Stossel on Keynsianism

This is right on the mark

His description of what Keynesians believe is correct. It's why Keynesians, including the President, thought that government spending would stimulate the economy. As Klein points out, "Obama didn't just have a team of Keynesians. He had the Keynesian all-star team."

Right, but then Klein gets it wrong: "The idea [behind Keynesian economics], in other words, is not about whether the government spends money better than individuals."

Yes it is! Obama and Klein think that during a recession, "the financial system scares business and consumers so badly that they hoard money, which worsens the damage to the system." Therefore, the government must take money away from individuals, and spend it elsewhere. Eric Cantor correctly pointed out that the theory is: "government can be counted on to spend more wisely than the people."

Part of the problem here is in nomenclature.  People don't think of saving as spending.  So I will shift a word a bit.  The idea of Keynesian economics is that the government can deploy your money better than individuals can.

The cause of the asset bubble for this argument is almost irrelevant.  Households, finding themselves over-leveraged, want to deleverage by buying fewer things and saving more money.  The Keynesians explicitly wanted to prevent this by taking the money that would have been saved and spending it.  This destroys value in two ways.  As Stossel points out, it shifts money from being deployed with an eye on productivity to being deployed with an eye on politics.  From a value-creation standpoint, this has to destroy value.  In addition, by slowing the process of deleveraging, it slows the recovery, unless individuals in the mean time can be convinced that they really don't need to deleverage.  And is that really the post-bubble message we should be sending out?



  1. Will:

    It looks like this debate is making progress. Rather than repeating your side's argument, you have modified or clarified it to respond to Klein's response. This is better than one can usually expect on the Internet.

    > Households, finding themselves over-leveraged, want to deleverage by buying fewer things and saving more money.

    Not all households can be overleveraged at once. If we all owe money to each other, we can just all agree to fix each other's debts. Instead, some households have lots of savings and few debts. These, households would obviously be the ones who would lend money to the government. These are the ones who are not "using their money" effectively. They are not overleveraged.

    Also: It's not like people don't want to lend to the government. They're practically begging to, offering money at 0% interest rates. Do you really think the government is so ineffective that it cannot efficiently use the capital embodied in a 0-interest loan?

  2. Craig:

    "If we all owe money to each other, we can just all agree to fix each other’s debts."

    Unfortunately, that's not the case. People owe lots of money to banks. The banks have no such debt to their customers to cancel. Your post is unintelligible.

    Keynes said that in the long run, we are all dead. It's the only thing he ever got right.

  3. JOdy:

    This is tangential to the post, but related to the comments...

    All households can be overleveraged. Just because some theoretical jubilee could be conceived that would forgive all debts doesn't mean that it can be reached via normal social search processes.

  4. Will:


    I know. The point I was making with the sentence you quote is that that isn't the case. Therefore, some people are creditors (for instance, those who own a lot of bank debt) and it is these people who standard Kenyesian theory says are saving "too much".

    Is my post intelligible now? Maybe at least more intelligible?

  5. Will:


    True. It depends on the exact structure of the debt, the terms, and other factors, but I think it is possible to get in a situation that would be quite messy to resolve.

    But I think a better argument would be - how did we get into this situation? Before the crisis, people were getting into a lot of mortgage debt to buy houses. Now the value of the houses has fallen and people are in debt. Being in debt but owning bonds is a really awkward situation - you're probably losing money on interest, and if you're not, you're losing on default risk. Few want to get into such a situation. Instead, the wealthy mostly have no debt or only small debts.

  6. Ted Rado:

    This country was built on free enterprise and individual initiative. Now, we are told that big brother knows how to make all our decisions better than we can.

    The current financial mess is because the government pushed the idea that everyone is entiltled to things (houses) they can't afford. They then twisted bankers' arms to get them to make shaky loans. Then they created Freddie and Fannie to buy up these loans. Then they had a great time demonizing and blaming everyone but themselves.

    If you create a situation where there is no penalty for failure, everyone (bankers included) will do risky things. Then tax the successful and remove any incentive to do anything constructive. I can't imagine a better system to guarantee failure and financial chaos.

  7. GoneWithTheWind:

    As a wise Latina I think the government should have all the wealth.

  8. Don:

    Is it just me, or do Keynsians all seem to think that the only way the people "save" is by putting their money under their mattress? This whole philosophy seems to be based on that premise.

  9. Slocum:

    "In addition, by slowing the process of deleveraging, it slows the recovery, unless individuals in the mean time can be convinced that they really don’t need to deleverage."

    Well, yes, that's the idea -- government spending will jump-start the economy, people will see this and regain confidence and return to their old savings preferences and stop being so 'paradoxically thrifty' with their money. Their 'animal spirits' will be restored.

    But it's really not working, and I think one big reason is that people are too aware of what the government is up to, and the massive, apparently unsustainable deficits being run up are creating fears about the future that are dampening the 'animal spirits'. Can Keynesian pump-priming restore confidence when a large percentage of citizens are frightened by the government debts being run up? The evidence suggests the answer is no.

  10. Fred Z:

    "From a value-creation standpoint, this has to destroy value."

    What is value? There is no such thing as objective value. Value is always subjective to an individual, human or corporate, and some weird statistical average to society. The value of a thing is the amount I am willing and able to spend on something at any particular time and place, as in the old bottle of water in the middle of the Sahara parable.

