Time to end the Keynesian pretense about fiscal stimulus

Sep 19, 2011 17:06 UTC

“The U.S. can pay any debt because we can always print more money.”

–Alan Greenspan
Meet the Press

August 7, 2011

Last week, Nouriel Roubini released a paper, “A Radical Policy Response to the Rising Risks of a Depression and Financial Crisis.” He writes: “Data suggest that developed and emerging markets alike are heading for a massive slowdown in growth, with advanced economies already slumping to stall speed.” Roubini is right, but for the wrong reasons.

Government intervention is the root cause of the financial crisis and the maladies identified by Roubini. Many of his proposals, such as debt restructuring and maintaining liquidity to solvent borrowers, are common sense initiatives that ought to be followed immediately. But the proposals by Roubini and others that governments should borrow and print even more fiat currency to fuel further fiscal stimulus are badly considered. Economists from Paul Krugman in the US to Adam Posen in the UK all call for more stimuli. They are all wrong.

First, when Roubini, Posen et al call for additional fiscal stimulus, we need to ask them why. The vast fiscal stimulus already attempted in the US failed miserably in terms of creating permanent jobs. More fiscal stimulus funded with debt will not generate real growth. Remember the idea of public deficits “crowding out” private investment? Huge public deficits actually kill private investment and increase inflation, but you will never hear the neo-Keynesians admit to it.

Second, when Roubini and Posen call for the Fed and the ECB to run the monetary printing presses, what they are saying implicitly is that the excessive debt currently killing growth in the industrial nations cannot be repudiated. To the point made in my earlier post on Roubini, we should no longer speak of “capitalism,” but instead of the tyranny of the fascist creditor-technocrats and their captive economists. While Greece faces seemingly inevitable default, many economists continue to believe that avoiding deflation in the larger industrial nations is the chief policy goal. Here again they are wrong.

Years ago, as an earnest young staffer for Congressman Jack Kemp, I expressed worry to my father Richard J. Whalen over the mounting federal debt. An adviser to several presidents and Fed chairman, he looked at me and smiled. “The duty of this generation is to pass the bubble onto the next generation, intact,” he quipped, reflecting the mainstream view in the US today. But as the quote from Alan Greenspan suggests, inflation is the sure result of this strategy. And deflation is the cure.

Deflation does hurt debtors and lenders, but it also advantages savers and institutions with cash to buy assets cheaply. The buyers of dead banks and bad assets generate real growth and jobs. When Roubini, Posen and other mainstream economists call for measures to avoid deflation, they actually cut off one of the few ways that consumers and private business have to offset the ill-effects of secular inflation — the real culprit behind the financial crisis.

But for the inflationary policies of the Fed and the ECB to stimulate pseudo “growth” over the past several decades, there would have been no financial bubble and no mountain of housing-related debt. Why do economists like Roubini and Krugman say we need more of this medicine? Such pathetic proposals for more-debt-driven government intervention are what pass for mainstream economic thinking today in the G-20 nations.

Keep in mind that there are still hundreds of billions in bad debts in the US and EU tied to real estate and other speculative endeavors — debt which must eventually default. Until the global financial system is cleansed of these bad debts, market volatility and uncertainty will remain high. Unless we bite the bullet and write down debts to levels that will allow private growth and employment, there will be no recovery.

Printing money and deficit spending hampers private credit creation. Higher inflation scares private investors and business leaders who refuse to hire new employees and invest in new capital stock. Fear of inflation is driving private capital flight into gold and other non-dollar assets. If the Fed wants to boost the US economy, then it should swear-off further monetary ease, raise interest rates gently, and provide ample volumes of credit to solvent banks.

Roubini is entirely right to focus on providing capital and liquidity to solvent banks, but he does not go far enough. Try this instead: restructure Bank of America and other insolvent US and EU banks and government agencies; Sell bad assets to solvent banks and private investors; Raise new private and public capital to create new, private financial vehicles to support leverage and new credit creation. Think of US Bancorp becoming the largest lender in the US as the zombie banks wither away.

The citizens of the US and EU states need to reject the siren songs of economists who wrongly advocate more debt-funded spending and inflationary monetary expansion. Only by restructuring bad debt, cutting public deficits and limiting the monetary policy caprice of the Fed and ECB can we create a sustainable environment for economic growth. Indeed, the one sure way to ensure the collapse of the fiat dollar system and the return of the gold standard is to follow the advice of Roubini, Posen and Krugman when it comes to monetary and fiscal policy.


Knowing and speaking the truth is only the first step in acting upon that truth . . . which WILL set you free.

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Paul Krugman and the neo-Keynesian myth of full employment

Jul 5, 2011 14:57 UTC

In the most recent issue of Housing Wire Magazine, economist Paul Krugman suggests more government spending as the means of dealing with the economic slump and the housing crisis.

“We will be seeing low interest rates for a very long time,” the Nobel laureate said. “The thing about housing … housing prices were stable for a long period of time, then they soared and came back down.”  So now we know that what goes up must come down.  Thank you Dr. Krugman.

Incredibly, neither Krugman nor his soul mates among the neo-Keynesian elite, a distinct group which exercises hegemony over American economic policy, seem to accept that government spending and more debt, enabled by double digit inflation, is not a solution.

“Government policies promoting consumer indebtedness with low interest rates and low down payments were partly responsible for the housing bubble,” notes Anthony Sanders of George Mason University in Housing Wire.  “It should be called the Keynesian bubble.”

