Monday, February 9, 2009

Conservative Keynesian Myth

There is a myth going around. Largely it is repeated in Conservative circles, but many political pundits (George Will and Newt Gingrich chief among them) like repeating it. They repeat over and over that "Keynesian economics has never worked." Yet immediately they turn right around and thoroughly disprove themselves.

The most openly Keynesian action by our government was the New Deal of FDR in the 1930s. Conservatives claim that Keynesian policy was an absolute failure because we didn't fully exit the Depression until World War II. They ignore two major flaws in this thinking.

The first problem is that Keynesian policy wasn't used throughout the Depression. From 1933 into 1937 FDR took the "kitchen sink" approach. He would try something, see how it worked and either continue it or move on to something else. The WPA and many other programs were started and got people back to work. For these four years, GDP grew an average of 10% per year, unemployment fell from 25% to a minimum of 12% in June of 1937 (using the same calculation for unemployment today that they used then, we are currently between 14 and 16%), and created an average 9% annual increase in average incomes.

Throughout this whole period FDR and his Treasury Secretary, Henry Morgenthau Jr., were constantly worried about the expanding deficit. By 1937, things seemed to be looking relatively better. GDP had grown from $56.4 billion to $91.9 (current dollars adjusted for inflation). Unemployment, as I said above, had fallen by nearly 50%. FDR let his inner deficit hawk take control and cut spending by over about two billion dollars (adjusted for inflation). When this happened, GDP stumbled and fell more than 3% and unemployment jumped to 19%.

Then we get to the second half of the Conservative myth wherein they contradict themselves. Every Conservative economist claims that the Great Depression disproves Keynesian economics because we didn't pull out of the Depression fully until the war effort ramped up. But if you look at that, it only proves Keynes correct. The war effort didn't have tax cuts, it didn't have a balanced budget (just the opposite, spending 140%+ of GDP). No monetary policy brought us out of the Depression during WWII. It was direct government spending unlike anything we had seen before or have seen since.

Other policies can help with recessions. Monetary policy has worked in the past, as recently as 2001. Tax cuts sometimes help, but rarely in isolation (see 2008 for an example of a tax cut failing in isolation). But these options aren't available to us and don't work in a demand death spiral like we are in now. Monetary policy is used up, we are at 0% interest. Tax rebates have already failed once and the smaller one being proposed now won't work any better. Tax incentives for purchases can't work if people can't purchase. The only thing left is for the US government to directly stimulate demand by direct spending. Other things like the middle class tax cut may help on the short term while government spending ramps up, but without the larger government projects, that short term stimulus will be wasted just as quickly as last year's stimulus checks.

UPDATE: Rachel Maddow discussed this as well. Here is an article with other good charts that reflect my points.


Comrade Kevin said...

An informative summary. Thank you!

The Republicans opposing this stimulus are opposed to it on principle, though that doesn't mean they would do anything else or anything better. They have no new ideas. Right now it's all about trying to get control and blaming the Democrats.

no_slappz said...

john j, the only conclusion your post leads to is this: War is the Answer.

Shortly before the election I attended a gathering in NY City. Former Senator Al D'Amato represented McCain and Represntative Jerrold Nadler represented Obama.

Nadler offered your argument to the audience -- which met at a Manhattan site -- and when Nadler claimed that Yes, WWII was the key to the end of the Depression and then noted it was the biggest Government Spending Program in US History, I called out -- saying Oh, so you believe War is the Answer.

He was unable to respond.

Obama is looking more and more like a fraud every day. And Tim Geithner is not up to his job.

As far as the Stimulus Plan goes, there's no one in the government -- Congress or the White House -- who can explain WHY the plan will work. That's because vast spending programs for programs with little or no economic merit are the bulk of the Plan.

John J. said...

No, war isn't the answer; war was the impetus that gave FDR the political and personal cover to spend 150% of our GDP. My hope, and President Obama's, is that by reacting quickly we won't need to spend that much for the recovery.

