Resurrecting a Zombie: The Revival of the Failed
Keynesian Myth and the Logic of Joseph Stiglitz
Resurrecting a Zombie:
The Revival of the Failed Keynesian Myth and the Logic of Joseph Stiglitz
Abstract: Nobel Prize winner Joseph Stiglitz recommends the economics of
Keynes as a stimulus as do a lot of economists and particularly so from Paul
Krugman, another Nobel laureate. To date, there is no believable benefit from
several trillion dollars in deficit spending and the prospect of thrice that in
the future. The economic arena is overflowing with theories and ‘examples’ that
portend the ability to climb out of massive debt by spending and then growth,
but an inspection of some of these, like Argentina, show that a debt
restructuring was the only effective remedy. This resulted in massive defaults,
collapses in the country’s credit and other major problems. We are buried in
debt and are told that we can ‘spend our way’ out of this debt. This is
nonsense. The Fed is trying to inflate
our way out of debt and monetizing the debt as we go along. The US is in bad
shape economically, but the UK and EU are even worse off. And, in all this
flurry of spending suggestions there exists not a single detailed plan to pay
back that debt. The EU will crash and disintegrate from this debt because,
unlike Argentina, there is no way to ‘restructure’ our debts in the US-UK-EU
group as no nation or organization has the necessary 20-40 trillion dollars it
would require. If we cannot stop
spending and bloating government we will go bankrupt. Period.
Here is
the Stiglitz comment:
“Thanks to
the IMF, multiple experiments have been conducted – for instance, in east Asia
in 1997-98 and a little later in Argentina – and almost all come to the same
conclusion: the
Keynesian prescription works. Austerity converts downturns into
recessions, recessions into depressions. The confidence fairy that the
austerity advocates claim will appear never does, partly perhaps because the
downturns mean that the deficit reductions are always smaller than was hoped.”[1]--To
choose austerity is to bet it all on the confidence fairy The mystical belief
is that a smaller deficit will lead to an investment boom. What Britain really
needs now is another stimulus By Joseph Stiglitz guardian.co.uk, Tuesday 19 October
2010 22.00 BST [Emphasis is mine in all quotes.]
Here is some info on the
Argentinean default:
The Argentinean default
in 2002:
Argentina defaulted on part of its external debt at the
beginning of 2002. Foreign investment fled the country, and capital flow
towards Argentina ceased almost completely. Argentina was "left out of the world." The
currency exchange rate (formerly a fixed 1-to-1 parity between the Argentine
peso and the U.S. dollar) was floated, and the peso devalued quickly, producing
massive
inflation.[2]—Wikipedia
We know
from reading Niall Ferguson’s excellent book The Ascent of Money that Argentina ran out of money on Friday
28 April, 1989. The World Bank refused
to put any more money and accused the country of not controlling its deficits
and the printing of money forced inflation to rise to more than 100% per month.
The national debt was denominated in dollars and soared in relation to the
inflating austral. Changes in currency did not help. There were three bailouts
by the International Monetary Fund, the IMF. Later the bondholders were clipped
down to 35 cents per dollar of debt. By 1994 the debt reached 64% of the GDP .[3] This mess ended in default.
So, at this point, I wonder just how the Keynesian Formula
can be applied in this case.
“Critics say
government won't spend the money well. To be sure, there will be waste – though not on the scale that the
private sector in the US and Europe wasted money in the years before 2008. But
even if money is not spent perfectly, if experience of the past is a guide to
the future,
the returns on government investments in education, technology and
infrastructure are far higher than the government's cost of capital.
Besides, the choices facing the country are bleak. If the government doesn't
spend this money there will be massive waste of resources as its capital and
human resources are under-utilised.” --To choose austerity is to bet it all
on the confidence fairy
Here, we can look at some of the Obama ill-spent
monies that contributed to the debt at great future expense and made the
intervention look silly if not psychotic.
We
are still stuck with a 9.7% unemployment rate [as of March 27, 2010] and much
of our current GDP comes from
temporary stimuli like the recent ‘jobs’ program
spent $92,000 per job[4] and, then, we
spent $24,000 per car on the Clunker
Follies and a mere $43,000 per house
on the housing scam[5]
And, none of these had a lasting effect. All of
the money to propel this was either borrowed or printed up quickie fashion by
our government.[6] This observation refutes the notion that the returns on government investments are
effective or cost worthy.
I think it is clear that this spending is
foolish. Obama wants to spend 9 trillion more in his term[s]. There are many
enemies of capitalism and Obama and most leaders in the European Union are
allies in this view.
This Stiglitz view can be contrasted with the Rogoff
position:
In
an open letter to Joseph
Stiglitz of June 2002[7] we read about the use of
deficits and debt to ease the growth of countries in dire debt: “The laws of
economics may be different in your part of the gamma quadrant, but around here
we find that when an almost bankrupt government fails
to credibly constrain the time profile of its fiscal deficits, things generally
get worse instead of better.”[8]-- An Open Letter By Kenneth
Rogoff, [Emphasis is mine in
all quotes.]
The general gist of this is to learn
that some variant of Keynes, with its stimulus and all that. can somehow lead
any country out of the massive national debt they conjured due to spending in
the socialist manner. But, missing is a realistic estimate of how we can avoid
defaults and pay back that debt.
Stiglitz
concludes:
“Britain is embarking on a highly risky experiment. More
likely than not, it will add one more data point to the well- established
result that austerity in the midst of a downturn lowers GDP
and increases unemployment, and excessive austerity can have long-lasting effects.
