Saturday, August 16, 2014

Problem with Keynesian Theory in Practice

Laurie knows me so well after these years of discussion, she knew I could not pass on 
MinnPost 3 Economic Stats.

Eric Posted a comment that I found interesting:
"The deficit was not the problem. The problem with focusing on the deficit it implies the deficit was a problem. It wasn't and isn't. The deficit is a symptom. Our problem was a recession, a financial crisis, a stimulus that was too small and too much directed to tax cuts, and then years of austerity when we needed the opposite. There's no reason at all the recovery needed to take this long. We learned hard lessons during the Great Depression, and then when it happened again, we ignored everything we learned. I guess the overwhelming evidence of history just didn't feel right."
So I replied with:
"Turn off the tap. I always liked this explanation. And "austerity", you must be kidding. Read the link.
Factcheck Obamas Spending Inferno or Not

And I can even understand turning up government spending temporarily while in the recession. The problem is that Democrats seem to always see that higher level as the new baseline, so they call any efforts to get back to a normal rate of expenditure a draconian heartless cut by the GOP. When those increases were to be temporary in the first place.

Remember all the gnashing of teeth when the GOP held firm on not increasing spending after the worst of the recession was over.

And if Obama was a real deficit hawk he would have pushed for un doing all of those "terrible Bush tax cuts". Instead he just stuck it to the well to do. That is one way in which I disagree with Conservatives. If higher taxes were good for them, we probably all should have gone back to those Clinton rates and eliminated the deficit."
As I said, I can imagine a situation where the government increases it's spending during times where the Private economy is slow. Preferably the Government would be carrying very little debt before the event, therefore it could borrow instead of raising taxes to increase Public spending through the recession. Then when the Private sector was booming again the Public sector would reduce it's spending and use the extra revenues to pay back the debt in preparation for the next recession.

The problem with this ideal situation is that Liberals always see the highest level of Public spending as the new bench mark. And any attempt to go back to the normal spending levels is called a cut. I mean Bush and Obama increased spending by a huge amount in response to the recession as they should, however now that it is time to go to back to normal spending, people are resistant.

And then in MN when the GOP did borrow when revenues were low, the Liberals thought it was absolutely terrible to make the departments and districts do this, even though they legally could.  They called it short term budget solutions, like that was a bad thing.

The recession was a short term situation to be survived.

So what did the DFL do when they got control, they jacked up taxes even though the state was pretty much out of the recession.  Thereby generating way more tax revenue than was required.  Which they promptly used to set a new all time high bench mark for MN government spending.

I may actually become a Keynesian if citizens actually came to understand that government budgets can go down as well as up without the world coming to an end.

37 comments:

Anonymous said...

Very well said John!!

The NumbersGuy

Anonymous said...

The increased spending is the result of an aging population. One way to slow the spending increase is to stop growing older. Is that an attractive solution for anyone? I think we should look for ways to reduce health care spending. But Republican opposition to any policy they would do that made health care cost cost cust politically impossible, while simultaneously complaining that health care costs are too high. So that leaves us with a political conundrum if you will. Republicans who complain costs are too high, oppose any attempt to reduce them, but then go on to worry about the debt, their ideological dysfunction brings about. Quite frankly, this conundrum is beyond my power to resolve. If Republicans to have a way out of the corner they have painted themselves into, I am all ears. But it has to mean something in policy terms. It can's be solved by employing metaphors. We have budget problems because we spend money on health care. You can't reduce expenditures by turning off a tap somewhere; you do it by denying care. Whose care do you want to deny?

==Hiram

Laurie said...

I agree with Hiram that the problem in the budget is healthcare.

John said...

You must be kidding... This is not all age related. The boomers are just starting to retire. And if medicare costs are higher than plan;
- raise the payroll tax rate appropriately
- delay the eligibility age appropriately

John said...

The reality is that we jacked up the fed budget with stimulus, extra welfare, extended unemployment benefits, etc, which was the right thing to do. Unfortrunately the addicts are just having a hard time with drawing from that government teat.

John said...

And the MN DFL admits that MN is doing great. Yet they decide to pass a huge bonding bill plus spending aanother~$200,000,000 in public spennding. Instead of giving the surplus back to us tax payers.

This had nothing to do with healthcare.

Anonymous said...

- raise the payroll tax rate appropriately
- delay the eligibility age appropriately

Neither measure would reduce the cost of health care spending. And health care spending is what's putting pressure on the economy. And it doesn't make a difference where that item appears on our books; whether we use the government to direct that money, or some other instrumentality like our churches. Bear in mind, it isn't the government's money that we are spending, it taxpayer money.

--Hiram

John said...

You are talking like health care money goes into a black hole.

The reality is that it provides millions and millions of good payimg American jobs.

And it provides great R&D funds, wealth creation and exports.

John said...

Hiram,
By the way, are you feeling okay? You just acknowledged "tax payer's" money....

Personal property is usually a concept you are resistant to.

Anonymous said...

"You are talking like health care money goes into a black hole.

"The reality is that it provides millions and millions of good paying American jobs."

