Keynesian Economics and Recession Counter-Measures

Here in the UK, and as far as I can tell all over the industrialised world, classic Keynesian measures are being put in place in an attempt to counter the current economic crisis.Interest rates have been slashed, taxes are being cut, particularly taxes that affect the least well off on the rationale that these will be spent in local communities rather than being saved or spent overseas. Additionally national public spending is being increased and/or expanded. Essentially we seem to be attempting to spend our way out of recession.In order to do all of this at a time when tax receipts are diminishing due to higher unemployment and reduced consumer spending requires mass government borrowing. In some cases borrowing on unprecedented scales.I am no economist. From what little I understand it is monetarist policies and laissez faire that have largely resulted in the current mess. I can understand the desire to minimise unemployment (as is the broad Keynesian aim - notably the opposite priority of monetarist policies as far as my understanding goes) both because of the longer term social costs and the immediate effect on the tax and welfare systems. However if there are any out there who have a knowledge of economics and who are willing to explain some things I would like to ask the following:1) Is there genuinely an economic cycle and if so what drives it, what stages are there etc?2) The aim of every economy is steady growth but surely nothing can grow eternally so there must necessarily be economic shrinkage in the form of recession every so often. No?3) Is it genuinely and historically verified that Keynesian policies of the sort being undertaken can and will help alleviate the current problems?4) What will be the longer term effect of the massive levels of borrowing? Who exactly are we all borrowing from? When and to whom does this money have to be paid back?5) Are comparisons with household economics really viable when considering international macro-economics? Here the free market advocates are comparing the current spending measures with a household that has maxed out it’s overdraft and credit card only to start borrowing from somewhere else. These sort of 'handbag' analogies are very reminiscent of the Thatcher era and could well strike a chord with voters. Are such comparisons justified or inherently flawed?Whilst I feel that I am a sort of instinctive Keynesian I am embarrassed to say that I am really too ignorant in this whole area to really be able to state why. Also the level of borrowing being undertaken has got to be worrying.I am hoping that other more learned EvC members will either be able to justify my instincts for me or explain to me why my instincts are wrong. Or maybe a bit of both - which might lead to some interesting debate............So any budding economists out there who can explain all this?

IMO, it seems like the "cycles" of economic ups and down seem to be more of an artifact of analysis than any actual immutable phenomenon. It seems like the actual cycle is:
1. Greedy people get into power and lift rules allowing them to suck more wealth from the lower and middle class.
2. Economic recession occurs.
3. The lower and middle class rebels and put more progressive minded people into power.
4. Those people instutute restrictions and programs that reset the economy on the proper foundation of wages and general welfare.
5. Prosperity ensues.
6. People get complacent or distracted by other issues.
7. Greedy people get into power ...... Aren't these just treasury bonds? At least in the case of the US I think that is the case. AFAIK anyone can buy them including foreign countries. Someone posted a good graph in the humor thread awhile back that showed a more important stat which is the amount of debt as a percentage of GDP. That is what really matters. Using your household example: It is good enough to be a decent analogy but its not quite right. It works if you assume that the person taking out more loans is then using them to increase their "personal GDP". If using that money they can ensure that in 10 years they will be worth 10 times as much as they are now, then their current debt will become trivial.You can either pay down the debt, or make the debt irrelevant by growing the economy. The way to do that is to focus on generating wealth which is the idea of the increased borrowing. If you use that money to create jobs that produce wealth, like in manufacturing, then you will see a return on investment and it will be worth it.If you use the borrowing to give everybody a $1000 then that is a foolish waste because those people will either horde the money, or spend it on stuff that may not have originated in your economy, so you didn't generate any wealth.IMO, Obama is doing the right thing when today he announced a massive public works project. Getting people back to work making things, is exactly the remedy you need. He will be setting up and subsidising industries that will be viable long after the money is spent such as green manufacturing.

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If a nation expects to be ignorant and free, in a state of civilization, it expects what never was and never will be. --Thomas Jefferson

I am not inclined to go so peacefully into that sweet goodnight. The new "jolt" is a jump start on an old battery. When the fliver stalls again will there be another jolt? And where will the money come from? We all know that when you play Monopoly it's illegal to photocopy the game's money and call it wealth. When real money comes out of thin air it will be worth less and less. And our children and their children will have to pay for our sins. Who speaks for them? There won't be enough jolts left to resuscitate tomorrow's Americans.I say let's take the cure. Hey, we're Darwinians, aren't we? Natural selection will inevitably sort out this mess, and it won't be kind to fat cats, skinny cats, and unborn babies, either.Gotta go now to see my Mercedes dealer and then check out the new 200-inch plasma TVs.”FTF

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I can see Lower Slobovia from my house.

