Tuesday, December 23, 2008

Debunking The Keynesian Myth

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9 comments:

Douglas Porter said...

Actually, if he had been listening, it redistributes income through taxes AND it uses those taxes as collateral to take out loans to further prime the pump. It is a way of jump starting the economy with everyone's money at a time when it is hard to get EVERYONE to spend. Those workers who are put to work on this money presumably will spend their income, hence causing a money flow.

I love how he says "somehow start spending" and how he talks about Keynesians in the past tense. Government spending on upgrading the public infrastructure will inject new money in the economy, assuming that those employees spend their wages.

His supposed "logical fallacy" is not a logical fallacy, and no Keynesian thinks that money comes out of thin air. The money comes from taxes and borrowing. Assuming that the borrowing is borrowed on real dollar collateral, the result spending on government jobs should stimulate the economy IF government employees spend their wages and don't save.

So, aggregate demand. Yes, there is an increase in aggregate demand if those government employees spend their wages. And, yes, that money then circulates though the economy IF those businesses who do business with government employees spend those profits. Unfortunately, this spending is limited.

Yes, there will be an overall increase in circulating currency in the economy, because taxes and borrowing take money from everyone in the economy, which assures that money from everyone in the economy is circulating.

Your friend in the video doesn't actually make a logical argument; he just states that there is no net increase in the money circulating in the economy. This is what is called an assertion.

Also, his assertion that all the circulating money ends up in the banking system is patently false. Some ends up in the banks, some is spent.

Wow, what a retard. He just argued that Hoover's spending and tax increases caused the Great Depression, when it was obviously the dust bowl that put millions of farmers and their small banks out of business. When your economy is primarily a farming economy, and your farms are going out of business and defaulting on their loans, the GD is the result. What a liar.

The problem I have with this guy is that he is uncritical of his own argument. He is a child of corruption. Keynesian stimulus is always much, much, much smaller than the overall economy, and hence can only have a limited effect. The real recovery has to come from the economy, which means the real reason why the GD lasted so long was because it was so deep. 9000 small banks and tens of thousands of small farms going out of business make a dent in the economy of such colossal size, that any stimulus is but a ding.

Again, it doesn't fail, there are no theoretical flaws, and your video is propaganda. If he had ended his video objectively, he would have noted that government likes to seem like it is doing something in times of crisis as a strategy against revolution and anarchy.... but, wait, he's not objective!

December 28, 2008 at 7:02 AM
Chris said...

I guess you are not going to answer this post! Pity, pity.

December 30, 2008 at 11:46 PM
Josh said...

I planned to, I just forgot about it. This will take more time, I'll look at it tomorrow.

December 30, 2008 at 11:59 PM
Josh said...

"9000 small banks and tens of thousands of small farms going out of business make a dent in the economy of such colossal size, that any stimulus is but a ding."

Why did they all go out of business?

"Actually, if he had been listening, it redistributes income through taxes"

Keynes promotes spending deficits, not increasing taxes.

"It is a way of jump starting the economy with everyone's money at a time when it is hard to get EVERYONE to spend."

If people are not spending, its because they cannot afford to. They should be saving to more wisely spend their money, hence stimulating more valuable production and building a stronger economy.

"Those workers who are put to work on this money presumably will spend their income, hence causing a money flow."

At least the ones that are working, the other 20% of the population is screwed I suppose.

"Government spending on upgrading the public infrastructure will inject new money in the economy"

And creates more debt, which more money is needed to pay back off...in the right pocket, out the left.

"Assuming that the borrowing is borrowed on real dollar collateral"

I'm not sure what this means.

"the result spending on government jobs should stimulate the economy IF government employees spend their wages and don't save."

You assume spending = economic growth. It doesn't. You spend on things that are already produced, and when there's a lot more money available to spend, money gets directed into places that provide no value (mal-investment). The depression was the result of mal-investment in the 20s due to a FED created stock bubble.

"there will be an overall increase in circulating currency in the economy, because taxes and borrowing take money from everyone in the economy"

Yes, lets take all kinds of money from people, spend a lot of it on useless government bureaucracies, and then give back a smaller portion to the people while increasing their debt.

