Welcome to the Vitus Capital Blog!
Notes to myself, possibly of interest to others.
-- Bill Northlich

Wednesday, July 28, 2010

Vitus on Keynesian Free-Lunch

I think the main argument against spending to bolster the economy is a gut-level repugnance of the "free-lunch" ism that the likes of Nial Ferguson ascribe to Keynesian solutions. I understand that the ballooning deficit issue in real Keynesianism is dealt with by the proposition that, per Krugman, one borrows now, in a deflationary crisis, when times are bad and interest rates are at or near the zero lower bound, and one pays back later, when times are good, largely through the increased tax revenues which naturally occur.

I think there is a problem with the Keynesian solution which is the same as the problem with securitization: In theory they are great ideas, but in the real world they get hijacked and abused by future ne'er-do-wells. Goldman and the banksters hijacked securitization which had worked well for 15 years before being torqued by mathematically unstable, throw-in-anything CDO's.  W hijacked the Clinton surplus with gratuitous tax cuts. Ie, in practice Keynesianism relies on optimistic assumptions about future economic actors.

Now, with at lest 10+ more years of high unemployment in the offing, so-called conservatives are willing to pay the price of casting 10+% of the workforce aside.  That is, they are willing to destroy wide swaths of the less fortunate part of the population, rather than potentially, maybe, destroy the whole country with huge gobs of debt, just like...Greece, or, ...Argentina.  Reinehart and Rogoff's This Time is Different, which demonstrates correlation (not causation) of low growth to high debt-to-gdp (greater than 90%), has been a prime and impressive backstop to the rightist argument (disregarding that the argument is now fairly well dismembered by Krugman and others). Anyway, I think that this is the argument on the right.

Admitting the uncertainty of whether future leaders will have the best interests of the country, as opposed to those of the monied interests, in mind, still, personally I vote for the Keynesian way, as I don't see much difference between the long term effects of either a bad austerity path outcome or a bad Keynesian path outcome.  And, Keynesian solutions offer a probability of a better near/medium term outcome, whereas the austerity path virtually guarantees a bad near/medium term outcome.

No comments:

Post a Comment