Whenever the economy stumbles, politicians and interest groups commonly argue that government spending should be increased. Based on a theory known as Keynesianism, this increase is supposed to boost economic performance.
Yet the notion that bigger government leads to more growth is both theoretically unsound and empirically false.
This strange theory was first put forth back during the 1930s, when America was suffering from a deep downturn.
An economist named John Maynard Keynes argued that the economy could be boosted if the government borrowed money and spent it.
This strange theory was first put forth back during the 1930s, when America was suffering from a deep downturn.
An economist named John Maynard Keynes argued that the economy could be boosted if the government borrowed money and spent it.
According to this Keynesian approach, this new spending would put money in people’s pockets, and the recipients of the funds would then spend the money. This would, according to the theory, prime the pump as the money began circulating through the economy.
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The Keynesians also said that some tax cuts — particularly lump-sum rebates — could have the same impact since the purpose is to have the government borrow and somehow put the money in the hands of people who will spend it.
So is this the right recipe to boost a flagging economy? Keynesian theory sounds good, and it would be nice if it made sense, but it has a rather glaring logical fallacy. It overlooks the fact that, in the real world, government can’t inject money into the economy without first taking money out of the economy.Money Government Puts In Economy's Right Pocket Is Money First Removed From Economy's Left Pocket ...
Put more bluntly, Keynesianism only looks at one-half of the equation. It conveniently ignores the fact that any money that the government puts in the economy’s right pocket is money that is first removed from the economy’s left pocket. As such, there is no increase in what Keynesians refer to as aggregate demand.
The bottom line is that Keynesianism doesn’t boost national income, it merely redistributes it.
The people who lend the money to government generally are not the same people who get money in their pockets because of the new spending or tax rebates, but that’s not important. The Keynesian theory is based on the notion that there will be an increase in overall spending power, yet that clearly is not the case.
Some advocates of this theory get a bit more creative and say that Keynesianism works because it increases consumer spending rather than the money sitting idle.
But money that is unspent by consumers does not sit idle. It winds up in the banking system someplace and is used to finance investment spending.
Some advocates of this theory get a bit more creative and say that Keynesianism works because it increases consumer spending rather than the money sitting idle.
But money that is unspent by consumers does not sit idle. It winds up in the banking system someplace and is used to finance investment spending.
Stimulus Programs Increase Consumption No Increase In Economic Output ...
So-called stimulus programs, at best, shift how national income is used so that more gets consumed rather than invested, but at noted earlier, there is no increase in overall economic output.
It is worth noting that government could finance new spending through inflation. Thankfully that option doesn’t seem to be on the table since almost all politicians now realize that it would be foolish to mimic the disastrous policies of basket-case economies such as Argentina and Zimbabwe.
The real-world evidence also confirms that Keynesianism is a failure. Indeed, it was a failure even before Keynes published *The General Theory in the mid-1930s. More recently, George W. Bush gave out so-called rebate checks in 2001 and 2008, yet there was no positive effect in either case. And Bush certainly was a big spender, yet that didn’t work either.
Not that this should be a big surprise. *Surveys of the academic literature reveal that even left-wing international bureaucracies are producing research showing that bigger government hurts economic performance by misallocating national resources.
The real-world evidence also confirms that Keynesianism is a failure. Indeed, it was a failure even before Keynes published *The General Theory in the mid-1930s. More recently, George W. Bush gave out so-called rebate checks in 2001 and 2008, yet there was no positive effect in either case. And Bush certainly was a big spender, yet that didn’t work either.
Not that this should be a big surprise. *Surveys of the academic literature reveal that even left-wing international bureaucracies are producing research showing that bigger government hurts economic performance by misallocating national resources.
The American Recession - Depression Experience
What is even more interesting is that if you look at the GDP output for the era, the US recovered by 1936-37 (including the pre-1927 growth rate) and was then hit with the price tag for all the New Deal starting in 1938 which caused a recession.Combine that with the unemployment figures, however, and you get the result of each person employed being more productive, which is one of the effects of getting rid of inefficient businesses: those that survive or start-up with new manufacturing methods employ fewer people, but produce more goods at a lower cost.
When you get to WWII the New Deal retirement system kicks in just as the economy needs every worker of older age that it can get: from that you get the temporary tax benefit to private firms to offer health insurance, which was previously a ‘perk’ to high paid employees and executives.That temporary relief became a permanent problem, so that we now spend more today, per person and adjuste for inflation, than our grand parents did on health care.
It isn’t that procedures are too expensive, it is that health care is subsidized which sets a minimum floor of pricing due to insured payments and government encouraging increases in payments through the government run health benefits plans.
It isn’t that procedures are too expensive, it is that health care is subsidized which sets a minimum floor of pricing due to insured payments and government encouraging increases in payments through the government run health benefits plans.
It isn’t that so many people are uninsured (and what an awful way to pay for something) but that so many *are*. Insurance only works if a pay-out happens rarely - and that is not the case with health insurance… but then learning that subsidies cause over-use of whatever is being subsidized is something politicians love to ignore, across the political spectrum.
