Economics

Obvious Failure of Stimulus Becomes Obvious Even To Economists

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This man needs a tax increase.

Where do Keynesians go now that even public radio is talking about the failure of one of history's costliest Keynesian stimulus efforts?

At City Journal, Guy Sorman notes how quickly the managed-market winds have shifted. When the credit unwind started, the papers, the TV and the newsweaklies declared capitalism dead in just a little less time than it took for Kent Brockman to declare his loyalty to the Space Ants. Less than two years later, you can't buy good press for the stimulus; the economy is frozen solid in August; the nation is rediscovering—despite the herniated efforts of local, state and federal government—the virtues of thrift; and if you search for Keynes on the interwebs, all you turn up are headlines like "How Dr. Keynes killed the patient."

But here's the tell: We're already starting to see the first of the "Today's Keynesians are misreading Keynes" walk-back arguments.

As an idea, neo-Keynesianism is dead. (As public policy, of course, it will live forever.)

Sorman checks in with just-emerging-from-their-bunkers free market economists,  including University of Chicago's Eugene Fama and Columbia University's Charles Calomiris – the latter of whom gives a nice list of all the ways that the supposedly unforeseen 2008 crisis fits into the pattern of "all banking crises that we have known about since the fifteenth century".

Fama provides a new wrinkle on recent discoveries about where and when the bubble began to pop:

The nature of recessions is important because of what may be the free-market economists' most surprising contention: that the recession triggered the financial crisis, not the other way around. Fama argues that the recession started as early as 2007, with consumers starting to spend less, borrowers falling delinquent on their loans, and homeowners who lacked a vested interest in their houses beginning to walk away from their mortgages. So the complex financial derivatives at the heart of the financial meltdown were not its cause but its victims. "For 25 years, before the current recession," Fama points out, "the derivatives worked well in lowering the cost of capital."

What has Fama learned from the crisis, then? "I learned a lot about government overreactions but not much about recessions," he tells me. Confronted with a sharp economic downturn, governments face political pressure to act; stimulus spending and other state interventions seem sensible, even when the history of past crises suggests otherwise. Worse, the new public debt and regulations then hobble economic recovery. Rebounding from the post-2007 recession would have been quicker, Fama believes, if the government had mostly let free markets clean up the mess, reestablish true prices, and select the enterprises able to survive.

Whoa, there, pardner! Whaddaya mean "mostly"? John Cochrane, another Chicago economist (and a suspect figure by virtue of his still believing that the great  "Great Moderation" really existed anywhere except in Linus' imagination) explains that we just needed smarter, better targeted interventions:

"The banks probably had to be saved," Cochrane tells me, "but the problem was that the salvation followed no pattern." Some institutions, like Bear Stearns and Wachovia, were rescued; others, like Lehman, were not. It became impossible to know what the government was going to do next. "If governments couldn't be predicted, nobody could be trusted any more," Cochrane explains. Credit froze.

I have an alternative explanation: Credit froze because all over the country defaults on mortgages, car loans, student loans and credit cards were reaching historical highs. Letting Lehman die was Henry Paulson's single act of courage, and he followed it up by doing what he does best: soiling his Depends and scaring the children with wild tales about the bank failures, derivative defaults and lover's lane murderers that would be unleashed if the taxpayers didn't give a trillion dollars to the largest banks on the planet. The entire ethical structure of the free market was destroyed so that Sheila Bair could be spared the inconvenience of euthanizing crippled, syphilitic ghouls like Citigroup and Bank of America.

With only two years' distance the TARP and the ARRA stimulus (and all the already forgotten lesser stimuli like the $400 billion Federal Housing Finance Regulatory Reform Act of June 2008) can be seen as one of the great public tragedies of our time. But at the end of a tragedy, the survivors learn something and move on. That's what's happening now. With any luck in the mid-term elections, Tim Geithner, Larry Summers and the rest of the Obama economic bureau may soon become the unemployment statistics they deserve to be.  This is good news. Sorman lays out the beginnings of an important reappraisal.

