Liberty on Tap since 1984

Correcting Misconceptions about Keynes and History

I responded to Caruba's post about the NJ teachers, Keynes and Roosevelt to clear up a couple of misconceptions. I don't think the comment will survive the rigorous screening process associated with his blog, so I will re-post it here. (Italics are quotes from his post.)

The Keynesian notion that a government can spend its way out of a deficit is, one hopes, now dead.

Umm.... That's not actually what Keynesian theory says. Keynes proposed 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."

Keynes did not say that the government can spend its way of of a deficit (that idea is self-contradictory, do you see why?). He said that government spending along with reduction of interest rates can bring the economy out of a depression. Do you see the difference?

The Roosevelt administration embraced Keynes, a British economist, throughout the 1930s and the result was the Great Depression.

That's an interesting idea, especially considering that 1) Keynes' seminal work wasn't published until 1936, fully 7 years after the Great Depression began, and 2) Roosevelt didn't take office until 1933, 4 years into the Great Depression. Perhaps Roosevelt had the same time machine that Obama used to go back and place those birth announcements in the Hawaiian newspapers.

What many Americans are only now realizing is that it has been the civil service unions that have been draining state and local budgets thanks to unrealistic salaries

Certainly some civil employees are too highly compensated (look at the former City of Bell officials). I don't think that's the case for NJ teachers though, as this article shows. NJ school administrators, on the other hand, probably make too much (235 of them make more than the Governor).

I frankly have zero faith that either the Democrats or Republicans, whoever is in Congress after the midterm elections, will do much more than nibble around the edges of the fiscal crisis.

I definitely agree with you there. :)

Tags: economics, keynes, roosevelt

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Comment by Ronald A. Lau on August 28, 2010 at 10:13am

Comment by Ronald A. Lau on August 28, 2010 at 10:09am: Ok. I'm not trying to be antagonistic, and I'm not arguing with you simply for the sake of arguing.

You are here to engage in intellectual dishonesty as a means of justifying socialism.

To propose that WWII spending is no different than Kensian spending intentionally ignores the fact that there was a war going on.

It intentionally ignores the difference of people's willingness to go along with the Government's plan of spending on a war or spending on make work and a political slush fund. How willing would people have been to invest in Obama Bonds? Not very. How willing would people have been to accept confiscatory taxes on income (or wealth) to fund a grant to political friends of the Administration? Not very.

You now want to propose that Obama's spending and tax increases will lead to the same effect that spending on WWII had on the Great Depression. All the while intentionally ignoring that the current debt is held by China and not the war bond holders, and also ignoring what the money was spent on in WWII (industry) compared to what Obama is spending the money on (make work).

In addition, you intentionally leave out recent history that completely invalidates your socialistic theories of war spending.

Why hasn't the Iraq war spending brought all these great economic benefits? I guess according to Liberal economic theory, its because we didn't spend enough on it!

OH WAIT! That can't be true, because according to Liberals, the spending on the Iraq war is what caused the economic melt down in the first place.

"It was under Mr Bush that the deficit spiralled out of control as we fought an unnecessary and endless $3,000bn war in Iraq..."
- James Carville, the Financial Times.

"The Iraq adventure has seriously weakened the U.S. economy, whose woes now go far beyond loose mortgage lending. You can't spend $3 trillion -- yes, $3 trillion -- on a failed war abroad and not feel the pain at home."
- Linda J. Bilmes and Joseph E. Stiglitz, The Washington Post.

"First, the facts. Nearly the entire deficit for this year and those projected into the near and medium terms are the result of three things: the ongoing wars in Afghanistan and Iraq, the Bush tax cuts and the recession. The solution to our fiscal situation is: end the wars..."
- Christopher Hayes, The Nation.

But wait! These Liberals can't be correct. Obama's stimulus hasn't had any effect and it:
http://www.washingtonexaminer.com/opinion/blogs/beltway-confidentia...

* Obama's stimulus, passed in his first month in office, will cost more than the entire Iraq War -- more than $100 billion (15%) more.

* Just the first two years of Obama's stimulus cost more than the entire cost of the Iraq War under President Bush, or six years of that war.

* Iraq War spending accounted for just 3.2% of all federal spending while it lasted.

* Iraq War spending was not even one quarter of what we spent on Medicare in the same time frame.

* Iraq War spending was not even 15% of the total deficit spending in that time frame. The cumulative deficit, 2003-2010, would have been four-point-something trillion dollars with or without the Iraq War.

* The Iraq War accounts for less than 8% of the federal debt held by the public at the end of 2010 ($9.031 trillion).

