Leading Keynesian Economist Uses The ‘D’ Word

September 12, 2014 by Against Crony Capitalism

Most Keynesian economists do not want to admit that we are in another depression. They find the word painful.

They find it painful because it contradicts the idea that Keynesian economic ideas have ended depressions forever. It also contradicts the idea that the massive and continuing Keynesian stimulus applied by world governments since 2008 has worked. For this and other reasons, euphemisms such as the Great Recession have been embraced not only by Keynesian economists, but by their allies in government and in the mainstream press.

I argued that we were in a depression in a January article and again in April. Now Brad DeLong, one of the most prestigious Keynesians, a professor at Berkeley and former deputy assistant secretary of the Treasury under Bill Clinton, says that he agrees. It really is a depression.

DeLong doesn’t blame Keynesianism; that would be too much to expect. But he does call the thing by its right name, which is a major departure from the usual Keynesian style.

These are, after all, the people who call the government creating money out of thin air “quantitative easing,” “bond buying” and the like, all of which are parroted by the press. When John Maynard Keynes did this, he was often being impish, as when he called newly created money “green cheese,” echoing the old nursery nonsense that “the moon is made of green cheese.” His acolytes have adopted the style of dissimulation, but without the slightest trace of a sense of humor.

Although we are in a depression, it is not a depression for everyone, as is by now well known. Even so, the full hit on the middle class and the poor relative to the affluent is not adequately understood. Consider these figures from Larry Lindsey, who served George W. Bush as chief economist at the beginning of the first term, only to be booted from the White House for too much truth telling:
U.S. Household Net Worth 2007-2013

Top 1 percent up 1.9 percent
Next 9 percent up 3.4 percent
Next 15 percent down 0.5 percent
Next 25 percent down 16.7 percent
Bottom 50 percent down 44.2 percent

None of the economic statistics we get from the government are reliable. Inflation is understated. Economic growth is overstated. Unemployment is understated. But this chart of net worth is about as reliable as we can expect to get.

It tells the story of a middle class in the process of being destroyed and of poor people who will never be able to get into it. It is also noteworthy that the 9 percent below the top 1 percent have done best of all. Although a great many government employee households are in the top 1 percent, a larger number are in the next 9 percent.

Sometimes, the economic statistics are intentionally manipulated. It cannot be a coincidence that the method of calculating inflation changed so much under Clinton. But keep in mind that the statistics also reflect Keynesian assumptions that do not make sense.

In Keynesian theory, it doesn’t matter whether money is spent or invested or what it is spent on or invested in. In this cockeyed view, spending more money to put people into Medicaid, paid for by borrowing from overseas or printing new money, is just as good as Apple’s investing in new jobs.

We saw an example of this in the recent gross domestic product numbers released by the government. Most of the new spending in the first quarter of this year was for healthcare, and most of that was for Medicaid expansion. But it wasn’t even actual, documented spending. It was just a wild, finger-in-the-wind guess by the government.

As a result, the first quarter was initially reported with a minus 1 percent economic growth, then revised to minus 2.9 percent. One idea floating around is that the Commerce Department’s revision reflected a decision to make the first quarter look worse in order to move healthcare spending to the second quarter and, thus, make it look better. If so, why would the second quarter have been deemed more important? It’s because it is leading up to the fall elections. The latest report for the second quarter is 4.2 percent.

The destruction of common-sense economics by Keynesianism is a major reason for what has happened to the American middle class and poor. But our governing elites and special interests do not just love Keynesianism for its own sake. They especially love the opportunity for crony capitalism that it affords. Keynes himself was not financially corrupt, and he would have been appalled to see the corruption he unleashed.

Nor did our present problems arrive in 2007-08. They can be dated at least to the beginning of bubbles and busts during the Clinton administration and arguably even further back.

For example, if we look at what has happened to poor people since the War on Poverty began in the 1960s, we see them earning less and less on their own and sinking even further into poverty, if we exclude growing welfare payments. Analyst John Goodman has calculated that economic growth cut the rate of poverty in half between the end of World War II and 1964, when the War on Poverty was launched. Since then, the percent of people poor would have increased, but for the extraordinary $15 trillion spent by the government, much of it with borrowed funds.

There are those among the top 1 percent and top 10 percent of households who are working on this problem every day. They help the middle class and poor by working hard, saving, making wise investments and hiring, or even by not investing or hiring until conditions are right. There are many others who make it steadily worse by feeding off a corrupt and swollen government and wasting trillions of borrowed or manufactured dollars.



Teddy Kujawski · Journeyman Electrician at C-Cat Co.

