Kelo Responds on Paul William Tenny, Keynes, George Bush & Roller Coasters
by Rick Kelo
Paul William Tenny recently penned an article addressing me on the topic of Keynesian Economics. It can be viewed here
His article is in response to a series of my own which can be viewed here:
I enjoy discussing topics like this and because so few people are interested in them I want to thank Paul William Tenny for his effort in tackling a complicated topic. I don't agree with his thoughts and I think they more represent what he imagines this topic should be like and not what it is actually like, but every side always thinks that about the other in discussions like this. So, to head off that criticism in your own mind I will do what Paul William Tenny fails to do in his article: I will provide factual support for each topic I address.
Before I go into the topic I am going to briefly mention a few of Paul William Tenny's remarks toward me that I took as personal attacks. I understand, in debate, that many feel strong language is warranted. It is especially needed in Tenny's case given that he is trying to convince internet readers of a position that he has mostly made up. So, to his specific slanderous remarks: I am not an advocate of "austerity" and in none of my writing have I ever suggested that approach, I am not a member of the birther society, or the flat earth society, or a denier of climate change
Those insults are necessary lies Tenny hides behind at the outset to take advantage of the fact most of his readers are not self-aware enough to detect an effect called Halo Bias
: that people see others as all good or all bad. Knowing this some more childish debaters will launch into personal attacks knowing this will cause readers not mindful of Halo Bias to consider the other party all bad.
WHY TENNY IS WRONG
Paul William Tenny makes his statements very confidently, but he has no idea what he's talking about and is wrong in every major topic he raises:
Furthermore, it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means... case is made out for a system of State Socialism which would embrace most of the economic life of the community. It is not the ownership of the instruments of production which it is important for the State to assume. ... [T]he necessary measures of socialisation can be introduced gradually and without a break in the general traditions of society.
~ John Maynard Keynes, The General Theory of Employment, Interest, and Money, page 238.
I believe that the cure for these things is partly to be sought in the deliberate control of the currency and of credit by a central institution
~ John Maynard Keynes, The End of Laissez-Faire
Had Paul William Tenny read Keynes before trying to write about it he would know Keynes called for the state to assume control of all investments. Until this could be done Keynes also called for negative interest rates so people had to pay the bank in order to save their money, which I detail here.
2. LACK OF DEMAND IN A RECESSION
Now on this exact topic I never elaborated on Keynes' theories, however, this is one area where Kelo & Keynes agree. On this topic Tenny is off in left field by himself... again. Keynes also felt that economic downturns came from declining investments not declining consumer spending. This is probably news to most people since consumer spending gets far more press time than the more complicated, and less understood area of investment.
Thus, to justify any given amount of employment there must be an amount of current investment sufficient to absorb the excess of total output over what the community chooses to consume when employment is at the given level. For unless there is this amount of investment, the receipts of the entrepreneurs will be less than is required to induce them to offer the given amount of employment. It follows, therefore, that, given what we shall call the community's propensity to consume, the equilibrium level of employment, i.e. the level at which there is no inducement to employers as a whole either to expand or to contract employment, will depend on the amount of current investment.
~ John Maynard Keynes, The General Theory of Employment, Interest, and Money, page 26.
3. REGULATION- Tenny says: "The only part that John Keynes played in all of that is that Congress took his theories to heart after the Great Depression and regulated Wall Street in ways that prevented another Depression for over half a century."
- Kelo says: Tenny just flat out made this one up. In fact, he's referring in this quote to Glass-Steagall, which was enacted in 1933 and assigning credit to Keynes for a book he wrote in 1936. Also, no where in that book does Keynes discuss regulating the banking industry, hey, at least his claims sound convincing.
- Keynes says: Hey Tenny, if you can't sleep at night take it back 5 years to the early 30s. I wrote a real snoozer of a book on central banking. Sadly for your point on regulation though the only thing I call for in there is that the central bank has to be able to control how much money is printed by its member banks.
4. FREE MARKETS- Tenny says: "John Keynes was generally a free market advocate"
- Kelo says: Tenny just flat out makes this one up... again.
- Keynes says: "We already have in these cases many of the faults as well as the advantages of State Socialism. Nevertheless, we see here, I think, a natural line of evolution. The battle of Socialism against unlimited private profit is being won in detail hour by hour." ~ John Maynard Keynes, "The end of laissez-faire"
- Tenny says:
"Keynesian economics respects the free market"
- Kelo says:
Paul, you are using words that you don't know what they mean again. Free Market, noun, "An economic system in which prices are determined by unrestricted competition between privately owned businesses.
