Government spending
Capitalism was brilliant but could go seriously wrong
Pirelli
Government spending
There are times when we must spend money
Critics (Hayek)
Contributions
“Keynes had solved the economic problems”
1970s high inflation
Born in 1883
Don’t beggar your neighbor — The Economic Consequences of the Peace
Chaos of the German economy
Cf. Eurocrisis
The Great Depression
Herd psychology
Slump for years
People lose their jobs
Governments should spend money they haven’t got
Normal times
Low animal spirits
You need more demand in the economy
The situation in America terrible
Roosevelt — New Deal
Multiplier
But it was the World War that ended the recession
2008 — government preaching the blessings of the free market for years
If individuals stop spending money
2009 — global Keynesian rescue plan
Austerity
The UK is voluntarily putting itself through austerity
We need institutions
1944, Bretton Woods
Currency controls
US
Germany doesn’t want to do this today
Neoliberalism from the 1970s
The cost of government intervention
Only a minimal state is necessary
All of these would be “state intervention” in one society but not in another
Eg.
Advantages of non-competitive markets
Institutional perspective
The state only intervenes when the market fails
But national markets were created by the state
For example
United States
All successful economic development
The state is still creating markets
Neoliberals want to depoliticize the economy
But there are lots of different human motivations
Property rights
States involved in wages in many ways
“Market rationality” only exists in relation to the existing institutions
Cannot understand the market without understanding institutions
Banks, pension funds, legal provisions for legitimate exchange
Institutions that regulate the exchange itself
We’ve been going back and forth for a century
I want to steer markets,
I want them set free
There’s a boom and bust cycle and good reason to fear it
Blame low interest rates.
No… it’s the animal spirits
John Maynard Keynes, wrote the book on modern macro
The man you need when the economy’s off track,
Depression, recession now your question’s in session
Have a seat and I’ll school you in one simple lesson
BOOM, 1929 the big crash
We didn’t bounce back—economy’s in the trash
Persistent unemployment, the result of sticky wages
Waiting for recovery? Seriously? That’s outrageous!
I had a real plan any fool can understand
The advice, real simple—boost aggregate demand!
C, I, G, all together gets to Y
Make sure the total’s growing, watch the economy fly
We’ve been going back and forth for a century
I want to steer markets,
I want them set free
There’s a boom and bust cycle and good reason to fear it
Blame low interest rates.
No… it’s the animal spirits
You see it’s all about spending, hear the register cha-ching
Circular flow, the dough is everything
So if that flow is getting low, doesn’t matter the reason
We need more government spending, now it’s stimulus season
So forget about saving, get it straight out of your head
Like I said, in the long run—we’re all dead
Savings is destruction, that’s the paradox of thrift
Don’t keep money in your pocket, or that growth will never lift…
because…
Business is driven by the animal spirits
The bull and the bear, and there’s reason to fear its
Effects on capital investment, income and growth
That’s why the state should fill the gap with stimulus both…
The monetary and the fiscal, they’re equally correct
Public works, digging ditches, war has the same effect
Even a broken window helps the glass man have some wealth
The multiplier driving higher the economy’s health
And if the Central Bank’s interest rate policy tanks
A liquidity trap, that new money’s stuck in the banks!
Deficits could be the cure, you been looking for
Let the spending soar, now that you know the score
My General Theory’s made quite an impression
I transformed the econ profession
You know me, modesty, still I’m taking a bow
Say it loud, say it proud, we’re all Keynesians now
We’ve been goin’ back n forth for a century
I want to steer markets,
I want them set free
There’s a boom and bust cycle and good reason to fear it
I made my case, Freddie H
Listen up, Can you hear it?
Hayek sings:
I’ll begin in broad strokes, just like my friend Keynes
His theory conceals the mechanics of change,
That simple equation, too much aggregation
Ignores human action and motivation
And yet it continues as a justification
For bailouts and payoffs by pols with machinations
You provide them with cover to sell us a free lunch
Then all that we’re left with is debt, and a bunch
If you’re living high on that cheap credit hog
Don’t look for cure from the hair of the dog
Real savings come first if you want to invest
The market coordinates time with interest
Your focus on spending is pushing on thread
In the long run, my friend, it’s your theory that’s dead
So sorry there, buddy, if that sounds like invective
Prepared to get schooled in my Austrian perspective
We’ve been going back and forth for a century
I want to steer markets,
I want them set free
There’s a boom and bust cycle and good reason to fear it
Blame low interest rates.
No… it’s the animal spirits
The place you should study isn’t the bust
It’s the boom that should make you feel leery, that’s the thrust
Of my theory, the capital structure is key.
Malinvestments wreck the economy
The boom gets started with an expansion of credit
The Fed sets rates low, are you starting to get it?
That new money is confused for real loanable funds
But it’s just inflation that’s driving the ones
Who invest in new projects like housing construction
The boom plants the seeds for its future destruction
The savings aren’t real, consumption’s up too
And the grasping for resources reveals there’s too few
So the boom turns to bust as the interest rates rise
With the costs of production, price signals were lies
The boom was a binge that’s a matter of fact
Now its devalued capital that makes up the slack.
