Keynesian Economics and Recession Counter-Measures

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No-one heard you complaining during the boom. Funny how no-one asks questions when everything is *looking* good. We've had our "results" upfront and now we're paying for them. And it will take a long time to pay them off. Short-term fixes are no answer - theory is critical, otherwise it's just guesswork.

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So far, all proposed solutions have been guesswork -- 'We Guess that if we give the Banks capital, they will start lending.'..'We guess that if we offer tax cuts, consumers will start spending',..Nothing so far has went according to plan because all the classic models and theories are out the window. This is uncharted territory. Only time, trial and error, and tinkering by the FEDS(more guesswork) will fix this issue.Nobody trusts the banks, not even their peers. Until this trust is restored, this problem will not reverse itself. We can take a guess as how to accomplish this, try it, and see if it works. If it doesn't, you guess at something else and try it until something kicks in.

I've already told you the solution, and it's not a guess. We know why the banks don't trust each other - lack of information. We give them that information. Simple. Getting the banks to agree to this level of outside scrutiny - not so simple. But who cares about agreement - it is enforcement we need now. As I said:

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What is required is published independent highly quantitative analysis of each bank, of a calibre that the banks will trust, and with sufficient enforcement by the government and regulatory bodies that it is unhindered.
  —cavediver

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I'm not really replying to any one person, but to the discussion as a whole so please bear with me. There are two points I found most interesting and which seemed to be generating the most interest. The first was "what do we do?" I don't really have an answer to that, but, I have heard of an analysis by a group called Moodys ( they do business analysis). They evaluated different actions based on their economic return. The best return was generated by, you ready for this? Food stamps. According to them the return was $1.78 per dollar of investment. The second best was job creation, $1.58 per dollar of investment. The worst were tax cuts, individual cuts generated $1.03 per dollar and corporate cuts generated $.30 per dollar. So cutting taxes to a corporation is, basically, just stroking the ol' razor across your own throat.I should also observe at this point that the American Society of Civil Engineers estimates that we will need to spend 2.2 trillion dollars, over the next 5 years. This spending will be needed just for neccessary repairs and replacements. So jobs generated for this task should pay dividends.The second point I wanted to tackle is the question of where the borrowed money comes from. It is my understanding that there are 4 potential sources:1) Borrowing internally from your own banks. This money is, however, drawn from savings account funds. As Americans are not saving this source is unavailable.2) Print money. This is risky, as the Germans could tell you from their experience with the Wiemar republic. Things got so bad there that the joke was "You take your money to market in a wheelbarrow and bring your purchases home in your wallet". Not good at all.3) Issue treasury bonds. However, you have to pay these off and you can't control who buys them. Case in point, the two largest holders of US treasury bonds are, in order, Japan and China. Which means we should be careful how we do our international dealings as people whom we are trifling with (the Chinese) have their hands on our economic throat. On another note I heard that the US was issuing short term bonds at an interest rate of zero. People were buying them. This shows you how scared everyone is, when they park money at no interest just because it means they won't lose it.4) Borrow from other countries. Our chief creditor is.....the Chinese! They have literally hundreds of billions of dollars due to the trade deficit with us. Again the bad news is it gives a foreign government a lot os say in your affairs. On the positive side the Chinese can't do anything to us without hurting themselves. Though I don't think the avoidance of mutual pain is the best basis for a relationship.The above is just me involving myself in the general conversation and "inserting" my 2 cents worth. I hope the preceeding is of some use to all.

Is it too early to tell?If so when will it be possible to determine if the measures taken to date have had any positive effect?The whole world seems to be sliding into deep economic depression. I think it has reached the point where most people know someone who has been recently made redundant and few people consider their jobs anywhere near as secure as they did a year ago.Politically I am an instinctive Keynesian and broadly agree with the measures taken by both the current US and UK administrations but the question has to be asked as to how much effect the measures to date have actually had in practical terms.As ever in this topic I hope to be enlightened by those with a greater knowledge of the practical and theoretical aspects of economics than I.

Well, considering that we have a $60 trillion derivative market still capable of failing, what is happening right now is basically economic whack-a-mole to try to keep as everything as much above water as possible. The real fixes, in the US at least, are not even in the pipeline yet. The beginning of the end will be when the markets get re-regulated. Credit default swaps should be eliminated or tightly regulated. Credit card companies need to be reigned in (there is another bubble waiting to burst). Tons of other things need to happen before the economy starts to fix itself for real.Even if we get out of this current mess by putting a new foundation on the economy (infastructure, manufacturing, etc) it will only be a matter of time before greed gets us back into the hole again.

Credit default swaps don't kill people, traders* do (*actually, highly ignorant fund managers...)

Back in November last year I started this thread about the recession and the Keynesian counter-measures being put in place by governments around the world. Message 1I just wondered if any of the more economically literate EvC members are willing and able to say whether now, nine months on, those measures have been successful or not?

In the UK and around the world governments are pursuing a massive exercise in deficit reduction following the global financial crisis.If we all deficit reduct at the same time is that a recipe for global recession gone mad?Have European (and possibly the US - I am less sure of their policy) governments abandoned sound Keynesian principles in favour of more monetarist strategies? Are they wrong? Are they right?Is the whole deficit reduction programme (e.g. in the UK) a necessary fiscal policy or an opportunistic ideological measure to implement a major shift away from public spending?

do to the idiots that run slovenija no mesures where taken or anything that you could call a mesure and it shows relative to our neighbors (except the southern ones) the recovery is taking longer. although we had money to help the greeks not much was done for our country by our politicians

It is probably a bit more complex than that. However, I do think that we are heading in the wrong direction.If I go by what I have heard on economic analyses over several decades, there are two things that cause problems for the economy:

1. too much consumer spending - consumers ought to save more;
2. too much consumer saving - consumers ought to spend more.

