If you want to know what is going to happen next to your investments, the job and housing markets, and more generally to the economy, you may want to follow what is happening to the ideas of British economist John Maynard Keynes. Keynes argued that when economies are sputtering, the government must increase deficits, because its increased expenditures will stimulate the economy to better growth. (The time to slash government spending is when the economy is running at full clip.) This is the theory Presidents Bush and Obama, as well as the Federal Reserve, have followed. However, the anti-Keynesians have long maintained that cutting government expenditures is the course to follow -- because the more money that is left in private hands, the better for the economy. The Tea Party is full of anti-Keynesians, and these days, so is the GOP leadership in Congress.
Recently in Europe, the anti-Keynesians seem to have won a round. When the conservative-led governments in the UK and Germany curtailed government spending and announced more cuts (note: the market is affected by what investors expect to happen next), the two countries' economies grew. Britain's government released an "austerity budget" of deep cuts, and soon thereafter (in the third quarter of 2010), its economy grew by 0.8%, surpassing predictions.
Similarly, by late summer of 2010, after German chancellor Angela Merkel announced nearly $100 billion in cuts from the budget by 2014, the economy was growing at a 9% annual rate, and unemployment had fallen to pre-crisis levels. In the Weekly Standard, Christopher Caldwell argued that the German results showed that "something in our economic dogmas is probably false." David Brooks proclaimed that the "early returns" of the "natural experiment" comparing American and German approaches suggested that the German approach was the correct one.
These observers uncorked the champagne too early. Both economies are now sputtering. In January 2011, the British government released figures showing that the economy had contracted in the fourth quarter of 2010, defying predictions of growth and reigniting fears of a "double-dip" recession. In April, the IMF downgraded its UK growth forecast for the third time in a year. And in Germany, previously-rapid growth has slowed significantly, although it seems to be regaining speed in the last quarter.
Meanwhile, in the U.S., the federal government has started cutting expenditures, and investors hear daily about many more cuts to come. Local and state governments are slashing their expenditures. The Federal Reserve is about to end the main part of its stimulating program in June. And U.S. economic growth slowed down from 3.1% at the end of 2010 to 1.8% at the start of 2011. Another round for the Keynesians.
Surveys reveal that economists tend to agree that the American economy will pick up pace again over the next months. If so, the anti-Keynesians will find a data point to support their agenda of more and bigger cuts in government expenditures. However, do not bet your last dollar on these predictions. At best, the economy may well continue merely to sputter along, growing a bit faster than in the first quarter, but still at a rather sluggish pace. In this case, the main point will not be that the Keynesians will win one more round -- but that we are following a wrongheaded economic policy that will cost us all plenty.
As I see it, Congress and the White House would best now commit themselves to major deficit cutting measures -- to be automatically triggered only once unemployment falls below 7.5% or some such figure. This should be a policy both Keynesians and the anti-Keynesians could learn to love.
Amitai Etzioni is a University Professor at The George Washington University and the author of The Moral Dimension (The Free Press, 1988).
When the "actual" corporate tax rate is 30%, not -.13%...
When Defense Spending is 40% less than it is currently...
When there is full disclosure campaign financing reform...
It will be a great start.
They actively participate in the deficit spending side of Keynes theory is rough patches in the economy.But they also defecit spend in the good times when they should have been saving for their rainy day fund.
When politicians stop spending to acquire votes thats when Keynes teachings will work.
(But we still need to discuss his and competing philosophies as well.)
F
I'm a leftie, but it is clear that we have to wean ourselves off the deficit teat. Personally, I favor doing it by increasing the taxes on the wealthy and forcing corporations to pay effective tax rates anywhere close to the statutes - and also by ending those incredibly expensive and pointless wars we are waging. But, however we do it, do it we must.
Not only do we need to pull out of the wars, we also need to bring home the troops stationed all over the world that no longer contribute to national security. Why do we still have troops in Germany?
Being the worlds policeman does put a major economic strain on the US, and has been the downfall of empires like Rome and the Biritish empire, being spread too thin and collapsing on ourselves
More importantly, we have been practicing Keynes nearly continuously since the 1980’s, funding artificial economic growth with other people’s money. Has it really made any country better off? I would argue…for a while…since borrowing money and dumping into the market cannot hurt in the short term, but as Thatcher warned, and as Greece has found out, sooner or later you run out of other people’s money and the long term bill for that borrowing comes due.
It is better to dial back the borrowing and government debt-financed expenditure, let markets equilibrate to a lower level, and then let’s grow from that level based on private savings, private borrowing, and private business creation as well as private job creation. It creates the SUSTAINABLE jobs that fuel an economy and, as Greece recently found out, when a bulk of your jobs are government supported, you leave yourself vulnerable to other countries that hold your debt since they, ultimately, are the ones who pay these employees.
If anything, the last few years has shown us, we need less borrowing, less regulation, less taxation of private individuals and industries, and more natural and sustainable economic growth and job creation.
Kai
a little keynes at this point would be a good thing after the failed experiment with chicago school
You fairly ask, ‘What alternate universe did you say you were from?’
It is called REALITY. It is an alternate reality to where most of you liberals are from, called FANTASY. But thanks for asking.
You state, ‘Friedman and Greenspan might have something more to do with the state we're in than Keynes.’
Perhaps. Care to elaborate with fact, data, etc? I will rebut.
You then state, ‘Ending Glass-Stea¬gal was definitely not a Keynes-lik¬e thing to do.’
You seem to know a lot about him. Certainly elements of his counter-cyclical government intervention in markets influenced parts of Glass-Steagall, but what specifically about the repeal of Glass-Steagall would he object to, in your opinion, as per his economic theories? Many of the mechanisms that he argued for in his works, namely interest manipulation, currency manipulation and deficit spending to affect full employment still exist today in the form of the Fed rate changes and Congressional borrowing, so…what would he be against specifically in your opinion?
Kai
Economists fail to be bold
And expose all the crooks
So they write for them books
And continue to do as their told
The unemployment rate is not a true measure of unemployment...therefore your plan is easily corrupted. Our official unemployment rate of ca. 9% does not nearly describe how many people are unemployed plus under employed.
Also the economic data for those countries who have "tightened their belts" is miserable while those who have been more lenient not so much.
http://krugman.blogs.nytimes.com/2011/02/26/iceland-ireland-again/
I think you are swayed too much by the anti-Keynesians. The economic outlook right now looks brutal...I don't see the pick up you are seeing.
My suggestion is that you read Paul Krugman's blog every day and try to refute what he says with what your supposedly sober anti-Keynesians are putting out. You will find that the latter have based their theory on scant to no data.
the automatic trigger that you mentioned tied to the UNemployment rates of 7.5 % or even 8 % would make sense.
also there is a way that people could help reduce the DEBT by contributing for this SPECIFIC purpose.
14 Trillion is a huge amount and it will take a long time. Instead of DONATING to the POLITICIANS who want to run for office...........people should contribute to US Debt reduction.
some ideas are posted ...........www.USDebtNOMore.blogspot.com
www.USDebtNOMoreUS.blogspot.com