Economics Questions

Re: What to reply to keynesians when they say "stimulus is good because look what happened in 1929"?

Consumariat — Fri, 09 Sep 2011 16:56:26 GMT

"Did Keynes champion tax cuts or government spending increases in a recession?

Again, he was extremely vague. On spending, he did say that deficits should be temporary and self-liquidating. He clearly did not advocate long-term spending in excess of revenues, since that causes structural deficits. Nor did he specifically recommend tax reductions for individuals or companies. Those types of cuts, however, are an obvious way to achieve his goal of boosting investment in a recession. And it's been used with great success by his Keynesian disciples. For example, the Kennedy Administration tax cuts were championed by Keynesian economists, and proved very successful at raising investment."

So it seems Smiling Dave had it almost corrrect. It was followers of Keynes that put forward explicitly the idea of tax cuts as a stimulus. Although I would claim that this is just a logical conclusion of following Keynes' theory.

Re: What to reply to keynesians when they say "stimulus is good because look what happened in 1929"?

Wheylous — Fri, 09 Sep 2011 16:44:03 GMT

He wouldn't have been in favor of efforts to raise tax rates in a recession to eliminate deficits

Re: What to reply to keynesians when they say "stimulus is good because look what happened in 1929"?

Consumariat — Fri, 09 Sep 2011 16:10:24 GMT

A marginally better source;

http://money.cnn.com/2010/02/04/news/economy/meltzer_keynes.fortune/

"Keynes wanted deficits to be cyclical and temporary. He wouldn't have been in favor of efforts to raise tax rates in a recession to eliminate deficits. "

Re: What to reply to keynesians when they say "stimulus is good because look what happened in 1929"?

Consumariat — Fri, 09 Sep 2011 16:00:44 GMT

That's a new one. Wikipedia says Hoover raised taxes in 1932.

Yes. Hoover raised taxes. That's one of the things that Keynesians cite as making the GD worse.

Note that there is no mention of cutting taxes.

Note also that there is no mention of increasing them.

Please show me some evidence of Keynesians calling for tax cuts during the Great Depression.

Like I said, Keynes did not publish the General Theory till '36 so there would have been no 'Keynesians' to call for anything. Certainly, there will have been people proposing all sorts of solutions - some of which were semi-Keynesian in appearance. However, witout a theoretical foundation for policy proposal, most of what went on in the New Deal was just ad hoc, 'try-it-and-see' stuff.

Now maybe some of the smarter ones, 50 years later, after seeing what a total flop their policy was, decided to make excuses and said, "Oh, did we forget to mention that you should cut taxes?" though I would like to see evidence for that, too.

I will try to find some direct sources from Keynes, but for now there is this;

Following John Maynard Keynes, many economists recommend deficit spending to moderate or end a recession, especially a severe one. When the economy has high unemployment, an increase in government purchases creates a market for business output, creating income and encouraging increases in consumer spending, which creates further increases in the demand for business output. (This is the multiplier effect). This raises the real gross domestic product (GDP) and the employment of labour, and if all else is constant, lowers the unemployment rate. (The connection between demand for GDP and unemployment is calledOkun's Law.) Cutting personal taxes and/or raising transfer payments can have similar expansionary effects, though which method has a better stimulative economic effect is a matter of debate.

http://en.wikipedia.org/wiki/Deficit_spending#Keynesian_Effect

I will try and get a better source, but you may be completely correct that it was later Keynesians that claimed tax cuts were beneficial. All I know is that modern Keynesians (or rather neoclassicals) adopt this perspective.

Re: What to reply to keynesians when they say "stimulus is good because look what happened in 1929"?

Smiling Dave — Fri, 09 Sep 2011 14:36:35 GMT

That's a new one. Wikipedia says Hoover raised taxes in 1932.

Here's what Keynes prescribed for the Great Depression, according to wikipedia:

Keynes argued that the solution to the Great Depression was to stimulate the economy ("inducement to invest") through some combination of two approaches: a reduction in interest rates and government investment in infrastructure. Investment by government injects income, which results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.^[5]

Note that there is no mention of cutting taxes. Please show me some evidence of Keynesians calling for tax cuts during the Great Depression.

Hoover and FDR did all that Keynes would have wanted of them before the book was written. The Hoover Dam, that great Keynseian white elephant, was started and finished before the General Theory was written.

