The Lure of Keynesianism

In his recent column, Prof. Robert Reich is saying that the rich are getting richer and the poor are getting poorer; and that this is not good for the economy. I can agree.

As a remedy, Prof. Reich is recommending extended government spending. He does not say where the government should take the money from. It could be done by taxing the rich (which usually means slowing the economy, thus affecting the poor the most), or by printing extra money (which means inflation, thus also hurting the poor the most).

The key to a free market is the "free" part. The more freedom all market participants have, the less likely it is that wide disparities in wealth distribution occur. Government oversight means that for the sake of the good of society some market players have their freedom limited. But, who can afford to pay lobbyists to have their interests prevail in government decisions? Government intervention produces results opposite to the stated intent -- it limits the freedoms of small market players and empowers mega-corporations.

The way out of our crisis is to limit further the influence of government over the economy, so that even if someone could afford to buy political influence, there would be very little to sell. When problems arise because some market players have more freedom than others, the solution is not to limit freedoms they have, but to extend freedom to all market players. By giving more freedom to everybody, not only to those who can hire Washington lobbyists, we can revive the economic strength of the middle class, flatten the wealth distribution, and make the whole country richer in the process.

The free market could be seen as a cruel political concept. However, it is the "cruelty" of an accountant telling us that two plus two is always four, regardless of how we feel about it. By using terms like "fiscal hawks," Prof. Reich defines himself as motivated by those feelings, not the cold logic of an accountant.

Lastly, Prof. Reich writes: "Income-tax cuts go mainly to upper-income people, and they tend to save rather than spend." What happens to that money saved? Do they rot in the bank basements, or do they finance new ventures?

Behind Prof. Reich's reasoning is an everlasting longing for a harmonious society. Unfortunately, society is a part of nature, and as always in nature, there are quiet moments and stormy ones. What is the philosophical reason for the expectation that we should have only rosy days? What is the background for the conviction that we have the knowledge and means to protect us from periodic economic hardships? At my Marxism-Leninism classes, I was told that socialism is better as it protects us from the periodic recessions of the capitalist system. It was actually accomplished by putting the economy in permanent stagnation; something I experienced first-hand in my native Poland.

Keynesianism, in its very concept, is oriented toward preserving the existing order. It is a mitigated form of socialism. In the free market approach, after every storm new horizons arise, and new opportunities along with them. Biblically, we were advised to build an ark to navigate throughout the deluge. Not everybody built an ark, not everybody survived. We can support public policies helping more individuals to build the arks needed to navigate throughout current economic turmoil. Prof. Reich wants to put the government into the business of stopping the deluge.

In Prof. Reich's view, we have to give more of our money and relinquish more of our powers to bureaucrats, hoping that they will be smarter then we are and somehow bring back the sweetness of the prosperity of the last two decades.

In my view, we have to face the cruelty of the numbers telling us that some of the things we have been doing so far, or the way we have been doing them, do not add up. We have to endure the pain of change, and find new ways and new opportunities out of this experience.

Comments

[Peter007]

Here is a personal example.
My son buys a shuttle bus to start a business. He invests capital. He than loses his drivers license due because he didn't have insurance. He didn't pay the fines so the fines doubled. Now he can't work at most jobs because he can't afford to pay the fines so he can't get a drivers license.
I investigate starting the bus business and find I have to get licenses from the city, state and county. The bus has to have special inspections. I need a special license to drive passengers. The state also requires I have insurance that cost almost as much as my anticipated revenues.
I decide not to go into the business because of all the aggravation, costs and risk.
. I look into opening a deli and talk to someone that owned one. They tell me not to do it because they closed their business due to aggravation from government inspectors and paper work .

My regular business may end because I have to pay $600 a year to the state for a license, ( new 2001 ). And I need to pay $1,000 in insurance for liability. ( I'm in the paper pushing business ) also recent.

Now, I can offer bus service on my route for $5.00 per person. Current fees are as high as $50 per person. I don't open my bus business and fares stay at $50 for the large limo company.

[uncleentropy]

Much of your argument rests on the notion that Keynesianism is "a mitigated form of socialism.­" What Keynes seeks to mitigate is capitalism, so in fact Keynesianism is not a competing economic system a la socialism, it is a tool used in a free market economy.

