Keynes

Immortal Keynes?

Anyone who has been watching President Obama's response to the Great Recession will realize that policymakers have learned little since the 1930s.

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r2hox/Flickr

Whatever you may think of Keynesian economics, you have to give it credit for one thing: its staying power. You can't watch a news program without hearing pundits analyze economic conditions in orthodox Keynesian terms, even if they don't realize that's what they're doing. One TV personality says that the rejection of Keynes indicates a disbelief in all science! What accounts for this staying power?

I'd have said it's because Keynesianism gives intellectual cover for what politicians would want to do anyway: borrow, spend, and create money. They did these things before Lord Keynes published his The General Theory of Employment, Interest, and Money in 1936, and they wanted to continue doing those things even when trouble came of it. So it was convenient that an eminent Briton furnished them a—I almost said "clear," but the General Theory was never called that—theoretical justification.

One of my favorite economists, Lawrence H. White of George Mason University, offers a different reason for this staying power in his instructive 2012 book The Clash of Economic Ideas: The Great Policy Debates and Experiments of the Last Hundred Yearsnamely, that Keynes's alleged solution to the Great Depression offered hope, apparently unlike its alternatives.

Many observers have credited the professional success of the new Keynesian doctrine to the optimism it offered, the promise that something could be done to speed recovery from the Great Depression. [Keynes biographer Robert] Skidelsky has commented that Keynes "gave people hope that unemployment could be cured" without abandoning a free society (in contrast to the path taken by Russia, Italy, or Germany), "and that was the great appeal of The General Theory for many people, including many of the young economists." John Kenneth Galbraith reminisced that, returning to Harvard after studying under Keynes in England, "There was this breath of hope and optimism, and I came back from Cambridge to find a whole group of people here who had also readThe General Theory."

One may point out that the Keynesian "cure" did entail some serious abandonment of freedom—Keynes even called for the "socialization of investment," which means that politicians and their court economists would make the crucial decisions about what is produced.

White also notes that "Milton Friedman, looking back in a 1996 interview, essentially agreed [that the alternatives to Keynesianism promised only a better distant future]. Academic economists had flocked to Keynes because he offered a faster way out of the depression, as contrasted to the 'gloomy' prescription of [F.A.] Hayek and [Lionel] Robbins that we must wait for the economy to self-correct."

What did Hayek and Robbins (and Ludwig von Mises) call for? White writes:

Hayek's and Robbins's contrasting policy recommendation, to let output and employment recover on their own as bankruptcies and layoffs released workers and machines to find more sustainable employments, was regarded by many as a counsel of despair.

Of course, Keynes made his name by rejecting the established understanding, which began with the classical economists (if not earlier) and was further developed by the Austrians, that—when governments give them the chance—ailing economies fix themselves and resume their beneficial equilibrating processes. That is, left to their own devices, people adjust their behavior and restore the market's coordinating powers, overcoming the previous disruption.

Note that the concern was not with what would put the economy on a long-term sustainable path, but rather with what would give the short-term appearance of improvement. It was regarded as obstructionist to warn that the measures intended to produce that appearance would themselves bring trouble in the future. Anyone who has been watching President Obama's response to the Great Recession will realize that policymakers have learned little since the 1930s. But they are not very good at producing even the appearance of good times, are they?

A related aspect of the Keynesian response to the Great Depression—this also carries on to the current day—is the stunning lack of interest in what causes hard times. Modern Keynesians such as Paul Krugman praise Keynes for not concerning himself with why the economy fell into depression in the first place. All that mattered was ending it. Krugman took the same position with respect to the 2008 recession. White quotes Krugman, who faulted economists who "believed that the crucial thing was to explain the economy's dynamics, to explain why booms are followed by busts."

IMF/Wikimedia

Krugman went on:

Instead, Keynes saw it as his job to explain why the economy sometimes operates far below full employment.… Rather than getting bogged down in an attempt to explain the dynamics of the business cycle—a subject that remains contentious to this day—Keynes focused on a question that could be answered. And that was also the question that most needed an answer: given that overall demand is depressed—never mind why—how can we create more employment?

