Comments (18)

• Richie

  The Keynesians are well aware of their economic fallacies and falsehoods. They are not true economists. They are political hacks. Thus, they use their bullhorns in the media to stir up fear in the masses so they can reduce any opposition to the socialist takeover of the economy. Indeed, any governmental data cruncher/modeler (a.k.a. governmental "economist") must justify "deficit" spending. They know that most voters will not spend the time checking the facts. In addition, the government puppets in the media will not fact-check for them.

  Published: July 6, 2009 8:52 AM

• Richard

  I thought one counter-argument to the Keynesian theory of the 1937 recession was that the economy had become (unsustainably) dependent on government spending and that the fiscal tightening of that year was necessary to liquidate the government malinvestments.

  Published: July 6, 2009 9:42 AM

• Eric

  I don't know how many times we keep hearing this:

  "The recovery from the Depression is often described as slow because America did not return to full employment until after the outbreak of the second world war." - Romer.

  So, let's turn this one around, draft everyone who's unemployed. How dare they pump up the unemployment statistics!
  

  Published: July 6, 2009 10:14 AM

• dewind

  It is somewhat baffling that these economists cannot dissect that government created speculative bubbles are wholly dependent on a continual flow of credit via low interest rates.

  There are no real market activities occurring in these bubbles to which they are doomed to collapse once the government is forced to liquidate its mal-investments.

  Of course, if they do not adjust and continue to print money they will be forced to destroy the currency. I suppose we would all be gainfully employed even though our real wages have been obliterated. Which at the point we are really just slaves that are given a lot of Monopoly money.

  But even that can only last so long; eventually labor will force wages up to in order to cope with higher prices. Businesses will be forced to trim their labor force and we'll have high inflation and unemployment.

  Enter poor welfare nanny state?

  Published: July 6, 2009 10:21 AM

• gilad

  I don't get it... if the New Deal was only second best to WW2 in reviving the economy, why should we settle for second best this time round?

  Published: July 6, 2009 11:32 AM

• BioTube

  Same reason we waited the first time: it takes time to prop up genocidal maniacs.

  Published: July 6, 2009 11:47 AM

• Daniel J. Fallon

  Professor Murphy, Romer is barbaric. Like Keynes, she realizes that his ideas are more suited for a total state. (Great choice by Obama). The following quotaton is from her article on the Great Depression she penned for Encyclopaedia Brittanica, no less. Notice how she matter-of-factly refers to Germany, omitting the "Nazi" qualifier, while subtly applauding economic fascism:

  “Fiscal policy was used more successfully in Germany and Japan. The German budget deficit as a percent of domestic product increased little early in the recovery, but grew substantially after 1934 as a result of spending on public works and rearmament. In Japan, government expenditures, particularly military spending, rose from 31 to 38 percent of domestic product between 1932 and 1934, resulting in substantial budget deficits. This fiscal stimulus, combined with substantial monetary expansion and an undervalued yen, returned the Japanese economy to full employment relatively quickly.”

  
  

  Published: July 6, 2009 12:17 PM

• Paul Marks

  We must also be careful to point out that the spending of World War II was NOT "good for the economy" although there were some part positive effects (such as war time inflation undermining the minimum wage law level).

  It was not till the post WWII period (the late 1940's period of the "do nothing Congress") that there was a real economic recovery.

  Published: July 6, 2009 12:34 PM

• Daniel J. Fallon

  Professor Murphy, Romer is barbaric. Like Keynes, she realizes that his ideas are more suited for a total state. (Great choice by Obama). The following quotaton is from her article on the Great Depression she penned for Encyclopaedia Brittanica, no less. Notice how she matter-of-factly refers to Germany, omitting the "Nazi" qualifier, while subtly applauding economic fascism:

  “Fiscal policy was used more successfully in Germany and Japan. The German budget deficit as a percent of domestic product increased little early in the recovery, but grew substantially after 1934 as a result of spending on public works and rearmament. In Japan, government expenditures, particularly military spending, rose from 31 to 38 percent of domestic product between 1932 and 1934, resulting in substantial budget deficits. This fiscal stimulus, combined with substantial monetary expansion and an undervalued yen, returned the Japanese economy to full employment relatively quickly.”

  
  

  Published: July 6, 2009 12:38 PM

• joebhed

  central government planner here

  Much ado about nothing here, really.

  Except, maybe the small truth that Hoover did many things, some that might be considered anti-Austrian in nature, that did help the country recover from the contraction and crash, for which he actually received little credit.

  I saw Krugman's article as being more about the fact that the nation's Governors have no choice but to shrink their activities because of their limited ability to deficit spend due to state bonding requirements, etc.

  While no fan of Romer's, I am confounded by the fact that the Austrians continue to fail to attack the underlying fractional-reserve debt-money system as the cause of the current financial chaos - heading for some SERIOUS hardships as Round 2 hits the street - and fail to state the obvious, that we need to abandon the private debt-money system, and move to a full-reserve banking system, if we are to restore any sanity to our financial structure.

  I see no significance to the niggling differences in current account deficits of the Democrats and Republicans; they mean NOTHING in discussing our economic crisis, and any hopes for the reforms necessary to move toward a more sound and stable economic future.

  We need monetary reform.
  Or we do this all again later.

