Bye-Bye Keynes?

Real Clear Politics ^ | December 19, 2011 | Robert Samuelson

[neverdem]

"Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist." -- John Maynard Keynes, 1936

WASHINGTON -- The eclipse of Keynesian economics proceeds. When Keynes wrote "The General Theory of Employment, Interest and Money" in the mid-1930s, governments in most wealthy nations were relatively small and their debts modest. Deficit spending and pump priming were plausible responses to economic slumps. Now, huge governments are often saddled with massive debts. Standard Keynesian remedies for downturns -- spend more and tax less -- presume the willingness of bond markets to finance the resulting deficits...

--snip--

"Given low interest rates and the still-weak U.S. economy, it will be tempting for the U.S. government to continue running deficits and issuing additional debt. At some point, however, investors will recognize this behavior for the Ponzi scheme it is. ... If history is any guide, this scenario will develop not gradually but abruptly. Previously gullible investors will wake up one morning and conclude that the situation is beyond salvation. They will scramble to get out. Interest rates in the United States will shoot up. The dollar will fall. The United States will suffer the kind of crisis that Europe experienced in 2010, but magnified."

Governments have ceded power to bond markets by decades of shortsighted behavior. The political bias is to favor short-term stimulus (by lowering taxes and raising spending), which is popular, and to ignore long-term deficits (by cutting spending and raising taxes), which is unpopular. Debt has risen to hazardous levels, undermining Keynesian economics as taught in standard texts.

Were Keynes alive now, he would almost certainly acknowledge the limits of Keynesian policies. High debt complicates the analysis and subverts the solutions. What might have worked in the 1930s offers no panacea today.

[MontaniSemperLiberi]

“If history is any guide, this scenario will develop not gradually but abruptly.”

But we can put some bounds on it. I’m sure, Gingrich, as a historian, knows that governments must default when the debt to GDP ratio gets between 90% and 120%. We are at about 74% now and adding about 10% a year. Growth is stagnant. So the crisis could hit the US in middle to late 2013, just as the fist budget is passed after the election, and definitely by 2016.

[ripley]

Progressives love to spend money and will continue to laud Keynesian economics. (Hopefully, they will not have access to the levers of power, anymore, very soon.)

IMHO

[Seaplaner]

You are correct in that Hoover Dam did provide important benefits; I view early NASA as a sort of equivalent.

That said, I always thought that Keynes believed in a kind of bottom up econ model, where if people were put to work (even on borrowed money) they would stimulate a demand for goods and services that would put others to work. (Sounds so nice, doesn't it?) The lefties' welfare philosophy follows the same model. I have heard liberals say that each person on welfare creates another job (some even say more).

Corrections invited (or I could even look it up).