Indeed, if you're trying to end mass unemployment, why would you want to get bogged down trying to understand what actually caused the mass unemployment? It's not as though the cause could be expected to shed light on the remedy.

"Hayek, by contrast objected exactly to the 'never mind why' approach," White continues in The Clash of Economic Ideas

He considered it an irresponsible search for a superficial fix: "I cannot help regarding the increasing concentration on short-run effects … not only as a serious and dangerous intellectual error, but as a betrayal of the main duty of the economist and a grave menace to our civilisation."

Hayek, Robbins, and Mises, in contrast to Keynes, could explain the initial downturn in terms of the malinvestment induced by the central bank's creation of money and its low-interest-rate policies during the 1920s. If you believe that explanation is correct, you'd want to see the mistaken investments liquidated so that ever-scarce resources could be realigned according to consumer demand and time preferences (the intensity of preferences for goods sooner rather than later). And you'd want the harmful government policies that set the boom-bust cycle in motion to end.

But Keynes did not see production as a multistage process through time (although he did in earlier writing) and did not believe that interest rates balance saving and investment. In fact, according to Keynes, saving is bad because it reduces the demand for goods and thus creates unemployment.

Much of White's chapter shows that Keynes casually cast aside the long-established understanding of self-generating market processes. Among the highlights is a clear explanation of Jean-Baptiste Say's law of markets, which Keynes had to misstate (as "supply creates its own demand") in order to refute. White shows that Keynes was not the first economist to reject the idea that when people are left free, their activities create orderly processes that serve individual and social well-being. White also shows that the body of knowledge discovered by early 19th-century economists, particularly in England and France, refuted Keynes long before he came on the scene.

This article originally appeared at the Future of Freedom Foundation. 

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78 responses to “Immortal Keynes?

  1. Maybe I could write A General Theory on Driving and explain that the fastest way to end a head-on collision is to turn into the collision and floor it.

    1. In a sense you can sum up these General Theories thusly:

      “Fuck it.”

    2. I wrote my remark below without reading the other comments, so I’ll write here that A General Theory of Driving would be that everyone should tailgate.

      1. With a knife blade mounted at the center of the steering wheel.

  2. Note that the concern was not with what would put the economy on a long-term sustainable path, but rather with what would give the short-term appearance of improvement.

    Government is just the name we give the can we all choose to kick down the road together.

    1. That’s a great line. Yours? I ask for purposes of attribution when I quote the shit out of it later today.

      1. As far as I know it’s mine. Obviously a bastardization of “government is the name we give the things we choose to do together.”

    2. Nice.

    3. Who is this “we,” Kemosabe?

      1. You and me, stupid.

    4. So, maybe ‘to can’ means to kick a can. And maybe there should have been a comma. And maybe their motto was: “Yes, we can!”

    5. Nice. Also:

      Government is just the name we give the force we use to compel each other to do things.

      1. One would think these would make a great meme.

        1. Really.

          Government is just a name we give expensive fuck-ups that we do together.

  3. I’d have said it’s because Keynesianism gives intellectual cover for what politicians would want to do anyway: borrow, spend, and create money.

    Oh dear; I would have agreed with Sheldon.

    And I’ve got Mary Stack stalking my blog again.

      1. Click his name.

        1. No, I meant the link to Mary stalking.

          I went to his blog and there aren’t any comments.

          1. The “Anonymous” comment to yesterday’s post on Queen Victoria is still there:

            Anonymous said…

            NARCISSISTS COMMENT NIGHTMARE!
            https://reason.com/archives/201…..nt_4532513
            OH, THE HUMANITY!!

            There’s another comment, presumably from the same Anonymous, to the previous post.

            Mary has posted links to her Youtube videos in the past, as well, although under the Kizone Kaprow name or something like that. I’m just assuming it’s her because nobody else from here has bothered to post gratuitously nasty comments. [No, this isn’t a request for all of you to start doing so! ;-)]

  4. My Macroeconomics Professor was a Keynesian. To this day I can’t understand how she could say things like “Governments don’t have to worry about defecits” with a straight face.

