Something Feral

Digging up the flower-beds.

Thursday, February 5, 2009

National Politburo Radio: Damn the logic, full speed ahead!

Evidently, we failed to understand the sheer genius of John Maynard Keynes the first time 'round, and the rescue plan will now be repeated louder, slower, and with additional gesticulation:
Keynes became this season's go-to solution because of his masterpiece prescription for how to get out of a global depression — The General Theory of Employment, Interest and Money.

"I've read the general theory five times," says Tyler Cowen, an economist at George Mason University. "The first time I read it, I was maybe 18." Cowen has been reading Keynes' book again, this time writing notes and conducting a discussion on his blog, Marginal Revolution.

Cowen says Keynes corrected what he saw as a fundamental error in the economics that had come before. Classical economics teaches that if there's a downturn, the economy will eventually sort itself out. If people aren't buying enough, prices will drop to a point where people start spending.

Keynes' radical insight was to look out the window in the 1930s and see that sometimes things don't right themselves. The economy goes into a downward spiral. The usual dynamic of supply and demand breaks down.
Further analysis shows that economic systems without central-banking occasionally undergo periods of suspended gravity, portals to the netherworld, and hang-nails.

In between smarmy fluffing-fits of fascist economic planning and its more notorious advocates, NPR erected a straw-man to prove the validity of the bailout schema:
The discipline of economics includes many different groups — the monetarists, the Chicago school and supply-side economics. The Keynesians used taxes and government deficits as their main tools for steering the economy. The anti-Keynesians thought you could have the same effect just by using the central bank — the Federal Reserve — to carefully control interest rates. If the economy overheats, raise rates. If it starts to sputter, lower them.

The Keynesians and anti-Keynesians fought some bitter battles through the 1980s. But by the time of the Clinton administration, most economists agreed on the basics: Some of Keynes' ideas are useful, but in a post-Keynesian world, the interest rate is the most effective tool.
The silence is deafening regarding Austrian economics; in a post-Keynesian world economic implosion, the most effective tool is the axe. Axe fractional-reserve banking, axe the Federal Reserve, axe the ability of the State to further its authoritarian designs. The faulty premise that prosperity can continue without interruption assumes perfect judgement on by every economic actor involved, particularly the government. Stop and think about this: when has this ever been true, even in their wildest fantasies? Not only is it ludicrous in theory, it's demonstrably impossible. (For a more eloquent explanation of the magnitude of failure involved here, particularly at this point in history, read Part I: BUSINESS CYCLE THEORY.)

Out of morbid curiosity, let us examine a plan that would make Rube Goldberg flush with envy:
"So, here's the way Keynes would have done it," Blinder says, sketching points on a blackboard in his office.

The Keynesian formula is straightforward. First, you estimate how much the economy should be producing — given all the people and factories and offices. Blinder's guess is $15 trillion. Then you look at what the economy is actually producing. He puts that at $14 trillion.

The government shouldn't have to spend the entire trillion-dollar shortfall. That's because of something called the "Keynesian multiplier." Every dollar the government spends produces more than a dollar in spending throughout the economy. If the government pays you to build a bridge, you spend your paycheck on rent and food and so on, and then your landlord and grocer have money. Using Keynesian math, you can figure out exactly how much the Obama administration should spend.

Blinder taps his chalk, winding up his calculations. "That would lead you to conclude that you needed about $650 billion as a stimulus," Blinder says. "Voila! That's the kind of number they're talking about right now. You see it in the newspapers every day, a number in that range."
Ah, devaluing the currency while shouldering a massive spending deficit, increasing military agitation abroad and increasing spending on public works* is truly the path to prosperity! In fact, this "Keynesian multiplier" is nothing of the sort: rather than a wholesome remedy for an illness, it has all the therapeutic effect of scarfing an entire bag of candy and half a case of energy-drinks before heading to the gym.

So, will the Obama "Magic Stimulus" fix the economy?

If you believe that, I have a public-works project for sale.

* This has been tried, and was admittedly a failure:

"In the meanwhile, however, President Hoover himself was beginning to have doubts about one of his favorite policies: public works. In a conference at the end of February, Hoover admitted that his public works program, which had nearly doubled Federal construction since the start of the depression, had failed. It was very expensive, costing over $1200 per family aided, it was unavailable to the needy in remote regions and to those who were unable to perform such labor, which was, after all, unskilled make-work. Hoover now was coming to favor more Federal grants-in-aid to states in lieu of more Federal public works. By May, Hoover had openly reversed his earlier position, and now opposed any further extension of non-self-liquidating public works."

America's Great Depression, The Hoover New Deal of 1932: Public Works Agitation


MikeT said...

Keynesianism looks great on paper, but in practice it cannot make things better in the long run because politicians don't usually plan on actually paying down the debt that they have created.

Something Feral said...

I concur; the easiest thing for Congress to do at this point would be exactly what they are doing: devaluing the currency. It's not a new strategy, and it's not even a winning strategy, but it is the plan.

In theory, the government would tax during the "boom" in the business-cycle, then rescind the taxation and spend until things recovered after the boom ended. Sounds like a simple plan for a simple Congress, but simple is as simple does.

Keynesianism, like all Statist philosophy, relies on the best-case scenario, and is incompatible with a government constructed to preserve life, liberty and property.

Triton said...

Actually, Keynes was well aware of the negative long-term consequences of his policies. When questioned about it, he simply replied that in the long run we're all dead.

So now Keynes is dead, and we have to deal with the long run.