People like to call Keynesianism socialism so that they can see it as antagonistic by nature to free markets, which is bunk. Keynes sustains markets by addressing demand-side problems created by unbridled capitalism.

I am not comfortable calling this large stimulus package "Keynesian" even if it is necessary. This stimulus is beyond what he ever contemplated (some will disagree with me on this) and is usually timed to create a temporary deficit, not to enlarge an already huge one.

[DiogenesOfAlaska]

'The free market could be seen as a cruel political concept. However, it is the "cruelty" of an accountant telling us that two plus two is always four, regardless of how we feel about it. By using terms like "fiscal hawks," Prof. Reich defines himself as motivated by those feelings, not the cold logic of an accountant­.'

This argument is 1) ad hominem 2) even false as an ad hominem argument.

2) Reich doesn't argue on the basis of the 'liberal do-good' that you presuppose.
1) well, it is ad hominem, and that's already a problem, but it's also not working:

Because:
You are ASSUMING that free-markets can always solve capital and resource allocation problems.
This is true only under suitable circumstances. It is a fact that markets have failed in the financial crisis. While it may not yet be obvious which of the assumptions of the free-market allocation machine failed, the burden of proof is on YOU, not on the skeptics.

Here's why it failed:
Not all things are easily tradeable. Credit risk is among the things that require a lot of sophistication to make them tradeable. It's possible, but not easy. The way it was done was NOT the way it can work.

[Peter007]

Regarding you statements that financial markets failed. I disagree and here is why.
The financial markets acted as they were supposed to act. The failure aspect of the markets lies with those participants that bet or aligned themselves with the wrong side of the trade. The general public or the US economy lost because they invested in the wrong commodity ( stocks, houses, CDO's ). The U.S. is now being told of the true worth of their investment. Free markets help determine the Value of things.
People are saying the market didn't work because they overpaid and lost. They relied on the government ( fed. Treasury, regulators ) to back them up. The regulators that were assigned to make sure everything went profitable for all investors didn't do their job. They failed. The system was too big for the regulators to control and it got away from them. If the markets were freer, the losses would have been less.

[DiogenesOfAlaska]

I'm not sure I will have the nerve to debunk all the flaws in your argument. I'll probably get tired along the way.

'The more freedom all market participants have, the less likely it is that wide disparities in wealth distribution occur.'

There are two problems with this: 1) there is no theory which implies this result 2) if you look at the world, you find that the claim is false. If you doubt this, consider Greenspan on the subject.

'Government oversight means that for the sake of the good of society some market players have their freedom limited.'

What if the purpose of government oversight is to SAVE the market from IGNORANT market participants who DO NOT know what is in their best self-interest? News sometimes travels at a slow pace, but the financial crisis and the resulting meltdown of markets is the result of a FAILURE of highly sophisticated investors. If you doubt this, consider the statements of Greenspan or of the International Institute of Finance (sponsored by the world's largest private banks).

[Henryk A. Kowalczyk - Huffpost Blogger]

Coincidentally, recently, I wrote about sophistication of credit markets,
http://www.huffingtonpost.com/henryk-a-kowalczyk/its-time-for-financial-di_b_128466.html

On the debate itself…

Prof. Reich, is right that at times of crisis we need to reexamine cannons of our policies.
My point is, that with calm approach, conclusions from this reexamination might be opposite to what seems obvious to him.

It is never ending dichotomy. Nevertheless, I see benefits of discussing it thoroughly from time to time, despite that Ludwig von Mises wrote closing arguments in his book “Socialism”, first published in 1922.

I guess, it would be up to the Huffington Post editors to determine, if there is enough public interest in justifying a prominent exposure for such a debate.

[DiogenesOfAlaska]

On your dinosaur-piece and back to this one:

I couldn't agree more: yes, the reason the banks are failing is because they didn't know well enough what they were doing and hence should be failing, according to the laws of the markets.

Many bankers were paid in a way that rewarded bets collectively leading straight into necessary failure. With the given incentives, no stable market was possible. Since this was a market that could only fail, bankers should have known and counteracted. They didn't. So it was both: a market failure and a scandal.

