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.
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.
*The New World Order Is Not New
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.
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 ...
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.
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.
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.
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.)
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 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 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.
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 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.
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.
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 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.
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.
Under serious recession/depression conditions deficit spending is indicated. The problem becomes it is addictive.
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.
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.
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.