxy where the “caregiver” induces illness its ward.

Finally, always keep in mind that LK has no comprehension whatsoever of the concept of economic calculation. Everything he writes flows from that.

http://tinyurl.com/8y5uwko

Lord Keynes said...

Irleand's 2009 budget:

"- This supplementary budget [sc. in 2009] involves expenditure cuts of €1.5 billion and tax increases of €1.8 billion in 2009, equivalent to almost 2% of GDP.

- It brings the total in fiscal corrective measures being implemented in 2009 to €8 billion or 4.7% of GDP, indicating a very contractionary fiscal stance this year."


Irish Supplementary Budget 2009
http://www.aibeconomics.com/PDFS/Supplementary%20Budget%20%20April%202009.pdf

With tax increases and spending cuts of €8 billion in fiscal year 2009, it's likely that the tax increases alone wiped out all the €4.3 billion increase in spending in 2009.

Once local government cuts are factored in, you have a highly contractionary budget.

Too bad you're a total idiot, incapable of even basic calculations about how fiscal policy works.

Tel said...

LK:

"No, it isn't: Krugman is talking about the fall in real GDP/GNP since 2008."

Well he as a very strange way of talking about 2008 when he says:

"And there was also the embarrassing fact that many on the right had prematurely declared Ireland a success story, demonstrating the virtues of spending cuts, in mid-2010, only to see the Irish slump deepen and whatever confidence investors might have felt evaporate."

That sounds very much like he is talking about recent events. Either way it is misleading to the reader. If Krugman wants to talk about 2008, let him say as much.

But anyhow, if you want to pick arbitrary historical dates to reference from, why not go back to 2000? Or back to 1990? Ireland has had many years of better GDP growth than the USA, and they achieved that by high leveraging and embracing high risk industries (e.g. technology). So they had two bad years (2008, 2009) at a time when everyone had bad years? In the scheme of things, so what? It's only what you would expect from a high leverage, high risk strategy.

Given that 20 years ago, Ireland was an agricultural backwater and anyone with an education or a brain left the country, I think they have turned things around quite well.

Also, they handed massive government money to their banks as bail-out bonus (stupidly IMHO), and when you include that there was no government "austerity", merely wealth redistribution, but that's another story.

Tel said...

"From 2009 to 2011, there was been a 13.5% cut to government spending."

And the same Index Mundi link you posted above shows that 2009 was the worst year for GDP. So what are you trying to prove here?

Bob Roddis said...

I never support tax increases. I never support taxes.

What happened in Ireland was not "austerity". Neither the problems nor the attempted "cures" in Ireland had or have anything to do with Austrian prescriptions.

The fact that these idiotic interventions under a continuing funny money/debt regime (but which aren't perfectly "Keynesian") do not work is not evidence that Keynesianism "works" or makes any sense whatsoever.

People engage in exchange. Government debt, spending and money dilution interfere with that process.

Bob Roddis said...

Let's revisit Jonathan F. Catalan's excellent "Government Spending in Bad Economics":

http://mises.org/daily/5123

Pursuant to the natural laws of the universe, LK attacked it without any understanding of its underlying concept, economic calculation.

When people engage in exchange, "spending" merely describes the fact that money was exchanged. When government "spends", it is based upon force and the threat of force, so it describes a completely different type of activity. The idea that one form might replace the other could only be held by the simple-minded.

Lord Keynes said...

"When people engage in exchange, "spending" merely describes the fact that money was exchanged. When government "spends", it is based upon force and the threat of force"

Defeated everywhere else, your tactic is to shout: "taxes is theft!".

"What happened in Ireland was not "austerity". Neither the problems nor the attempted "cures" in Ireland had or have anything to do with Austrian prescriptions."

Red herring: I never said real-world neoliberal austerity is an "Austrian" prescription.

The "Austrian" prescription you presumably adhere to is liquidationism, where the financial system is allowed to collapse, central banks are abolished, and even government itself. If that's not what you prpose, epxlain what you do propose.

"Pursuant to the natural laws of the universe, LK attacked it without any understanding of its underlying concept, economic calculation."

LOL: Catalan's main purpose was to deny that fiscal contraction contributed to the recession of 1937. He is wrong and an ignoramus.

Lord Keynes said...

"And the same Index Mundi link you posted above shows that 2009 was the worst year for GDP. So what are you trying to prove here? "

Did you even read what I wrote above?

In 2009, Ireland's fiscal policy was contractionary, because of tax rises and local cuts. It was also hit hard by the worst effects of the global recession in that year, as its government contracted fiscal policy.