" Contrasted with: "Keynesian economics advocates a mixed economy" (Wikipedia)
5. MULTIPLIER- Kelo says: "The answer revolves around something called the Keynesian multiplier. The basic idea is that every dollar government puts into the economy creates much more than just $1."
- Keynes says: "It is, however, to the general principle of the multiplier to which we have to look for an explanation of how fluctuations in the amount of investment, which are a comparatively small proportion of the national income, are capable of generating fluctuations in aggregate employment and income so much greater in amplitude than themselves." ~ John Maynard Keynes, The General Theory of Employment, Interest, and Money, Page 81
- Keynes says:
"To dig holes in the ground, paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services". ~ John Maynard Keynes, The General Theory of Employment, Interest, and Money, Page 139
- Tenny says: "
The only reason the specific job the government creates would matter is that you want to get the biggest multiplier -- the biggest bang for your buck. Digging a hole and filling it in would only increase demand for shovels, so the multiplier would low."
Tenny completely mis-states this topic. From his explanation you would not understand it at even the most basic level.
The Keynesian multiplier is a macro economic term. The basic idea is as demand decreases in a recession government makes up the gap with spending that is augmented by a multiplier. Keynes felt that after government spent a dollar, then the person who got that dollar would spend it and so on, thereby multiplying the effect. (But he ignored the cost for government to raise that dollar through taxes or debt & the amount skimmed or wasted by passing it through government's hands). This becomes important when we suppose that for every dollar of infrastructure spending it produces an actual effect of $1.75 in the economy, but maybe every dollar spent on a tax refund only produces $0.80 in the economy.
This may be news to you after reading Tenny's piece and it may be news to him, but the multiplier has nothing to do with micro economics. It has nothing to do with the demand for shovels, or any other single product. Wikipedia
explains it this way:
Keynesian and Hansen-Samuelson multipliers:
Keynesian economists often calculate multipliers that measure the effect on aggregate demand only.
And, of course, Keynes theory of the multiplier doesn't proof out anyway. Showing that government can move output around is not the same as showing it can increase overall output, which it can not.
- Keynes: I believe government should own all the banks, AKA "comprehensive socialisation of investment"
- Keynes: "I have become convinced that the retention of the structure of private enterprise is incompatible with that degree of material well-being to which our technical advancement entitles us... above all, let finance be primarily national." ~ John Maynard Keynes, "National Self-Sufficiency"
- Too big to fail was a nationalized finance scheme that gave government partial socialized control over banks & investment firms.
- Keynes on government control of manufacturing: "War experience in the organisation of socialised production has left some near observers optimistically anxious to repeat it in peace conditions. War socialism unquestionably achieved a production of wealth on a scale far greater than we ever knew in peace, for though the goods and services delivered were destined for immediate and fruitless extinction, none the less they were wealth." ~ John Maynard Keynes, The End of Laissez-Faire
7. THE ROLLER COASTER
- Kelo says:
"Alan Greenspan's easy money policies sent a false signal to the housing industry to produce. A signal that caused malinvestments in housing far above what the market actually needed. With that in mind how logical does the Keynesian suggestion that deficit spending & easy money are the cure for the recession sound?"
- Tenny says:
"Opposing the theories of Keynes is to embrace a roller coast from one economic bubble to the next"
To those who don't know better yet not to take advice on economics from Paul William Tenny let me just put the nail in the coffin for you.
8. TENNY DEFENDS GEORGE BUSH'S ECONOMICS
To defend Keynesian economics is to defend the economic policies of George W. Bush. Tenny is fine with defending this, so is Krugman for that matter. Do you think Krugman cares if you get a huge recession from a housing bubble? Hell he was calling for it:
To fight this recession the Fed needs more than a snapback; it needs soaring household spending... Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.
~ Paul "I'd Like to Recant This Statement" Krugman, New York Times, August 2nd, 2002 (Source)
In 2001 Bush came into office in a recession. He enacted Keynesian fiscal stimulus (remember those tax rebate checks?) and a demand-side tax cut. The Bush Administration's position was: "Go shopping." Remember that Keynesian economics believes you need to spend, spend, spend to get out of a recession. Bush's exact words about what to do with this money were: "Get down to Disney World in Florida. Take your families and enjoy life, the way we want it to be enjoyed."