    1. Because she is impervious to logic and reason?

    2. My macroeconomics professor was this guy

      http://youtu.be/0qq84IhZxRM

      Watch at your own risk.

    3. Because women can’t balance a checkbook?

      /ducks and runs in a serpentine pattern

    4. Aren’t they all?

  5. I’d have said it’s because Keynesianism gives intellectual cover for what politicians would want to do anyway: borrow, spend, and create money.

    1. We must do something.
    2. This is something.
    3. Therefore we must do this.

    1. That is one of my Top 10 Things That Explain Politics.

  6. As long as our economy is functioning reasonable well as compared to all the other basket cases we’ll continue along the Keynesian path until we’re so FUBAR the whole thing comes undone. I don’t know if that’s a good thing for not.

    The Financial Times found some significant errors in how Thomas Piketty presented his data:

    The central theme of Prof Piketty’s work is that wealth inequalities are heading back up to levels last seen before the first world war. The investigation undercuts this claim, indicating there is little evidence in Prof Piketty’s original sources to bear out the thesis that an increasing share of total wealth is held by the richest few.

    http://www.ft.com/intl/cms/s/2…..z32jOyZ400

  7. Well it’s pretty clearly. Keynesian economics satisfies the innate desire to DO SOMETHING!!!

    1. Ah, a “mugged by reality” article – those are always fun!

    2. EU polls are redundant – Czech ex-president Klaus after voting:

      Klaus said he participated in the elections “with great misgivings” and that he did not read the parties? manifestos.

      He said the low turnout [which ranges between 10 and 15 percent for now] testifies to that more and more people realise that the attempt to centralise and artificially manage Europe form one place is a mistake.

  8. Before the Deluge – Otto Friedrich
    Chapter 7 – A Kind of Madness, pp 120-121

    A man recounting his university years

    ” “When I was in college, back in the 1940’s, I went through a phase of wearing strange clothes, “……My mother tried to humor me by giving me my father’s Waltham watch, which hadn’t run for years but fitted nicely into my waistcoat pocket, and then my father tried to help by turning over his father’s old German watch chain, which consisted of a string of little iron plaques, with one word on each plaque saying, ‘Gold for defense, Iron for honor’. You see, his parents had turned all of their gold over to the German government during the First World War, including my Grandfather’s gold watch chain, and this is what they got in exchange. And this exchange – some scrap metal and a few words in exchange for their gold – is the story of a whole generation of the German middle class.”

    1. cont –

      The middle class had worked and saved, and had put it’s savings into gold. Gold, thought the middle class, would survive all the typhoons of war and revolution. When the typhoons came, the Kaiser’s wartime ministers were too timorous – or perhaps too middle class – to simply seize the gold they needed. Or perhaps they also believed in the mythology of the hoarded gold, inviolable, a Nibelungen treasure. Since they did need this treasure, however, they ‘borrowed’ it, giving in return paper notes ( and iron watch chains ) . “By a continuing process of inflation,” as Keynes said, “governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens……The process engages all of the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose.”

      1. Essentially Keynsians, as opposed to old fashioned confiscation at gunpoint, are picking the people’s pockets while whispering sweet nothings in their ears.

        Thievery all the same.

        1. No worries.

          Bitcoin will rape the Keynsians in the butt.

  9. Of course, Keynes also said that during boom times, governments should cut down on spending and borrowing, and run surpluses, to avoid an inflationary spiral that would lead ultimately to a crash. Funny how that part of Keynesian theory is forgotten.

        1. Yep. The other half of the theory which is always disregarded.

    1. You know, if we had tried it just once in the last 80 years, I might be inclined to take Keynes theory more seriously.

  10. Academic economists had flocked to Keynes because he offered a faster way out of the depression, as contrasted to the ‘gloomy’ prescription of [F.A.] Hayek and [Lionel] Robbins that we must wait for the economy to self-correct.”

    So Keynesianism is an economic theory that sells itself like a get-rich-quick scheme?