In spite of all the circumlocution and commotion by President Roosevelt, the 1930s President never came close to ending the depression economy. The massive deficit spending of World War II did end the depression economy and set it upon the road to postwar prosperity.
Consider World War II from an economic viewpoint. It was a huge public works operation financed by unprecedented deficit spending. It commandeered the productive capacity of this country and then destroyed this production in the battlefield. Why didn’t this bankrupt the country?
Theoretically, an operation like that should have bankrupted the country like a closed system business operation would have been bankrupted. (Fortunately, free-market capitalism at the macroeconomic level is open system.)
One can only imagine the derision and criticism had anyone of stature, in the 1930's, proposed such a program to end the depression economy. But there’s no denying that World War II deficit spending did do it.
Until one has a theoretical framework that can satisfactorily explain why World War II, not only did not bankrupt the country, but was the key factor in economic recovery — all one can do is bewail the problem without offering any solutions that will work *Open system perspective.
Until one has a theoretical framework that can satisfactorily explain why World War II, not only did not bankrupt the country, but was the key factor in economic recovery — all one can do is bewail the problem without offering any solutions that will work *Open system perspective.
Its republicans, not democrats you need to convince of the truthfulness of this thesis. Its republicans who have been spending down the treasury for the past decade. That’s the whole reason they got their asses kicked in the past two elections. If we can’t depend on republicans to exercise some fiscal responsibility, then what are they good for?
Its the only reason that I tolerate all their incessant moralizing, their over-dependence on religion for their politics and their unending desire to get involved in the affairs of my bedroom. If they can’t control themselves when it comes to the budget, then they’re worthless. Which is exactly why they got their asses kicked. There are 700 billion reasons why they should be fired.
Its the only reason that I tolerate all their incessant moralizing, their over-dependence on religion for their politics and their unending desire to get involved in the affairs of my bedroom. If they can’t control themselves when it comes to the budget, then they’re worthless. Which is exactly why they got their asses kicked. There are 700 billion reasons why they should be fired.
The depression didn’t end until 1946 or so. Ask anyone who lived through the war, or read any available history, and you will find that the citize4ns at home still didn’t have much. Rationing and scarcicty were still the order of the day. Aggregate cash flow numbers mean nothing.The situation only got fixed when the wartime and other depression-era controls were lifted and after many trade limitations were listed.
We might also remember that the US could also sell to the rest of the world as many other countries could not because they were lying in ruins after the war.
In short, all WWII did was kill many millions of people, ruin the psyches of millions more, destroy untold amounts of wealth, and set economic progress back by a decade or more.
During WW-II, there was massive increase in destructive consumption, but also a massive increase in capital investments, the net result was a stagnant economy for the individual.After the war, the capital investment was already in place, and the destructive consumption ceased. Individual productivity, forced upon the economy by manpower shortages, and amplified by the capital investment, rose to unprecedented heights.
We were able to sell our production for a profit instead of blowing it up.
The Fools Running The Federal Reserve
The half of Mr. Paulson’s 700B TARP funds which he’s already spent shoring up banks, including the one where he used to work, seems to have been vaporized already by short sellers. Too bad Mr. Cox is a fool on the subject of short selling and uptick rules. Maybe we should ask Robert Mugabe to take over at the Treasury, but then they seem to be following his policies anyway…print money.
After all, my fellow Republicans seem to have vaporized more wealth through ineptitude than Mugabe has by design. For what they’ve lost they might have purchased Uganda lock stock and barrel. Now the Democrats are going to try to outdo the present crop of nitwits. Throw money at the Big Three, now there’s a novel idea. Amtrack only managed to sublimate 13B in a decade. GM and Ford will easily go better in a quarter, or maybe even a month if they really work at it.
Ultimately, it was the increase in worker productivity, enabled by capital investment that ended the Great Depression.Let us see how well worker productivity fares with stimulus checks drawn at the expense of capital investment this time around.
It has never worked before, but I hear that since the right people are in charge now, it is bound to work this time.
The only thing that is known to truly work is to lower taxes and help small business create jobs. Reagan had it right.
The Stock Market approves because capital starts to filter down into the economy, the government approves because they receive more revenue from increased production and consumer spending, and the people approve because they get to go back to work.
Government welfare programs don’t kickstart anything, they only seem to prolong a recession; FDR proved that! The prewar economy was characterized by excess supply side capacity versus demand (farmers dumping milk, killing livestock and burning fields).
The war economy was precisely opposite: due to war, more demand than supply thus rationing: so it is true the citizens still didn’t have much. But there was full employment with wandering hobos shanghaied off the streets to work in factories. The private economy greatly improved their equity position and when the war was over, with price controls lifted, there was a burst of inflation due to pent-up demand.
The war economy was precisely opposite: due to war, more demand than supply thus rationing: so it is true the citizens still didn’t have much. But there was full employment with wandering hobos shanghaied off the streets to work in factories. The private economy greatly improved their equity position and when the war was over, with price controls lifted, there was a burst of inflation due to pent-up demand.