  Published: July 6, 2009 3:08 PM

• End the Fed

  Keynesian Non-Economics is the broken window fallacy on a national scale. You want full employment? The government can help, by smashing everybody's windows. The jobs created during the rebuilding will "boost" the economy.

  Nothing boosts the economy except an increase in goods and services.

  Published: July 6, 2009 3:22 PM

• Franklin

  joebhed:
  "We need monetary reform.
  Or we do this all again later."

  Correct.
  But we will not obtain monetary reform.
  And we will, indeed, do this again later.

  Predicting Armageddon, the end of days, the implosion of the U.S. economy, is silly. I read it often on this site. There is enough innovation by those who contribute to this economy, enough creativity to mitigate (not eliminate) the hackery, such that eventually (within a year or two) the perception shall be an expansion of commerce, increase in employment, and upswing from the dark days of George Bush.

  Richie's comment nails the issue perfectly.

  Keynesians shall cite the activity as proof of deficit spending's success. It has worked for nearly a hundred years. And this political argument shall win yet again.

  Keynes' approach is not discredited because it serves the interest of the State, and seems to work. (I said, "seems".) It is much like the wizard waving his wand, predicting rain, day after day, during a 60 day drought. Eventually the rain comes. Thus, the wizard's magic was successful.

  Published: July 6, 2009 3:36 PM

• beneficii

  joebhed,

  "While no fan of Romer's, I am confounded by the fact that the Austrians continue to fail to attack the underlying fractional-reserve debt-money system as the cause of the current financial chaos - heading for some SERIOUS hardships as Round 2 hits the street - and fail to state the obvious, that we need to abandon the private debt-money system, and move to a full-reserve banking system, if we are to restore any sanity to our financial structure."

  Isn't this what Rothbard was talking about?

  Published: July 6, 2009 7:34 PM

• axiomata

  Daniel J. Fallon:

  Romer's acquiescence of totalitarian economic regimens is nothing new among Keynesians. In his forward to the 1936 German edition of his General Theory Keynes admits "[n]evertheless the theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state, than is the theory of the production and distribution of a given output produced under conditions of free competition and a large measure of laissez-faire."

  Published: July 6, 2009 8:31 PM

• Lucas M. Engelhardt

  joebhed,

  Actually, many Austrians (especially on this blog) whole-heartedly support 100% reserve banking. (For example, see my daily article from this fall - an article that is far from unique on this site.) Generally, those that don't wholeheartedly support 100% reserve banking agree that our current monetary system is nonsense - and the kind of nonsense that makes the "fraction" in the fractional reserve system far too low. Also, Austrians generally (I'm tempted to say "universally") blame the current crisis on the Fed - and therefore on our monetary system. (Murphy also has pieces along these lines - just look for them, and you'll find them.)

  So, worry not. Austrians are generally in your camp - and are not silent about it.

  Published: July 6, 2009 8:32 PM

• Daniel J. Fallon

  axiomata,

  That is exactly what I am referencing. Thanks for grabbing the actual quotation.

  Published: July 7, 2009 10:02 AM

• joebhed

  Both Beneficii, in mentioning Murray Rothbard, and Mr. Engelhardt, also bringing in Robert Murphy's writings here, advance our common sense of malady with the Federal Reserve banking system, and the need to resort to full-reserve banking.
  But we are on opposite paths, crossing at somewhat less than right angles.
  I see Rothbard's and Robert Murphy's writings limited to the failures of the Fed because it is part of a giant government-corporate trust that must be broken.
  While all agree on the soundness of full-reserve banking, I do understand that, for some reason, ALL seem to have missed a major difference between their writings and mine.

  My criticism is clearly the fallacy of the debt-money system - its uncscientific and unsustainable nature - we create only the principal amounts of loans in money creation and never create the money for the interest payment obligation, often doubling the principal repayment obligation, that is created at that same time.
  To me, THAT is the issue of the day.
  That is where the present system is the most vulnerable because we are experiencing the living proof of that unsustainability.
  I see that proof in this piece from Steven Lachance:
  http://www.financialsense.com/fsu/editorials/2005/1212b.html

  My major diference with Mises folks is I do not see this debt-money system as being the system of the government at all, but of the private bankers that own the Fed.

  Remember my criticism of the article here is the limit of its observations on Ms. Romer's opinions on what happened during '37 - '38.
  What's needed is a daily reminder that the debt-money system is broken.
  And then we can talk about what replaces this system.

  Published: July 9, 2009 8:43 AM

• Bob Roddis

  Romer does make one good point. Why raise taxes in a depression? Note the outrageous tax rates that began under Hoover in 1932 and continued into the future while creeping upward. Compare those rates to the major rate cuts in the 1920s:

  http://taxfoundation.org/taxdata/show/151.html

  There is simply no way to deny that what Hoover did was to enact the first unreconstructed Keynesian anti-slump prgram in US history. Spending in 1932 and 1933 was 250% of receipts:

  http://www.presidency.ucsb.edu/data/budget.php

  According to the Keynesians, in 1937 after EIGHT YEARS of depression, the "stimulated" economy was so pathetically weak that it immediately collapsed again into a new depression due a balanced budget. And this PROVES that Keynesianism works?

  Slashing spending and tax rates would have cured the depression. Check the slashing of spending by 2/3 following WWII on the budget chart, supra. That's what ended the depression, not WWII.

  Published: July 9, 2009 12:53 PM