"Also, his assertion that all the circulating money ends up in the banking system is patently false. Some ends up in the banks, some is spent."

And when it is spend, the people take that money and put it where?

"he just states that there is no net increase in the money circulating in the economy."

He demonstrates it. The only way their could be a net increase in money is via printing it, which would simple lower the value of the money. The only way to create wealth is via production of items that people want to buy (so they can sell them to other nations). The more valuable production in an economy, the more the currency can buy, the more valuable the currency, the less you need to live a higher standard of living. Of course, to produce items people want requires investment which comes from savings.

He treats printing money as a crazy idea noone would be stupid enough to do...except the FED, Argentina and Zimbabwe, so there is no increase in "cash" and no increase in wealth.

"He just argued that Hoover's spending and tax increases caused the Great Depression"

The point is that it didn't help. There was going to be a recession regardless, a very painful one, but it could have been much shorter. The intervention from Hoover and FDR prolonged it.

"Keynesian stimulus is always much, much, much smaller than the overall economy, and hence can only have a limited effect."

Unfortunately a negative effect.

"The real recovery has to come from the economy, which means the real reason why the GD lasted so long was because it was so deep."

The recovery did come after government spending was cut after the war. Unfortunately, the GD lasted so long because of government price fixing which resulted in high unemployment for 12 years.

"he would have noted that government likes to seem like it is doing something in times of crisis as a strategy against revolution and anarchy.... but, wait, he's not objective!"

The reasons behind the government actions are many, but the reasons do not matter as the actions provide the wrong result.

December 31, 2008 at 11:44 AM
Chris said...

"Why did they all go out of business?"

I think it had to do with one of the longest droughts in history. But don't worry, Josh, you just hide your head in your ideology and pretend as if the New Deal was the key cause.

http://en.wikipedia.org/wiki/Dust_bowl

"The Dust Bowl affected 100,000,000 acres"

with more than 500,000 Americans left homeless.

That elimination of wealth couldn't have been good for smaller banks, which had loaned these farmers money to expand and modernize their farms. No wonder their was a second recession in 1937.

"Keynes promotes spending deficits, not increasing taxes. "

Spending deficits and the use of taxes. BOTH. Again, deficits are not deficits, but loans. The propagandistic language that you are not critiquing is coloring your view without you even knowing it.

"If people are not spending, its because they cannot afford to. They should be saving to more wisely spend their money, hence stimulating more valuable production and building a stronger economy."

Pish posh. It's because of ideologues like you who don't know what they are talking about. People will not spend if all the pundits are saying save! save! save! Only those who truly don't have the money to spend need to save (those, or the people who are saving for a reason).

"
At least the ones that are working, the other 20% of the population is screwed I suppose."

That's why its important that people keep spending. If people save, save, save there will be a further psychological contraction. Those in control should be showing the public how the bailout money is being spent, and how it is putting those in control of the lending institutions at ease. But what is happening? Nimrods like you are rallying against the bailout as if it is the Great Satan.

"And creates more debt, which more money is needed to pay back off...in the right pocket, out the left."

Yes, it creates new debt in the short term, but in the long term it creates money velocity, which creates new money by easing up the pyschological defense against spending during a crisis, which is natural.

"I'm not sure what this means."

Collateral! Like when a person takes out a loan. The bank looks at how much collateral you have.

"You assume spending = economic growth. It doesn't. You spend on things that are already produced, and when there's a lot more money available to spend, money gets directed into places that provide no value (mal-investment)."

You seem to think the economy is only investment. It is not. The backbone of the economy is the everyday spending on everyday items, and the life-long spending on big items like houses and cars. When I buy something, something new has to be produced, hence causing someone to work to produce it. Investment is investment, the economy is the economy. Get your concept straight.

"The depression was the result of mal-investment in the 20s due to a FED created stock bubble."

No, the stock market crash was the result of the FED (maybe), while the Great Depression was the result of more than one factor. For example, 500,000 people were left homeless by the dust bowl from 1929 to 1936.

"Yes, lets take all kinds of money from people, spend a lot of it on useless government bureaucracies, and then give back a smaller portion to the people while increasing their debt."

If people are too scared to spend or if 500,000 people are homeless because of a natural disaster, yes, redistributing to stimulate the economy is the right thing to do. And, no, not all the bureacracies FDR created were useless.

