The Stimulus Worked, But Keynesianism Failed

[True Earthling]

The CBO estimated that it created about 3.3 million jobs. Or maybe it "created or saved" that many jobs, but it clearly had a positive impact on employment, which was the primary goal. Also, GDP resumed growing not long after the stimulus was enacted.
But clearly the stimulus didn't create a lasting or robust recovery, and this is where the Keynesians get it wrong.
See, the traditional argument for stimulus is based on this notion of the "multiplier" effect. You know: The government spends $1 and voila, that turns into $4 in the economy. Sound like magic? That's because it is a myth.

Read more: http://www.businessinsider.com/the-stimulus-worked-but-keynesianism-failed-2011-8#ixzz1UAgJppsU

The confusion flows from the faulty theory underlying the stimulus bill. In Keynesian thought, a decline in demand causes a decline in spending; since one person’s spending is someone else’s income, a fall in demand makes a nation poorer. As a poorer nation cuts back on spending, it sets off another wave of declining income. So any big shock to consumer spending or business confidence can set off waves of job losses and layoffs, as fewer goods are demanded and more workers become useless.

Under this logic, one possible remedy is for public spending to take the place of private spending. As government increases its spending, the money creates new employment. That, in turn, spurs those new workers to consume more and prompts businesses to buy more machines and equipment to meet the government-induced demand. Economists call this increase in aggregate income the “multiplier” effect. One dollar of government spending, the theory goes, ends up creating more than a dollar of new income. It’s a rare free lunch.

As appealing as the Keynesian story sounds, many economists have long doubted it. In 1991, looking across 100 countries, Robert Barro of Harvard presented historical evidence that high government spending actually hurts economies in the long run by crowding out private spending and shifting resources to the uses preferred by politicians rather than consumers. For a dollar of government spending, we end up seeing less than a dollar of growth. Can long-term poison be short-term medicine?

http://reason.com/archives/2009/10/19/the-myth-of-the-multiplier

[mmonk]

1. Hey Milton.

:hi:

Your shock doctrine is working.

[Zenlitened]

2. Ain't it, though? Unreccing the OP for turning reality upside-down. n/t

[Enrique]

3. alerted for a Libertarian source n/t

[Zenlitened]

5. Those libertarians would be spending like mad if only the gummunt wasn't crowding them out! -n/t

[OHdem10]

4. Reason--Hard core Libertarian opinion.

Last night Nadinenabrinsi posted charts which illustrate
just the opposite. Including charts showing a direct
correlation between Low Taxes-Bad Economy and Increased
Taxes--good economy.

[Zenlitened]

8. Oh the things Libertarians will say! Up is down, black is white, there's no elephant in the room...

:rofl:

[Demoiselle]

6. This is bullshit.

[HereSince1628]

7. Keynesian economics may be done poorly at times

but supply-side economics are always a Laffer.

[RaleighNCDUer]

9. What's with all the anti-Keynesian crap today?

Business Insider...Reason...The New Republic - all attacking Keynesian economics and being posted here as if they had a smidgen of truth to them.

"In 1991, looking across 100 countries, Robert Barro of Harvard presented historical evidence that high government spending actually hurts economies in the long run by crowding out private spending and shifting resources to the uses preferred by politicians rather than consumers. For a dollar of government spending, we end up seeing less than a dollar of growth."

What spending, and what countries, was he looking at? High spending on the military will KILL an economy - look at the Soviet Union and the US. High spending on infrastructure and maintaining the social contract will keep an economy humming - look at Western Europe.

This is all Chicago School bullshit.

[stklurker]

20. Western Europe?

I didnt see the SARCASM after the Western Europe comment...

[RaleighNCDUer]

28. Western Europe has also been poisoned by anti-Keynesian economics

but they are fundamentally far more sound than we are - a strong social contract, investment in infrastructure - and will weather the downturn much better than we.

Unless, of course, the US dominated World Bank and IMF fuck them up too much with their 'austerity' plans.

[dtexdem]

10. Ignore the evidence, RW ideology says Keynesianism is wrong.

Who you going to believe: the results or blind pigheadedness?

[immoderate]

11. Bogus.

One of these articles uses military spending to illustrate that the multiplier effect doesn't work. :rofl:

--imm

[humblebum]

12. Keynesian economics could have worked this time if we were already

not so dependent upon China, et al. When you flood the market with new money, inflation occurs unless you come up with new tangible projects and programs and "things" to spend all that new money on. However, when an outside country has so much invested in your economy, those new dollars have to be spent on paying interest on old debts and nothing new and tangible is created. Therefore, things remain the same. FDR kept the money at home and invested at home, and out of that came a massive new economy, which was a powerhouse for addressing world concerns. Now gone. We need to invest in American factories that hire Americans.

[mmonk]

14. Keynesian economics isn't dependant on who or where money is.

It is a principle when enacted properly, helps spur job growth.