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88 responses to “Obvious Failure of Stimulus Becomes Obvious Even To Economists

  1. “Obvious Failure of Stimulus Becomes Obvious Even To Economists”

    ‘Bout time. Education getting in the way of common sense……

  2. “Fama argues that the recession started as early as 2007, with consumers starting to spend less, borrowers falling delinquent on their loans, and homeowners who lacked a vested interest in their houses beginning to walk away from their mortgages.”

    Back in 2007, the main reason that consumer spending was beginning to decline was the fact that we were returning to 70’s style inflation across the globe. Here in the US, the inflation rate hit 4 percent, and in places like China, it was in the double digits. Central banks worldwide had to tighten credit or watch hyperinflation occur. They chose the former and the bubble was burst. This was a keynes caused recession.

  3. That google search provided this excellent article:

    Japan’s Economy Shows Limits of Keynesian Policies

  4. What happened to Nouriel Roubini? I hardly ever see his name any more.

    1. He’s locked in a closet on the Daily Show set.

      1. He’s in the Hamptons

  5. I don’t know why people always talk about going back in time to kill Hitler when they could be going back in time to kill John Maynard Keynes, AKA history’s greatest monster.

    1. You know, I live around the corner from his former residence. Would you like me to pee on it when I get drunk on saturday?

      1. You could at least break a window.

        1. That would piss off Zombie Bastiat though.

          1. Perhaps we should dig up their lawn/garden then fill it in the next weekend?

            1. Sounds pretty stimulating to me.

        2. “You could at least break a window.”

          I see what you did there.

      2. I hear the Borough of Milton Keynes is planning to change its name to Milton Friedman.

        1. 🙂

          It’d still be the most boring place in Britain though.

        2. “Letting Lehman die was Henry Paulson’s single act of courage, and he followed it up by doing what he does best: soiling his Depends and scaring the children with wild tales about the bank failures, derivative defaults and lover’s lane murderers that would be unleashed if the taxpayers didn’t give a trillion dollars to the largest banks on the planet. The entire ethical structure of the free market was destroyed so that Sheila Bair could be spared the inconvenience of euthanizing crippled, syphilitic ghouls like Citigroup and Bank of America.”

          Nice writing.

          1. Put on some dark music of your choice, reread it and tell me you don’t feel just a little nauseated.

            Agreed. Well done.

  6. Rebounding from the post-2007 recession would have been quicker, Fama believes, if the government had mostly let free markets clean up the mess, reestablish true prices, and select the enterprises able to survive.

    But that medicine tastes yucky! I won’t take it! I won’t, I wont, I won’t!

    PS – Housing prices haven’t even hit botton yet.

    1. ^ HTML fail! ^

  7. The stimulus worked wonders for the economy. It’s just a messaging problem. When people find out what’s in the stimulus, they’re going to really love it! The Prez just needs to articulify his case for stimulus. And if Faux News (heeheeheehee – fingers own butthole) would quit lying about it, we could see all the multipliers working.

    1. You want hot sauce with that?

  8. I would like to have a dollar for every person on this board that said the stimulus wouldn’t work, and would lead to more debt.

    1. Yes, but we should only take those dollars from the people that said it would work.

    2. I’d take it in Swiss Francs if I were you.

      1. If it’s not gold, it’s not money.

  9. “Of course that square peg goes in the round hole. It’s a perfect fit. You’re just not hitting it hard enough.”

    1. somebody needs to stick a 4×4 square peg up your round hole.

      1. Sounds pretty stimulating to me.

  10. I would be willing to be that the percentage of working economists (those who are paid money for economic advice that is believed to increase the value of shareholder’s equity) who actually place any credence in Keynesian Economics to be very close to the percentage of neurosurgeons who carefully plan major brain surgery to limit damage to the ego, superego, and the id.

    1. i can vouch from experience that industry economists, whether it be due to theory or just in practice, do place less faith in the textbook keynsian stimulus than achademic economists do.