"And when it is spend, the people take that money and put it where?"

You obviously don't understand the money flow. Some ends up in the bank and some is spent. That's how velocity works. Also, sometimes money is taken out of the bank! Especially when people are already making money by being employed by useless government bureaucracies!

"He demonstrates it. The only way their could be a net increase in money is via printing it, which would simple lower the value of the money."

No, he merely states it. He doesn't demonstrate anything. It is a bad argument.

"The only way to create wealth is via production of items that people want to buy (so they can sell them to other nations)."

Yes, and the everyday buying of those items IS the economy. Hence, stimulating people to spend during an economic crisis is the right thing to do.

"The more valuable production in an economy, the more the currency can buy, the more valuable the currency, the less you need to live a higher standard of living. Of course, to produce items people want requires investment which comes from savings."

This is assumes that the value of real wages stays equal.

"He treats printing money as a crazy idea noone would be stupid enough to do...except the FED, Argentina and Zimbabwe, so there is no increase in "cash" and no increase in wealth."

And except all the previous rulers in the history of economics.

Stop comparing the U.S. to Argentina and Zimbabwe. They are not the same example, yet.

"The point is that it didn't help. There was going to be a recession regardless, a very painful one, but it could have been much shorter. The intervention from Hoover and FDR prolonged it."

No, it was the fucking drought that left 500,000 people homeless, put thousands of small banks out of business. The only thing you have succeeded in doing is a) convincing me that you don't know the differnce between investment capital and the economy, b) you don't know money velocity and flow works and how important it is, and that you don't understand that a stimulus can be nothing but positive. The only negative thing that FDR did was perhaps creating a couple of useless governmental orgnanizations, which were eliminated after the depression.

"Unfortunately a negative effect."

Sorry, I don't see your argument. You can't say that considering the dust bowl and its effects.

"
The recovery did come after government spending was cut after the war. Unfortunately, the GD lasted so long because of government price fixing which resulted in high unemployment for 12 years."

No, it was the drought that made it last so long, Josh. The farms represented one of the biggest sectors of the economy at that time. New economies just don't grow up over night. They take decades to grow. You're just angry that government would take taxes from people.

"The recovery did come after government spending was cut after the war. Unfortunately, the GD lasted so long because of government price fixing which resulted in high unemployment for 12 years."

No, it came during the war, when demand for military products created an huge increase in the demand for labor. The Great Depression ended in the early 40s, Josh, not the mid-40s.

"The reasons behind the government actions are many, but the reasons do not matter as the actions provide the wrong result."

According to you. But according to you, the economy and investment are the same thing, which is patently false.

January 1, 2009 at 12:05 AM
Josh said...

"I think it had to do with one of the longest droughts in history. But don't worry, Josh, you just hide your head in your ideology and pretend as if the New Deal was the key cause."

Natural disasters don't help anyone, but the government intervening and attempting to sidestep nature is just a waste. The point I make is that, a recession was inevitable, a deep one that would last a few years maybe, but the depression was caused by the government. Their intervention prevented and depressed the ability for a rebound to take place sooner.

"(those, or the people who are saving for a reason)."

Here's a reason: for emergencies incase you lose your job.

"Nimrods like you are rallying against the bailout as if it is the Great Satan."

More name calling. It could be called the "great satan" i supposed. The bailout money is being banked by the big banks as they de-leverage their debt to capital ratio. The stimulus package provide earlier this year was used to pay down personal debt and it was also banked. There are hardly any talking heads on TV promoting saving. You have to understand, the videos I put up is a VERY small percentage of the propaganda spewed on television. These guys are only every brought on to provide a counter-argument to the assumed solution and are never taken seriously. They're there to play the devil's advocate only.

"Yes, it creates new debt in the short term, but in the long term it creates money velocity"

I love that term...money velocity. Sometimes money can go to fast maybe and needs to slow down or else it might crash?

"Assuming that the borrowing is borrowed on real dollar collateral"

Its borrowed on future dollars...US Government Bonds...not real dollars...

"You seem to think the economy is only investment. It is not. The backbone of the economy is the everyday spending on everyday items, and the life-long spending on big items like houses and cars. When I buy something, something new has to be produced, hence causing someone to work to produce it. Investment is investment, the economy is the economy. Get your concept straight."