    Maybe that’s the case. But I think that the staying power of Keynesianism has to do with the arrogance of economists, envious of the (apparent) power over nature that the hard sciences allowed, making gods (again, apparently) out of the natural scientists. Keynesianism offered a path to share in the same glory to all these prideful people. Even the clear evidence that Keynesianism did not work and that, in fact, Hayek’s and Robbins’ prescriptions worked faster than the myriad government interventions, did not faze these true believers in their own greatness one bit.

    1. In a free market there is place for, not to mention notoriety, for people like Paul Krugman.

      They only get Nobel prizes and lucrative university chairs in in a Keynesian alternative universe.

    2. Wow! Just wow! You used “faze” in the correct manner, instead of “phase”.

  11. Learned little? Wouldn’t nothing be a lot more accurate?

    Well, maybe not. They certainly have learned how to dominate the national conversation, so that pro-government-spending groupthink and selection/confirmation bias reign supreme.

  12. Basically it’s the principle of “DO SOMETHING!!!!”

  13. Keynesian economics (London School) has 1001 unproven ways for politicians (God forgive their black-hearted dictatorial impulses) to control the economic state and thus the populace. Austrian economics (Hayek, von Mises, Rothbard, Friedman) actually studies the effects of past folly and failure (the seminal work is entitled “Human Action”) and by that method removes the impetus for major pork harvests by insisting that individual choices are the path to economic growth.

    Since graft and pork are the way of the politician and the Austrian School limits those opportunities, of course the London School is all that is discussed by politicians and their Sycophants.

  14. So true…

    “A little learning is a dangerous thing.
    Drink deep, or taste not the Pierian Spring;
    There shallow draughts intoxicate the brain,
    and drinking largely sobers us again.”

    People in or ‘near’ government always, always think they ‘know’ economics despite never having spent an hour in an actual economics classroom.

    Yes, Keynes was WRONG. His model is flatly incorrect. Sorry. We have other models though. Models that, surprise, actually work correctly.

    So, the magic words are Ramsey, Solow, Tobin, and Sidrowski. Four ‘different’ models that agree with each other and actually work correctly from the ground up.

    Ramsey and Solow abstract away money and use different assumptions and math to come to the same conclusions. Tobin and Sidrowski are Ramsey and Solow with money added back in. They all work. They all come to the same conclusions.

    Keynes? Nothing but the go to model for frustrated socialists.

  15. And that was also the question that most needed an answer: given that overall demand is depressed?never mind why?how can we create more employment?

    One of the advantages of being a non-economist listening to economists chatter is that it’s pretty clear that the entire profession is bogged down by jargon that has lost touch with corresponding reality.

    The concepts of “supply” and “demand” are helpful to symbolizing how human beings operate within a system of trade, but it seems like those who read the literature for too long reify and then separate the terms, which seems to be the main problem with post-Keynes economic thought. It’s clear that saying that supply creates demand–which Say never said, as Richman points out–is a false statement. Instead, supply is demand; these abstract terms indicate that one person’s production is someone else’s consumption even in the aggregate. The concept is simple, but the jargon-laden explanations in academic literature are not.

    We’ve had a few discussions that veered into psychology lately, and it looks to me like economics has a particularly bad case of the same problem that has afflicted the psych disciplines since the DSM came onto the scene. Intelligent people develop these abstract models for complicated phenomena, and through the process of endless debate and argument, they begin to mistake the model–itself a symbol–for the reality of human action and behavior.

    1. *Which is to say that when an economist says something like “overall demand is depressed,” I take that as an exceptionally weird formulation. Demand *can’t* be depressed, as so long as there is desirable stuff to be had and people to have it, they will want as much of it as they can get. They might not want it at a price that’s profitable for the stuff’s producer, but that obviously doesn’t mean that people don’t want the stuff at all.

      You can justify that by intuition or by Skinnerian positive reinforcement & the laws of behaviorism, but the point is that people want to get their hands on stuff, and it’s the existence or non-existence of the stuff itself rather than our “animal spirits” that allow or prevent its possession. And when you cut through the reams of economic jargon and approach the topic of human action from a deductive understanding based on how human beings actually behave, you can understand just how thoroughly befuddled by language Keynesian economists really are.