      I was actually in a meeting with about 12 industry economists when the stimulus package was annouced by the white house, so we learned of the news via blackberry. One guy who works for a major investment bank said “i thought we stopped doing this 30 years ago?” And the guy in the room most supportive of the idea had to qualify his statement first with, “well im still very much an old fasion type economist, so…”

      1. From Massim Taleb:

        Find it strange that in the aftermath of the crisis, the demand for my services has never been higher; true of the economics profession in general. Some would argue it’s better to have a map of Chicago, better than no map at all, even if you are going to fly to New York. If you want to figure out what’s going on in the economy, better to ask an economist than electrician–but that’s not necessarily true. People use astrologers all the time and it’s not hurting anyone. Alternative medicine, lowers your anxiety. Just want to build a society in which forecasts are not taken seriously. Example: you need an option, insurance–two lungs, two kidneys. Economists: you need one central kidney and people would borrow it–that would be more efficient.

        1. More:

          A year and a half after the crisis started, we are worse off because all the ills are compounded. Larger financial institutions; larger state roles; more deficits; more susceptibility to forecasting; more dependence on economists who never got anything right in the past.

  11. But what will Harvard Bidness School teach now?

    1. Since the theory’s out the window, they should focus on practical classes like Networking with Douchebags, Kissing Ass, and Superfluous Powerpoint Tricks

  12. Is the guy in the picture gay or is he building a mosque? I need to know which kind of story this is.

    1. Pretty sure it’s Ayn Rand in drag.

      1. I thought Ayn Rand’s default state was drag. Who is Ayn Rand not in drag? Who is John Galt?

  13. And now the whole fucking country is shovel-ready.

  14. The man in the photo is obviously not paying his fair share.

  15. …that the great  “Great Moderation” really existed anywhere except in Moderation” really existed anywhere except in Linus’ imagination)…

    No Peanuts reference should be without a link about Weapon Brown

  16. To be fair to Keynes, he prescribed LESS government spending when times were good. The government spending was never for spending’s sake, it was simply to make up for lost consumer spending.

    This is why politicians (and pukes like Krugman) only trot out Keynes when the economy is in the crapper. If they really believed Keynes they would be rolling back on deficits when the recessions end.

    1. keynes also went through a number of phases. He changed his mind a lot and was natorius for it. What we call keynsian theory now isnt even really what he believed. Its just that he created the way of looking at the economy in aggrgate demand/ aggragate supply model. And saw that the government could effect demand in a number of ways for various purposes.

    2. And that’s exactly what we are going to do. Were, that is. But we ran out of funds.

    3. To be fair to Keynes, he prescribed LESS government spending when times were good.

      If he believed that would happen, then he was too naive to be taken seriously.

      The government spending was never for spending’s sake, it was simply to make up for lost consumer spending.

      Government spending doesn’t displace consumer spending only when the government spending financed by debt. And even then, it represents a transfer of future consumer spending to the present, with an additional penalty imposed by borrowing costs.

      Yeah, yeah, he was all “in the long run, we’re all dead.” Well, guess what, fucker. The long run is here, and while you may be dead, we’re not.

  17. Does anyone know if any stimulus funds will be used to build the Ground Zero Mosque?

    1. No, but we are flying the good imam around the Mideast on a goodwill/fundraising tour on the taxpayer dime.

      1. Did Blago arrange that in exchange for the Senate seat?

  18. Today’s Keynesians ARE misreading Keynes.

    Keynes’ argument was that the state could take unproductive capital and labor and put it back to work – producing something.

    Putting aside the problems with government actually knowing what to produce, and the potential for corruption, that’s a completely different argument than what today’s Keynesians think: That throwing money around randomly will create jobs by stimulating demand.

    Hence the idiotic belief that unemployment benefits are stimulative.

    At least the real Keynesianism aims to actually produce something that benefits the economy, like a road or a bridge. Even if it isn’t the mopst efficient way to spend money.

    The new Keynsians think that printing more money will make us all rich.

    1. Keynesianism didn’t even work back when he was still alive, and it has never worked once in all the time since.

      What’s so ironic is that this copswaddle was already discredited way back in the ’70s, but like one of those bad horror movie villains, it somehow inexplicably keeps coming back to life over and over again.

      The only people on earth who keep believing in this rubbish in spite of all the facts, evidence, and results are ivory tower academic types who get handed Nobel prizes, but have never made a payroll or created a real job in their lives.