Since Keynesian economics has never worked anywhere in all the history of the world, you already know what comes next: it doesn't work.
So, what does Keynesian theory next call for? Monetary stimulus! The Federal Reserve must solve the recession at the printing press & in the form of lower interest rates. So, in 2002, away went Alan Greenspan to do just that. And, as I said above, it created an artificial boom that popped in 2007.
Still not quite aware of this though, Tenny still has Bush's back: "the Lesser Depression of the late 2000s would be dealing with the consequences of not listening to Keynes in the first place." No Tenny, Bush followed Keynes to the letter.
Once the Keynesian bubble burst, what solution did Bush turn to? Right back where he started in 2001: more Keynesian monetary stimulus, this time $168 billion. Then, he left office and Obama came in and did even more Keynesian monetary stimulus (now $787 billion). But, since Keynesian economics never works... well it didn't work for Bush or Obama either (notice a trend with Keynesian policies yet?). So... Monetary Stimulus time!! Ben Bernake has been soaking the economy with huge amounts of money ever since; just like Alan Greenspan before him.
How's it working for us? How's that job market out there? This is the roller coaster that is Keynesian economics.
- Tenny says RE: government jobs: "Those people will stop needing unemployment insurance, reducing government spending and will start spending their salaries on the economy buying food."
Kelo says: In order for your statement to be right they would have to have NOT been spending their unemployment on food for one. Secondly government paying enough to hire someone full time does not reduce government spending. In fact most of the jobs "created" by stimulus were done so at a cost of ~$250,000/average. You call that reducing government spending over an unemployment check?
- Tenny says: "During a financial recession -- one created by Wall Street -- demand drops and businesses start laying off workers"
Kelo says: This recession wasn't created by Wall Street, it was created by Keynesian monetary stimulus, AKA easy money.
- Tenny says: "The idea that government spending will crowd out private spending during full employment simply doesn't apply in the aftermath of a financial recession."
Kelo says: Yes it does, you just don't know what you're talking about. In fact the entire term "crowding out" originated from this observed effect during the Great Depression, which was in the terms you are using a "financial recession"
- Tenny says: (referring to digging holes in the ground) "Odd as it may sound, such an activity would stimulate economic growth under the right conditions. A modern era counterpart to that would be replacing old bridges, repaving roads, and demolishing old buildings and replacing them with new ones."
Kelo says: Two issues: first you are misinterpreting Keynes (again), that's not what he said. In fact Keynes disagrees with your example; quote below. Secondly the only proper case to be made for doing infrastructure repairs during a recession is if you already had to do them anyway and want to take advantage of the lower interest rates.
Keynes says: "Two pyramids, two masses for the dead, are twice as good as one; but not so two railways from London to York." ~ General Theory p. 86.
- Tenny says the most effective method to solving unemployment is:" put people on the government payroll as a means to solve an unemployment problem"
Kelo says: People employed by the government provide no good or service, they are a net drain on the economy. Suppose we took the American government from employing some 15% of the workforce to employing some 40% of it. Now the only goods/services that can exist are what the 60% produce which must be divided amongst the 100% instead of the previously better arrangement where 85% of the country is engaged in productive activity.
Facts say: The governments in Portugal, Italy, Greece & France all employ between 28% - 35% of their nation's workers; how are they doing?
- Tenny says RE multiplicative spending: "That's not a theory of John Keynes, it's economics 101."
Kelo says: Actually that was Keynes' exact theory you might try to read it some time.
- Tenny says: "Even when the government funding goes away, growth will return to normal instead of being accelerated."
Kelo says: If you go read the actual economists instead of Krugman's nutty web blog they are all predicting that the stimulus after 2016 will produce a permanent 0.8% reduction in economic growth until it is (never) paid for.
- Tenny says: "There is no economic argument that the government hiring people to dig holes and then fill them in wouldn't stimulate the economy. It's diversionary because it seems silly, but it's fundamentally sound."
Kelo says: Hahaha. Seriously dude just stop.
- Tenny says: Blah, blah blah, Rick Kelo quoted Keynes' intro about how Keynesian economics would work best in a totalitarian state. In response I am going to paste another paragraph from the intro where Keynes talks about something totally different.
Kelo says: You're proving a point, but its not the one you think you're proving.