      1. What they mean is that stuff (land, labor, capital, other goods) are being saved that could be used sooner. People are saving their effort, keeping lots vacant, holding on to cash, etc. because they anticipate its future worth to be greater than its current worth, because either their needs will be greater then or circumstances will have changed to allow them to make a killing. Keynesians think that the aggregate is smarter than the individual regarding judgment on that point.

        1. They also discount the future.

  16. The article is bogus:

    Number 2|5.25.14 @ 11:25AM|#
    “Of course, Keynes also said that during boom times, governments should cut down on spending and borrowing, and run surpluses, to avoid an inflationary spiral that would lead ultimately to a crash. Funny how that part of Keynesian theory is forgotten.”

    Correct.
    What we are seeing is not Keynesian any more than Stalin gave the world Socialism, and for exactly the same reasons: They both require humans to act in ways that humans do not.
    For Keynesianism to function, a government would have to cut spending in good times and ‘rebalance; the books by reducing taxes. It has not and will not happen, as it requires a government bureaucracy to act in ways inimical to its existence.
    Similarly, Socialism will never work, as it requires individuals to act in ways inimical to their existence.
    We never had Keynesianism as we never had Socialism; we have a debased form of socialism, spiced with enough free-shit and remaining awards to keep the populations gruntled.

    1. For Keynesianism to function, a government would have to cut spending in good times and ‘rebalance; the books by reducing taxes. It has not and will not happen, as it requires a government bureaucracy to act in ways inimical to its existence.

      An elegant way
      Of putting it; My man-crush
      For Sevo grows great

  17. “Keynesian Economics” is just another term for Legalized Larceny –
    stealing from unborn Americans to enrich our lives today
    and then expecting those future Americans to pay for our spending binges.

    You can’t do this in your personal life without going to prison after declaring bankruptcy –

    the same fate awaits America – punishment and bankruptcy……..

    1. “Keynesian Economics” is just another term for Legalized Larceny –
      stealing from unborn Americans to enrich our lives today

      I think more accurate metaphor would be what investors call ‘trading on margin.’ You borrow lots of money to maximize gains, but only if you’re making smart investments – otherwise you’re maximizing doom.

      History of regimes is a litany of such leveraged bets by a sovereign. Prince Henry the Navigator undoubtedly borrowed money to finance his sailing schemes – turned out to be a pretty smart investment. Bomb craters from Vietnam to Iraq with windmills everywhere in between? Not so much.

  18. I’d say the main reason for the popularity of Keynsianism is its plausibility.

    Keynesianism in a nutshell is the belief that frequently there is too much potential capital tied up in savings & specul’n for the overall good of the economy?that the economy could produce more value (yes, subjective value, if you were wondering) in the long run if there were some way to prevent savings & specul’n from being too great. This belief is plausible because there is evidence in some cases of timidity on the part of potential investors?for example, when people are unsure of how to deploy capital because they don’t know which of a set of potential technologies will become dominant, or which kind of development in a geographic area will determine that area’s character?wherein it appears that if some outside force were to push the action in some, maybe any, direction, everyone would benefit.

    Also, people may be overly risk-averse, and hence hedge too much. For instance, it’s been said that if everyone in a line of traffic tailgated, the traffic would move faster.

    1. Except for that knife mounted in the center of the steering wheel. That being said, “In the long run, we are all dead”, or “On a long enough timeline, everyone’s life expectancy drops to zero”. I don’t fear death, I just regret missing what happens after I die.

  19. Since WW II the US has used Keynesian fiscal stimulus until we have fully recovered to combat every recession except this one. For instance, we set post WW II records for spending as a % of GDP in FY’s 1981, 1982 and 1983 and had fully recovered the 2.7 million lost private sector jobs by the end of 1983.

    On the other hand, while we set a new spending record in FY 2009, George Bush’s last budget year, starting in FY 2010 we cut spending. We didn’t just cut spending as a % of GDP–we cut spending in nominal dollars for the first time since FY 1965.

