Killing Keynes & Krugman Part 5: Food Stamps & The Housing Bubble
By Rick Kelo
This article is the fifth in a six part series. I am writing these articles in layman's terms so any non-economist can easily follow along. They break out as follows:
- Examples of Keynesian failures
- Keynes' Flaws of Government Action in a Recession
- Flaws of Stimulus
- Government vs. Unemployment
- Keynesian Bubble Creation
- Keynes' Flaws of Government Action in an Expanding Economy (AKA Clintonomics)
In keeping with my promise to explain Keynes in plain English I decided to redact part of this article on the Keynesian Cross & the errors of stimulus vs full employment. Instead I'm going to tell you about the technical area of Keynes' theory that has the most impact on the economic news you read every single day. In going this route I will expose Krugman's repeated lies about the 2009 Keynesian stimulus, and directly disprove a major announcement by the CBO.
- Artificially Lowering Interest Rates
- The Keynesian Multiplier
- Disproving The CBO's Lie of "3.3 Million Jobs Created"
1) Artificially Lowering Interest Rates
Meanwhile, economic policy should encourage other spending to offset the temporary slump in business investment. Low interest rates, which promote spending on housing and other durable goods, are the main answer.~ Paul Krugman, CNN MoneyLine, July 18th, 2001 (Source)
Keynesian economics is the default mode for those who think government should control the economy. When America went through its last recession the Keynesians were proclaiming that government must act! Krugman's quote above is one call for action that sounds very dangerous today. But, Keynesians believe we can spend our way out of being broke by manipulating money, redistributing income, financing things through debt and other measures. So when the tech bubble burst and the US economy entered a U-shaped recession toward the end of Clinton's presidency the Keynesians demanded government intervention like above. Let's hear the Keynesian call for action one more time from Keynes most significant remaining disciple:
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)
Now would you rather have the very minor recession around 2000 when the dot com bubble collapsed or the 2007 Great Recession the economy has yet to recover from in 2013? That's the problem with Keynesian methods.
Keynes saw interest rates as imaginary things that could be changed arbitrarily. He was wrong, and if anything showed you the reality of that it was the "Great Recession" of 2007 after a decade of easy money policies from Alan Greenspan & George Bush's increased government spending year after year. The interest rate, like every other price in a free market, is set by market demand.
If government artificially lowers interest rates, as Keynes & Krugman recommend, this fuels an artificial boom. The economy starts growing while being set up for a crash. This time that crash was 2007. It happened because those artificially low interest rates encouraged investment in types of production that weren't sustainable in the long run. Remember capitalism is a profit & loss system. The loss part is as important as the profit part because it signals to producers when to delay growth & delay production. When government artificially lowers interest rates the long-term sectors of investment stretch themselves too thin. They never get the signal to delay production. The result? A crash.
2) The Keynesian Multiplier
This one is a big sticking point with Paul Krugman that you will no longer see him mention in his loosely written popular column. This is because if he presented Keynes' theories honestly & completely he would not be able to repeatedly claim that the 2007 & 2008 government stimulus bills failed to produce a recovery because they were not big enough. Here's one of his many rationalizations after the fact:
In declaring Keynesian economics vindicated I am, of course, at odds with conventional wisdom.
(Yes you are, conventional wisdom is that Keynesian economics is a failure).
In Washington, in particular, the failure of the Obama stimulus package to produce an employment boom is generally seen as having proved that government spending can’t create jobs. But those of us who did the math realized, right from the beginning, that the Recovery and Reinvestment Act of 2009 was much too small.
~ Paul Krugman, December 29, 2011 (Source)
Let's take Krugman to task: precisely what size stimulus did Keynes' theories call for? 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.
Here's an example of this idea in use:
"When you talk about the SNAP program or the food stamp program you have to recognize that it is also an economic stimulus. Every dollar of SNAP benefits generates $1.84 in the economy in terms of economic activity. If people are able to buy a little bit more at the grocery store then someone has to stock it, shelve it, process it, ship it, all of those are jobs."
~ Tom Vilsak, Secretary of Agriculture, MSNBC August 16th, 2011 (Source)
I include that example to point out the usage of the Keynesian multiplier: each $1 spent by government produces $1.84 in economic activity by the accepted 1.84x Keynesian multiplier in use back in 2011. Please focus on that part and ignore the rest of the lunacy in Tom Vilsak's statement since all sane people know that food stamps don't stimulate the economy, they depress it. If it were that simple government could just give us each a one million dollar tax refund every year.
(Sidebar: I will inevitably be asked how food stamps depress the economy so I'm going to just answer the question now. Transfer payments reduce the total reward for working, and the real question is what behavior are we encouraging? In the example of the food stamp program you no longer have to work in order to eat you can now eat by not working. What's more, by not working you can eat better than you could by working in some jobs. So recipients of transfer payments become idle at a higher rate than they would be without them. Secondly, in order to fund the transfer payment (food stamps in this case) you need increased taxes. Higher taxes further disincentivize work. That is why the more redistribution of income in a society the lower the GDP. This is the reason that America's regime of 77 federal welfare programs have been such a machine for entrapping & producing poor people.)
