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Old 10-24-2013, 03:09 PM  
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IT'S OFFICIAL: Keynes Was Right

Hey, TJ and BEP

http://www.businessinsider.com/its-o...s-right-2012-4
IT'S OFFICIAL: Keynes Was Right

This morning brings news that Europe may finally be beginning to soften on the "austerity" philosophy that has brought it nothing but misery over the past several years.

The "austerity" idea, you'll remember, was that the huge debt and deficit problem had ushered in a "crisis of confidence" and that, once business-people saw that governments were serious about debt reduction, they'd get confident and start spending again.

That hasn't worked.

Instead, spending cuts have led to cuts in GDP which has led to greater deficits and the need for more spending cuts. And so on.

And the same may well be said for the U.S. next year if the government continues with its plan for "Taxmaggedon." (A huge tax increase on January 1).

Now, this is not to say that the global debt-and-deficit situation is not a huge problem. It is. It is merely to say that, of the two painful ways to work our way out of the problem—"austerity now" or "stimulus now and cuts later"—the second one seems more effective.

In other words, based on the experience of the last five years, it seems that Keynes was right and the Austerians are wrong.

(Yes, I realize that Keynes also called on governments to run a surplus during good times, which they are never capable of doing. So I'm speaking here only of his approach to digging our way out of the current economic problem.)

Now, I'm not an economist, and I'm not born of a particular economic school that I've bet my life's work on, so I have observed the global economic events of the past five years with a fairly open mind.

I've listened to Keynesians like Paul Krugman argue that the way to fix the mess is to open the government spending spigot and invest like crazy.

And I've listened to Austerians like Niall Ferguson argue that the way to fix the mess is to cut spending radically, balance government budgets, and unleash the private sector.

And I've also looked back at history—namely, Reinhart and Rogoff's analysis of prior financial crises, the Great Depression, Japan, Germany after Weimar, and so forth.

And more and more it appears that Keynes was right.

In the aftermath of a massive debt binge like the one we went on from 1980-2007, when the private sector collapses and then retreats to lick its wounds and deleverage, the best way to help the economy work its way out of its hole is for the government to spend like crazy.

Or, rather, if not the "best way," at least the least-worst way.

Because, obviously, piling up even bigger mountains of debt is not a happy side-effect of such spending.

But let's face it: Austerity doesn't work.

At least, austerity doesn't work to quickly fix the problem.

The reason austerity doesn't work to quickly fix the problem is that, when the economy is already struggling, and you cut government spending, you also further damage the economy. And when you further damage the economy, you further reduce tax revenue, which has already been clobbered by the stumbling economy. And when you further reduce tax revenue, you increase the deficit and create the need for more austerity. And that even further clobbers the economy and tax revenue. And so on.

Basically, austerity puts you into a death spiral in which you keep trying to cut your way to prosperity, but all you end up doing is digging a bigger hole. And in the meantime, tens of millions of people are out of work, the economy is retrenching, and everything is generally miserable.
And how about the alternative?

Well, die-hard anti-Keynesians will tell you that the alternative is what we're experiencing now. Obama did the big Keynesian stimulus thing a couple of years ago, and the economy is still lousy and the unemployment rate is still too high. And we have an absolutely massive debt pile that we need to work off.

Ergo, Keynesianism doesn't work.

But isn't that an unfair conclusion?

Most of the debt mountain we've piled up is the result of what we did before the crisis, not after it. In the years leading up to 2007, our absurdly undisciplined leaders took a nice big budget surplus and then squandered it. And they created absurdly loose lending standards and encouraged the whole country to lever up and buy stuff we couldn't afford. And they never said "no" to anything except tax increases, no matter what, and denied all the structural problems that were building up for decades.

And by 2007, they had put us in one hell of a hole.

And, given that, it seems reasonable to think that, as Krugman has long argued, one of the problems with the economy now is that the original stimulus just wasn't big enough.

And it also seems reasonable to conclude that, given the mess we got ourselves into, there is just no quick fix, regardless of what anyone does.
And that, in fact, is my real conclusion about our current situation—that, no matter what anyone does, we're going to be licking our wounds for years.

But I will also add this in defense of Keynesianism ...

The Austerians love to point at the 1930s as "proof" that Keynes was wrong. Look at the huge "New Deal," they say. Look at all those expensive public works projects. Look at all the spending the government did to try to get us out of the Great Depression, and it never really worked. What got us out of the Depression, the Austerians smugly observe, was World War 2.

But what was World War 2 if not an absolutely gigantic Keynesian stimulus?

The Federal deficit in World War 2 was massive—much bigger than any time during the Great Depression. And we built up a huge Federal debt load. And ... we set the stage for two decades of amazing prosperity, in which we worked off those debts.

Our current debt and deficit situation scares the bejeezus out of me. We absolutely have to get our long-term budget problems under control, and doing so will involve both cutting spending and raising taxes. If we don't do that, we really will collapse, as Niall Ferguson et al have long been arguing.