When it comes to the Depression we are experiencing I see just a few initial failures. The US government has no income except from taxation, and yet they want to grant amnesty and continue to allow the drain of our social services by those who send their earnings overseas. These people do not pay taxes and our government wants to roll out a red carpet for them. That notwithstanding we have the next false thought. It goes something like this “How can I be overdrawn I still have checks?” When I wrote a check on an account that was overdrawn I was arrested for obtaining goods or services with a dishonored check. When the government does it it is called “business as usual.”
Lance Brofman · NYU

An old economics joke is “A recession is when you are out of work. A depression is when I am out of work.” However, the differences between a recession and a depression are not simply how many people are unemployed. It is important for investors to recognize and understand the significance of the differences between recessions and depressions
The key difference between a recession and a depression is that a recession can be ended by monetary policy alone.

If every few years you got the flu and now you had a strep throat it would be incorrect and possibly dangerous to think that you just had a bad case of the flu this year. Over the last hundred years there have been numerous recessions but only two depressions, the depression of 1929-1941 and the depression that began in 2007. The symptoms of strep throat and scarlet fever may be similar to that of the flu or common cold. However, causes of the former are the streptococcus bacteria while influenza is viral. Hence, strep throat and scarlet fever require antibiotics which are useless against viruses. Likewise, believing that the depression that started in 2007 is just a severe recession is quite dangerous to both investors and policy makers. As long as many policy makers appear not to realize the distinctions between recessions and depressions, investors ignore those distinctions at their peril.

The effects of the 2007 depression are much less severe than the 1929-41 depression because of safety-net benefits now provided. Consider the horrendous, though not uncommon situation of a household in 1932 comprised of elderly grandparents being supported by their working-age children with young children of their own, when the breadwinners became unemployed. The 1932 family would be destitute. Today the grandparents would have social security and Medicare benefits. Their working-age children could now collect unemployment benefits for up to 99 weeks. Additionally, the entire family could also be eligible for food stamps, Medicaid, rent subsidies, heating fuel subsidies, free school lunches and other benefits. The 1932 family might also have had a bank account in one of the many banks that failed and lost their savings. Today, Federal Deposit Insurance protects such bank accounts. You might say we are now in a depression with benefits.

The difference between a depression and a severe recession are not just semantic. Recessions occur when the Federal Reserve raises interest rates in an effort to slow down an overheated economy. Most importantly, recessions end when the Fed lowers interest rates. In a recession the pent-up demand for housing and durable goods means that monetary policy alone can cure the recession. Just as antibiotics can be effective against bacterial infections but not against viruses, monetary policy alone cannot end a depression. Furthermore, modest fiscal stimulus and the automatic stabilizers that can hasten the end of recessions cannot end a depression. There can be ups and downs in the unemployment rate during a depression. However, the unemployment rate remains elevated. It was 14.5% in 1940 and 9.7% in 1941.

If we are in a recession, economic activity will fully resume just from the monetary and fiscal stimulus that has already occurred. Ultimately interest rates will rise. However, if we are in a depression, even one with safety-net benefits that mitigate the hardships, interest rates will remain relatively low for decades as was the case in Japan and the USA of the 1930s, where only World War II ended the depression. The ideal investment for an extended period of low interest rates is agency mREITs.

Depressions occur after investment bubbles burst. In free-market capitalism, capital generates income for the owners of the capital which in turn is used to create additional capital. This is very good. Sometimes, it can be actually too good. As capital continues to accumulate, its owners find it more and more difficult to deploy it efficiently. The business sector generally must interact with the household sector by selling goods and services or lending to them. When capital accumulates too rapidly, the productive capacity of the business sector can outpace the ability of the household sector to absorb the increasing production.

The capitalists, or if you prefer, job creators use their increasing wealth and income to reinvest, thus increasing the productive capacity of the business they own. They also lend their accumulated wealth to other businesses as well as other entities after they have exhausted opportunities within the business they own. As they seek to deploy ever more capital, excess factories, housing and shopping centers are built and more and more dubious loans are made. This is overinvestment. As one banker described the events leading up to 2008 – First the banks lent all they could to those who could pay them back and then they started to lend to those could not pay them back. As cash poured into banks in ever increasing amounts, caution was thrown to the wind. For a while consumers can use credit to buy more goods and services than their incomes can sustain. Ultimately, the overinvestment results in a financial crisis that causes unemployment, reductions in factory utilization and bankruptcies all of which reduce the value of investments.

If the economy was suffering from accumulated chronic underinvestment, shifting income from the non-rich to the rich would make sense. Underinvestment would mean there was a shortage of shopping centers, hotels, housing and factories were operating at 100% of capacity but still not able to produce as many cars and other goods as people needed. It might not seem fair, but the quickest way to build up capital is to take income away from the middle class who have a high propensity to consume and give to the rich who have a propensity to save (and invest). Except for periods in the 1950s and 1960s and possibly the 1990s when tax rates on the rich just happened to be high enough to prevent overinvestment, the economy has generally suffered from periodic overinvestment cycles.
It is not just a coincidence that tax cuts for the rich have preceded both the 1929 and 2007 depressions. The Revenue acts of 1926 and 1928 worked exactly as the Republican Congresses that pushed them through promised. The dramatic reductions in taxes on the upper income brackets and estates of the wealthy did indeed result in increased savings and investment. However, overinvestment (by 1929 there were over 600 automobile manufacturing companies in the USA) caused the depression that made the rich, and most everyone else, ultimately much poorer.