Sidebar over back on topic: Keynes considered the economy in only large macro chunks. He called this aggregate demand, which was made up of consumption, investment & government spending. So very simply prices are relatively rigid so any fluctuation in one of those 3 areas of spending causes aggregate demand to change. But that's not where Keynes' theory stops. That change in output, in aggregate demand, is also subject to a multiplier that makes its total effect larger.
Keynes described it this way:
[W]e can calculate what level of incomes, and therefore what level of output and employment, is in profit-equilibrium with a given level of new investment; out of which develops the doctrine of the Multiplier. Or again, it becomes evident that an increased propensity to save will ceteris paribus contract incomes and output; whilst an increased inducement to invest will expand them. We are thus able to analyse the factors which determine the income and output of the system as a whole;—we have, in the most exact sense, a theory of employment. Conclusions emerge from this reasoning which are particularly relevant to the problems of public finance and public policy generally and of the trade cycle.
~ John Maynard Keynes, The General Theory of Employment, Interest, and Money, p. 10It follows, therefore, that, if the consumption psychology of the community is such that they will choose to consume, e.g. nine-tenths of an increment of income, then the multiplier k is 10; and the total employment caused by (e.g.) increased public works will be ten times the primary employment provided by the public works themselves.
~ John Maynard Keynes, The General Theory of Employment, Interest, and Money, p. 78
In 2009 & 2010 the US GDP was some 8% below where it had been trending to have been. So, by June, '09 we had an economy with a GDP of $12.7T instead of the $13.8T it was trending toward before the recession hit. Now, that does not mean that the stimulus needs to be the size of the $1.1T shortfall. It only needs to be large enough that, after the Keynesian multiplier is applied, it bridges the shortfall.
To spare you some long mathematics the Keynesian multiplier in 2009 was agreed upon to be somewhere between 1.44x and 1.6x. So if we need to bridge June 2009's $1.1T output gap then Keynes' actual theory states that we need a stimulus between $687B and $763B. We enacted a fiscal stimulus 25% larger than the maximum amount Keynes' theory calls for: $955B between Bush & Obama's two stimulus packages. (That $955B total also ignores massive monetary stimulus by the way).
Krugman saw the stimulus (until it didn't work) as an even better multiplier than everyone else was using:
[T]he multiplier is 1.5, which is more or less the conventional wisdom right now.But if $100 billion in spending raises GDP by $150 billion, and the marginal tax rate is 1/3, $50 billion of the spending comes back in additional revenue. So bang for the buck — increase in GDP per dollar of added debt — is 3, not 1.5. Since the main concern about stimulus is that it will add to government debt, it’s this bang for the buck measure, rather than the multiplier, that’s relevant. And 3 sounds a lot better than 1.5.
~ Paul Krugman, NY Times, January 13th, 2009 (Source)
So the stimulus amounts were, to the letter of both Keynes' theory & Krugman's specific recommendations, even larger than needed. The lack of result? Well that's because his theories don't work, even when you follow them. If they did we could just tax all income at 100%, let it pass through government's hands and come out multiplied as 1.5x the amount of money that went in. Keynes & Krugman's ideas make far less sense when explained that way don't they? That brings us to this point:
3) Disproving The CBO's Lie of "3.3 Million Jobs Created"
We've talked about the Keynesian multiplier. When the Obama administration arrived at its decision on the stimulus amount in January, 2009 they used a multiplier between 1.51x & 1.55x. (Source) That means the $1.1 trillion dollar economic shortfall required a fiscal stimulus of $709B - $728B. Not to be outdone by that jerk George Bush and his wimpy $168B stimulus Obama went large and grossed the theoretically required amount up an extra ~10% and enacted a $787B stimulus bill (which ended up totaling $831B when it was all said & done).
|"The Jobs Impact of the ARARP" January 9th, 2009. (Source)|
Above is the picture President Obama's economists portrayed of what would happen to unemployment if we did not have the Keynesian stimulus of 2009.
The CBO, separate from Obama's people, made similar proclamations:
In the absence of any changes in policy…[t]he unemployment rate is forecast to rise above 9 percent by early next year. ~ CBO, January 2009 (Source)
Except that we did not get the promised unemployment of 7% WITH stimulus we got at unemployment rate of 10% WITH the stimulus. How did this happen?
There are only 3 explanations for the inability of these Keynesian policies to produce the result theory dictates it will produce:
- The stimulus had no effect and we go the same unemployment we'd have gotten without it.
- The stimulus made unemployment worse.
- Without the stimulus we would have gotten unemployment of 12%.