    2. Putting aside the problems with government actually knowing what to produce

      Given what the private sector spent the last twenty years producing (McMansions in the deserts, SUV factories, cheap Chinese shit importers, job outsourcers, and credit default swaps), I am really hard pressed to think of anything the government is seriously considering spending money on that is worse. Well, except the wars, but that is a Republican thing (whom you implicitly support, whether you admit it or not).

      1. So, if the private sector produces McMansions, that’s a terrible waste of resources, but if the government gives people money to buy a bunch of McMansions that they couldn’t have afforded under the free market, that’s genius.

        Chad, you should look into getting a fuckingstupidectomy.

        1. a fuckingstupidectomy!

          That needs a TM!

      2. Genius Alert!

        Chad, what should the private sector be producing? Obviously, it should be stuff YOU like, so please enlighten us. Maybe you can make a list of the things that are deemed “okay” for production.

      3. Do you have to work at being this stupid, or does it come naturally?

  19. Keynes’ argument was that the state could take unproductive capital and labor and put it back to work – producing something.

    OK. For starters:

    (1) Producing something with borrowed money, that will have to be paid back with interest, so he starts out in the hole, medium-to-long-term-wise.

    (2) You have to net out the opportunity cost of tying up that productive capacity on government jobs, so knock down the presumed “return” on this “investment” again. For “unproductive” capacity, that opportunity cost may be low, but its not zero.

    1. I think the big economic fallacy here is the belief that government jobs are the same thing as private jobs, and that government spending is the same thing as private spending.

      In reality, or if you like, outside of Paul Krugman’s wet dream, government jobs are a drain on the economy. The government does not produce anything that the private sector cannot produce, and the private sector can do it better (see: Rothbard’s theory on monopolies, socialist economic calculation problem, etc.) So, in essence, public sector jobs are a leech on the private sector; every dollar given to a public sector employee is one less dollar that can be given to a private sector one.

      For example, when President Franklin Roosevelt began construction of the Hoover Dam, the New Dealer’s in both Congress and the media hailed it as a project that would provide countless jobs to Americans and would decrease unemployment. There are two problems with this fallacious statement:

      (1) There is no such thing as a free lunch; rather, the money and resources for the Hoover Dam cannot be magicked out of thin air. It is taken from the only place it can be taken from; the private sector. The private sector will either pay for the dam now, through taxes, or later, with higher prices caused by monetary inflation. Clearly, leaving the $165 million in the hands of the consumer, to invest and purchase the goods they view as most important is a superior alternative to letting 435 men in Washington decide how they view the public wants to spend it’s money. If the private sector felt it was necessary to build a monstrous dam on lake Mead, it would have been built without any government intervention. The country is not $165 million richer; it is $165 million poorer.

      (2) These public sector jobs are not permanent. This needs little explanation; after the dam has been built, the 10,000 or so workers will find themselves unemployed. To tie this in to what I said earlier, if the $165 million had been left in the hands of the private sector, it would have been invested in capital and consumer goods that the consumers felt most urgent, which would expand employment and supply these workers with permanent jobs, ones that actually help the economy rather than hinder it.

      I hope what I said added to the evidence of why Keynes and his modern-day pupils are the economic equivalent of the creationist.

      1. In reality, or if you like, outside of Paul Krugman’s wet dream, government jobs are a drain on the economy. The government does not produce anything that the private sector cannot produce, and the private sector can do it better (see: Rothbard’s theory on monopolies, socialist economic calculation problem, etc.)

        That is such a broad statement of pure faith. Almost laughably silly.

        Your argument is that “well, the government has some problems with its decision-making process. Ergo, the private sector is better”. Of course, you ignore that the private sector has all sorts of problems with its decision-making processes as well (externalities, the principle-agent problem, monopolistic or oligopolistic behavior, lack of concern for future generations or natural capital, etc).

        In fact, both systems are flawed, and either can work better than the other, depending on the context. The best solution is usually a blend of both.

        Btw, your faith is utterly refuted by health care. We have the most “free market” system on earth…yet it provides mediocre results at a high price. I am sure you simply believe the “solution” is to move it even FURTHER to the right.