Re: What to reply to keynesians when they say "stimulus is good because look what happened in 1929"?

Consumariat — Fri, 09 Sep 2011 14:11:53 GMT

But Keynesians would have recommend cutting taxes in the Great Depression. Hoover and Roosevelt both raised them to ridiculous levels. This is one of the reasons that Keynesians give for the GD lasting so long.

Re: What to reply to keynesians when they say "stimulus is good because look what happened in 1929"?

Smiling Dave — Fri, 09 Sep 2011 14:04:20 GMT

The General Theory was apologetics for what was already being applied by Hoover and then FDR for years.

'Course, you have to read up a bit to see the evidence for that.

Re: What to reply to keynesians when they say "stimulus is good because look what happened in 1929"?

Consumariat — Fri, 09 Sep 2011 13:43:21 GMT

I would agree that Smoot-Hawley was the main trigger that turned the world towards depression, and I think this is widely accepted by all economic schools of thought. What I am not so certain of is whether or not 'Keynesianism' was actually applied during the GD. I mean, the General Theory wasn't published till 1936?

What is the definition of Keynesianism that you are using here if not the application of the General Theory?

Re: What to reply to keynesians when they say "stimulus is good because look what happened in 1929"?

Hazel Brazell — Fri, 09 Sep 2011 07:28:33 GMT

Thank you guys, excellent replies.

Re: What to reply to keynesians when they say "stimulus is good because look what happened in 1929"?

Properal — Wed, 31 Aug 2011 04:30:58 GMT

If markets are prone to fall into depressions that can only be solved by Keynesian policies or long amounts of time, why have we not had longer depressions than the Great Depression before Keynesianism?

Ask the Keynesian if the stimulus enacted during the Great Depression was good, why was the Great Depression the longest depression in history. Is it just a coincidence that the first time Keynesian like stimulus was tried that the longest depression in history occurred? Or is it likely that the stimulus made it harder to recover? Make them answer this question. They will avoid answering it and change the subject because, they can't answer it. Keep reminding them that they have not answered the question. They will get frustrated because it causes cognitive dissonance, by showing them empirical evidence that Keynesian policies may be the cause and not the solution. It forces them to hold two definitions of the severity of the great depression at the same time. One that it was the worst that any depression in history needing unprecedented Keynesian policies and on the other hand it was better than the old days before Keynesian policies.

They may ask you for evidence that the Great Depression is the longest and worst. Remind them that if wasn't so bad why according to their own explanation it lasted from 1929 to the end of World War II. That's12 years. Then ask them to find a depression longer than the Great Depression.

They may respond with the Longest Depression was longer (1873-1879) siting NBER data. However you can respond that production numbers were lower due to falling prices during that time and not lower production. So it was not really as severe a depression as the statistics indicate. You can site page 30 of A Monetary History of the United States, 1867-1960.

The other claim they may make is that recessions have been shorter since Keynesian policies have been enacted. They may sight the NBER data that uses the technical definition of a recession. This makes the Great Depression two recessions, so it seems like it is two shorter events instead of one long event. Once the Great Depression is broken into two events the average length of a recessions is shorter after Keynesianism than before, especially when the before mentioned mythical Long Depression is included in the data. Now you can remind them that they can't have it both ways. Either The Great Depression was one unprecedented event that was improved by stimulus that was never need before to end depressions (because Keynesianism did not exist before) and did not end until the true Keynesian policies of WWII were enacted , or it was just two separate cycles that on average are shorter that past cycles, and ended before WWII started. According to their theory if there was no stimulus the Great Depression would be one long event and would have continued past 1941 had the US not entered into the war. It would have been longer than the 12 years that they claim it lasted. They can't claim it was the longest depression in history and deny it at the same time. They can't claim it took Keynesian policies (WWII) to end it and claim it was not as bad as other depressions in history.

Why were there no depressions longer than the Great Depression before Keynesianism?

For a quick (~1hr) lesson on the Great Depression watch Murphy's - Contrasting Views of the Great Depression.

Re: What to reply to keynesians when they say "stimulus is good because look what happened in 1929"?

James — Tue, 30 Aug 2011 13:47:11 GMT

Would you read two books to change minds?