What happened is exactly what you would expect under Keynesian theory.

Tel said...

LK: do you even read your own posts?

Check December 30, 2011 10:06 PM above, it's your own post man. You have from 2007 to 2008 a substantial increase in govt spending (increase of 9.4%) and this was a terrible drop in GDP (fall by 2.972%). Then you have listed from 2008 to 2009 a 7.7% increase in govt spending and GDP dropped by a shocking 6.995% at the same time.

Then as things turned around, 2009 to 2010 we saw a reduction in govt spending of 8.3% and that year GDP stayed almost level down by only 0.43% and from 2010 to 2011 another reduction in govt spending and they expect to make a small gain in GDP this year.

These are the figures you brought into the discussion, and they point in the complete opposite direction to what you are trying to suggest!

E.g., there was a deficit in 2010 and 2011, but with cuts in total spending (plus taxes increases and local austerity) the net effect of fiscal policy is highly contractionary.

Except that the actual GDP is growing from 2010 to 2011, not contractionary at all (as explained by the reuters article above). Why is this so difficult? I'll quote it one more time:

"Ireland's quarterly GDP data are notoriously volatile due to the inclusion of the earnings of Irish-based multinationals and analysts said the country should achieve full-year GDP growth this year, the first since 2007, but below the 1 percent forecast by the government."

See that bit in bold?

Lord Keynes said...

No one denies that Ireland has had highly unreliable and volatile export-led growth, in only 4 quarters over 2010-2011, out of 15 quarters since Q1 2008. That has been the ONLY (occasional) source of growth. That was due to demand for Ireland's export from its trade partners, and even that has not been enough to make positive annual GDP growth. The domestic sectors have continued to contract - just as Keynesian theory predicts.

Annual GDP growth in every year from 2008-2010 has been negative.

2008 -3.5
2009 -7.6
2010 -0.4

http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG

As for 2011, the negative Q3 contraction has already just wiped out most of the export-led growth they experienced. Q4 will determine whether the economy has any net growth this year. It is not looking good.

William L. Anderson said...

The thing to remember is that both Krugman and LK believe that governments by the act of printing money actually are CREATING new resources. Yes, yes, they would say that creating inflation actually "stimulates" people to buy now and to purchase those goods that already are made.

Furthermore, the surge in new purchases then will encourage new capital development and more employment. Not bloody likely, folks. That is where they go wrong, as the only way that could happen would be if the creation of new money were also the creation of new wealth.

Bob Roddis said...

LK employs his usual deceptive tactics on his blog when he claims:

The usual suspects [Bob Murhpy] have questioned whether Ireland really pursued austerity. Others seized on the fact that the Irish government increased government spending in 2009: wasn’t this a stimulus?

Whoever said this was "stimulus"? Government spending is not "stimulus", it's theft, fraud and waste. The point is that these activities do not amount to "AUSTERITY" as in the word "austere" pursuant to the familiar understanding of the English language.

http://tinyurl.com/7vvth8t

And LK has already admitted that neither the cause nor attempted cure of these problems were Austrian.

There was no austerity and the "austerity" implied by the language-mangling obscurantist Keynesians* is not Austrian.

*Yet another natural law of the universe

Lord Keynes said...

"they would say that creating inflation actually "stimulates" people to buy now and to purchase those goods that already are made.
Furthermore, the surge in new purchases then will encourage new capital development and more employment. Not bloody likely, folks. "


LOL.. Even if you subscribe to Austrian business cycle theory, that theory requires that new money injections create REAL capital goods investmnets thought to be malinvestments - your bizzare statement would deny that even that happens.

You're pretty much the most laughable Austrian on the internet. You should re-name your blog "Anderson-in-Wonderland".

And not even Hayek was so stupid as to deny that increased government expenditure creates demand for commodities and employment increases:

"To return, however, to the specific problem of preventing what I have called the secondary depression caused by the deflation which a crisis is likely to induce. Although it is clear that such a deflation, which does no good and only harm, ought to be prevented, it is not easy to see how this can be done without producing further misdirections of labour. In general it is probably true to say that an equilibrium position will be most effectively approached if consumers’ demand is prevented from falling substantially by providing employment through public works at relatively low wages so that workers will wish to move as soon as they can to other and better paid occupations"

Hayek, F. A. von. 1978. New Studies in Philosophy, Politics, Economics, and the History of Ideas, Routledge & Kegan Paul, London. p. 212.

Eric said...