        1. The Hoover dam is actually a very good example of what government can achieve: Lake Mead and the dam will produce electric power in perpetuity for all intents and purposes. Combined with the labour input such as cement, sand , gravel, reinforcing steel, hydro-turbines and generators, all produced by private industry, the net benefit, including that of flood control and water supply during droughts, may very well exceed the inefficient capital outlay by the government.

          At that time large dam construction in the USA was generally managed by the federal government; not sure why though, perhaps because of the amount of capital and manpower required for the protracted period of dam construction.

          Another example of a net benefit of government construction is the Autobahn in Germany, the originals of which are still in use today.

          However, as a general principle the government should not get involved into what private business and financing can achieve on its own.

        2. (Part 1 in a terribly long response)
          Before I go on, I must say that as a lurker of Reason, I have quiet enjoyed your escapades with Tony. You continually bring up the same tired economic fallacies over and over again, ones that have been proven false decades ago, but still pretending that they’re new and groundbreaking. I have seen you dress the broken window fallacy in so many different clothes that I’m sure, wherever Bastiat’s grave is, he’s rolling in it. And whenever a helpful commenter on Reason politely points you towards information that shows otherwise, you spit in their face. So, I’m willing to continue this conversation with you, but if this debate lapses into a single strawman or petty progressive talking point, i.e. “You hate the homeless, capitalism is a war between the producer and the consumer, think of the children, you hate grandma” I’m just going to stop talking to you. I will not feed the troll. If you can back up any of your empty left-wing talking points with empirical evidence, then by all means, go ahead. So, let us continue.

          “That is such a broad statement of pure faith. Almost laughably silly.”

          Chad, I’m curious, did you actually read the paragraph you were responding too? And, if so, do you know what a statement of faith is? For example, “God created the Earth” is a statement of faith. Their is no empirical proof that a God created the Earth, and since faith means ‘a belief not resting on logical proof or material evidence’, saying “God created the Earth” is a statement of faith. What I said, clearly, is not a statement of faith.

          You might have overlooked it because I put it in parenthesis, but I backed up my statement that the private sector can allocate scarce resources better than the public sector by directing you to two theories, (1) Rothbard’s theory of monopolies and (2) the socialist economic calculation problem. I would like you to take a moment to use that wonderful search engine called Google and learn a little bit about them. You don’t need to be a scholar in Austrian economics to understand them (I’m a novice in every sense of the word), but please make yourself familiar with them. They’ll illustrate why the government is a failure at managing resources. If you cannot find adequate information on the subject, please tell me and I will explain it to you to the best of my ability.

          1. (Part 2 of a terribly long response to Chad)

            “Your argument is that ‘well, the government has some problems with its decision-making process. Ergo, the private sector is better’. Of course, you ignore that the private sector has all sorts of problems with its decision-making processes as well (externalities, the principle-agent problem, monopolistic or oligopolistic behavior, lack of concern for future generations or natural capital, etc).”

            I am not saying that the government has some trouble managing scarce resources; I’m saying it is terrible at managing them. A government committee, no matter how large, cannot possibly know all the needs and wants of 300 million unique people. It simply cannot be done. By individuals purchasing and making investment in the private sector, the price-value system sends signals to entrepreneurs telling them where they want their resources allocated. This is a simplified version of the price-value system, but whole books have been written on the subject. In short, unless the bureaucrats are omniscient, they will horribly malinvest the taxpayer’s dollars. And on a side note, if you knew anything about economics, then you’d know that monopolies can only be granted by the government; in a laissez-faire economy, they simply would not exist.

            “In fact, both systems are flawed, and either can work better than the other, depending on the context. The best solution is usually a blend of both.”

            I see, so you support mixed economies. Does that mean I can blame you for the horrible cyclical boom-bust economy caused by the Federal Reserve? Does that mean I can blame you for the record deficit spending? Mixed economies do not work. Government intervention always leads, eventually, to socialism. Government intervention hurts the market, which leads to calls for further government intervention to correct the previous government intervention, and on and on and on. Ludwig von Mises talked about it decades ago, and it’s happening now.

