Old Project Avalon Forum (ARCHIVE) - View Single Post - WHY OBAMA'S STIMULUS PLAN WILL FAIL ... And A Better Alternative

peaceandlove · 01-25-2009, 03:19 AM

Don't look to Keynes
Michael Costa | November 14, 2008

Source: campaignforliberty.com

Article from: The Australian Business with the Wall Street Journal
http://www.theaustralian.news.com.au...-30538,00.html

MOST economists would agree with the proposition that there is no such thing as a free lunch. All activities incur costs in terms of resources that have to be paid for directly or in terms of other opportunities forgone. This proposition is a fundamental insight of modern economics.

But although most economists would acknowledge the theoretical validity of this proposition, not all believe it to be true in practice.

Traditional Keynesian macro-economics is the theoretical refuge of economists who continue to believe economic magic can occur by the government waving its fiscal wand.

This year's Nobel laureate in economics, Paul Krugman, is in this category. Many were surprised when he won this year's prize. Krugman has become the pin-up boy of the US liberal Left for his attacks on the Bush administration and his advocacy of greater government involvement in the economy. To be fair to Krugman, his early work on strategic trade theory in particular is as worthy of recognition as the work of some other recent prizewinners. Whether there should be a Nobel prize for an imprecise social science such as economics is another question.

In a recent column for The New York Times, Krugman resurrects several old Keynesian chestnuts to argue that consumers have capitulated to bad economic times by pulling in their belts and adjusting their consumption patterns to tighter economic circumstances.

He claims that individual virtue has become public vice and "attempts by consumers to do the right thing by saving more can leave everybody worse off".

This, of course, is the classic Keynesian paradox of thrift, which requires corrective action from monetary authorities. Interest rates need to be cut and the economy stimulated to avoid a recession.

Krugman goes on to argue that the US in particular also faces the other classic Keynesian problem, the liquidity trap. Monetary policy alone cannot solve the problems. Further reductions in interest rates are unlikely to have a positive effect on the economy. He writes that "the financial crisis has made (Federal Reserve) policy largely irrelevant for much of the private sector" and "efforts to bail out the financial system, even if they work, won't do more than slightly mitigate the problem".

The solution? You guessed it: "a major fiscal stimulus" that should take "the form of actual government spending rather than rebate cheques that consumers probably wouldn't spend". Now, Krugman is not the only prominent economist advocating a fiscal stimulus for the US economy. Martin Feldstein and Lawrence Summers also have argued for a fiscal stimulus.

Article Continues Here: http://www.theaustralian.news.com.au...-30538,00.html

Source: http://www.realityzone.com/currentperiod.html

01-25-2009, 03:19 AM	#6
peaceandlove Avalon Senior Member Join Date: Sep 2008 Location: Turtle Island Posts: 2,776	Re: WHY OBAMA'S STIMULUS PLAN WILL FAIL ... And A Better Alternative Don't look to Keynes Michael Costa \| November 14, 2008 Source: campaignforliberty.com Article from: The Australian Business with the Wall Street Journal http://www.theaustralian.news.com.au...-30538,00.html MOST economists would agree with the proposition that there is no such thing as a free lunch. All activities incur costs in terms of resources that have to be paid for directly or in terms of other opportunities forgone. This proposition is a fundamental insight of modern economics. But although most economists would acknowledge the theoretical validity of this proposition, not all believe it to be true in practice. Traditional Keynesian macro-economics is the theoretical refuge of economists who continue to believe economic magic can occur by the government waving its fiscal wand. This year's Nobel laureate in economics, Paul Krugman, is in this category. Many were surprised when he won this year's prize. Krugman has become the pin-up boy of the US liberal Left for his attacks on the Bush administration and his advocacy of greater government involvement in the economy. To be fair to Krugman, his early work on strategic trade theory in particular is as worthy of recognition as the work of some other recent prizewinners. Whether there should be a Nobel prize for an imprecise social science such as economics is another question. In a recent column for The New York Times, Krugman resurrects several old Keynesian chestnuts to argue that consumers have capitulated to bad economic times by pulling in their belts and adjusting their consumption patterns to tighter economic circumstances. He claims that individual virtue has become public vice and "attempts by consumers to do the right thing by saving more can leave everybody worse off". This, of course, is the classic Keynesian paradox of thrift, which requires corrective action from monetary authorities. Interest rates need to be cut and the economy stimulated to avoid a recession. Krugman goes on to argue that the US in particular also faces the other classic Keynesian problem, the liquidity trap. Monetary policy alone cannot solve the problems. Further reductions in interest rates are unlikely to have a positive effect on the economy. He writes that "the financial crisis has made (Federal Reserve) policy largely irrelevant for much of the private sector" and "efforts to bail out the financial system, even if they work, won't do more than slightly mitigate the problem". The solution? You guessed it: "a major fiscal stimulus" that should take "the form of actual government spending rather than rebate cheques that consumers probably wouldn't spend". Now, Krugman is not the only prominent economist advocating a fiscal stimulus for the US economy. Martin Feldstein and Lawrence Summers also have argued for a fiscal stimulus. Article Continues Here: http://www.theaustralian.news.com.au...-30538,00.html Source: http://www.realityzone.com/currentperiod.html Last edited by peaceandlove; 02-03-2009 at 12:26 AM.