    If you are looking for an explanation for the slow recovery, look to the LACK of Keynesian fiscal stimulus until we had fully recovered.

    1. …”starting in FY 2010 we cut spending.”…

      If you’re going to base your argument on a lie, you ought to do it a bit less obviously.
      No, we did not “cut spending”, liar.

      1. Federal spending:
        FY 2009 = $3.518 trillion (24.4% of GDP)
        FY 2010 = $3.457 trillion (23.5% of GDP)

        http://www.cbo.gov/publication/44716

        You could also find this data at your source at http://www.usgovernmentdebt.us…..111mcn_F0f near the bottom of the page

        1. $3.518 trillion minus
          $3.457 trillion equals

          a $61 billion cut in spending in FY 2010.

          1. 100+ trillion in future liabilities – 61 billion = No one cares.

            Seriously dude. Learn opportunity cost.

            http://mises.org/daily/5593/Th…..ow-Fallacy

            1. I’ll be dead. I really don’t give a fuck. Same with AGW.

    2. This is the Keynsian alternative universe these delusional statist ideologues have dragged us into.

      If Keynes’s policies were so effective why did it take until 1946 or 1946 to end the depression that was just about over in 1932 until the New Deal policies “stimulated” it back to life again?

      1. Not sure how negative 12.9% real GDP growth in 1932 is your idea of the end of the depression. Real GDP in 1932 was only 75% of real GDP in 1929.

        Real GDP Growth
        1930 = -8.5%
        1931 = -6.4%
        1932 = -12.9%
        1933 = -1.3%
        1934 = 10.8%
        1935 = 8.9%
        1936 = 12.9%
        1937 = 5.1%
        1938 = -3.3%
        1939 = 8.0%
        1940 = 8.8%
        1941 = 17.7%
        1942 = 18.9%
        1943 = 17.0%
        1944 = 8.0%
        1945 = -1.0%
        1946 = -11.6%

        The negative growth anomaly in 1938 correlates with cutting the deficit from $2.2 billion in FY 1937 to $0.09 billion in FY 1938. The federal deficit went back up to $2.8 billion in FY 1939 and we went back to positive GDP growth.

        Likewise the federal deficit was cut from $47.6 billion in FY 1945 to $15.9 billion in FY 1946.

        1. The problem with your little theory, amateur, is that we have even more recessions now under Keynesian economics. Your “spending” comes at the opportunity cost of prolonging the bust cycle. Take a look at Christy Romer’s paper on the subject for more proof:

          (The number on the right is output loss, aka “percentage-point months of industrial production lost until previous peak”)
          Year-to-Output-loss
          1920 = 662.7
          1923 = 188.2
          1927 = 67.9
          1929 = 3120.0
          1937 = 579.8
          1939 = 64.7
          1948 = 117.4
          1953 = 122.5
          1957 = 140.1
          1960 = 93.0
          1969 = 98.0
          1973 = 248.1
          1980 = 73.1
          1981 = 187.4
          1990 = 76.4
          Current Correction Period = ~455

          Once you average this out, the pre-Depression “gold standard” (not really a true gold standard btw) era was still better, from a business cycle perspective. In the late 19th century and early 20th century, prior to the depression, the average was 136.4

          Like the other commentators said, you’re just making excuses for fascism and making arbitrary calculations of utility. People like to save money and not waste it all on garbage, stop bothering them.

          http://emlab.berkeley.edu/~cromer/JEP_Spring99.pdf

          1. Credit goes to the funny Murphy-Krugman debate I read about here:

            http://mises.org/daily/6055/Ch…..th-Krugman

          2. @hk – Let’s test your first statement: “we have even more recessions now under Keynesian economics.”

            In the 78 years since 1936 we have had 13 recessions lasting a total of 143 months, or one recession every 6 years and an average of 1.8 months of recession per year.

            In the 78 years prior to 1936 we had 18 recessions lasting a total of 407 months, or one recession every 4.3 years and an average of 5.2 months of recession per year.

