Kling on Traditional Keynesianism in 2009 (and some other stuff)

Arnold Kling on Keynesian policies and the 21st century American economy. His concluding paragraphs:

The way I see it, the complexity of today's economy means that old-fashioned Keynesian policies will not restore full employment. Pump-priming and stimulus policies are a good fit for a manufacturing economy with homogeneous labor affected by temporary layoffs. They are not such a good fit for a post-industrial economy with an educated labor force facing permanent structural changes.

Over the next ten years, some sectors of the economy on long-term downward trends will continue to shrink. Sectors that became bloated in recent years, notably mortgage finance, will eventually settle back to lower, sustainable levels. Much of the new strength in the economy will come from underlying long-term forces. New workers will be absorbed by businesses that have not yet been launched in industries that we have not even imagined. For this restructuring, what I like to call The Great Recalculation, Keynesian stimulus will be irrelevant.

This is definitely an oversimplification, but I think what Kling is more or less saying is this: If you owned a house today built in the 1930's that had continually been renovated so it was currently modernized, and suddenly it was devastated by a storm, why would you use 1930's technology, design and materials to repair it?

Also, here is an excellent overview by Kling on the history of monetary and fiscal policy since the 1930's and the effects different economic theories had on those policies.

To Stimulate or Not to Stimulate? That is the Question...

Investor's Business Daily claims the stimulus has failed. The New York Times believes additional stimulus spending should be pursued.

Both debaters are missing the key point. This is not an economic debate. This is, as I've mentioned before, ex post storytelling. In other words, both groups, pro and con, are constructing ever evolving arguments around underlying theory mixed with the most recently released data. Bad unemployment numbers come out? Anti-stimulus folks instantly claim the spending has failed. Pro-stimulus types retort say it has mitigated more colossal economic destruction and that more is needed to alleviate further pain.

But no one knows for sure. We can't control and lab test any of this. There are no alternative universes to see what would have happened under different conditions and policies.

This was never about economics. This was always about politics. We can honestly debate the merits and faults of Keynesian ideas to no end, a debate well worth having, but let's not pretend the same thing is going on in Washington, D.C.

Robert Reich and the Keynesian Argument

von Mises, Keynes, and Where We Stand Today

Mark Spitznagel's op-ed in The Weekend Journal on Ludwig von Mises' "Theorie des Geldes und der Umlaufsmittel" ("The Theory of Money and Credit") is well worth a read.

But so is Don Boudreaux's letter to the editor concerning the article, which points out that Keynes' rejection of the work was not "based... on anything as lofty as informed disagreement; it was based instead on incomprehension."

GDP and The Descendents of Keynes

Veronique de Rugy cuts through the nonsense of the recent GDP numbers. A snippet:

the way the GDP accounts for government spending is totally biased: It assumes that if the government is spending $200,000 on a contractor to repave a road in the middle of nowhere that it will create $200,000 of genuine economic value. By contrast, GDP measures are tougher on private-sector spending. As my George Mason university colleague Garett Jones explained to me recently “So if Exxon Mobil pays an engineer $200,000 per year, that only shows up in GDP if the engineer finds an extra $200,000 of oil to sell, or builds a new machine that sells for $200,000, something like that. So our GDP measures of “government spending” are awful–and when the government is in a race to spend money as quickly as possible, these measures are going to be even worse than usual.”

Mario Rizzo does an even better job examining the whole of the White House's and Congress' spending strategies. His concluding paragraph:

In sum, at least 2.5 percentage points of the 3.5 percent increase are suspect on their own terms. And then there are the future costs to bear. As long as the stimulus-spending persists the “stuff index” (GDP) will look okay. And as long as the costs are hidden either in the future or in some other way, the politics will look fine for the stimulators.

Keynesian types want to spend as much as quickly as possible because they believe Depression 2.0 will arrive if we don't. Supply siders want the market to reallocate resources on its own to achieve equilibrium. The Keynesian argument is markets are driven by fear and greed, as Rob has pointed out a few times, and will spiral into oblivion without proper government intervention. The consequences of spending nor the creation of value/utility related to said spending do not matter to the Keynesian (though he may claim they do). Supply siders believe a reallocation would be long, tough and painful for many, but ultimately more appropriate and healthier than attempting to manipulate the economy on a grand scale.

GDP is a wonderful tool for the neo-Keynesian to frame and promote his story. But when you seperate the recipe from the final product, I don't think there is a whole lot to trust or like.