Government spending doesn't go into a hole; it goes to provide millions of Americans with good paying jobs. Jobs that generate income on which taxes are paid.

--Hiram

jerrye92002 said...

Here's the problem: Government cannot spend one thin dime that it does not first extract out of the economy through taxes, borrowing against future taxes, or inflating the currency, the "cruelest tax of all." For Keynesian theory to work as its authors proposed, government would have to be either spending out of surplus revenues, or plucking $100 bills off the magic money tree in DC. The biggest problem with government budgets is that there is absolutely no upper limit on the amount of good that can be done with Other People's Money, and OPM is addictive to its users.

Anonymous said...

Government cannot spend one thin dime that it does not first extract out of the economy through taxes, borrowing against future taxes,

But that's true of any spending. Money we spend is extracted out of the economy elsewhere.

--Hiram

Laurie said...

it seems that "During the past 40 years, federal spending for everything other than major health care programs, Social Security, and net interest has averaged 11 percent of gross domestic product (GDP). Such spending declined from 12 percent of GDP in 1973 to 8 percent in the late 1990s and early 2000s, stayed close to 10 percent through most of the first decade of the 2000s, and then spiked to 14 percent in 2009, before receding to 11 percent of GDP in 2012.

CBO projects that if current laws generally continued without change, other federal noninterest spending would drop from a total of 11.3 percent of GDP in 2012 to 7.6 percent in 2023 and then to 7.1 percent in 2038. "

Federal Spending for Everything Other Than Major Health Care Programs, Social Security, and Net Interest

and here is one more link. The third slide shows I am right (again): (about health care costs straining the budget)

Federal Health Care Spending: Why Is It Growing? What Could Be Done About It?

John said...

"Why Is Federal Health Care Spending Growing?

Federal health care spending is growing because of a combination of the aging of the population, an expansion of federal subsidies for health insurance, and rising health care costs per person."

What Could Be Done About the Growth of Federal Health Care Spending?

There are a number of policy options, but they all have disadvantages as well as advantages.
Reducing the number of people eligible for federal health care subsidies or the size of subsidies would be a straightforward way to reduce federal spending—but it also would cause the affected people to bear higher costs, to lose health insurance in some cases, and to receive less health care in some cases.

Restructuring federal payments in ways designed to reduce health care costs per person holds the promise of encouraging greater efficiency in the delivery of care or better choices about the use of care—but it also would present risks of the same shifting of costs and loss of access to insurance and care."

John said...

Laurie,
It seems we agree somewhat.
Gov't Spend

Though I think the 2008/2009 jump was more severe than can be explained by medical cost or aging increases.

And you did notice root cause number 2 above. "an expansion of federal subsidies for health insurance" Of course, the voluntary expansion of subsidies and medicaid increased costs.

John said...

So we know that people are living longer, healthcare is becoming more expensive and people are getting older.

We have known this for a long time, so why have we not increased the payroll tax rate to cover these higher costs?

This is not rocket science, insurance companies do it every day. If the expected benefit payout is likely to increase, the premiums charged to the recipients of those benefits need to increase.

Or something needs to happen to reduce the expected benefit payout. In this case it could mean raising the eligibility age.

These programs were never intended to fund people living to the ages we currently live to.

John said...

Hiram,
I liked Jerry's answer.

Government expenditures are chosen for political reasons whether people would spend their own money on it or not.

Everyone I know when faced with a life threatening condition will spend their own money on medical treatment.

Where as this is not necessarily the case for bike path bridges, light rail, military, roads, schools, etc, etc, etc.

Whether it comes via the government, private insurance, charity or our own pockets, most of us will happily spend the money to stay alive.

John said...

Thank heavens that expenditure helps us, future patients, healthcare workers, insurance workers, government revenues, and American knowledge/exports.

Anonymous said...



"Government expenditures are chosen for political reasons whether people would spend their own money on it or not."

Why people choose to spend money in the way they do, make the choices they make doesn't matter very much in economic terms. To say we make choice for political reasons is pretty much the same as saying we make the choices we like to make, pretty much the same basis on which we choose which big screen TV we decide to buy.

Lots of things we buy aren't necessary, but we choose to buy them anyway.

==Hiram

John said...

The difference is as you said, it is other people's money.

"Bear in mind, it isn't the government's money that we are spending, it taxpayer money."

Good decisions are hard to make if one just "has the money" and did not have to work for it.

jerrye92002 said...

"Why people choose to spend money in the way they do, make the choices they make doesn't matter very much in economic terms."

Actually, it makes all the difference in the world. When /you/ spend, you are spending /your/ money on what /you/ want, in the amount /you/ are willing to pay. When government spends your money, it is on what THEY want, and they don't care how much of your money they spend on it. This leads to ridiculous situations like government health care spending, which has driven health care costs throughout the market (since government controlled over half of it, even BEFORE Obamacare) to about TWICE what they would be if left to the free market alone. It's also why Keynesian economics sometimes falls short, because what the politicians choose to "buy" is not what individuals would buy if given that choice, meaning money is actually diverted from where it will do the most "good."

Sean said...