Whether it’s the late twenties or two thousand and five
Booming bad investments, seems like they’d thrive
You must save to invest, don’t use the printing press
Or a bust will surely follow, an economy depressed
Your so-called “stimulus” will make things even worse
It’s just more of the same, more incentives perversed
And that credit crunch ain’t a liquidity trap
Just a broke banking system, I’m done, that’s a wrap.
We’ve been goin’ back n forth for a century
I want to steer markets,
I want them set free
There’s a boom and bust cycle and good reason to fear it
Blame low interest rates.
No it’s the animal spirits
Hayek Round Two.
Round 2.
0 Same economists.
Same beliefs.
New microphones.
New Mustaches.
Let’s go.
Let’s go.
Let’s go.
Here we are.
Peace out.
Great Recession.
Thanks to ME.
As you see.
We’re not in a depression.
Recovery.
Destiny.
If you follow my lesson.
More Keynes.
Here I come.
Line up for the procession.
We brought out the shovels and we’re still in a ditch.
And still digging.
Don’t you think it’s time for a switch from that hair of the dog.
Friend the party is over, the long run is here, it’s time to get sober.
Are you kidding?
My cure works perfectly fine.
Have a look.
The recession ended in ’09.
I deserve credit.
Things would have been worse.
All the estimates prove it.
I’ll go chapter and verse.
Econometricians, they’re ever too pious.
Are they doing real science or confirming their bias?
Their Keynesian models are tidy and neat.
But that top down approach is a fatal conceit.
We could have done better if we’d only spent more.
Too bad that only happens when there’s a world war.
You can carp all you want about stats and regression.
Do you deny that world war cut short the Depression?
Wow.
One data point and you’re jumping for joy.
The last time I checked wars only destroy.
There was no multiplier.
Consumption just shank as we used scarce resources for every new tank.
Pretty perverse to call that prosperity.
Ration meat.
Ration butter.
A life of austerity.
When that war spending ended, your friends cried disaster.
Yet the economy thrived and grew faster.
You too only see what you want to see.
The spending on war clearly goosed GDP.
Unemployment was over, almost down to zero.
That’s why I’
M the master.
That’s why I’
M the hero.
Creating employment is a straight forward craft when the nation’s at war and there’s a draft.
If every worker were staffed in the army and fleet we’d have full employment and nothing to eat.
Jobs are a means, not the end in themselves.
People work to live better, to put food on the shelves.
Real growth means production of what people demand.
That’s entrepreneurship, not your central plan.
My solution is simple and easy to handle.
It’s spending that matters.
Why’s that such a scandal.
Money sloshes through the pipes and the sluices.
Revitalizing the economy’s juices.
It’s just like an engine that’s stalled and gone dark.
To bring it to life we need a quick spark.
Spending the life blood that gets the flow going.
Were it goes doesn’t matter.
Just Get Spending Flowing.
You see slack in some sectors as a general glut.
But some sectors are health only some in a rut.
So spending’s not free, that’s the heart of the matter.
Too much is wasted as cronies get fatter.
The economy’s not a car.
There’s no engine to stall.
No experts can fix it.
There’s no “it” at all.
The economy is us.
Put away your wrenches, the economy is organic.
So what would YOU do to help those unemployed?
This is the question you seem to avoid.
When we’re in a mess, would you have us just wait, doing nothing until markets equilibrate?
I don’t wanna do nothing, there’s plenty to do.
The question I ponder is who plans for whom.
Do I plan for myself or I leave it to you.
I want plans by the many, not by the few.
Let’s not repeat what created our troubles.
I want real growth not a series of bubbles.
Stop bailing out losers, let prices work.
If we don’t try to steer them they won’t go berserk.
Come on are you kidding?
Don’t Wall Street gyrations challenge the world view of self regulation?
Even you must admit that lesson we’ve learned is more oversight is needed or else we’ll get burned.
Oversight?
The government’s long been in bed with those Wall Street execs and the firms that they’ve bled.
Capitalism is about profit and loss.
You bail out the losers there is no end to the cost.
The lesson I’ve learned is how little we know.
The world is complex, not some circular flow.
The economy is not a class you master in college, to think otherwise is the pretense of knowledge.
You’ve been on your high horse and you are off to the the races.
I look at the world on a case-by-case basis.
When people are suffering I roll up my sleeves and do what I can to cure our disease.
The future’s uncertain, our outlooks are frail.
That’s why markets are so prone to fail.
In a volatile world we need more discretion so state intervention can counter depression.
People aren’t chess men you move on a board at your whim, their dreams and desires ignored.
With political incentives, discretion’s a joke.
Those dials are twisting – just mirrors and smoke.
We need stable rules and real market prices so prosperity emerges and cuts short the crisis.
Give us a chance so we can discover the most valuable ways to serve one another.
FINAL REFRAIN Which way should we choose? more bottom up or more top down the fight continues… Keynes and Hayek’s second round it’s time to weigh in… more from the top or from the ground …lets listen to the greats Keynes and Hayek throwing down
For example: