The Real Keynesianism

At the Center for Economic and Policy Research they’re characterizing David Einhorn’s views as “looniness”:

Today the deficit cutting crusade is led by hedge fund manager David Einhorn. In a lengthy column Einhorn bemoans the fact that at least some people in the Obama administration are more concerned about getting people back to work than reducing the deficit.

Einhorn is a bit more knowledgeable about basic economics than many of those who worry that the United States will be unable to find investors to buy its debt. Since he has heard of the Federal Reserve Board, he recognizes that the actual concern should be inflation, not insolvency, since the Fed can always buy up government debt.

However, since one would have to struggle to find any evidence of inflationary pressures in recent economic data, Einhorn chooses to invent his own evidence…

I’m not decided one way or another on additional stimulus programs. I’m unenthusiastic, shall we say. Remember that in those distant days when dinosaurs roamed the earth and I took economics Keynes was king. I can envision how a perfect fiscal stimulus executed with perfect timing could actually produce more economic growth than it consumed. I’m not nearly as confident that actual fiscal stimulus packages executed the way they’ll inevitably be executed in the real world will do that. If those enacting the ARRA had been half as interested in fiscal stimulus as they were in funding pet projects we’d have had significantly more spending last year and this year and significantly less in the “out years”.

And I’d have even more confidence if those who are supporting a large new fiscal stimulus package would announce in anticipation under what specific conditions they’d support pro-cyclical real spending decreases and where they think those spending decreases should be made. Note that you can’t get nearly enough cutting to offset the spending just by reducing defense spending even by eliminating it altogether.

6 comments… add one
  • Interestingly enough, in my day job we’re seeing quite an uptick in business due to ARRA projects. Infrastructure projects take time, but there’s definitely an economic effect.

    Whether it’s the BEST effect is something I don’t have the chops to judge.

  • I was just reading the UCLA Anderson School forecast and they note that the recovery will be “bi-polar” rising GDP, but lagging recovery in unemployment/employment. Their most likely culprit: the stimulus and low interest rates. Many businesses see these things as temporary and rarely make hiring decisions based on temporary policies.

    Guess their crazy too.

  • Steve V., interesting thing. As you know (and have reminded me occasionally) there’s a difference between gross domestic product and gross domestic income. Turns out the that GDI has fallen farther and risen slower in this recession than GDP. GDI seems to be a better predictor of lag in employment, etc. than GDP does this time around.

  • steve Link

    The UCLA folks are echoing what everyone else has noted about recent recoveries. Given that we have generally tried to get out of recessions with deficit spending, either via tax cuts and/or direct spending, and this time is no different, I think this reflects some basic changes in the economy (which I think we have talked about before). I will say that I dont see any inflationary evidence right now, but the European markets have distorted everything for a while.

    Steve

  • steve Link

    Dave-If you were brought up on Keynes, you might like this piece by Keynes. As an historical piece it is interesting. It is also quite clear that he was very aware of Russia’s shortcomings. This stands, I think, in contradiction to accepted theories that no one knew what was going on in Russia or that Keynesians wanted to model government on socialist states like Russia.

    http://www.mtholyoke.edu/acad/intrel/interwar/keynes.htm

    Steve

  • Keynes’s wife was Russian and he visited Russia in the 1920’s. He had, perhaps, a more realistic view of the regime than other Western intellectuals, possibly due to the straits in which the Bolsheviks had put his wife’s family.

    He wrote a book about his travels there which I’ve read (remember that at one point in my life I was studying to be a Sovietologist).

    Much of the adulation of Russia on the part of many Western intellectuals didn’t occur until the 1930’s. The articles that won Walter Duranty the Pulitzer Prize and the influenced a generation’s thoughts about Russia were written then, roughly coincident with the Keynes article to which you referred me and which I hadn’t read before. Thank you.

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