During deflation, when money supply is in a collapsing spiral due to debt deleveraging, the result is currency values soaring relative to other assets — the marketplace is saying that there is a shortage of dollars. This is nothing more than an imbalance in the supply/demand equation.
It is so simple to solve this problem that it seems to defy comprehension. Print money and introduce this cash flow into the private economy through tax rebates or cuts.
This would be just the same as if the US treasury owned a mine, with a shaft of solid gold, for use in an emergency such as this. If this doesn’t seem like it’s possible that the value ascribed to dollars is real those dollars could be buried and recovered through mining with the purpose of installing real value to the asset.
It is just as important to create money for price stability as it is to stop printing money for inflation.
The government can indeed create an asset to which the marketplace will ascribe full value. And this would not be a liability to be paying off with future cash flow.The only thing the conservatives can offer is the inevitability of financial collapse in severe economic downturn from excess credit expansion. Just try selling this load of pessimism to the electorate. This is the conservatives’ Achilles heel in the current crisis.
The political party that allows this to happen will be tossed out of office and wander in the political wilderness for the next 40 years, if it doesn’t destroy the party.
Conservatives should (posthaste) support large rebate like cash flow into the private economy until asset prices stop declining and housing prices start levitating. At this point to crisis will be over because toxic mortgages will be tradeable.
Otherwise, the big government political class will offer the World War II argument for huge public sector spending that won’t end like it did when World War II was over.
This could end up to be a permanent entrenchment of liberal/leftist European-style ruling political class which would destroy our dynamic entrepreneurial economy. It’s much better to have this money in the private economy for investment and consumer demand — for much greater multiplier effect. This allows the economy to grow in the direction it ought to.
Otherwise, the big government political class will offer the World War II argument for huge public sector spending that won’t end like it did when World War II was over.
This could end up to be a permanent entrenchment of liberal/leftist European-style ruling political class which would destroy our dynamic entrepreneurial economy. It’s much better to have this money in the private economy for investment and consumer demand — for much greater multiplier effect. This allows the economy to grow in the direction it ought to.
Unemployment remained very high throughout the 1930s and overall output did not get back to the 1929 level until World War II. But why did WWII end the depression? Oh, because government spending increased aggregate demand. That put the unused capacity of the nation to work.Under serious recession/depression conditions deficit spending is indicated. The problem becomes it is addictive.
Fiat money inflation (temporarily) benefits only those who are first to get the new currency - the politicians and their friends. From there, as the purchasing power of the dollar declines, each successive receiver and holder of dollars gets successively more shortchanged for his past real labor and savings. This is why counterfeiting - whether legalized or not is always morally wrong; it’s theft!
Fiat does not create real sustainable, stable, reliable value; only production of real, not fiat, goods and services can create real wealth.
This is the root problem of the mainstream modern economics profession: virtually no economist studies the root of economics - production and trade by individuals and corporations. They’re too busy studying consumption for the statistic folly of concocting ever more impossible schemes to centrally “plan” and manage” the flow of billions of individual trades.
Fiat does not create real sustainable, stable, reliable value; only production of real, not fiat, goods and services can create real wealth.
The Root of the Problem
This is the root problem of the mainstream modern economics profession: virtually no economist studies the root of economics - production and trade by individuals and corporations. They’re too busy studying consumption for the statistic folly of concocting ever more impossible schemes to centrally “plan” and manage” the flow of billions of individual trades.
When you accept money in payment for your effort, you do so only on the conviction that you will exchange it for the product of the effort of others… Destroyers seize gold and leave its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. [like the FED] Gold was an objective value, an equivalent of wealth produced.Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked ‘Account overdrawn. We need to return to free banking and privately issued, competing currencies.
Then the quality of our money would be restored and its value would again be objective - set by millions of individual traders every day instead of by the whims of 12 Fed governors every 6 weeks.
Of course, the statistics demand a monopoly on the issue of currency because if they had to compete with REAL money, they be out of business in a week and their giant looting scheme would be over.
Under a free market, only reckless fools would take Federal Reserve IOU Nothings in payment for their hard work. Abolish the Fed.
What the government should be doing, is borrowing now, whilst the economy heads to recession, and increase spending in order to bolster consumer spending and investment, but then be taking the money out of the economy in the good times, the boom.
This way the two extremes of the standard boom and bust economic cycle are softened and the standard of living can still increase over time with recessions being shallower and shorter, and booms not being so dramatic and, increasing inflationary pressure.
Under a free market, only reckless fools would take Federal Reserve IOU Nothings in payment for their hard work. Abolish the Fed.
What the government should be doing, is borrowing now, whilst the economy heads to recession, and increase spending in order to bolster consumer spending and investment, but then be taking the money out of the economy in the good times, the boom.
This way the two extremes of the standard boom and bust economic cycle are softened and the standard of living can still increase over time with recessions being shallower and shorter, and booms not being so dramatic and, increasing inflationary pressure.
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