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HappySqurriel on 23 May 2010
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Akvod said:
HappySqurriel said:
Akvod said:

No... the concept that Keynesian uses as a pillar is sticky wages. Keyensianism isn't trying to restore confidence by raising income through stimulus. A stimulus is only a way to increase production and consumption, to ensure that busineeses ride the demand shock, continue to invest, continue to employ as much, etc. When people feel that the economy as a whole is stable and growing again, they will feel confident. They will feel their life time wages have increased again.

I think it's a good thing that there isn't huge growth. I'll rather have a growth that's close to the long term rate, so that when there's the next recession it'll be smaller and shorter. Being so anti-Keynesian, you should also be advocating contractionary policies during economic expansions... your question is irrelevant if you, like me, believe that the government doesn't need to worry about creating growth, just making sure economies get back to normal rates, and then simply prevent it from growing too much (which is easy, just tax, raise interest rates, etc)

The investment spending is, you and me agree, buying capital. We buy capital, to replace old ones, and in expectation of more demand. When there is a demand shock, the government simply steps in, for the consumer, and demands products. Liquidation and a reduction in production capicity, as well as unemployment, is minimized.

Because of this, consumer confidence will be regained faster, due to people feeling confident that the economy is growing and good. People then begin to spend more of their income. The government gradually lowers its own demand for products, while consumer increases their own. It's simply a trade off. By the end of it, if the government only demanded as much as the long term output, consumers will demand as much to get back to the long term output, and it'll be the same thing.

 

As for your last point... so you believe that if you simply let stuff go, consumer confidence will return, but with Keyensian policies, consumer confidence won't return within 20 years? O.o Yeah, liquidation of capital, jobs, crashing of financial institutes, freezing of credit, etc, sure will make us confident within 20 years...

I think you missed my point. If you are unemployed and I give you a job for a year digging ditches and then filling them in again what is the likelihood that you’re going to spend the excess money you earned on goods and services you truly don’t need? Being that you know that you’re going to be unemployed in a year I would suspect that you would probably save most of the money you didn’t require for necessary expenses. Even if you’re earning the exact same amount you were prior to the recession you’re going to be far more likely to save your money or pay down debt than to buy additional goods and services. When the year is over and you’re unemployed again the economic growth from the project is gone, there is no residual value from it, and since spending never recovered there are no new private sector jobs to go to; and you’re back at square one all over again, with the exception that the government spent a whole lot of money.

You don’t solve a problem with sticky prices by preventing the prices from falling by paying people to do meaningless work; and this is exactly what John Maynard Keynes advocated. The only way to improve consumer confidence long term, and to truly recover from an economic downturn, is for the private sector to recover and start producing stable full time positions at a rate faster than population growth.

 

Now, I don’t advocate for contractionary or expansionary policies by the government at anytime; and the only role the government has in the economy is in regulation and oversight designed to prevent dangerous behaviours from existing (or becoming wide spread). Taxes and spending should be very stable; and total government spending should be (roughly) 19% of the 5 year floating average of GDP, and taxes should be 20% of GDP. If bubbles are not forming from artificially low interest rates and government supported loose lending practices the economic downturn should not be significant enough to threaten the entire economy as a whole.

Such programs aren't really done for the sake of the ditch workers, but more for the coffee shops that they go to. If that makes sense. If it's come to the point that the government has to employ everybody, that simply means that the long term output has shifted leftwards already, and it is too late.

Hmmm, I'm not an expert on the Great Depression, but only learned the basic theory of discretionary policies. However, forgetting extreme cases like the great depression, I think it makes sense for there to be stimuluses and government spending when there's a recession that can't be solved by monetary policy.

I think it's too simple to say that bubbles, and moreover recessions, can be prevented like that. How did you come up with those percentages?

 

So, as a coffee shop owner you notice that a large portion of your customers work as ditch diggers and will only be employed for one year. Knowing full well that their project will be completed in a year and they won’t regain employment are you going to spend your excess income to expand your business or are you going to save it for when these new customers disappear?

Now, first off Monetary policy can not be used to fix problems in the economy it can only be used to create inflation and rob individuals of their savings. Besides that, if it wasn’t for inflationary monetary policies, lax regulation or government policies that support risk the market could not become so dangerously inflated that the economy would need government (or central bank) intervention to recover. Basically, if it wasn’t for the Federal Reserve giving away “Free” money, Fannie Mae and Freddie Mac buying garbage mortgages, and bakers being allowed to create overly complicated mortgage derivatives there is no way that the housing bubble could have ever inflated to the extent that it had.

Central Bank and Government intervention in the economy is the problem, not the solution.

 

 

Anyways, the tax rate comes from Hauser's Law which (basically) states that regardless of what the marginal tax rate is, the revenue collected by the government through taxation stays at (roughly) 19.5% of GDP.