    Thus Value is a moving target so complex that the Keynesians cannot possibly calculate it. A google of supercomputers linked could not do it. When the Keynesians assure me that I really, really will value the high speed train project they tout, I laugh.

    The value destroyed is the value of everything else, including existing things already bought and paid for and thus "valued". If I don't have money to buy product/service x because the government took it then the value of x to me is reduced, perhaps to nil, and my little piece of the average falls out and x is "valued" less.

    Every time the government takes a dollar your bought and paid for house is worth less because the guy who used to have that dollar can no longer use it to bid on your house. More abstractly, taxation for high speed rail increases the demand, and so the price, of high speed rail, and decreases the demand, and price, for your house.

    Toughers on you baby, shoulda voted conservative or libertarian and worked harder to convince your neighbors and friends that Obama and the Dems, and many Repubs, were liars, losers and fools.

  11. NL_:

    I think the typical non-academic who espouses Keynes-like beliefs thinks the economy is 90% animal spirits and aggregate demand. If we can just convince everybody that the economy is fine, then it WILL be fine because everybody will go back to whatever they do that causes growth.

    In other words, they argue like the economy is all psychology and all economic problems are about uncoordinated negative attitudes. This a great conclusion to reach for somebody who already wanted a reason for the government to intervene. If there is little or no objective component to economic growth, and positive attitudes on the economy are self-fulfilling, who better than Leviathan to be the first mover to show everybody else it's okay to have positive animal spirits?

  12. sean2829:

    It's not just a question of who spends money more wisely but also one of imbalances that go beyond deficit spending. If the government decides that it is important that everyone have something, they encourage it, either through tax policy or direct spending. If I had to name three things that the government has been promoting more of for an extended period of time it is home ownership, universal health care and higher education. The government push to expand home ownership to people who can't afford a mortgage trigged the financial mess we are in now by driving prices up beyond affordability, banks and lender responded with creative financing and adjustable mortgages that kept the beast alive for 3 years longer than it should have because Fannie and Freddie were buying every loan that sold, eliminating risk for the banks. On the health care front, I think between 15 and 20 percent of the stimulus funds ended up in Medicaid. This was a double whammy as insurance premiums for working people had to increase to make up for the shortfall in payments to hospitals and health care providers from the higher Medicaid load. Higher education is the only sector in the economy where the prices increase over an extended period of time actually is higher than health care. All because the government feels compelled to fix the high cost of tuition problem by throwing money at education. It just raises prices without increasing value and you actually lose ground because even more people are priced out of a college education.
    So even if the debt mess gets resolved and we start on a path to a more sustainable level of government spending, the real structural problems in certain segments of the economy won't be solved until the government realizes that throwing money at markets to improve affordability does exactly the opposite of what is intended.

  13. Dan:


    Sure. All the problems in this country are caused by the government. Big business had nothing to do with all those loans given out to people who couldn't afford to pay them back.

    People on this thread need to sometimes take their blinders off and consider that government alone isn't responsible for everything that goes wrong.

  14. tomw:

    Dan, read up on the "CRA", or Community Reinvestment Act. The government distorted the market, with penalties for failure by the banks to lend, with Fan and Fred buying up the non-vetted loans, and with the eager help of Wall Street financiers figuring out a way to package debt instruments and sell them worldwide.
    That is not 'all the problems in this country', but adding in the 'cash for clunkers' and the 'rebates for new home buyers' are just a few more logs added to the pyre of money burning the government has done since 2008.
    The recent government has spent money like it grew on trees, with little concern that it ever be paid back, with even less concern of its value in the world market, and with little concern to the ratings of the bonds that it can no longer sell readily. We will not be able to pay the interest, much less any reduction in principal, if spending is not reigned in.
    I don't blame big business. I blame big government.

  15. GoneWithTheWind:

    It's true! I was walking down the street in 2007 and big business came out of the shadows and at the point of a gun made me take a loan. I blame all my problems on big business and Bush. makes me feel like raising someones taxes.

  16. Will:

    @Dons: Keynesianism works if at least some people save by putting money under their mattresses or similar - for instance, excess reserves at the Fed.

    @Slocum: Market prices reflect expectations about the future. If people were worried, wouldn't the price of government debt be lower?

    @Fred Z: You don't need to calculate value, you just need to estimate it. When a resource is unemployed, it doesn't take perfectly accurate calculations to find a use for it that's probably better.

    @sean2829: Then why have summer camp prices also skyrocketed?

    @tomw: The CRA was passed long before the start of the housing bubble. Fannie and Freddie were among several buyers of non-vetted loans. They were a part of the problem but not the whole problem.

    @GoneWithTheWind: Yeah, and the next day big government came and made someone buy it. The world is not simple, either way. The world is complex.

  17. Slocum:

    "@Slocum: Market prices reflect expectations about the future. If people were worried, wouldn’t the price of government debt be lower?"

    "Worried about their own economic future" is not the same as "worried that the U.S. government will default". Paradoxically, government borrowing rates are very low *because* people are worried about the economy and, therefore, prefer to preserve capital by parking it somewhere safe (Treasuries) rather than, for example, spending it to start or expand a business. The low T-bill rates shouldn't be interpreted as 'confidence in the government and the bright future of the U.S. economy' but rather the opposite.