Is Keynes correct after all?
Can the stimulus stimulate anything useful?
| We trim, blend, and append four 2009 articles from: (1) AlterNet, Feb 12, 2009, on Baker by Josh Holland; (2) the National Post, Jan 29, on Keynes by Ike Brannon and Chris Edwards, via reader Mike O'Mara; (3) the Huffington Post, Feb 15, on stimulus by Ann Pettifor, author of Debtonation -- The Coming First World Debt Crisis; and (4) the Boston Herald, Feb 15, on small business by Jennifer Heldt Powell. |
by Dean Baker, by Brannon & Edwards, by Ann Pettifor, and by Jennifer Heldt Powell
- Economist Dean Baker on fellow economists
Economists have very little incentive to think for themselves. Just repeat Alan Greenspan and everyone else, there's not really a downside. If you step out of line, you take a risk. You don't know for sure you're right. And if you're wrong, you'll be humiliated. No one's going to take you seriously. You won't get promoted. You could get fired. So, economists shouldn't be trusted to step out of line, they shouldn't be trusted to think originally. What we should expect is that economists, including many highly paid economists, are going to say what every other economist will say.
JJS: Yet Baker is an economist, so should he be ignored, too? Et al?
- Barack Obama's Keynesian Mistake
The dominance of Keynesianism ended in the 1970s.Government spending and deficits ballooned, but the result was higher inflation, not lower unemployment. That discredited the belief in an unemployment-inflation trade-off.
Even if a government stimulus were a good idea, policymakers probably wouldn't implement it the way Keynesian theory would suggest. To fix a downturn, policymakers would need to recognize the problem early and then enact a counter-cyclical strategy quickly and efficiently.
The Obama administration's claim that its stimulus package will create up to four million jobs is outlandish. A spending stimulus will put the government further into debt and impose a large debt burden on young Americans, but it will not increase or sustain real output or income.
- The Fiscal Stimulus Will Pay For Itself
Deficit spending of the 1930's in the US and the UK raised employment after 1933.
(Ed. Note: Even if it did, the Great Depression lasted the rest of that decade.)
During the Bush-Cheney years the US national debt doubled from $5,700bn in 2001 to $10,700bn today.
(Ed. Note: So, if huge deficits can’t prevent recession, can they reverse recession? Pettifor thinks they can do that and more.)
At times of high unemployment tax cuts may be saved and not spent into the economy.
(Ed. Note: Not the working poor. They need to spend every penny they can get. Abolishing taxes on incomes below $25,000 would be a boon to them.)
But when the government invests the bulk of $789 billion in real productive economic activity, it can benefit from the 'multiplier effect'.
Say federal government invests in local government programs that are labor-intensive, like road repair and mass transit and rail, water projects, energy efficiency and renewable energy programs, and public housing improvements. These programs hire workers and purchase materials. Workers and material makers pay income taxes. Then workers purchase goods and services from others, which boosts their income and tax revenue for the government. The government can use these tax revenues to fix the budget. As more get hired, government makes fewer unemployment and food stamp payments. The outlook is positively rosy for a surplus on the budget as the economy recovers.
Yet $789 billion falls short of the $2 trillion collapse in output since the crisis started. The fiscal stimulus is not big enough. Get ready for phase two of stimulus spending.
(Ed. Note: So, if deficit spending works wonders, then why worry about getting paid back? Is the sky the limit? Why not run up huge debts always and forever? Ideology aside, what can somebody running their own business do?)
- Stimulus is stiffing small business
Even though small businesses employ about half of the nation’s work force, they will get little aid from Washington’s $787 billion package.
It has provisions to increase lending through the Small Business Administration. Loans have been down significantly with recently. That will not do much, however, for businesses that are not looking to borrow money.
Businesses will be able to write off up to $250,000 spent on equipment, up from $125,000. That’s great if you are planning to buy some pricey items. It will not help those who don’t have cash or can’t get loans because of tighter lending practices.
Businesses stand to benefit indirectly from the tax rebates to consumers. Yet if a rise in spending follows, it may not last long.
The National Federation of Independent Businesses was advocating a six-month moratorium on the payroll tax. It got a little traction, but not enough to move forward.
While the best thing for the economy may be to hire more people, that is not necessarily the best thing for the small business.
(Ed. Note: Hang on. Pettifor claims Roosevelt made jobs for many, yet the economy remained comatose for years.)
Small businesses have to figure out how to turn things around for themselves. They must find new ways to do business. That means adapt to new needs.
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Jeffery J. Smith runs the Forum on Geonomics.
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Also see: What the US government can't buy for $700 billion
Meet the Economist Who Thinks We're Doomed
Economists and Geonomists overlap on five key issues |
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