I sometimes wonder whether there is even more double talk and self contradiction in economics than there is in biblical literalism.

Not really double talk. Bad times are always the fault of Satan the Consumer.

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Anyone so limited that they can only spell a word one way is severely handicapped!

I study economic at university, though; I have not studied that long and still need to take some classes in macroeconomics. I have only read the first post and some of the last posts, so some of the things I write in this message have probably been discussed I guess.The basic goal of capitalism is growth and more growth. An economy gain growth by spending money so yes, it is basically a bad idea to stop spending money when there is a financial crisis. The main reason why this crisis is not near as devastating as the depression back in the 30ies, is because people do not panic (whether it is because of I-do-not-care-ism or I-should-just-act —as normal-as-possible-ism) and spend their money (very, very simplified!). With this said; economists are still discussion what caused the great depression!The UK has abandoned, but most other, as far I know, have not abandoned, the Keynesian principles in favour of austerity. Paul Krugman and other Keynesians critics say this will push the economy into a depression simply because unemployment rate is high, spending is still low and the interest rate is close to zero. Said in another way; deficit-cutting will result in stagnation and deflation.In the other camp the people say we cannot spend money for all eternity. By taken control of the economy they believe this will create confidence among companies’ and households’ and lowering risk premium of government debt, and a well-designed fiscal policy consolidation can actually boost growth. Said in another way; when households’ confidence increases they will spend money because they have a greater overview of the situation; decision is not lead by bad faith and fear.It is damn hard to say what the right solution is. In a rational world, with no speculation or other irrational behaviour, economists agree on how to distribute resources, but when we introduce irrational behaviour, we have no fucking clue — it is not like physic anymore! We will first see the answer after the crisis and then people will still debate with each other on whether it was a good idea to do x instead of y.Edited by Adminnemooseus, : Add one more blank line.

Produce more per capita, consume more per capita.More so, produce more efficiently. A big boost to production efficiency? Being able to produce the same or more with less employees.But who's going to buy that production? Those employees can't soak it up - They lost their good job and now have less money to spend.Bottom line: Production and production efficiency has increased to the point that there is no way consumption can keep up. The non-wealthy would need to go into debt (even more) by buying stuff they probably didn't need anyway, and/or the wealthy would need to buy even more stuff they didn't need anyway. And the whole thing uses ever more natural resources to produce stuff that really didn't need producing.Modern capitalism has succeed in making the well-off even richer and the not well-off even poorer.The solution as I see it - Socialism. Tax the wealthy and spend the money to pay for maintaining the public infrastructure. But you need to do it in a way that doesn't require big business, to get the money to the people that really need it. Otherwise largely you're just recycling the money back to the wealthy.Or something like that.Moose

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Professor, geology, Whatsamatta U
Evolution - Changes in the environment, caused by the interactions of the components of the environment.

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"I know a little about a lot of things, and a lot about a few things, but I'm highly ignorant about everything." - Moose

I guess I agree with you to some extent. I am not in the mood for the great discussion on how to save the world tomorrow, but I recall a video a saw a year or two ago:
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"The Paradox of Choice: Why More is Less". I think you would like the video.Basically, classic economy assume that more is better -> it will increase your utility no matter how much you get. This guy show some examples of why, at least, more choices can be bad, which should be easy to imaging how this relates to too much production and maybe on macroscale with a little imagination and speculation. A little off-topic but I guess it is okay.

Tax receipts are diminishing because the wealthiest individuals of the developed world have found loopholes, especially in the U.S., to avoid paying proportionally-fair taxes on their, and their companies', income. Not necessarily. The current recession is the result of a couple of decades of fast-trading, high-turnover transactions which paid greatly to select individuals but have slowly eroded the economy by beefing up the price of goods faster than the goods themselves could appreciate in value. This, combined with poor business choices (made possible by a series of deregulation strategies) led to once-profitable businesses and industries racking up losses as creditors came knocking (creditors, the debts to whom were created during the fast-trading, high-turnover transactions). Given that many third-world emerging industries are supported, or subsidized, by their governments, allowing them to sell at prices well below cost in order to flood first-world markets where prices are higher, the chances for first-world businesses to increase sales, thereby at least partially recuperating their losses, are shattered, and when they can no longer make interest payments, their debts are defaulted and they declare bankruptcy, go out of business, and leave many folk without jobs. Slow and continual economic growth is most-certainly possible. However, as the growth gets larger and larger, the lure for folk interested in taking advantage of the stability and growth through underhanded, get-rich-quick schemes increases, and if these people have enough power and clout, when the shit hits the fan for them, it can cause ripples throughout the system. The steps necessary, and regulations needed are not the ones you have described. What is needed are regulations on the ones who have made the mess. Slashing taxes on the poor may give them more money, but they will always spend it on the cheapest merchandise (see my reply to #2 for who that is), only bringing more trouble to first-world economies. Furthermore, fewer taxes only makes the already inept governments less capable of doing their jobs; increasing taxes is the solution to underfunded governments, so long as those increases are on the proper parties (again, see reply to #2). Debts that, with the system functioning as it is now, will never be repayable, at least not by those borrowing the money and if anyone else pays the money, they will make the borrowers pay in other ways.As jar always says, the debt will be paid. If done right, we'll all be okay, if not, things will go very poorly.Jon

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"Can we say the chair on the cat, for example? Or the basket in the person? No, we can't..." - Harriet J. Ottenheimer

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"Dim bulbs save on energy..." - jar