As for the current stimulus, I read version the House passed and am currently reviewing the conference committee version and while there are a few programs that won't have an effect ($1b for the census is the biggest ticket item I found) and there are tax breaks that won't have any real effect overall it is a good bill. I don't know that it will pull us fully out of recession, but it will start the climb. Unfortunately, even the best job gain estimates are less than what Bush helped us lose last year alone.

no_slappz said...

john j, you are dancing around the simple fact that WWII was the answer to the Depression and that if we follow the same path today, it will take another massive war to set the country on the right track again.

Except this time, lots of countries have nuclear weapons, which means war is a very different propositn.

As for the ridiculous spending ideas that Obama believes are the answer, well, I urge everyone who believes him to look at Lower Manhattan.

There is a big hole in the ground at Ground Zero where the Twin Towers stood until 9/11.

Next door is 7 World Trade Center, a beautiful new building that is open and adding new tenants on a regular basis.

The Big Hole in the Ground is managed by the government. Seven years after 9/11 all we have is a big hole in the ground.

But next door, Larry Silverstein, the private real estate developer, has gotten his building rebuilt and open for business.

Do you really believe the federal government has the ability to get projects approved, funded and under construction in less than a few years?

What's happening in New Orleans -- three years later? Not much. When the government intrudes in private industry, the result is endless quibbling about every aspect of every project, leading to delays, delays, delays. That is reality.

Obama, on the other hand, seems to exist in his own dreamland.

John J. said...

No, Slapz, you're missing the point. War wasn't the answer. War SPENDING, war PRODUCTION was the final answer.

I do believe we can ramp up projects very quickly because people are begging for work. Caterpillar has promised to hire back the 20,000 workers it laid off last month. States around the country are begging for money for infrastructure spending. Scientists around the country have been begging for funding for more than a decade. Schools are practically falling down around students. 70% of the funding will be spent in 2 years by CBO estimates, and I expect it to be done quicker.

As for New Orleans, I will not judge President Obama's potential by one of the worst failures of the worst president our country has had in it's 230 year history.

no_slappz said...

john j,

the CEO of Caterpillar has already stated that Obama was wrong about the impact of the Stimulus Plan on his company. Yesterday he said that Caterpillar will most likely lay off MORE people over the coming year before it begins to rehire workers.

The CEO said he expected Caterpillar would get a very small benefit from the Stimulus Plan.

But, as I've sai, Obama avoids discussions of reality.

Meanwhile, it is outrageous to state, as you have, that no one -- no politicians in N.O., LA, or Washington, no businesses, no community groups -- in the US would act to repair the damage to New Orleans due to Bush's presence in the White House.

States are always begging for infrastructure money. So what? I'm all for building new roads. But we've got roads everywhere in this country.

The major AND minor roadways have been built. Many of them need the usual maintenance and repair work, but there no Major projects for which people are desperate.

However, road projects require labor and cost a lot. Roadbuilding is also one of the more corrupt activities in this country. The concept of "featherbedding" is part of building roads.

A few more bridges might be a good idea. But it's undboubtedly more important to repair and upgrade existing bridges.

I live in Brooklyn, NY. The NY City public school system comprises 1,000 school buildings. Many are old and some are new. However, no one in the school system has ever said that students are failing to learn because the buildings are no good.

Frankly, most of the new schools built in the last several years have been built in the crappy neighborhoods. Student performance is still lousy in those crappy neighborhoods with the new schools.

Scientists begging for money? Yeah? So? That's what they always do. If they are given a trillion dollars, they will beg for more next year, because that's what they do.

I'm all for spending on science. But exactly what programs are to get funding? Can you name any meaningful scientific and technical advances that resulted from federal spending on science programs?

You claimed 70% of the funding would be spent within two years. Not likely. In fact, not possible. The spending is spread out over more years. Meanwhile, I think you are mixing the allocation of funding to projects with the actual disbursement of money to people employed in these projects.

