December 30, 2009
Steven Horwitz, the Charles A. Dana Professor of Economics at St. Lawrence University, has five questions for a Keynesian:
1. Why did Keynes think savings was bad if when people save through financial intermediaries they give control over resources to the banking system, which in turn will lend that out to firms to create capital and new jobs?
2. How does government spending create jobs and wealth if the resources that government spends must ultimately come from the private sector, through taxes or reduced borrowing due to government borrowing more (or inflation), and the private sector would have spent it either on consumption directly or on investment through savings anyway?
3. If one of the problems of the housing boom is that we put too many resources into housing and finance, how will a Keynesian government spending package know where that spending should have gone instead?
4. Keynes frequently wrote about the importance of the uncertainty of the future and the way that made things difficult for private investors and for the connection between savings and investment. Why doesn’t that same uncertainty prevent governments from knowing exactly how much and where they should be spending in a recession, especially because markets have prices and profits as signals to help entrepreneurs navigate that uncertainty while government bureaucrats do not have similar signals?
5. Given the enormous role that government interventions played in causing the current recession, from the expansionary policies of the Fed to GSEs like Fannie and Freddie, to misguided regulations in housing and banking, why should anyone believe that the same government actors will know how to solve it?
For the answers to these and other questions, be sure to read Professor Horwitz’s interview with Free Market Mojo.
November 3, 2009
Jeffrey Miron and Russ Roberts tackle the question of whether or not the stimulus worked. Their answer? Not quite.
Research finds more evidence for the efficacy of monetary as opposed to fiscal policy in ending recessions. And the studies on fiscal stimulus have shown more impact from tax cuts than from spending increases.
We also do not know whether the positive G.D.P. growth resulted partially or mainly from natural equilibrating mechanisms, rather than from monetary or fiscal policy. Much discussion of the recession presumes it will end only because government comes to the rescue.
In fact, the U.S. economy recovered from significant recessions before 1914, when monetary and fiscal policy had not even been invented. Economies can and do recover on their own, and intervention might make things worse by generating uncertainty and distorting the economy’s allocation of resources.
I once thought that spending money was the government’s strong suit. But as of October 20, only $120 billion of the $290 billion available so far from the stimulus package has been spent. Despite the early rhetorical emphasis on shovel-ready projects, the Department of Health and Human Services, the Department of Labor, and the Department of Education accounted for two-thirds of the total spent.
The Department of Transportation, a source of spending that is likely to be rich in shovels, has $30 billion available but has only managed to spend $4 billion. So perhaps it is not surprising that construction workers and manufacturing workers (who make up half of the job losses since the beginning of the recession) are struggling to find jobs.
I think the Keynesian narrative is right about one thing — consumers lack confidence. The crucial question is whether a large increase in government spending financed with borrowed money that swells the deficit to $1.4 trillion is good for confidence or bad for it. No one knows the answer.
The arguments against the stimulus are rooted in basic economics. Unfortunately, basic economics rarely make for an inspiring campaign speech.
September 8, 2009
According to Bloomberg:
The dollar’s role in international trade should be reduced by establishing a new currency to protect emerging markets from the “confidence game” of financial speculation, the United Nations said.
UN countries should agree on the creation of a global reserve bank to issue the currency and to monitor the national exchange rates of its members, the Geneva-based UN Conference on Trade and Development said today in a report.
I’m not sure that ditching a national monetary policy is the best course of action for the United States. Nor do I think the American people support forfeiting their monetary sovereignty to the “global community.”
Milton Friedman has this to say about a global currency:
I view it as a monstrosity—on a par with my reaction to world government, for that is what a common currency amounts to for one aspect of economic activity. As a citizen of the United States, I find it bad enough that we have developed monetary arrangements under which so much power has been vested in a small group of unelected individuals, subject only indirectly to political control. I find it far worse to vest so much power in individuals chosen by international negotiation, individuals who are not accountable in any meaningful way at the ballot box.
August 10, 2009
The U.S. Dollar is now worth less than 10% of its value in 1913 (the year the Federal Reserve was created).
July 22, 2009
The Wall Street Journal has produced an excellent op-ed on Bernanke’s Assurances. For me, the following excerpt is the most forboding piece of the article:
The problem is that Mr. Bernanke has long dismissed both the value of the dollar and commodity prices as guides to monetary policy. Like the Fed staff, he focuses on unemployment and the “output gap,” which is the difference between actual and potential economic growth. Both are lagging economic indicators, which is why the Fed so frequently is behind the curve with its monetary decisions.
Ignoring economic theory and empirical data, logic alone dictates that unemployment and output must necessarily be lagging indicators. The economy will enter a recovery period well before actual growth appears and firms begin to hire again. In the meantime, the Fed will have time to create another inflationary bubble. And, for my own part, I’m not sure the U.S. can take another recession following on the heels of the once we’ve already experienced. That is, of course, assuming that our economy can recover under the socialist and Keynesian policies under which it labors.