            I believe you constant whining about externalities has been addressed before, but allow me to explain again. An example of a negative externality would be that a factory creates a product which pollutes a river. In the world of voluntary trade and private property envisioned by us silly libertarians, the problem would be solved relatively easily. The owner or owners of said river (the whole community may collectively have purchased the river) will negotiate with the factory owner. An agreement will be made, say, where the factory owner can pollute the river so long as he pays a fee which cover cleaning it up. If he refuses to stop polluting or reach an agreement with the owners of the river, the owners can take him to court for damaging their property. He will be fined for the same reason I would be fined if I burnt down your house. In a capitalist society, all externalities are therefore internalized.

            1. (Part 3 of a terribly long response to Chad)

              The principle-agent problem is one that, ironically, originated with the Marxists. The principle states that workers are at a disadvantaged position when bargaining for wages with their employers. This is untrue; neither one has an advantage of the other. The employer may make an offer, and the worker can seek employment elsewhere. This is called “competing for employment”; employers will compete for skilled workers by offering them higher wages or benefits. In a healthy economy, this means that for most people, their reservation wages are met (the minimum amount of money they are willing to work for), and they are payed somewhere in between their reservation wage and the maximum wage payment of their hopeful employer.

              I’m confused about what you mean by “lack of concern for future generations”. I’m assuming you mean pollution? Well, that’s solved by fixing the externality problem, isn’t it? Please elaborate.

              Natural capital is a problem of capitalism? So in Progressive Land, you wouldn’t use nature to assist in production?

              “Btw, your faith is utterly refuted by health care. We have the most “free market” system on earth…yet it provides mediocre results at a high price. I am sure you simply believe the “solution” is to move it even FURTHER to the right.”

              The fact that the AMA has a monopoly on medical licensing is enough to destroy your theory that we have anything that even comes close to a free market health care system. Not to mention the lack of competition across state lines, the insane regulation….quiet the anarcho-capitalist utopia we have here in America, Chad.

              I look forward to your response. You should be proud to know it took me two and a half pages to tell you how wrong you are. And H.F. Wolf, thank you for the kind response; I appreciate you not acting condescending like Chad. I believe that, in a way, I’ve responded to your post in my debate against Chad.

              1. There are a lot of things that I could respond to, but I’ll pick this one.

                I’m confused about what you mean by “lack of concern for future generations”. I’m assuming you mean pollution? Well, that’s solved by fixing the externality problem, isn’t it? Please elaborate.

                How expensive would oil be if our great-great-grand children could bid on it, with the intent of simply leaving it in the ground until they could pull it out in 2150?

                How much are orangutans worth…not only to today’s humans, but for tens or hundreds of thousands of generations into the future?

                Given the process of corporate “discounting” of future costs and benefits, how much exactly would they pay to avoid the utter annihilation of the planet in the year 4000? (Hint, it’s a fraction of a penny…one red cent, and they would balk).

                The “market” does not care about the future. I work in R&D, which is the most future-oriented element of a corporation, and still most of what we focus on is about two years forward. We have vague plans for the next decade, and a few even more vague wild-ass guesses about “megatrends” for the next century. That’s all of the concern we have for anything or anything beyond the next few quarters. Do you really think we are going to do what is best for our twenty-great-grandchildren with that methodology?

                1. You’re such a hack, Chad. “There are a lot of things that I could respond to, but I’ll pick this one”? I see, this is your way of conceding defeat without outright admitting it. You can’t respond to any of my refutations of your economic fallacies without resorting to progressive hyperbole, so instead you’re going to pretend I never made them to begin with. chad goodthink bellyfeel doublethinker; doubleplus good, comrade.

                  Now, as far as I can tell, this article is pretty much old news, and chances are no one is going to read this response; I have my doubts that even you will. But I feel that since I’ve already invested two and a half pages of my time picking apart your brand of progressivism, I owe it to the people of Reason and myself to smash this final economic fallacy into several tiny pieces.

                  “How expensive would oil be if our great-great-grand children could bid on it, with the intent of simply leaving it in the ground until they could pull it out in 2150?”