It is based on investment. You buy a camera you think will be able to take nice pictures for you for a long time. The usage you get out of the camera is the return on your investment and the money you have given to the manufacturer is an investment into that company. This can be brought back to my argument as to why businesses have a stake ensuring their products are safe, but that's another post. . .

You do not provide a job because you bought something, the job was created before hand.

In relation to cars, if you have to go out and buy a new Chevy every 5 years, compared to a new Honda every 10 years, Chevy may have to support more jobs to make more cars, but the jobs Honda provides are obviously providing more value as they are making cars that last longer. Now, would you rather live in an economy where all of the companys acted like Honda, or like Chevrolet? Obviously Honda because you don't have to make as many cars, the labour can be used to do something else thats useful instead of rebuilding Chevs every 5 years. So if Americans can only buy Chevs, than they are worse off because they have to use twice the labour and resources to get the same functionality and return on your INVESTMENT you get out of a Honda. Through buying Hondas, the individual has invested in a product and expects to get a better return on the investment than if they had bought a Chevy. Wealth is redistributed to Honda as they are more efficient and create better quality and then they are able take your cash and reinvest it into better products for the future which they think will create profit and jobs. The government cannot stop this no matter how much they want to prop up the Big 3. They can just prolong it and cause more pain than good in doing so.

So yes, an economy is based on investment, not spending.

"For example, 500,000 people were left homeless by the dust bowl from 1929 to 1936."

They should migrate to more fertile land :).

"No, it came during the war, when demand for military products created an huge increase in the demand for labor. The Great Depression ended in the early 40s, Josh, not the mid-40s"

Standard of living didn't increase until the mid-40s.

"According to you. But according to you, the economy and investment are the same thing, which is patently false."

I just proved you otherwise.

January 2, 2009 at 10:32 AM
Douglas Porter said...

"Natural disasters don't help anyone, but the government intervening and attempting to sidestep nature is just a waste. The point I make is that, a recession was inevitable, a deep one that would last a few years maybe, but the depression was caused by the government. Their intervention prevented and depressed the ability for a rebound to take place sooner."

Nope, a massive chunk of your economy suddenly disappearing is what causes long depressions. The most similiar depression to this one only lasted 4 years. Unfortunately, in the 19th century they didnt have the problem of corporations moving to China to pay slave wages. That's going to make the current crisis last A LOT longer.

"Here's a reason: for emergencies incase you lose your job."

They should already have savings. That's economic wisdom. If they don't, the talking heads shouldn't slow down the economy more by telling everyone to save and lying about the type of alternatives they have politically.

"More name calling. It could be called the "great satan" i supposed. The bailout money is being banked by the big banks as they de-leverage their debt to capital ratio. The stimulus package provide earlier this year was used to pay down personal debt and it was also banked. There are hardly any talking heads on TV promoting saving. You have to understand, the videos I put up is a VERY small percentage of the propaganda spewed on television. These guys are only every brought on to provide a counter-argument to the assumed solution and are never taken seriously. They're there to play the devil's advocate only."

I think that sort of commentator has more traction than you beleive. Their type of arguments have been leading the economic policy of institutions and governments for the last twenty years, without interruption.

"I love that term...money velocity. Sometimes money can go to fast maybe and needs to slow down or else it might crash?"

Its a real ecnomic term, Josh. Look it up. It is the speed at which one dollar passes between X number of hands.

"Its borrowed on future dollars...US Government Bonds...not real dollars..."

US Government Bonds are predicated on tax dollars. REAL DOLLARS.

"
It is based on investment. You buy a camera you think will be able to take nice pictures for you for a long time. The usage you get out of the camera is the return on your investment and the money you have given to the manufacturer is an investment into that company. This can be brought back to my argument as to why businesses have a stake ensuring their products are safe, but that's another post. . ."

Josh, there could be ZERO investment in new products tomorrow and there would still be an economy, because the economy is more than investment. The real problem here is that you don't know your basic definitions.

One of three things expands the economy: increases in population, increases in demand, or investment. At best, you are right in saying that investment is one factor that expands the economy and creates new jobs.