Well, generally from US Treasury bonds, if I understand correctly. Americans themsevles own the largest chunk of the national debt. Krugman's blog at the NYTimes has an interesting thing to say about that. Britain's version of Obama's plan is much smaller because they can't really finance their debt--the bond market there doesn't like the plan or something. Read it yourself at Economics and Politics by Paul Krugman - The Conscience of a Liberal - The New York Times. Suggests to me at anyrate that we can find the money to pay for the plan.Secondly, indications which I make no pretense to understand suggest that we might be facing the risk of deflation, not inflation, thus avoiding a 70s style stagflation a la UK. Of course, up until october or so it was the risk of inflation that began to halt the fed's rate-cutting spree.Thirdly, if we do manage to jumpstart a green, or at least greener, economy, how is it beating the same old horse? Our infrastructure is frightful (some nations apparently spend twice as much, as percentage of GDP, on infrastructure than we do our own military, and we spend practically nothing on meaningful infrastructure). Still, we don't know the full extent of his plan and probably won't until he's sworn in.

Isn't giving Krugman a Nobel Prize in economics something llke giving an award to a crew member of the Titanic? Wasn't Krugman the one who warned us all about our costly deficit and the burgeoning interest payments on our national debt? Where was he when we needed a good watchman to spot the icebergs?I'm all for fixing our collapsing infrastructure; I like that part of the plan. And, like you, I don't claim to be an economist. But I take notice that with all the great economists around like Krugman we still found ourselves in this crisis. The Titanic was unsickable, so the captain said full steam ahead. The metaphor works for me. Our compartments are flooding and we're going down. Forget the deck chairs. Put all the poor passengers in steerage. Get the rich people into the lifeboats. There'll be a savior ship here soon to pluck us out of the icy waters and serve us hot tea and cookies.Do mean to say, kuresu, that there will never be a waiter coming to our table with an impossible bill to pay? Do you trust Krugman when he says it'll all work out? If he's all that smart he shoulda known about icebergs.”FTF

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I can see Lower Slobovia from my house.

If you make this statement then you obviously missed the point of what I said. The jolt is an investment in producing wealth. Infastructure is a long term asset that produces gains far greater than the burden you take from building it in the first place. This is a proven technique that not only worked for the US but is in fact working for other countries. Look no further than China and India for examples of this in action.It is the same theory behind taking out a student loan versus taking out a loan for big screen TV. The money you spend on your education is in theory making you worth more which makes the proportion of the debt you took out on your education mean less to you. On the flip side, the money you spent on that TV which just depreciates over time is a net decrease in your value because it doesn't produce anything.Spending money isn't always bad. Spending money that doesn't do anything is which is why the first economic stimulius package was a stupid idea. Then you should be incredibly pissed off at the doubling of our national debt (even more so when you consider liabilities we have taken on by partially nationalizing investment firms) for spending on non-investment activities. War is basically flushing money down the toilet because all of the effort and wealth used to build a bomb or a tank, etc will cause the net wealth of the nation to go up by 0. Becase we borrowed money to make war, it is probably worse than that. That is why you should only do it when it is ABSOLUTLY necessary. Our founding fathers understood this quite well. All wars in our country have put us into debt and have either sent us into recession or depressed the economic growth that could have occurred had the wealth generating centers of our economy not been focused on making value-less instruments of war.On the other hand, putting the effort and wealth of the nation into building a highway which improves commerce, or building a school that will produce a more educated workforce, or building the next generation of solar panels adds directly to the value of the nation and by extension the dollar.In sort, spending money is not the same as printing money. The process already did. The policies that got us into this mess were voted out last election in the US. The only thing that cutting taxes while we were at war as well as increasing domestic spending under a "fiscal-conservative" administration has done is produce an economic bubble that burst before they could get out and blame it on the next guy.

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If a nation expects to be ignorant and free, in a state of civilization, it expects what never was and never will be. --Thomas Jefferson

I think a lot of people forget that from the level of the government money is fake. It is an abstraction of value. It is a statistic to manage economies and interface for trade with other nations.When a bank makes a loan, they are essentially creating money in the future by putting up a placeholder for something that doesn't exist yet, like a new house, that will likely have value. The problem with the housing crisis was that the banks "created" more money than there was real and tangible value in the houses that were being sold. You only noticed it once the bottom fell out and people realized that they were living in homes that were worth less than the amount they owed on it irrespective of their ability to afford it. Remember, there are a significant number of forclosures that are happening not because people can't afford their homes, but because their home is now a massive liability.