* During Bush's Iraq years, 2003-2008, the federal government spent more on education that it did on the Iraq War. (State and local governments spent about ten times more.)

Comment by Ronald A. Lau on August 28, 2010 at 9:41am: Tell me, what is the difference to the economy between the government buying $X million worth of cars and storing them in a warehouse (or throwing them in a black hole), and the government buying $X million worth of Jeeps and planes from the same manufacturers and sending them to Europe to be blown up or shot down?

Is the reason you went into IT because you hit your head really hard after graduating with an economics degree?

Comment by Joel Mathis on August 27, 2010 at 7:16pm: I can't help but feel there's a remarkable number of posters at around here who take offense at the idea that they should defend their assertions or buttress them with evidence. Makes you wonder about the quality of opinion they offer.

Comment by Marcotte Anderson on August 27, 2010 at 5:17pm: I gave you my opinion for free and labeled it as such.
Ok. I'm not trying to be antagonistic, and I'm not arguing with you simply for the sake of arguing. For what it's worth, this is only the 2nd blog I've posted on with any regularity. The first was Infinite Moneys, where I first "met" Jim Lakely. I started coming here when he started this up because I valued the debates he and I had. Like I said elsewhere, one of the reasons I continue to post here is that having discussions with people who don't agree with you is much more rewarding and enlightening than only talking to people who do agree with you.

Back to the topic at hand: there was a dramatic increase in government spending, from the mid 1930s through the end of WWII. I haven't run the numbers but I suspect that in relative sense it was a much more drastic (and sustained) expansion then the one we are currently witnessing. (Interesting note: government spending was cut back a lot in 46-50; I hope we can say the same thing in 3-5 years, or whenever we truly get the Great Recession behind us.) At the same time as this expansion in government spending, interest rates were kept low - war bonds barely outpaced inflation. By the late 1930s and through the war, the economy was finally expanding again and unemployment fell. By the technical definition, the depression actually ended in 1934 when Real GDP grew. However, GDP fell again in 1933 and '38 and virtually all economists agree that it wasn't until WWII that the Great Depression was really ended. Indeed, Real GDP in 1944 was almost double what is was in 1939. Meanwhile, unemployment hovered near 20% through out much of the late '30s, but dropped to 1.4% in 1944.

What this means to me is that flurry of sustained (for 10 years) government spending, paid for by increased taxes and borrowing and coupled with low interest rates, played a major factor in finally pulling the economy out of the doldrums. I am open to other interpretations of this however, so if you have another plausible explanation I would be very interested to hear it.

Comment by Grant Davies on August 27, 2010 at 12:30pm: Time is precious. I have wasted many hours in my life exchanging posts with others on blogs who merely want to argue and go from site to site amusing themselves by doing so.Frankly, it bores me.

In the meantime,I gave you my opinion for free and labeled it as such. I will not not be teaching an economics class online without compensation. I charge $100 per hour. Let me know if you want to enroll.
Alternately, continue to amuse yourself by arguing with other posters, some of them seem to enjoy it as well.
I wish you well. Carry on.

Comment by Marcotte Anderson on August 27, 2010 at 10:19am: If he said that, he was incorrect.
How do you figure that, in regards to the Great Depression?

Comment by Grant Davies on August 27, 2010 at 8:50am: You make some interesting points about perceptions of Keynes. But I must opine on this one; "He said that government spending along with reduction of interest rates can bring the economy out of a depression".
If he said that, he was incorrect.

Comment by Marcotte Anderson on August 26, 2010 at 9:09pm: And absent a war, if the auto companies had been told to build cars that the Government would pay for would have brought us out of it?
Tell me, what is the difference to the economy between the government buying $X million worth of cars and storing them in a warehouse (or throwing them in a black hole), and the government buying $X million worth of Jeeps and planes from the same manufacturers and sending them to Europe to be blown up or shot down?

Comment by Ronald A. Lau on August 26, 2010 at 6:10pm: No, but it did force reluctant private corporations (such as the auto industry) to switch to producing military goods (such as airplanes) instead of consumer goods.

And somehow that spending would have gotten us out of the Great Depression if there wasn't a war? pfft.

And absent a war, if the auto companies had been told to build cars that the Government would pay for would have brought us out of it? pfft..

And the population would have accepted dramatically increased taxes just so that the vastly expanded Government could have brand new cars? pfft.

Good luck hawking your economic theories in the real world. Oh wait, you don't work in the economic analysis industry. Whew.

Correcting Misconceptions about Keynes and History

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