But getting the budget under control by radically chopping spending or increasing taxes this minute, as many Austerians want to do, won't help. In fact, it will likely make the problems vastly worse, because it will put that many more people out of work and reduce tax revenue that much further (just take a look at Europe).

Meanwhile, given that we've already racked up $15 trillion of debt, I certainly wouldn't be opposed to our spending another couple of trillion upgrading our piss-poor infrastructure. Incurring debt to build things that help all Americans, from unemployed folks to business leaders to children, is a trade-off I'm willing to make. Especially if the jobs created by this "stimulus" spending help alleviate our massive unemployment and inequality problems.

And, by the way, I don't think this "stimulus" necessarily needs to come from just the government. Our corporations are as profitable now as they have ever been. So I'd like to see a lot of them voluntarily decide to invest more and pay their low-wage employees more and hire more employees. They can afford it, and "cash flow" isn't the sole objective or reward of running a business.

Anyway, based on the experience of the last five years, it seems to me that Keynes was right.

I still have an open mind, though, if any Austerians out there want to have another go.
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Old 10-24-2013, 03:18 PM   #2
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And a note about the author:


In 2002, then New York State Attorney General Eliot Spitzer, published Merrill Lynch e-mails in which Blodget gave assessments about stocks which conflicted with what was publicly published. In 2003, he was charged with civil securities fraud by the U.S. Securities and Exchange Commission. He agreed to a permanent ban from the securities industry and paid a $2 million fine plus a $2 million disgorgement.
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Old 10-24-2013, 03:35 PM   #3
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Quote:
Originally Posted by Prison Bitch View Post
And a note about the author:


In 2002, then New York State Attorney General Eliot Spitzer, published Merrill Lynch e-mails in which Blodget gave assessments about stocks which conflicted with what was publicly published. In 2003, he was charged with civil securities fraud by the U.S. Securities and Exchange Commission. He agreed to a permanent ban from the securities industry and paid a $2 million fine plus a $2 million disgorgement.
That was a major scandal for the industry. He wasn't the only one.

Nor does it contradict anything that he wrote.
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Old 10-24-2013, 03:45 PM   #4
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What European countries actually practiced austerity?!
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Old 10-24-2013, 03:46 PM   #5
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It's always nice to read the sage words of a Wall Street fraud.
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Old 10-24-2013, 04:07 PM   #6
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Originally Posted by Prison Bitch View Post
It's always nice to read the sage words of a Wall Street fraud.
It's always nice to see a dumbass who doesn't read the articles and then launches into ad hominems.
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Old 10-24-2013, 04:14 PM   #7
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Nobody reads your garbage, loser. And even if they did, nobody is going to take seriously a con artist banned from Wall Street for fraud.
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Old 10-24-2013, 04:33 PM   #8
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Where there tax cuts to go along with the reduction in spending?
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Old 10-24-2013, 05:33 PM   #9
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BS

Keynesianism is unsustainable long term.
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Old 10-24-2013, 07:35 PM   #10
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Quote:
Originally Posted by BucEyedPea View Post
BS

Keynesianism is unsustainable long term.
Lol define long term stupid bitch
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Old 10-24-2013, 07:50 PM   #11
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This thread is getting tons of interest, loser. Good work like usual.
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Old 10-24-2013, 08:12 PM   #12
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The Author is wrong in that Austrian's believe that WW2 ended the Great Depression because once the war ended the economy was sliding right back into a recession. Once the Republicans in Congress started dismantling the New Deal in the late 40s and ended the rationing and massive government spending did the economy start growing again.

Only once the government price controls, rationing, and massive interference in the market were swept away did the economy finally recover. Also, it is hard to consider a society with rationed goods as prosperous.
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Old 10-24-2013, 08:19 PM   #13
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"The Federal deficit in World War 2 was massive—much bigger than any time during the Great Depression. And we built up a huge Federal debt load. And ... we set the stage for two decades of amazing prosperity, in which we worked off those debts."

Some one explain to me how this is true.
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Old 10-24-2013, 08:23 PM   #14
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Quote:
Originally Posted by GloucesterChief View Post
The Author is wrong in that Austrian's believe that WW2 ended the Great Depression because once the war ended the economy was sliding right back into a recession. Once the Republicans in Congress started dismantling the New Deal in the late 40s and ended the rationing and massive government spending did the economy start growing again.

Only once the government price controls, rationing, and massive interference in the market were swept away did the economy finally recover. Also, it is hard to consider a society with rationed goods as prosperous.
How could WWII end the Depression while still claiming once it ended the economy recovered? I don't think you actually meant that as written.

Anyhow, the Austrians do not believe WWII itself ended it. They say it was once the war was over and there were massive spending cuts and cuts in govt that ended it. Similar to what you're saying in your second paragraph.

The conventional mainstream view is that the war itself ended it. Austrians say that is just the Broken Window Fallacy.
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Old 10-24-2013, 08:27 PM   #15
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Hard to agree as Keynes's advice has rarely been followed. Everyone loves the part where you deficit spend during tough times, but few countries have remembered to cut spending or raise taxes when things get better.
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Old 10-24-2013, 09:37 PM
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