To spare you a bunch of econometrics & comparisons we know that #3 is not the case. Even the groups with the most vested interest in the largest stimulus possible (including large parts of Congress, the CBO & then President-elect Obama's people) knew #3 was not the case. Mathematically every one of their calculations has been reviewed a thousand times by every major economist in the country and been found to be entirely correct. Except that the projected impacts of the Keynesian stimulus never appeared. The 2009 stimulus was like manufacturing a gun from a set of blue prints, making every part precisely according to the plans, then pulling the trigger and the gun doesn't shoot. We got the exact same economy with the stimulus that was projected without it (FOR A VISUAL OF THE PROJECTED VS ACTUAL US ECONOMY CLICK HERE). This is where the confusion begins as the reality of options #1 & #2 start to set in.
Frantic efforts to conceal the truth that we just flushed $1 trillion down the toilet next led to one of the greatest myths of this current economy: the CBO's statement that stimulus worked and created 3 million jobs in just that quarter alone. This myth is an accepted fact to most, and in the discussion around Part 1 of this article I asked die-hard supporters of this program to identify any job created by the stimulus and if it did not seem odd we couldn't locate these 3.3 million jobs considering that's some ~3% of all jobs in America. Locating them should be easy... My question in that discussion was a somewhat unfair one because I already knew the answer when I asked it and it was perhaps a bit entrapping.
But people have a very misplaced confidence that jobs were created because the CBO made a grand announcement to that effect:
CBO estimates that ARRA’s policies had the following effects in the second quarter of calendar year 2010: Increased the number of people employed by between 1.4 million and 3.3 million
(Source: CBO, August, 2010).
The myth of the CBO's 3 million jobs is propagated by people who scan & grab a headline but do not analyze how that conclusion was reached. When you actually look at how the CBO reached that conclusion they took the Keynesian multiplier used in January, 2009 to predict the effect of the stimulus. They then re-multiplied it with the actual levels of spending. So, in essence, the CBO took a forecast and re-did the forecast, then proclaimed that forecast was what happened. The forecast was for 3.3 million jobs so they just announce it created 3.3 million jobs. Totally dishonesty! There were no jobs created, only a projection that X amount of spending SHOULD result (according to Keynes) in Y amount of jobs created. So instead of being honest and admitting this theory doesn't work the CBO decided to instead state the theoretical outcome as a fact & the actual outcome! Translation: you were lied to America.
The CBO actually believes you are dumb enough you wouldn't notice that about 3% of all the jobs in the economy were supposed to be created by this program in just one quarter when, in reality, there were only 600,000 jobs created that entire quarter and none of them from stimulus. Heck in the entire 51 months we have final jobs data on since the stimulus was enacted (Feb 2009 - April 2013) there have only been 1.8 million cumulative jobs created TOTAL! That's over 51 months.... a big difference from 3.3 million jobs created in 3 months isn't it?
Let me break this down & translate it for you. Here's the full CBO announcement; in plain English it translates to say:
- The stimulus created 1.4 million to 3.3 million jobs (the quote above you've already seen)
- Next paragraph is below an
d translates: the stimulus didn't actually create those jobs, but we estimated before the stimulus (in Jan, 09) that it would create them.
- We've just taken the same multiplier as then, multiplied it by the actual spending and are announcing our year old estimate as fact now because most of you aren't smart enough to translate our gibberish and realize we just pulled a carnival shell game on you.
CBO’s current estimates reflect small revisions to its earlier projections of the timing and magnitude of changes to federal revenues and spending under ARRA. They also reflect, for 2011 and 2012, a small shift in CBO’s assumptions about the future actions of the Federal Reserve.
(Source: CBO, August, 2010).
READY FOR THE REAL KICKER? This is the next paragraph. It translates: we looked at the real data and it didn't show any jobs created so we disregarded it and instead republished our estimates from before the stimulus, but stated them as facts this time even though they're really only estimates:
Although CBO has examined data on output and employment during the period since ARRA’s enactment, those data are not as helpful in determining ARRA’s economic effects as might be supposed.
(Source: CBO, August, 2010).
BOTTOM LINE: These ideas don't work folks. They don't work for very basic philosophical reasons I've laid out in previous articles. They don't work when you start to get into technical details. What's worst of all: the only reason people think they work is because the proponents of Keynesian economics cover for its failure. They have a major dog in the fight on these theories proving right after all, their credibility and livelihood are on the line.
The result: Keynesians like Krugman fail in all their blogging to mention very critical things like the Keynesian multiplier because they knows it then disproves all claims that the stimulus was too small. You have people like Doug Elmendorf at the CBO flat out lying in published "results" of the stimulus's impact because he knows no one understands Keynesian economics well enough to catch his lie. So 100% of the news media who read that press release stopped at the "3.3 million jobs created" line and did not understand the next paragraphs in which the CBO admits that those 3.3 million jobs just stated as fact are actually not fact. They are an estimate the CBO claims to be fact after dismissing the facts that proved their estimate was wrong.
If these theories worked as well as Keynesians claim there would be no reason for them to intentionally conceal things like this, and you & I would be enjoying a very prosperous, booming economy in 2013. But we all know the truth is far different from the sweet lies whispered by Krugman & by Keynes before him.