You should read about the actual regulatory history in those days, but no matter when it's taking place, regulation is a barrier to entry controlled and/or surpassable by the big fish. Regulation is pointless if Congress is effectively owned by industry lobbyists, and any other form of 'regulation' is a revolving door for the same guys who run Wall Street.

As for stimulus spending, you can mention the broken window fallacy. If someone's window breaks, the fact that they have to consume to get it fixed doesn't make them any richer.

What the Keynesian is really suggesting is that consumption should be forced, because otherwise people will just save their money forever and never spend it on anything. It doesn't matter so much what they spend it on, as long as it is spent, IMMEDIATELY.

Now, what's really going to happen if lots and lots of people are left to their own devices to save is that the interest rate will be naturally driven down, because there's a greater supply of money available for people to borrow, allowing for investment in healthy and sustainable growth as consumers are able to spend their savings on exactly what they want, when they want it. The system does seek a state of equilibrium when it's left alone.

The Keynesian thinks that this happens too slowly, or something... That deferred consumption in the form of savings is some sort of waste of time, and that the government is in a position to cut to the chase - the spending - by forcing the taxpayer to spend right now on anything, absolutely anything...

It leads to the boom-bust cycle... Forcing the taxpayer to spend money on something they don't really want right now artificially elevates the apparent value of that something until such a time as the artificial stimulus is no longer available, and then the bubble pops.

For people, money is a means to an end. It's good for spending now, or spending later, on the real things one actually wants. That's the utility of money, for an individual person. For Keynesians, money is wealth in itself, and when you have a lot of money sloshing around the balance sheets, things must be going great, even if the money is being spent on things no one in their right mind would want. Incredibly, for those Keynesians who believe that WW2 ended the Great Depression, it doesn't matter that the money was being spent on killing millions of people and laying waste to half a continent.

I mean, they've lost the plot. One is not being an economist by manipulating demonstrated preference with force. You supposed to tell people how they can most efficiently get what they want, not what they should want.

It is a good system for fleecing sheep. It is not a good system for making the sheep wealthier.

Re: What to reply to keynesians when they say "stimulus is good because look what happened in 1929"?

Hazel Brazell — Tue, 30 Aug 2011 13:36:06 GMT

Perfect, thank you! :)

Re: What to reply to keynesians when they say "stimulus is good because look what happened in 1929"?

John James — Tue, 30 Aug 2011 12:56:03 GMT

Well, I mean a chapter or two in either one of those would do it, but obviously I figure the more resources made easily available, the better.

But if you want the short answer:

a) The market wasn't "unregulated", so that couldn't have been the cause of the crash.

b) Even to the degree that the market was free, a lack of regulation was not the cause of the crash, let alone the Depression that followed for more than a decade.

c) There is no such thing as "too few cash circulating." The Depression was extended and exacerbated by government intervention, beginning with the Smoot-Hawley Tariff Act, and continuing with FDR's alphabet soup...as Sowell outlines. FDR issued more Presidential executive orders than all subsequent presidents throughout the rest of the century.

As you can probably guess, short answers like that are not going to convince anyone like your friend. Indoctrinated myths like the ones you named are not at all easily let go of. It's very difficult for people to realize (let alone admit) they've been wrong about something their whole life, even when they're faced with all the facts...so there isn't much you could hope to do with "brief answers" to such big questions.

This is why I provided the sources. You can download America's Great Depression for free in the "resources" section at that link. All of those lectures are obviously free on youtube. All the answers are right there for you and anyone else to learn. And if you ever wish to be able to convince anyone, you probably should. Otherwise, why should they listen to you? It would be the blind leading the blind, would it not?

Re: What to reply to keynesians when they say "stimulus is good because look what happened in 1929"?

Hazel Brazell — Tue, 30 Aug 2011 12:14:36 GMT

Ok, thank you, but I was wondering how could someone briefly answer to those questions.

I don't think he'd read two books to change his mind ;-)

Re: What to reply to keynesians when they say "stimulus is good because look what happened in 1929"?

John James — Tue, 30 Aug 2011 11:00:16 GMT

As you might have guessed, this has been gone over ad nauseum...

It's all right here:

And here's a nice little snippet:

(Please visit the site to view this media)

And of course there's plenty of lectures on this...

The Great Depression playlist

And if you need more on why WWII didn't "get us out of the Depression", see here.