            Calculated from the data at http://www.nber.org/cycles/cyclesmain.html

            Looks like you started out with a false statement. We have fewer recessions now and they don’t last as long as they did before 1936.

            1. ERRRRR, sorry you’re wrong. Romer directly confronts the NBER’s incompetent analysis.


              In an earlier paper, I showed that the NBER’s dating procedures have not been entirely consistent over time (Romer, 1994). In particular, while the post-World War II dates of peaks and troughs have been derived from aggregate indicators in levels, the prewar and interwar dates were derived, at least partially, from detrended
              series. Detrending a data series that is generally upward sloping, like real output, tends to produce a series that peaks earlier and troughs later than the same series in levels. This is true because growth typically slows down as output reaches its highest point and accelerates slowly from its nadir, causing the deviations from trend to be highest before the peak in levels and lowest after the trough in levels. As a result, the earlier procedure of using detrended data is likely to make pre-World War II expansions look shorter and pre-World War II recessions look longer than they would if postwar procedures had been used.” Continued:

              1. “For this reason, I derived a new series of pre-World War II peaks and troughs. To do this, I created an algorithm based on Burns and Mitchell’s guidelines that, when applied to monthly postwar data on industrial production, yielded business cycle reference dates that were nearly identical to those of the NBER. I then applied the same algorithm to the adjusted Miron-Romer industrial production index for 1885?1918 and the Federal Reserve index for 1919?1940 described above. When the new reference dates were significantly different from those of the NBER, I went back to the contemporaneous business press to check that the new dates were at least as plausible as the NBER’s. The new prewar and interwar dates of peaks and troughs, along with the postwar NBER dates, are given in Table 3.8”

                “Table 4 shows the length of time from peak to trough (recessions) and from trough to next peak (expansions) for each peak. It also reports the averages for the prewar, interwar, and postwar eras.

                The first finding is that recessions have not become noticeably shorter over time. The average length of recessions is actually one month longer in the post-World War II era than in the pre-World War I era.

                1. Continued:

                  “By combining the dates of recessions with the monthly data on industrial production described above, it is possible to analyze the severity of downturns in different eras. The output loss in a recession is a sensible measure of severity that takes into account both the size of the peak-to-trough decline and the duration ofthe fall. It can be calculated as the sum of the percentage shortfall in industrial production from the peak in every month that output is below the peak.10 This measure shows the percentage-point-months of industrial production lost in a recession. For example, a recession in which output was 10 percent below peak for each of six months would have an output loss of 60 percentage-point-months. Table 5 shows the output loss for each recession and the average for various eras.”

                  So as you can see, you are merely FG% to my Regularized Adjusted advanced stat. Not only does Romer measure peak-to-trough but also the precise severity of the output loss and magnitude of the recession. Mindlessly inflating back to pre-recession levels is not the way to determine the magnitude of a recession, you don’t understand the way a stock market works. This is why measuring actual output lost, adjusting for prices, is the sound way to look at this debate.

                  The past 100 years shows an increase in the business cycle severity compared to the end of the 20th century. Simplistic NBER calculations of “recovery” serve no one here.

                  1. Furthermore, the NBER measured 1937’s panic at only “13” months, when it was a significantly stronger recession than the latest one. And it was certainly not almost comparable to 1948.

                    And with regards to the “contraction” of the late 19th century, the “long depression” of that century was not a depression at all if one measures production output. You know, actual living standards and affordability of products? In a real capitalist society prices are supposed to fall, and if the stock market “contracts” it means nothing if your lifestyle improves. Real product per capita was excellent during various “contractions”.

                    In contrast, recessions in the modern era are real recessions that decrease wealth, since prices falling in a managed economy are completely different.

          3. Except for the “New iPhone” or “new Windows” scams.

    3. Lack of a free market is more plausible.

  20. “Keynesianism gives intellectual cover for what politicians would want to do anyway: borrow, spend, and create money.” In fact this is pretty much what the Hive’s “academic scribblers” have done throughout the 20th and now into the 21st Century: provide intellectual respectability for the State’s rapaciousness.

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