Despite all of the academic fussing about the triumph of neo-liberal economic thinking in the 1980s and 1990s, the real underlying model of American political economy is entirely socialist in political terms and inflationist as to the core monetary model.  When the advocates of free market economic tenants have shown the temerity to challenge the control of the temple by the neo-Keynesian Sanhedrin, the result has been more government and ever mounting piles of public debt.

The roots of neo-Keynesian socialism of the Krugman variety go back to before WWI, to the creation of the Federal Reserve System in 1913.  I spent a good bit of time talking about the statist and ultimately socialist roots of the Fed in my book Inflated: How Money and Debt Built the American Dream, including a number of sources that deserve more attention. One of these is “The Role of Keynesians in Wartime Policy and Postwar Planning,” by Byrd L. Jones of the University of Massachusetts, who described how Harry Hopkins and the socialist brain trust around FDR plotted a course to “full employment” using deficit spending funded with debt.  Historians of this era lionize these socialists for “saving what even conservatives call capitalism,” to quote James Galbraith on Alvin Hansen, another of the authors of the Keynesian illusion of pretend economic growth via deficits and debt.

Hansen was one of the key architects of the idea of “full employment,” a concept he developed during a series of lectures at Harvard University, one of the great birthing grounds of American socialism.  James Tobin wrote of Hansen in 1976 that as the principal intellectual leader of the Keynesian conquest, Hansen deserves major credit for the “fiscal revolution in America.”

That revolution, sadly, put the US on the road to fiscal recklessness and a steady rate of debt accumulation and inflation that has robbed Americans of most of the value of a dollar of a century ago. FDR operatives such as Leon Henderson, Richard Gilbert and Lauchlin Currie based the recovery of the US economy in the 1930s on defense spending, arms exports and domestic subsidies — a tendency for an expanded government learned in WWI, expanded in WWII and continued happily ever since.

Currie, a Canadian socialist who like Hansen worked at the Fed and later at the White House for FDR, also focused on war as a means of economic stimulus — a policy still followed under President Barrack Obama.  Jones writes that in Currie’s analysis, defense spending and arms exports were means to be “temporary” aids to the economy, but that a long run solution not dependent upon “chronic fiscal deficits” required “a liberal program of progressive taxes, increases in social security benefits, more public works projects and encouragement of investment (especially in home building).”

If you think that the last sentence sounds an awful lot like what we hear coming from the mouth of Paul Krugman and other advocates of more public spending today, then you’re correct.  The basic program of the neo-Keynesian socialists has not changed in decades, namely to expand the role of the state in the US economy and use inflation to create the illusion of economic prosperity — what liberals call “full employment.”

During the years following WWII, America donned the clothing of free market capitalism, at least in a rhetorical sense, but the underlying model of political economy has remained true to the socialist roots of FDR.  Conservatives from Hayek and Henry Hazlitt on forward have warned that the end result of the neo-Keynesian path is an authoritarian state and we have one today.

Yet even with a government monopoly on the housing sector, professor Krugman still wants to spend and borrow more.  In a post on Zero Hedge yesterday, “Counter-Cyclical Follies,” my friend Dick Alford argues that economists are finally realizing that “counter-cyclical fiscal and monetary policies do not address the cause of the under-performance of the US economy and hence are not solutions.”

Maybe.  But it has taken educationally deprived Americans a century to figure out this key economic insight.  So long as people take their policy guidance from committed neo-Keynesian advocates like Paul Krugman, who continue to follow the same socialist line set down a century ago by the likes of Hansen and Currie, we shall make no progress on truly fixing the US economy.


This article makes grandiose use of creative labels but avoids some critical facts:

A third of the stimulus was comprised of tax cuts. Another third went to shore up state budgets which were being slashed and so did not add new spending to the economy. The actual amount of stimulus was just over 300 billion, spread out over two years. Krugman estimated that for the stimulus to reverse the effects of the recession, it would need to be 2 trillion. So there really was no stimulus.

Krugman, and Keynes, never advocated stimulus in good times. It is a tool to be used sparingly and wisely only when capital and labor are idle because of a vicious cycle. Once the markets recover and growth resumes, both economists say that stimulus spending should not be used. Whalen conflates the pre-recession government support of the housing market with “neo-Keynesian” (an absurd attempt at slur) stimulus, which it is not. Further, the housing bubble wasn’t an American phenomenon. Investors around the globe grew the housing bubble. Is Whalen saying the US government policies buttressing Fannie and Freddie are to blame for the housing bubble in Spain, Ireland, Italy, etc.? This is a ridiculous and dishonest claim. Does Whalen know better or is he simply blinded by ideology?

The only moment in history when stimulus spending of the scale proposed by Keynes was actually deployed was during WW2. And it worked. The economy of the US was put back on track and the growth it enabled lasted decades. This fact is well understood by all who are not blinded by fear and hatred of American hegemony. The very term is a dead giveaway.

Finally, we have plentiful examples of the effects of austerity and raising interest rates on a global recession. Britain has gained nothing by cutting its public spending. Revenues are down because growth is still nonexistent. Businesses have cash but won’t invest until the economy begins to grow again. In the absence of public spending, the economy will take perhaps decades to begin growing again on its own, thus the recession deepens and lengthens.

This is all so elementary, but like most facts it stands no chance of being recognized by those who cling to their irrational belief systems.

Whalen is not credible.

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