[humblebum]

19. In theory, it is not. But when a creditor demands that they be

paid back in "real" dollars that have tangible assets behind them, that requires the creation of that much more money to creat the new internal wealth, which is required to spur the economy. We never reached that point and now the process has been stunted, and we are left with all this debt without anything to show for it. Stop the wars and start investing in American jobs.

[mmonk]

22. It doesn't require new money if one doesn't think tax cuts creates job growth

and recognizes it for the limited stimulus it is which also adds to deficit spending and debt.

[humblebum]

26. Agree. nt

[Democrats_win]

13. States cut their workforces and this had significant impact.

The idea of Keynesian theory is to step in when private spending is not occuring--so it does not necessarily crowd out private spending.

Note that the George W. Bush presidency was nothing more than a massive Keynesian scheme along with massive tax cuts. However, the money in that case went to defense contractors, homeland security contractors and corporations that outsourced our jobs. We the people were completely left out!

It just goes to show you that if you really spread the money out as happened during the depression and WW2, the economy actually becomes FUNDAMENTALLY sound. This is in contrast to the Shrub always telling us that the fundamentals were strong while everything was falling apart.

[Hawkowl]

15. Fucking bullshit

Absolute crap. "We are all Keynesians now" : Richard Nixon.

[rampart]

16. review that old macroeconomics text

keynes models worked just as predicted.

do not blame theory for inappropriate practice.

1. a large proportion of the stimulus consisted of tax cuts, and should not be counted at all.

2. "government spending" by contracting to the usual infrastructure contractors, with their usual high level of profit and use of cheapest labor is not exactly rhe wpa.

[marmar]

17. ........

[wurzel]

18. In the "long run" we are all dead! This isn't rocket science!

The four pillars of the economy are: Corporate spending, Consumer spending, Government spending, and distribution of wealth in society.

Corporations have admitted they have ton of money in their coffers they won't spend because of no consumer demand. The rich have never cornered so much of the wealth. Consumers are unemployed, out of money, and in debt. The Government is also in too much debt.

The only thing to do to get out of the mess we are in is to permanently tax millionaires a at least 50% and billionaires at 80%. And close Corporate loopholes. Use that money in public works. A lot of public works!

IT WILL NEVER HAPPEN.

[ProgressiveEconomist]

21. Barro: "govt spending hurts economies in the long run" Even if true, what

fiscal policies should governments pursue in the short- and medium- term? If stimulus spending avoids letting a recessions run into a decade of deflation and depression, who chares if there's some small price to pay in output for moderation of volatility? Certainly not workers who are living from paycheck to paycheck.

And Barro's thesis is by no means universally accepted. Even by Barro! He's changed his mind from time to time

Another important point is that only when high interest rates result can government borrowing to finance deficits crowd out private borrowing for business investment . Such a situation certainly is not prevalent now, with interest rates at historic lows.

[muriel_volestrangler]

23. An opinion from *2009* is not 'proof' that the jobs created in *2010* did not last

Business Insider fails a basic logic test. They link to the Aug 2010 CBO story that says the stimulus saved/created 3.3 million jobs; and then say "it didn't last, because the multiplier effect is a myth" - and point to a 2009 Reason opinion piece that reckons that since jobs went down in 2009, there is no such thing as a stimulus package that creates employment.

What this shows is (a) Reason were too quick to bloviate, (b) Business Insider has some truly idiotic people writing for it, (c) the OP is a waste of time.

Unrec.

[fishwax]

24. Keyenesianism didn't fail, but the stimulus should have been bigger

[Starry Messenger]

25. Reason. com are the same shitheads Matt Damon just took on this weekend.

No left winger would post that crap here.

[Taverner]

27. You call this Keynesianism?????

HHAAAAAAAAAAAAAAAAAAA!

Best laugh I had today

Guess what: The Debt Ceiling is really Distributism!

Did you know Football causes cancer!

Stairway to Heaven is really about Chicken Farming

[suffragette]

29. Reason.com is a Koch funded propaganda site

It is part of Reason Foundation

http://www.sourcewatch.org/index.php?title=Reason_Foundation#cite_note-3

The Reason Foundation is a self-described "libertarian" <1> think tank. The Reason Foundation's projects include NewEnvironmentalism.org and Privatization.org, as well as Reason Magazine<2> It is part of the Atlas Economic Research Foundation network.

The Reason Foundation is funded, in part, by what are known as the "Koch Family Foundations,"<3> and David Koch serves as a Reason trustee. <4>


They are spending part of their enormous wealth to persuade people to support systems that help them amass even more wealth to the detriment of the majority of people in this nation and our society as a whole.


Robert Barro is anti-union and against collective bargaining:
http://online.wsj.com/article/SB10001424052748704150604576166011983939364.html

He is also against extending unemployment benefits:
http://online.wsj.com/article/SB10001424052748703959704575454431457720188.html

Robert Reich counters that very effectively here:
http://robertreich.org/post/1039598190