If Britain
were wealthier, or if the prospects of success were greater, it might be a risk
worth taking. But it is a gamble with almost no potential upside. Austerity is a gamble which Britain can ill afford.”--
To choose austerity is to bet it all on the
confidence fairy
I seem to get the feeling that Keynes didn’t
solve any problems anywhere and that his emphasis on government
spending was only a political sop to the socialists or worse. The
Neo-Keynesians seem to be flush with all sorts of spending options and banking
regulations including nationalization, but they seem to offer some vague ‘solution’ to be created
by the ‘growth’ that will enable countries to handle their debts.
I have formed the impression that many of these
‘economists’ are only advocates or peanut gallery level chum chuckers for the
rabid Left. No matter what the occasion, it seems many like Paul Krugman and
now Stiglitz have no other solution but to spend or tax and spend and create
mountains of debt. For this reason, they and their like-minded colleagues must
be considered as a collective encumbrance to effective societies and those
socialist countries that are now crashing in debt [this includes the US]. The
so-called stimulus conjured by Obama
and those ‘economists’ on the left have spent almost 4 trillion dollars
[counting TARP] with nothing to show in terms of positive results. The notion
that ‘millions of jobs have been saved’ is not convincing. Increasing the
government is not any kind of a solution.
Krugman’s
Eternal Solution to all government problems: spend more.
“Austerity
is self-defeating: when everyone tries to pay down debt at the same time, the
result is depression and deflation, and debt problems grow even worse. And
conversely, it
is possible — indeed, necessary — for the nation as a whole to spend its way
out of debt: a temporary surge of deficit spending, on a
sufficient scale, can cure problems brought on by past excesses.”[9]--
1938 in 2010 By Paul Krugman
From a
previous blog” [Sep 2010]
“It is
of interest here to wonder how massive deficit spending on foolish stuff is
effective in any way. The consequences of debt are always ignored. The Obama stimulus
#1 has not worked and neither did cash for clunkers or the housing
subsidies. The recent ‘jobs’ program spent $92,000 per job[10] and, then, we
spent $24,000 per car on the Clunker Follies and a mere $43,000 per house on the housing scam.[11]
And, none of these had a lasting effect. All of
the money to propel this was either borrowed or printed up quickie fashion by
our government. I wonder why Krugman cannot seem to defend or explain why these
measures failed as he seems to cover up this offal with some nostrums about
caution or insufficiency. In the lexicon of the left the word failure is always
used as the limiting case. We failed to spend enough…or we failed to tax the rich some more
or… When confronted with defending a stupid program like busing, War on
Poverty, HUD, Welfare etc. there is silence. There is always a reason why such
programs didn’t work out that well and they will recite the 1,2,3s above as the
reason why the project was not exceptional.[12]
We
cannot believe these people any more. They are now just a chorus of advocates
singing the old Fabian songs of 1900.
rycK
Comments:
ryckki@gmail.com
[1] To choose
austerity is to bet it all on the confidence fairy The mystical belief is that
a smaller deficit will lead to an investment boom. What Britain Tuesday 19 October 2010 22.00 BST http://www.guardian.co.uk/commentisfree/cifamerica/2010/oct/19/no-confidence-fairy-for-austerity-britain
[Emphasis is mine in all quotes.]
[3] The Ascent of Money: A Financial History
of the World (Hardcover) by Niall Ferguson (Author) http://www.amazon.com/Ascent-Money-Financial-History-World/dp/1594201927
[4] 650,000 Strawdogs Bark at the Moon. The Obama ‘Recovery’
is a Numerical Monkey Circus
[5] Belligerent Ignorance, Phony Economics and the Clunker
Crusaders: Washington
[6] Maximizing Both Tax Revenues and Economic Growth: The
Folly of Government and the Generation of Phony Numbers and Class Warfare
[7] To Joseph Stiglitz,
Author of Globalization and Its
Discontents
(New York
“The Stiglitzian prescription
is to raise the profile of fiscal deficits, that is, to issue more debt and to print more money. You seem to
believe that if a distressed government issues more currency, its citizens will
suddenly think it more valuable. You seem to believe that when investors are no
longer willing to hold a government's debt, all that needs to be done is to
increase the supply and it will sell like hot cakes. We at the IMF—no, make
that we on the Planet Earth—have considerable experience suggesting otherwise. We earthlings have found that when a country in fiscal
distress tries to escape by printing more money, inflation rises, often
uncontrollably. Uncontrolled inflation strangles growth, hurting the entire
populace but, especially the indigent. The laws of economics may be different
in your part of the gamma quadrant, but around here we find that when an almost
bankrupt government fails to credibly constrain the time profile of its fiscal
deficits, things generally get worse instead of better.”-- An Open Letter By Kenneth
Rogoff, Economic Counsellor and Director of Research, International Monetary
Fund http://www.imf.org/external/np/vc/2002/070202.HTM
[8] An Open Letter By
Kenneth Rogoff, http://www.imf.org/external/np/vc/2002/070202.HTM
[Emphasis is mine in all quotes.]
[9] 1938 in 2010 By Paul Krugman [Emphasis is mine in all quotes.] Published: September 5, 2010
Krugman Offers Us Canned Circular Revisionism:
We Can Repeat the War Time Successes of FDR.
[10] 650,000 Strawdogs Bark at the Moon. The Obama ‘Recovery’
is a Numerical Monkey Circus
[11] Belligerent Ignorance, Phony Economics and the Clunker
Crusaders: Washington
[12] Krugman Offers Us Canned Circular Revisionism: We Can
Repeat the War Time Successes of FDR.
http://ryckki.blogspot.com/2010/09/krugman-offers-us-canned-circular.html
http://tinyurl.com/4f88c4t
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