Like I said, 7 years after 9/11 there's nothing but a big hole at Ground Zero -- the part controlled by the government. I was looking in the pit yesterday, then looking up at the great new building at 7 World Trade.

As for New Orleans, it is a fact that a couple of billion dollars were given to victims and they squandered it on nonsense.

What makes you think a new type of human being has arrived in the US since Obama's inauguration?

John J. said...

I read the interview with Caterpillar, and it more sounds like he is backpedaling from promising the full 20,000 and changed it to "[T]here are a lot of other moving parts." The overall estimates though are about three million jobs saved or created by the stimulus.

If you want to discuss actual spending points, use reality and leave your personal racist biases out of it. I will delete any racial diatribe you put here.

As for the rest, don't put words in my mouth.

no_slappz said...

john j,

The CEO of Caterpillar said:

"As I indicated yesterday, the President and I fundamentally agree that the U.S. stimulus package will be beneficial to the U.S. economy and should spur demand for the types of products made by Caterpillar. The passage of significant stimulus packages in the United States and abroad
would help move the global economy toward a recovery, and if these
packages are enacted quickly, they could stimulate demand for our products that would likely, over time, provide Caterpillar the opportunity to recall employees who have been laid off during this downturn. We know this won't happen overnight, but I am confident that swift passage of the
stimulus will lay the important groundwork to rebuild our workforce," said Caterpillar Chairman and CEO Jim Owens."

In other words, he acted in a polite fashion, avoiding the appearance of saying the president is wrong. Moreover, the CEO NEVER said the Stimulus Plan would put the laid-off Cat workers back on the job. That was Obama's fiction, something he's been expanding upon seemingly daily.

He then said:

Owens added, "The tractors and pipelayers made in East Peoria are used for infrastructure and mining projects in the U.S and around the world-in fact, more than 55 percent of the products made in East Peoria are exported from the U.S. As a bellwether company for the global economy, we are experiencing the unprecedented depth of this still unfolding global recession and we believe strongly a fiscal infrastructure investment will create construction jobs in the near term, and enhance the competitive
position of the U.S. in the global economy."

Again, the CEO was attempting to keep the president from looking like a dolt while letting investors know that Caterpillar may be under considerable pressure for a couple of years.

M. Tate said...

Thank you. I heard some cons talking about FDR and how he "failed" and I thought to myself pretty much everything that you said, glad to see it backed up.

War is Keynesian policy, but a lesser sort. We end up with craters instead of roads.

Anonymous said...

And the debt created by this stimulus has NEVER BEEN REPAID.


Keynesian economics along with an elastic money supply is not only an outright THIEVERY of wealth of the general populace, but is UNSUSTAINABLE, and therefore an ABSOLUTE FAILURE. Based on Keynesian policies, the USD has lost more than 95% of it's value since the early 1900's. And after nearly a century of these shenanigans, we have more debt than ever before! How the hell is this not an absolute failure of the applied economic policy?

John J. said...

To Anonymous: If, as you say, it hasn't been repaid, how has wealth been stolen from the populace? Even if it were not borrowed money, it is not "stolen". We live in a representative democracy, that means that money the government spends is spending (and at some point, taxing) that is voted on. If we lived in a monarchy or a despotism, you may have some grounds for your "thievery" claims, but spending money on stimulus is no more "thievery" than spending on police officers and fire departments.

While government spending does affect inflation, Keynesian policies have neither been the primary driver of government spending for the past 60 years, nor has it been the primary driver of inflation.

Keynesian policy has nothing to do with inflation or debt. It acknowledges that it will inherently have a negative effect on deficits. The purpose of Keynesian policy is to fuel economic growth, something it did incredibly well 1933-1937, 1939-1944 as well as this year, adding an estimated 3-4% to GDP (about $420 billion) so far. In fact, according to some economists, had this year's stimulus been more focused on Keynesian policy and less on Friedman style corporate tax cuts, we may have seen and even larger GDP boost. (Forbes article )