So if the government were to pursue stimulus policies right now, you argue they would be destroying wealth. Does that mean if things got better, and the government followed the austerity/ deflationary policies Krugman recommends in times of plenty, they would be creating wealth? If that's the case, it would mean the government isn't creating or destroying wealth at all, its just moving it around to where its most needed using inflation/deflation as a vehicle, which I think is the basic point of borrowing money.

Bob Roddis said...

There are many good reasons why it's called The Mises Institute and not The Hayek Institute. Hayek was wrong often enough to allow someone like LK to quote him favorably.

Of course, LK still does not understand the concepts of knowledge or economic calculation, about which Hayek was quite right.

Further, why are Austrians supposed to come up with the perfect cure for the economic and societal death imposed by previous Keynesian policies? Once private property rights have been eviscerated and prosperity destroyed through Keynesian theft and fraud, how does one go about restoring what the Keynesians have destroyed? The fact that Austrians might disagree about putting Humpty Dumpty back together says nothing about Austrian analysis of the causes of the problem. This is precisely why LK always focuses upon Austrian disagreement about solutions to the Keynesian-imposed disaster while ignoring unanimity in the analysis of the cause.

ekeyra said...

"If that's the case, it would mean the government isn't creating or destroying wealth at all, its just moving it around to where its most needed using inflation/deflation as a vehicle, which I think is the basic point of borrowing money. "

The government has no way to discover where wealth is "most needed". Not only would beauracrats approach the subjet from a collective standpoint (what is most needed for the entire country), even if they cleared that hurdle they still would not be able to engage in economic calculation because they are not engaged in mutually beneficial voluntary exchanges. If your revenue stream is based on collections by force rather than voluntary exchange, you have no incentive to even make economical decisions with those resources.


If people would have voluntarily funded the lines of production the government throws money at, (e.g. "green energy") there would be no need for the government to intervene at all. Which means that all lines of production that the government funds are, in reality, things people do not value. So contrary to your statement, they are in fact destroying wealth by funneling resources to endeavors that people do not value enough to pay for voluntarily.

Bala said...

LK,

When is that theoretical explanation coming? I am talking of the theoretical basis of claiming that countries which implemented Keynesian stimulus packages showed better economic performance BECAUSE OF the Keynesian stimulus.

And after the discussion we had on your blog, you should stop claiming that multiple interest rates is a take down of ABCT. Sraffa pretty much stands exposed as a fool.

Eric said...

@ekeyra

But the financial crisis demonstrated that private investors will invest in projects that are not an effective use of resources, for them or anyone else. I know the conservative line on this is that the government made them do it, but you have to admit that at least some of the financial crisis was based on decisions private investors made on their own initiative. Given that private investors have proven to be inefficient with resources (to put it mildly), it doesn't seem unreasonable to let the government have their turn.

Bob Roddis said...

Eric again demonstrates my theory that no non-Austrian anywhere in the galaxy has the slightest understanding of even basic Austrian School concepts.

Given that private investors have proven to be inefficient with resources (to put it mildly), it doesn't seem unreasonable to let the government have their turn.

It's hopeless.

ekeyra said...

Eric,

You still arent seeing the fundamental difference between private losses and public spending. Private losses signal that the line of production that resources are being channeled to is not valued enough to make it profitable, and therefore sustainable. This is a critical market function because it signals enrepreneurs to STOP investing along those lines of production to avoid greater losses in the future. Government beaurcrats have no way to emulate this mechanism because they operate wholly outside the realm of voluntary exchanges and have no way of discovering the information needed to determine what is most valued, absent market prices and profits and losses.

In other words, private losses are essential because even though they do cost real resources, they prevent an even bigger loss of resources in the future, from not only their own investors, but all investors. Government spending ensures nothing more than moral hazard and rent seeking.

I also have to point out that,to portray the situation as people not letting the government "have their turn" is absurd on its face. If I dont let them "have their turn" spending my money they will throw me in jail.

ekeyra said...

Eric,

Besides that, Lord Keyenes tried to make this exact same argument a few weeks ago. He was eviscerated for the exact same reasons.

By your logic, I should not be able to choose what to have for dinner because, if I choose poorly and do not like it, I have taken food away from starving people.

Not only that but the fact still remains that private property is the owner's to dispose of as they choose. So even if someone decides they are going to spend millions of dollars on, say, transgender prostitutes and 2 foot adult novelty items, noone has any claim to say that he is being inefficient and must have his resources confiscated.

Django said...

"If we assume a multiplier of 3"

We would be idiots.

Bala said...

"Ever heard of the multiplier?"

Ever learnt how moronic the concept of the multiplier is?