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During this era of Obama, we've begun to see the re-emergence of Keynesian economics to the spotlight (if it ever went away in the first place). With another jobs bill being proposed and possibly another stimulus, it seems that the White House has found the solution to our woes. The problem? Those "solutions" have been tried and ended up in failure.
Japan, like the US, experienced an economic boom in the mid to late 1980s. At its peak, the Nikki stock market actually overtook the US stock market in value. Housing had huge value, despite the fact that Japan total only represented 3% of the Earth's land mass. Everything was skyrocketing until it suddenly collapsed and the Japanese economy went into a recession.
So what's the issue? Well, according to the Keynesians, the problem was the Bank of Japan not cutting interest rates fast enough. So, that's what they did, they cut rates down to near 0. Over the years, Japan passed a series of stimulus programs aimed at public works and subsidies to businesses. If I remember correctly, they passed a total of 10 stimulus programs. However, their efforts were naught. Instead, Japan got handed a huge load of debt and an economy that was desperately trying to self-correct.
So, what was the real problem? The problem was the 1980s boom was merely artificial, and the expansion of the monetary base along with the lowering of interest rates created a false sense of growth. Then, when the economy went down, the government impeded any attempts of a recovery. The market lost and Japan lost out as a result.
The Austrian theory of the business cycle is more accurately a theory of an unsustainable boom than a theory of a depression (Garrison 2001, p. 120). Japan's experience in the late 1980s is what Austrian theory describes as an unsustainable boom that must collapse. The recession or depression that follows an artificial boom is not something to avoid but is essential to the alignment of consumer time preferences and the structure of production. According to Austrian theory, the late 1980s boom was artificial, caused by the Bank of Japan's expansionary monetary policy. The 1985 discount-rate reduction began the central bank-induced boom. Following this reduction, the Bank of Japan expanded the money stock by an average of 10.5 percent per year from 1986 until 1990 (International Financial Statistics Yearbook 2001).5 While this action would not concern other schools of thought, because of price-level stability at the time, Austrian theory identifies monetary expansion as the problem. "The market process set in motion by credit expansion does not depend in any essential way on there being a change in the general level of prices" (Garrison 2001, p. 71).
So how does this relate to us? Well, our situation went under very similar circumstances. We had an explosion in the housing sector that was fueled by interest rates being cut to very low levels in 2004. When it finally crashed, our government (under Bush and Obama) responded with the similar types of stimuluses and bailouts, along with a huge monetary expansion. If history does indeed repeat itself, we could be in for a long ride with this recession.
It is hard to get enthused about a thread regarding Japan's recession or an analysis of Keynesian economic theory when the discussion is based upon an article that in the very first paragraphs completely misstates Keynes postulation of the cause of downward shifts in demand. For example.
In Keynesian macroeconomic theory, business cycle fluctuations are caused by aggregate demand collapsing. Consumption is regarded as relatively stable, so the weakening in aggregate demand is due to the declining investment.
Consumption cannot by definition be considered stable if demand collapses.
As for Keynesian responses to Japan's fiscal crisis, well if you assume that sum total of the Japanese response was to interject purely Keynesian prescriptions or even Keynesian prescriptions done well... one would be terribly out of line with the facts.
The depression of 1920 was WORSE than the Great Depression in terms of unemployment and GDP slowdown, yet we got out of it in 18 months.
Once again...
All deflationary cycles, be they recessions or depression do not spring from the same structural sources, so the prescription is not nor should it be the same, something that even Sir John Maynard Keynes would agree with, so to argue that one set of interventions is appropriate for another is a facile argument and underlies the prescribers basic economic illiteracy.
The depression of 1920 was WORSE than the Great Depression in terms of unemployment and GDP slowdown, yet we got out of it in 18 months.
One of the fabled predictions by Keynesian economists after WWII ended was that 1946 would be an extremely terrible year since the government was no longer involved in "stimulating" the economy. They made all kinds of predictions and warnings about how the sky would fall if we didn't do something. Well, as it turns out, that doom and gloom prediction never came, even though a lot of the government spending and wartime controls were repealed. The market easily absorbed the labor force and allowed wages to adjust.
Quote:
Consumption cannot by definition be considered stable if demand collapses.
The next paragraph states:
Consumption is regarded as relatively stable, so the weakening in aggregate demand is due to the declining investment. Keynes did not precisely explain why investment collapsed; instead he attributed it to "animal spirits" in the business community. If the 1980s asset bubble is ignored, and Japan's stock market is viewed between 1989 and 1992, a massive withdrawal of confidence occurred in the business community and investment collapsed, causing the Nikkei index to fall more than 60 percent. Because the investment decline is not attributed to something specific in Keynesian theory, the theory is difficult to refute. Nevertheless, in Japan, there has been a recession that has not corrected itself following a drop in investment.
So in general, the Keynesian theory regards it as stable until something happens on the investment side. Why does it happen? The theory isn't too specific on that other than by some speculation.
Quote:
As for Keynesian responses to Japan's fiscal crisis, well if you assume that sum total of the Japanese response was to interject purely Keynesian prescriptions or even Keynesian prescriptions done well... one would be terribly out of line with the facts.
How is it not? To Keynes, it didn't matter if you told people to bury bottles filled with money and then have people dig them out again, it was still stimulus the same. If Keynesian economics has to be "done right" because its methodology didn't work the first time, then that already exposes some serious holes in its ideology.
A perfect example in today's time period is our war spending. Keynesian economists regarded war spending as a type of economic stimulus. By all regards, we should have an extremely overheated economy thanks to the deficit spending. But as it turns out, it doesn't correlate to that at all.
And yet, the graph that you've provided shows that the "upturn" begins as early as April 2009. As I've stated in another post, economists usually regard changes in macroeconomic policy as having a two year lag (as it should be, this isn't the Soviet Union's five year planning). So in one way, TPM is crediting Bush and the previous Congress for the recovery.
Another thing to point out is that if you're going to credit Obama for the recovery, you should also credit the Democratic Congress that was seated in 07 for the recession. But again, we know that isn't true. As I've stated above, the recession was caused by bad policies at the Federal Reserve along with the government's mismanagement of the housing sector. In fact, I'm sure if you found such a chart for the UK or another industrialized country, it would look very similar.
To me, this chart is seriously misleading. Sure, it's certainly good news that we're not bleeding jobs, but we have a long way to get those jobs back. Right now, SGS is still estimating 20% unemployment.
As we've seen with Japan, plugging in stimulus after stimulus doesn't work. I found a more detailed list here:
A lot of those programs look very similar to what Obama has outlined that needs to be spent on. If you're looking for a quick recovery, I'm afraid that you won't find one. Much like how your nose runs in order to discharge germs, an economy enters into a recession because bad assets need to liquidated. Impeding or preventing that correction from occurring makes the recovery much slower (if at all) and that's how you end up with events like the Great Depression.
keynesian economics never failed-- neither usa nor japan ever practiced it. we have been practicing reaganomics-- which surpplanted keynesian economics -reaganomics = "debt is meaningless".
No mention of credit default swaps, predatory lending, hows that?
Credit default swaps are a type of insurance against the bond market. The problem isn't with the CDS, it's that companies like AIG bet on the wrong side of the market and were rewarded with a nice bailout. The free market doesn't tend to favor huge corporate behemoths that make bad decisions unless the government interferes with that process.
Please explain what "predatory lending" is. Last time I checked, a gun wasn't held to your head that required you to sign any kind of loan.
Last edited by swirling_vortex; 02-09-2010 at 09:46 AM..
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