The term "Keynesian" is greatly simplified nowadays, and thus functions as code for favoring additional fiscal stimulus. And for my purposes today, that's good enough. If you want to delve into Say's Law, Pareto Optimal states and whether economies tend or do not tend toward equilibrium, I recommend the brief but accessible article How Keynesian Stimulus Works.
In a critique of Keynesian stimulus written in January, 2009, the Financial Times' Willem Buiter wrote the following—
First, the fiscal policy actions pursued thus far by the Bush administration, but even more so the policy proposals leaked by Obama’s proto-administration are afflicted by the Keynesian fallacy on steroids. They appear to exist outside time, with neither the long-run consequences of the actions like to be implemented over the next couple of years, nor the history that brought the US to its current predicament, the initial conditions, being given any serious attention.
Even without a deep understanding of the "Keynesian Fallacy", it is possible to see where Buiter is headed here. I'll focus on the lack of attention to the history that brought the US to its current predicament (as opposed to the long-term consequences of wildly inflating our public debt.)
Now, when you hear fools Nobel Prize Winners like Paul Krugman and Joseph Stiglitz argue that we must apply far more fiscal stimulus to right the economy—bring it into equilibrium—there is a strong implicit assumption that we must do so in order to return to "normal", to restore the sound basis for robust growth that existed before the crisis. See my Paul Krugman's Free Lunch Theory to get a handle on what I mean here. That is why Buiter says that Keynesian stimulus ignores the historical roots of our problems. About this, he is absolutely right.
Although there is no dearth of material, I require only two graphs today to demonstrate why any return to "normal" is a disaster. Indeed, properly understood, "normal" has not existed for many years. Here are the two graphs.
Source: San Francisco Fed
Source: Credit Suisse
These graphs are simple to understand, so don't be daunted by apparent complexity. The first graph clearly shows that real household debt departed from real disposable income in the early 1980s in a most unhappy way. As household debt grew like crazy whereas income did not, economic "growth" was fueled by two bubbles in the economy as shown. The bubble tops are circled in gray.
The second graph is equally clear. Again in the early 1980s, the household debt to GDP ratio began to grow at a faster pace and then, during the Bubble Era 1997-2007, it exploded. The no-frills explanation is that each dollar of GDP "growth" required more and more underlying debt to support it. I hate to use this word, because it is now hackneyed—it has grown stale from overuse—but growing real household debt to higher & higher levels was not, and never will be, sustainable.
And that is the "normal" people like Krugman and Stiglitz would like us to return to. And I haven't even mentioned the frightening growth in the trade deficit during the Bubble Era, the Balance of Terror because foreigners (especially China & Japan) hold so much of our debt, and must purchase any new debt we create, etc. But these non-trivial problems are beyond the scope of my blog post today.
Every time you hear an economist call for more fiscal stimulus to fix a debt problem with more debt, and every time you hear that same economist tell you that servicing the new debt will not be a problem—this is due to the fabulous economic growth we will experience after we apply the new stimulus—remember that households (the Middle Class) are currently up shit creek without a paddle as shown in the two graphs above.
Without painful, fundamental changes in the way our currently unsound economy is structured, we are going to have slow or no growth, or recessions, for years & years to come, seemingly without end. Keynesian delusions about "stimulating" the economy aren't going to change this outcome.
Well, maybe when we realize that Keynesian economics actually believe, preach, and teach that money grows on trees, we will finally admit and teach that Keynesians don't understand that wealth comes from individual production, efficiency and ingenuity.
I feel we have one of two ways to proceed, complete Tyranny or a Real Free Market system. The first will erase or eliminate all freedoms, it must. The second will require acceptance of personal responsibility for oneself and, to a lesser extent, for those around us.
What will Washington decide? Or will Americans let them decide this for us.......
Posted by: ehmoran | 02/21/2010 at 05:04 PM