                  Well Chad, when demand exceeds supply prices are bid up, which allows more suppliers with higher minimum selling rates to enter the market; eventually, demand will equal supply, and the market will be cleared. What this has anything to do with a lack of concern for future generations is beyond me.

                  “How much are orangutans worth…not only to today’s humans, but for tens or hundreds of thousands of generations into the future?”

                  I don’t know Chad, and you can’t possibly know either, for two reasons: (1) Value is entirely subjective, so the value of an orangutan will vary from person to person, and (2) You cannot see the future, nor can you possibly know where each individual on the entire face of the earth places the orangutan on their value scale.

                  “Given the process of corporate ‘discounting’ of future costs and benefits, how much exactly would they pay to avoid the utter annihilation of the planet in the year 4000? (Hint, it’s a fraction of a penny…one red cent, and they would balk).”

                  The entire idea entrepreneurship is based upon the process of evaluating future costs and benefits. Individuals invest money and/or resources in producing goods in the hopes that either (1) the direct use value of the good will be worth more to them in the future than the money/resources used to make said good are worth to them now, or (2) the exchange value of the good will be worth more to them in the future than the money/resources used to make said good are worth to them now. Individuals, by investing in production, are hoping to make a psychic profit (i.e. they feel that their standard of living is now higher than it was before); the psychic loss is all the other ways the money/resources could’ve been put to use.

                  For example, lets say that General Motors buys 5,000 tons of steel, which it plans to use to make 10,000 cars (the amount of steel and cars is really insignificant in this example. The psychic loss is (1) the countless other ways the money used to purchase the steel could’ve been put to use and (2) the countless other ways the steel used to create the automobiles could’ve been put to use. General Motors hopes that when the cars finished being produced (i.e. in the future), the exchange value of the cars will result in a net increase in psychic revenue (the net increase in psychic revenue may simply balance the net loss in psychic revenue, which means that making the cars for General Motors was a zero-sum game).

                  “The “market” does not care about the future. I work in R&D, which is the most future-oriented element of a corporation, and still most of what we focus on is about two years forward. We have vague plans for the next decade, and a few even more vague wild-ass guesses about ‘megatrends’ for the next century. That’s all of the concern we have for anything or anything beyond the next few quarters. Do you really think we are going to do what is best for our twenty-great-grandchildren with that methodology?”

                  If your company fails to successfully evaluate expected consumer demand in the future, then it will suffer a net loss in psychic revenue, and may be forced to close up shop. In a free market, only entrepreneurs that succeed in evaluating consumer demand in the future are rewarded with continued business.

                  And on the subject of pollution, please read my response to the externalities economic fallacy.

                  1. Hi, Tncm,

                    The much simpler response to Chad is: since when does the government care about anything beyond the next election?

                    To provide a specific example, if the government cared about *current* generations, much less future ones, we’d be fixing Social Security right now (or, even better, transitioning away from it.) If the government cared about future generations in the ghetto, we’d come up with policies that actually encouraged people to work (hint: infinite, unlimited welfare is not one of those.) Etc.

                    Now it is true that a free society needs a lot of other institutions besides the free market. You need some people to do things which don’t necessarily make a profit. However, society has plenty of ways of doing such things besides the government, and when property rights and freedom of action are protected, the likelihood of being able to sustain and fund such organizations over the long term is a lot greater. Not to mention that private efforts are generally a lot more nimble and subtle than the government is.

                    1. Very true, David Perry. While I’m a fence-sitter on the minarchit/anarcho-capitalist debate, it’s clear that those in government are concerned only with themselves.

    2. 1) Producing something with borrowed money, that will have to be paid back with interest, so he starts out in the hole, medium-to-long-term-wise.

      The government’s cost of borrowing is practically zero, and most of things we would be buying have solid returns on investment.

      1. most of things we would be buying have solid returns on investment

        Citation needed.

  20. I’ve been reading this guy for a while, and he dates the start of our problems earlier: http://greatdepression2006.blogspot.com/
    An interesting blog, one that I think backs up what I have been reading here. Furthermore, he paints a pretty bleak picture in terms of fiat currency.

