Tuesday, June 19, 2012

Henry Blodget Goes Totally Keynesian

In a column at Business Insider, Blodget writes:
Instead of cutting spending and firing people, the way it has been for the last few years, the government can do the opposite: Commit to spending, say, an extra $2-$3 trillion over the next decade to rebuild our country's infrastructure--and create work and awesome infrastructure for millions of Americans in the process...

But wait. Can we afford to spend $2-$3 trillion on infrastructure? We already have $15 trillion of debt, and we're accumulating more debt at a rate of more than $1 trillion per year!

The answer is.... yes, we can afford it. As long as we commit to fixing our social-insurance programs (Social Security, Medicare, Medicaid) over the next decade. Those programs are what are slowly bankrupting this country, not infrastructure spending. And in the meantime, our infrastructure is collapsing...

The economy is basically composed of three big spending engines —consumers, corporations (investment), and governments. So when the first two weaken, as they have in recent years, the third can help offset this weakness.

Specifically, the government can increase its spending to offset the lost consumer and business spending.
What would Friedrich Hayek say about Blodget's proposal? That Blodget has "limited knowledge of economic theory" and is promoting a "view long the preserve of cranks".

For starters, Blodget makes an error in thinking that it is consumption, not production that results in a growing economy. Second, he simply ignores away the fact that in order for the government to spend additional money, it must take that money from some other sector of the economy. The government must either tax it from others, borrow it (thus crowding out the private sector) or print the money, thus cheating out all other holders of dollars.

When it comes down to it, Blodget's view that there is not enough aggregate demand to buy goods produced  is a failure to understand simple supply and demand. Produce product and price will adjust on the market for the goods to clear.

8 comments:

  1. Hayek: You see, another political element was that, of course, politicians just lapped the argument and Keynes taught them if you outspend your income and run a deficit, you are doing good to the people in general! The politicians didn’t want to hear anything more than that -- to be told that irresponsible spending was a beneficial thing and that’s how the thing became so influential.

    http://www.youtube.com/watch?v=N364sN5E0hQ&feature=relmfu

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  2. "Instead of cutting spending and firing people, the way it has been for the last few years ..."

    Where?!

    As for Bob's:

    "For starters, Blodget makes an error in thinking that it is consumption, not production that results in a growing economy. Second, he simply ignores away the fact that in order for the government to spend additional money, it must take that money from some other sector of the economy. The government must either tax it from others, borrow it (thus crowding out the private sector) or print the money, thus cheating out all other holders of dollars.

    When it comes down to it, Blodget's view that there is not enough aggregate demand to buy goods produced is a failure to understand simple supply and demand. Produce product and price will adjust on the market for the goods to clear."

    Is it just me?

    I've explained these simple and easily understood points to all kinds of people, from Keynesians to left-liberals to conservatives, and hardly any seem to get it. I think I explain it very simply, as Bob does, and it's quite obvious to me, but almost always I get a blank stare in response.

    I can see that erroneous Keynesian beliefs have a hold on many, but I'm truly stumped that anyone can continue to hold to these beilefs once the errors are pointed out.

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    1. I think we need to come up with a board game, like a very simple "Monopoly" that just goes through the sequences and demonstrates the fallacy.
      Has Sal Khan done anything on this subject?

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  3. And in the meantime, our infrastructure is collapsing


    I've been hearing this for the last 20 years. Where is it collapsing?

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    1. I've heard there are some bridges that need to be fixed from Rand Paul, but that's about it.

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  4. I have 2 points to make.

    First, Bob is right, but prices aren't being discovered. The Fed is propping up asset and commodity prices with its interference in the market.

    Second, I'm not so sure that these writers actually believe the claptrap that they write. They may just be trying to invoke 'animal spirits' and get consumers to spend again, nevermind that they have no money.

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  5. Mr. Buckley: Well, how would you account for the almost unanimous opinion of liberal Democrats that in order to reduce unemployment it is necessary for the government to pursue vast spending projects? Since you speak of this as being almost manifestly ill-advised, the question arises why such superstitions should survive?

    Mr. Hayek: Well, it’s almost entirely the work of one man – in a way a genius, Lord Keynes – who is much more concerned about influencing current policies than about advancing the right sort of theories and he was operating then in a very peculiar situation. Now in Great Britain, a successful attempt was made after World War I – which brought a good deal of inflation – to bring prices down to the pre-war level. Prices came down but wages did not, so you had in the 1920s a position in Great Britain where wages were internationally too high and Britain had become noncompetitive on the world market. The problem in Great Britain was to make Britain competitive again and it was clear that this required a reduction of real wages. Notice these real wages had been artificially increased by increasing the value of the pound. So because the pound was par to its former level, people receiving the same wartime salary and wages, or inflated wages, could buy much more. Wages had not come down.

    Now, his first argument was wages must come down. Then he found that was politically impossible, so he must find another way. Instead of getting money wages down, we must depreciate the pound so that given money wages should correspond to a lower level of real wages and then by a curious intellectual somersault I would almost say he led himself to believe that even bringing down money wages was not of any use. It involves a complex economic argument and all he concluded was that – well, we must inflate, in short.

    Now notice several things. Keynes was a genius, but a genius who spent only a fraction of his time on economics – one of the busiest men I ever knew. But he knew very little economics except particularly the Cambridge tradition, and he was much more concerned to influence policy at a particular moment than develop a true theory. In fact, the last time I talked to him was after the war. I knew him very well. When I asked him wasn’t he getting alarmed about what his pupils who swallowed all this theory were doing after the war when the danger was clearly inflation, his answer was:

    “Oh, don’t mind. My theory was frightfully important in the 1930s. Then, we needed an expansion to correct a situation. Do trust me. If this theory becomes dangerous, I’m going to turn public opinion around like this”.

    Six month later, he was dead. And as usual, what happened is that the very doctrine – pupils of this man did apply to completely different situation a theory which was designed to influence policy in a particular situation. The only thing I blamed Keynes for is to making his theory more attractive and effective, he called it THE general theory. In fact, he knew precisely that it was not a general theory, but it was an argument to persuade government in the 1930s to do particular things.

    Mr. Buckley: It was an ad hoc?

    Mr. Hayek: It was entirely ad hoc. He was one of the most fascinating men I knew, but the personal magnetism of this man not only persuaded the younger generation of economists. And if I had been a much younger man and a student, I probably would have been swept off my feet as were most of the people.

    Mr. Buckley: Like Nixon.

    Mr. Hayek: No, no. (laughter).


    http://www.youtube.com/watch?v=gaQcbGoW2C0&feature=relmfu

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  6. "So when the first two weaken.....the third can help to offset".

    That is the howler of the day!

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