Failings of Keynesians

The unwillingness to act, stimulate now by investing in infrastructure, education, research and development, while developing a long term plan to get our debt problem under control, has less to do with economics than communication.

Our prime communicator, the President, has failed on this issue. Further, Keynesian economists, those who believe in a stimulus now and a long term debt reduction plan, have been unable to gain credibility on the need to stimulate because they spend too little time acknowledging the need to harness the expansion of debt in outlying years.

One loses credibility If the general public and those in Congress “feel” we must gain control of spiraling debt caused partially by an aging population and yet 90% of the message they hear from Keynesian’s is we need to stimulate now while giving little time to our need and ability to solve the debt issue over a longer term horizon.

As a college professor one can have total command of a given subject, but if one lacks the ability to transfer that wisdom to his students he fails as a teacher. The President and the Keynesians have failed in this quest to educate Congress and the general public.

Federal Reserve Quantitative Easing

I support the Fed’s actions to buy large quantities of mortgage bonds, and potentially other assets, until the job market improves substantially. However, there will be consequences in the long term. When buying short-term treasuries, the theory is as the economy improves the Federal Reserve, to fight inflation, will pull money out of the economy by not extending their purchases of new securities.

This will not be as easy with the purchase of mortgage backed securities which have an average life of twelve years. An improving economy will result in interest rates rising and thus the value of mortgage backed securities decreasing. If they pull money out of the economy to hold inflation in check the Federal Reserve will incur significant losses that will need to be covered by the tax payer.

Don’t blame the Federal Reserve for this needless loss. Blame the Republicans in Congress for not shouldering their responsibility to stimulate the economy by making sound investments in infrastructure that would create jobs. Also blame Congress and the White House for not going after banks for retribution for causing our near depression. This retribution would save the tax payers billions of dollars. Goldman’s contributions to our politicians is paying off. More

George W. and Stimulus

Below is an excerpt from an article concerning a book that has its forward written by George W. Bush called The 4% Solution: Unleashing the Economic Growth America Needs.

“While the causes of the 2008 crisis will be debated by scholars for decades to come, we can all agree that excessive risk-taking by financial institutions, irresponsible decisions by lenders and borrowers, and market-distorting government policies all played a role,” Mr. Bush wrote in the foreword. “The question now is which policies we should adopt to fix the problems, speed the recovery, and lay the foundation for another long, steady expansion.”…

“…At the same time, while warning of the consequences of spiraling federal debt, the book cautions against deficit reduction as an immediate goal, saying tax increases and spending cuts in the short term could strangle growth. “Reducing the debt is critical,” Mr. Glassman wrote in the book’s introduction, “but growth comes first.”…”
Enlisting Economists, Bush Adds Book to Fiscal Debate,  New York Times, July 15, 2012

This needs to be required reading for those on the right. George W. Bush is endorsing a book that says growth comes first before cutting debt and reducing cost. We need a plan to reduce debt; however, the front end of the plan is to spur growth and not cut debt. In other words, stimulate. More

Stimulate, Stimulate Wisely!

We need to stimulate more now; however we must do it wisely. Today is not like the Great Depression. We stimulated then because we had no choice.

  1. As war was approaching we had no choice but to prepare for it. We would have had no future if we hadn’t.
  2. After the war we were the last industrialized nation standing and the result was our economy boomed with no competition as the rest of the world was rebuilding and we were doing the building.

Today, the answer to the question of whether we should stimulate is less clear. Further, there is much more competition than after World War II and therefore, we cannot expect today’s recovery to be as quick as the forties and fifties of the last century. This does not mean we should’t try on three fronts.

  1. Implement a stimulus package that focuses on investing in things that will help us compete in the future, like transportation infrastructure and upgrading the internet.
  2. Address the debt problem. This would be a confidence builder. The American public watched as our leaders could not reach agreement on a long-term plan to solve the debt problem. Our citizenry are now doubting whether it will ever be fixed. This “confidence boogeyman” must be put to rest
  3. We must do more concerning the mortgage crisis and the precipitous drop in home prices. As home prices fell, so did the net worth of a large portion of our population. This should be addressed using very little of the tax payers money. More: Retribution

Confidence Boogeyman!

A form of the “confidence fairy” is needed in the United States; confidence that we have the room to do further spending without making our debt problem so huge that we will not be able to recover from it.

The situation today is different from the 1930’s through the end of World War II. Back then we were literally fighting for our lives and after the war we were the last country standing. Today the world is much more economically competitive and therefore we are not alone in wanting to meet the world’s demand for goods and services.

In 1933 the total U.S. debt, combined government, consumer and business debt, to GDP peaked at close to 300%. Today it is 360%.

Keynesian economists and the present administration have done a poor job of “selling” the idea to the public that we can handle a surge in stimulus and in fact it is the proper thing to do.

In the meantime, Paul Ryan and his ban of out of control Republican crazies have been beating the drum of lowering taxes as the way to spur growth. The President needs to be bold and step out on the plank of stimulus, investing for the present and future, and explain the situation to the voter. Instead, he is on a sabbatical called campaign 2012.

He needs to understand that making growth a part of his campaign is a winner. Instead of hiding from the question of whether we are better off than four years ago he should explain that indeed we are. Four years ago we had an economic bomb brewing; we just did not recognize it. Today we suffer from the “confidence boogeyman” and the President needs to put him to rest.

The boogeyman was created when the citizenry of this country watched our government unable to agree to a plan to get our debt problems under control last summer. Is it any wonder they have doubts whether our politicians can muster the will to do what is necessary?

Below is a recent interview with Paul Krugman, Nobel Prize winner in Economics. I agree with much of what he is saying except we need to get rid of the boogeyman now.