The camera example is a bad example. Tech companies intentionally charge higher prices for new products to reinvest that money and make a profit, hence being able to profit and innovate new tech at the same time. For example, I bought a camera for $800 dollars, knowing full well that the price was exorbitant. The camera, just before the crisis, was selling for $400. That means that that extra 400 dollars was used to develop the newer model while company still made a product.

"You do not provide a job because you bought something, the job was created before hand"

It was manufactured based on the conclusion that there would be demand for it. That someone would buy it. ME>>> Therefore, because someone calculated that there would be enough demand to sell their product, I, and anybody else who demands cameras, created that job.

"In relation to cars, if you have to go out and buy a new Chevy every 5 years, compared to a new Honda every 10 years, Chevy may have to support more jobs to make more cars, but the jobs Honda provides are obviously providing more value as they are making cars that last longer. Now, would you rather live in an economy where all of the companys acted like Honda, or like Chevrolet? Obviously Honda because you don't have to make as many cars, the labour can be used to do something else thats useful instead of rebuilding Chevs every 5 years. So if Americans can only buy Chevs, than they are worse off because they have to use twice the labour and resources to get the same functionality and return on your INVESTMENT you get out of a Honda. Through buying Hondas, the individual has invested in a product and expects to get a better return on the investment than if they had bought a Chevy. Wealth is redistributed to Honda as they are more efficient and create better quality and then they are able take your cash and reinvest it into better products for the future which they think will create profit and jobs. The government cannot stop this no matter how much they want to prop up the Big 3. They can just prolong it and cause more pain than good in doing so.
"

I would rather live in world where people make a fair wage. That is not Japan. The Japanese know that it is cheaper to produce in Japan, becasue their wages are much lower. They're not stupid.

Also, you are ignoring the velocity that high paying jobs create in the economy.

Finally, the investment argument is utter shit if only a small percentage of the population can benefit from it. Right now, we benefit from the high wages fought for by generation after generation of workers. The big three unions represent the tip of this economy.

"So yes, an economy is based on investment, not spending."

Innovation and a certain degree of economic expansion is based on investment, but no, the economy is not based on investment. Buy and selling is the core of the economy. Investment would not be able to occur without it.

"They should migrate to more fertile land :). "

Insert insult here: _______.

"Standard of living didn't increase until the mid-40s."

And?

"I just proved you otherwise."

No, you just proved yourself woefully ignorant.

Answer me this: why would I invest my time and capital into developing a product if there was no one to buy it in the first place? I wouldn't because the economy and investment is not a chicken and egg question. The economy is a requisite for new investment to occur.

January 3, 2009 at 4:52 AM
Josh said...

"Unfortunately, in the 19th century they didnt have the problem of corporations moving to China to pay slave wages."

And the 30s didn't either.

"They should already have savings. That's economic wisdom."

Average savings rate in the US is negative. So to recommend to save is wisdom. To recommend to save in currencies other than the US dollar is greater wisdom.

"Its a real ecnomic term, Josh. Look it up. It is the speed at which one dollar passes between X number of hands.

I never doubted the existence of the term.

"US Government Bonds are predicated on tax dollars. REAL DOLLARS."

Tax dollars are dependent on future economic growth, which is dependent on production, which is dependent on profit. . . and so on. They're not real dollars, and dollars are not real money.

"Josh, there could be ZERO investment in new products tomorrow and there would still be an economy, because the economy is more than investment. The real problem here is that you don't know your basic definitions."

Yes, and North Korea has an economy too. I'd like a growing economy, and that requires savings and investment. Not spending money on trinkets.

"One of three things expands the economy: increases in population, increases in demand, or investment."

Population and investment are needed for production and therefore growth in the economy. Demand has no bearing on the economy if there is no supply.

"The camera example is a bad example. Tech companies intentionally charge higher prices for new products to reinvest that money and make a profit, hence being able to profit and innovate new tech at the same time. For example, I bought a camera for $800 dollars, knowing full well that the price was exorbitant. The camera, just before the crisis, was selling for $400. That means that that extra 400 dollars was used to develop the newer model while company still made a product."

I don't understand why this counters my point or why this makes the camera a bad example. Please explain.

"I would rather live in world where people make a fair wage. That is not Japan. The Japanese know that it is cheaper to produce in Japan, becasue their wages are much lower. They're not stupid."

The Japanese economy has been stagnate for the past 15 years due to bailouts like we are seeing in the US. Your response, again, has nothing to do with the point I made in my comment. But thanks for coming out.

"The big three unions represent the tip of this economy."

Tip of....the iceberg the US economy is running into :) I'm so funny.

"Innovation and a certain degree of economic expansion is based on investment, but no, the economy is not based on investment. Buy and selling is the core of the economy. Investment would not be able to occur without it."

Buying is investing, and selling is liquidating that investment.

"why would I invest my time and capital into developing a product if there was no one to buy it in the first place? I wouldn't because the economy and investment is not a chicken and egg question. The economy is a requisite for new investment to occur."

You wouldn't, which is why capitalism doesn't bring the doom and gloom you claim it does. Government intervention does.

January 6, 2009 at 3:11 PM
Douglas Porter said...

"And the 30s didn't either."

Good point! It was one of the longest depressions as a result!

"Average savings rate in the US is negative. So to recommend to save is wisdom. To recommend to save in currencies other than the US dollar is greater wisdom."

Not when that saving will cause the economy into depression.

"Tax dollars are dependent on future economic growth, which is dependent on production, which is dependent on profit. . . and so on. They're not real dollars, and dollars are not real money."

Tax dollars are taken from real paychecks, Josh! They are based on nominal and real dollars. You might argue that the recession will allow less tax dollars to be taken, but that does not the diminish them as a real source of the real dollars.

I see that when the facts don't align to your theory, you have no problems lying to yourself!

"Yes, and North Korea has an economy too. I'd like a growing economy, and that requires savings and investment. Not spending money on trinkets."

Actually, North Korea has been characterized by an economy that hasn't been working. Hence the millions starving. When an econonmy can't get food to people, it's probably not a working economy.

Anyway, equating the North Korea economy to the American economy is another example of your lying to yourself to make the facts align with your theory. If the American economy of the 1990s were to have suddenly have had a 0 growth quarter, it would still have been an economy, an much better economy than the North Korean one. It would have traded goods on a daily basis, bought and sold, produced, all the basics of an economy. It would not have been growing, of course, but growth is not a requisite of an economy being an economy.

"I'd like a growing economy, and that requires savings and investment. Not spending money on trinkets."

A growing economy definitely does require investment, but I'm not so sure it requires savings. People can go to venture capitalists, take loans out, borrow from friends to create a new business without having any savings at all.

"Population and investment are needed for production"

Nope. Production can occur without investment. The local tire factory can just go on producing tires over and over without investment. It's a fact. Stop lying to yourself!

"and therefore growth in the economy."

Nope, production has nothing to do with investment. Increased production has something to so with investment (sometimes), but not necessarily.

"Demand has no bearing on the economy if there is no supply."

True, and production can be increased by using profits from previous production to build new machines. Is this investment? Yes and no.

"I don't understand why this counters my point or why this makes the camera a bad example. Please explain."

Because most products don't have investment capital built into the profits they get from selling the product.

"The Japanese economy has been stagnate for the past 15 years due to bailouts like we are seeing in the US. Your response, again, has nothing to do with the point I made in my comment. But thanks for coming out."

Just reiterating my point and telling you why Japan has been in recession for many decades: low wages. Their bad monetary policy just got the ball rolling.

"Tip of....the iceberg the US economy is running into :) I'm so funny."

If there are no high paying jobs, of course.

"Buying is investing, and selling is liquidating that investment.

No, buying is buying for one's needs or wants. Buying is only investing when you know a portion of what you are paying goes toward reinvestment, like with my 800 dollar camera. When I buy a carrot at the grocery store, I am buying, not investing.

Selling is not "liquidating". Selling occurs to reclaim the costs of production and to make a profit. And no, profit DOES NOT EQUAL investment.

"Buying is investing, and selling is liquidating that investment."

When the government does something that is not wanted, it is stopped, but by a process different than the market. THE GOVERNMENT IS NOT THE MARKET. Acting like it is or should be is ridiculous.

January 7, 2009 at 1:11 AM

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