Still, there are a lot of things I view differently:
-the reason they are bailed out (and the money they obtain are loans or equity sold, it's not just for free) is because otherwise the economy would suffer more. For the future, this has very strong consequences about regulation. That's one of the reaons they must be regulated: because the government must at all times be able to know for certain what it costs to close them down/let them fail.
-regulation has nothing to do with government spending.
-neither regulation nor government spending are socialism (in the sense of opposing property rights and neglecting or opposing democracy).
-the problem with government spending and debt is that it may not work, not that it is welfare. It isn't welfare. And sometimes it's the only thing left that could work.

[Peter007]

Again, I disagree, " That the failure of highly sophisticated investors was a market failure."

The markets worked wonderfully. The sophisticated investors made out like bandits. $$$$$
Part of this equation is risk. It has a value. Remember that. The CDO's that were sold had high risk. The buyers of the instruments didn't pay enough for the risks they were taking. The reason was because the rating agencies rated the risk low. The government required the CDO's to be rated , not in a free market way, but by Moody's and Standard and Poors. Thats the law..regul­ation. not free market... .The Government, thru their subcontractor S & P. gave a false value to the CDO's . They were worth less because they were high risk. If they weren't rated, a better market value would have been assigned and less cash made available to fuel the housing bubble. Less profit for the sophisticated ivy leaguers.

[drgeorgep]

Once, again, Dr. Kowalczyk, call on us to re-think the conventional. Although I don't believe, for a moment, Keynes "has been proven correct time and time," my gut reaction is go with Keynes. Dr. Kowalczyk is compelling in his suggest we re-think the tryed and true, opting to quickly find a novel resolution or, at least, one of comprise. Bravo! (BTW: I doubt if Keynes would accept the notion of proof, of any sort, applied to his ideas.)

[Schaz]

We've seen repeatedly that the more freedom granted to "market players", the more harm they cause. The premise that a "free market" is the sole and ideal foundation of our economy is flawed. And when the premise is faulty, any conclusions drawn from it are irrelevent.

[UzhasKakoi]

We've seen repeatedly that human beings get sick time and time again. The premise that human body is the sole and ideal foundation of human existence is flawed. And when premise is faulty, any conclusions drawn from it are irrelevant.

See how it works? What's the premise?

No one ever said that "free market" is ideal, -and certainly not sole -, foundation of ANY (not just our) economy. But as someone who similarly to the author lived under another "excellent" system, I can attest that Free Markets, for as imperfect they are, are certainly better of all other alternatives.

BTW, it's NOT true that poor get poorer under free market system. What claimants mean is that the disparity between rich and poor is larger. Who cares? Would you rather poor have $10 busks and rich $20 OR poor have $1,000 and rich have $1,000,000? I guess we can agree to disagree on this one, right? (I'd rather poor have $1,000 than $10. How about you?)

Do we measure how poor the poor are or how envious we are?

Anyone who thinks that free markets system is evil has a choice. There are plenty of countries out there that try another way (Cuba, Venezuela, and even China and Russia) . Rather than killing free markets here, please go there and check for yourself. At least you'll have free markets to come back to. Or is this a wrong premise?

[Henryk A. Kowalczyk - Huffpost Blogger]

Your error is in making an assumption that something as "ideal foundation of our economy" exists.
See my video on this subject,
http://www.youtube.com/watch?v=GfOR-MRPIG8

[DiogenesOfAlaska]

'We have to endure the pain of change, and find new ways and new opportunities out of this experience­.'

With this, I totally agree.

What I am saying is: the new ways and new opportunities out of this experience include - among others - the notion that regulation of financial markets is a necessity.

NOT out of do-goodism. NOT as a step towards socialism. But because it is the only way to keep markets alive.

[BillZBubb]

The key to the "free" market is fools that believe markets are free. Too bad you cannot accept the simple truth that Keynes has been proven correct time after time. To call Keynesian economics a brand of socialism is typical right wing nonsense. If the right doesn't like it, it's "socialism"!

We need to raise taxes on the high wage earners, the sooner the better. That does not "slow the economy" contrary to the right wing myth. Historically, raising taxes on the wealthy has always resulted in a robust economy. Clinton did it in 1993 and the right wing claimed he would bring on a depression. As usual the right wing, "free market" crowd was dead wrong.