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If a nation expects to be ignorant and free, in a state of civilization, it expects what never was and never will be. --Thomas Jefferson

There is one very, very important exception to this. WWII. It, unlike the New Deal, actually provided the massive stimulus required to restart the US economy. That's not to say that the war-years were a boon, but here's a fun little graph (courtesy Krugman) that shows the spending difference between WWII and the New Deal. Fiscal FDR - The New York Times
Now that's an economic stimulus! And it wasn't until the 1950s that things were good again if I'm correct.Of course, without WWII, would such a stimulus program ever have been passed? Unlikely. Should we fight a war to stimulate our economy? Certainly not.That said, wars are certainly not the most efficient method of constructively stimulating the economy.

Sorry, Jazzns, but I don't think the cure has happened yet.Did you notice on 9-11 that for many minutes after the planes hit the towers no one thought those building could come down. And did you notice that the NYFD sent in many fire fighters, hundreds, to their deaths by going in their to save the victims? That metaphor works, too, and this crisis we're in is no over yet. The towers have not yet come down. Tell me, Jazzns, that in two years this calamity will be over, and I'll tell you what America was like two years after 1929.”FTF

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I can see Lower Slobovia from my house.

Say what? A boat doesn't sink because the owner can afford to patch the holes in its bottom, it sinks because it fills up with water.Ay?”FTF

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I can see Lower Slobovia from my house.

No, but would you agree that wars are good for distracting a gullible nation from the stupidity and ineptitude of its leaders?”FTF

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I can see Lower Slobovia from my house.

First of all, I took a lot of my time to write a post that described no only WHAT I thought the solution was but also WHY. It just seems like this response from you, rather than engage me in a substantive discussion, is to be incredulous by analogy.The economy is not built with steel and the current economic woes are not the same as a plane crashing. __I never said that it would be fixed in 2 years. It will probably be a decade or more before a new green industry can stand on its own. We not only have to erase an achievement gap in education we need to exceed other countries if we want to remain competitive while at the same time be less populated than the East.We have some hard times ahead of us. Heck, there are even shanty towns propping up in some places like after 1929. But the progressive ideas of the New Deal got us out of that and they will get us out of this too if we let them.If we don't let the upcoming reforms happen or if we dismantle them again like Nixon/Regan did then we will become a second rate player like we were before WWI but it still won't be the end of the world. Neo-Conservative ideology is in fact dead, it is just a matter now of when we decide as a society to bury it rather than let its rotting corpse stink up our country.

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If a nation expects to be ignorant and free, in a state of civilization, it expects what never was and never will be. --Thomas Jefferson

I welcome the reforms. They are what we need. And if they don't include closing a whole bunch of military bases they won't impress me very much. But I'm staying with my 9-11 metaphor: we ain't seen notin' yet.”FTF

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I can see Lower Slobovia from my house.

It is a massively widespread myth that WWII was a boon for our economy. The myth is perpetuated because it was the only war that didn't result in a recession in the aftermath but in fact if you look at the trend that the economy was going before the war, the war in fact depressed the growth of the economy.Had we not been forced to fight in WWII, we would have had massivly higher growth in a peacetime economy. Imagine the industrial muscle that was leveraged against Germany and Japan used to create industrial wealth rather than worthless items such as a bullet or a bomb.Eisenhower (a republican I might add) spoke at great length about this after the war. He recognized that the wartime economy and the conversion back into a peacetime economy was sending us downward and guess what he did. He hiked the top income tax to 90% and pumped that money back into infastructure. You can thank him the next time you drive on an interstate highway. The result was that he saved the economy from the burden it bore from WWII.All that being said, no one should take my comments as thinking that WWII was unnecessary. Like I said before, sometimes you need to fight wars but we should ABSOLUTLY dispell the myth that wars are good for the economy. Wars do not generate wealth unless you are physically raiding it from someone else.

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If a nation expects to be ignorant and free, in a state of civilization, it expects what never was and never will be. --Thomas Jefferson

You need to either stop with the analogies or use better analogies.If you bought a house for 400k that was now worth 200k with no hope of ever regaining its value, would you contine to spend 60% of your income for your housing?That is the very real position that many people are in. The first round of problems were for people whos rates reset. Then as the dominoes fell this next class of homeowners was hit with the reality of what it means when you call something a "bubble". It means that these houses were never worth what they were sold for to begin with and to continue to think that they were is fantasy that helps no one. The only way for us to start climbing out of the housing mess is for us to hit rock bottom which has not yet happened.

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If a nation expects to be ignorant and free, in a state of civilization, it expects what never was and never will be. --Thomas Jefferson