  21. I guess those Keynesians go to the same place with all the “libertarians” who voted for a Democratic congress and for Obama: a series of stupid rationalizations and unpersuasive justifications. Because no intellectual ever admits a mistake.

  22. I hope the President realizes this BEFORE we end up like Greece.

    1. What do you mean BEFORE?

  23. Well, I am as conservative as they come, but even I believe that the govt should very rarely use its vast powers to borrow to address panic liquidation scenarios.

    It is funny – most of the stuff we tried didn’t work at all (cash for clunkers, mortgage mods, toxic asset purchases, 0% interest rates); however, the much maligned TARP program actually had a shot at 1) producing a positive return for taxpayers, and 2) re-liquifyeing the banks.

    It is only when we used TARP to bail at the UAW and Goldman Sachs thru the AIG fiasco that it was perverted. Which proves you can’t give a big pot of money to Congress to play with.

  24. Even Keynes rejected what most of his current disciples consider Keynesianism. Having said that, the major reason the “stimulus” has done so little to help is because Comrades Obama, Pelosi, and Reid spent the money on political cronies (which is always part of government spending) who were engaged in non-stimulative endeavors. They would have gotten more bang for their buck if they had spent it on building bridges (even to nowhere), rather than giving it to public employees and paying for scientific research. I love science, but when you spend a million dollars on three researchers and a troop of monkeys, I have to say you could have done more stimulus with that money. Of course remember when Obama was lecturing on economics: “Of course it’s a spending bill. That’s what stimulus is – it’s spending money.” There’s more to it than that tovarish.

  25. Quick, savor the irony of people digging up septuagenarian economic theory and retaining the title “progressive”!

    Unfortunately, too much of the electorate still believes markets are operated centrally, by levers, instead of through millions of independent transactions the government can’t ? and shouldn’t ? control.

    See you in the dole queue.

  26. keynesians are economic luddites.

    they have so many examples to pick from in europe, which are so much closer to the precipice, yet they mine the piles of manure, looking for flecks of gold.

    Their observance to keynes is tantamount to relgious zealotry. Tell them that the ideas they have held for so long, are so far from the truth and they act as if one is denying the existence of god, only in this case the empirical evidence of the religion’s failure is evident for all to see, except them.

  27. Hey, the next line from Socialists &
    Marxists is “they didn’t go far enough.” There must be some people who still have money and it belongs to the
    govt. These people are greedy for you money. The first steps in a Communist takeover is the destruction of the middle class. We’re well on our way.

  28. http://i.dailymail.co.uk/i/pix…..06×543.jpg

    I LOVE MADONNA I LOVE MADONNA I LIVE MADONNA

  29. Keynesians are smelly.

    MADONNA RULEZ

  30. F, please unignore me. I’ll be good; I promise.

  31. BMO (Bank of Montreal) countered myths about stimulus spending in the US and Canada…”stimulus hasn’t really been tried yet…US public sector spending and investment has barely grown in the past year.” Public sector spending includes government at all levels, not just Federal.

  32. I will need to go look at the Fama work. I have been wondering for quite some time why nobody ever talks about what effect $4 gas had on the economy. 2007-2008 the economy was struggling with overextended private credit, then boom gas goes to $4 and everybody feels it from consumer down through the supply chain. Then unexpectantly the economy goes, or goes deeper, into recession.

  33. Obamanomics was never about the economy. It was about ideology. The economy was simply the vehicle used.

  34. As a general rule, if you headline an article “Obvious Failure of Stimulus Becomes Obvious Even To Economists” it might be useful to cite some Keynesian economists who have actually changed their minds. Your links go to Forbes magazine and Josef Joffe of the Hoover institution.

    The standard Keynesian view at the time of the stimulus was “better than nothing, but not nearly enough”, and the leading Keynesians are now saying “We told you so”.

  35. A followup: “Even public radio” turns out to mean “Tyler Cowen, interviewed on public radio”. Cowen’s a good economists, but scarcely a repentant Keynesian.

  36. Do you think there will ever be a Libertarian or independent president or will it always be someone from one of the two major parties?

  37. people want to live in a progressive and positive country

  38. This is good news. Sorman lays out the beginnings of an important reappraisal.

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