Since 1969 there has been a tremendous shift in the tax burdens away from the rich and onto the middle class. Corporate income tax receipts, whose incidence falls entirely on the owners of corporations, were 4% of GDP then and are now less than 1%. During that same period, payroll tax rates as percent of GDP have increased dramatically. The overinvestment problem caused by the reduction in taxes on the wealthy is exacerbated by the increased tax burden on the middle class. While overinvestment creates more factories, housing and shopping centers; higher payroll taxes reduces the purchasing power of middle-class consumers….”

Mike OSullivan · Top Commenter · Lagrangeville, New York

Excellent synopsis on state of the economy, a disaster based on house of cards, and the cards are getting more flimsy every day, yet no one talks about it, they just keep kicking the can down the road while blaming others. This current mild depression is about to get more severe.

I sit back and try to understand what it is about government that they can’t understand it. Is it really about buying votes so they can stay in power? Because even a tape worm knows if it gets to big it will kill off its food supply. Even a third grader will tell you it is never good to spend more money than you have. Why do the people in government seem to loose their common sense when they get elected? Is it because they move away from the common people and into DC with the old timers and become brain washed and memorized by the power of infinite money? Get rid of DC and force representatives to live in their states and do all government work over the net.

So now all the “pols” are on board for an increase n the minimum wage thanks to their union army. So the dolts jump on board and believe they are striking it rich. Here is what happens. Employers have to pay more for labor. Employers have to charge more for product/service. Increase pay equals increase tax liability. Increase product cost equals increase sales tax receipts. So far, it’s gubmint 2 vs employee 1. Now, we factor in obammycare. Wages up, subsidies go down. 3 to 1 in favor of gubmint. Cost of goods/services up, company tax liabilties up. 4 to 1 gubmint. Cost of living up cancels your “minimum wage” increase. Guess what? You lose 4 – zip. That in a “nut”shell is your gubmint run economy!

BINGO!!!!!…Those on low or fixed income suffer the most here!!  The great Thomas Sowell, as usual , gets to the point:  http://nypost.com/2014/09/09/the-mob-rule-living-wage-scam/

Our bread and soup lines are food stamps, our unemployed are not looking, the new jobs are disability, and gov’t jobs. The true unemployed rate is nearly 23%! The true inflation rate for the 5 years preceding dec. 31st, 2013 is up 150% in food, 45% in automobiles, 138% in the energy sector, more than 100% and more to come in the healthcare sector, rents have increased 50%, taxes have increased exponentially on everything! One dollar in stimulus now produces .13 cents in gdp, as recent as 1980 that was nearly a buck, in 1967 it was $1.43, money supply has increased 400%, acceleration has declined to the comparable of 1937 (per capita) and continues to fall, middle class wages have fallen 43%(those who work) middle class wealth has decreased more than 55%! They used to call it stagflation, back when they computed the real economic and employment figures in our economy. Since Billary’s regime we have been lied to! It can go on for years! Productivity would change it. We have no productivity per capita, only non productive social programs and G jobs. Our growth in gdp is from the inflation above, and must not take in consideration deceleration and the raising of taxes to maintain an ever growing gov’t replacing the taxes lost in the loss of acceleration tax contributions!

Right! The government is not going to kill the goose that lays the golden egg. Since the government took us off the gold standard in 1971 that backed the US dollar, the national debt has sky-rocketed. All the politicians have to do now is say they want this amount of money to pay for this or that program and the Fed Reserve credits their account and adds it to the national debt. The “people” don’t get any say into what is being charged on OUR account! I look at this as fraud on the American public on a BIG scale. Whatever happened to “the CONSENT of the governed”?


About arnash

“When you find yourself on the side of the majority, it’s time to pause and reflect.” - Mark Twain - Politicians and diapers - change 'em often, for the same reason. "Government is like a baby. An alimentary canal with a big appetite at one end and no sense of responsibility at the other." Ronald Reagan "Liberals claim to want to give a hearing to other views, but then are shocked and offended to discover that there are other views." William F. Buckley, Jr. “The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt.” - Bertrand Russell The people are the masters of both Congress and the courts, not to overthrow the Constitution, but to overthrow the men who pervert it. Abraham Lincoln “Good people sleep peaceably in their beds at night only because rough men stand ready to do violence on their behalf.” - George Orwell “Satan will use a lake of truth to hide a pint of poison”.
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