Raising the eligibility age fore Medicare doesn't save money. Per the CBO, raising the eligibility age to 67 would save the federal government about $3 billion a year, while adding $5 billion a year in costs for everyone else. Not a good deal.

Anonymous said...


The difference is as you said, it is other people's money.

No, tax dollars are my money which I have entrusted to my agents, the government to spend. This happens in the private sector as well. When a corporation in which I own stock in spends money, it's my money they are spending. I may not always agree with the choices they make, but it's my money they are choosing to spend.

==Hiram

Anonymous said...

When government spends your money, it is on what THEY want, and they don't care how much of your money they spend on it.

Really? Does the government want to be protected from terrorism? Or is it us, who want to be protected from terrorism? Does the government need health care? Or is it us who needs health care? When the government builds an interstate highway, is it because the government needs a road on which it can transport the White House?

Does the government age and retire? Does the government needs Social Security to pay for groceries? Ever seen the government take up residence in a nursing home?

==Hiram

Anonymous said...

By the way, the Keynsian analysis of economic finance doesn't have a lot to do with the specific choices we make with our money. Economics generally doesn't tell you, or is concerned with why we make choices. It deals with the consequences of the choices we make for other reasons. An economist as an economist, for example can't tell you why a picture painted by Van Gogh sells for more than a picture painted by me, but once those choices are made, in this case on aesthetic grounds, an economist could analyze the consequences of those choices.

Something people are confused about is that while we have a right to have views, we don't have a right to have them prevail. I was talking with a guy just the other day who seemed to be under the impression that just because some political choices went against him, that his freedom was under attack, that being on the losing side of a political debate was the first step toward tyranny. That is simply not so.


--Hiram

John said...

We seem to have gotten off topic.

How can we get to the point where government spend increases during a recession and decreases once the good time are back?

As I mentioned, the MN DFL started taxing and spending in earnest once the good times were back. This does not bode well for when we run into the next recession.

Sean said...

"How can we get to the point where government spend increases during a recession and decreases once the good time are back?"

You're assuming that is the correct course to take.

Clearly, in good times, we expect spending on safety net programs to go down. But, it's not always correct to say that all government spending will go down.

In your original post, you endorsed things like the school shift. Well, that has to be repaid, which increases spending in the good times.

It's also true that the basic school funding formula has failed to keep up with inflation since the Ventura Administration. During the "good times" is when we should catch up on that funding.

So, I think you're oversimplifying the issue here.

John said...

Wiki Keynesian

"Keynesian economics advocates a mixed economy – predominantly private sector, but with a role for government intervention during recessions."

The school shift would have been paid back by now without the tax increases or the DFL in charge.

Please provide a source for this statement. "basic school funding formula has failed to keep up with inflation" I am curious what you are basing it on.

Sean said...

"The school shift would have been paid back by now without the tax increases or the DFL in charge."

Yes, but the effect of the shift is to temporarily cut spending in the "bad years" and temporarily increase spending in the "good years", which is the opposite effect from what you claim to desire.

Source for inflation claim: http://www.mn2020.org/issues-that-matter/education/a-decade-of-school-funding-cuts-reversed

John said...

MN2020 School Funding Fixed

John said...

MN2020 CPI vs IPD

John said...

"what you claim to desire"

I am not claiming to desire this, liberal economists like Paul Krugman and liberal folks like Eric are Keynesians.

That is why Eric makes statements like this...
"stimulus that was too small and too much directed to tax cuts, and then years of austerity when we needed the opposite"

They believe that the government should start spending like a drunken sailor when the economy starts to tank. Which will then jump start the economy.

The problem is they never seem to like going on the wagon after binging.

John said...

G2A And the Economists Say
G2A Economists

Jon Miners said...

As I mentioned, the MN DFL started taxing and spending in earnest once the good times were back

State finance is different. Minnesota, like most states, must balance it's budget. In the Pawlenty years, we did this with accounting tricks, basically Enron style shifting of debt off the state books. Now we have an honest budget.

In Keynesian terms, there isn't much difference between public and private spending. The dollar the government spends is exactly the same as the dollar the private sector spends. What can be different is the constraints on spending. State governments do have some ability to expand during a recession using money from targeted taxes, but this is highly limited. Locally, the decline in state government with the resulting loss of employment was one of the principle contributing factors in the recession. When large employers lay off workers, it hurts the economy, and it doesn't matter whether the employer is the state or in the private sector.

The federal government can print money so it has more flexibility to respond to economic crises.

--Hiram

Anonymous said...

The problem is they never seem to like going on the wagon after binging

Actually, this is not true. For example, after the stimulus binge, stimulus programs were not extended, pretty much bringing them to a halt. Going forward, it is going to be very difficult to maintain programs like Obamacare and Social Security where going on the wagon seems to be the default position of the government. With respect to what government spends money on, we are fighting cuts not expanding them.

--Hiram

Sean said...

"They believe that the government should start spending like a drunken sailor when the economy starts to tank"

I'm pretty sure Paul Krugman doesn't actually think that way. (Yes, he once made that wisecrack.) He's actually done some fairly extensive work on the subject of aggregate demand in large economies, if you'd bother to check.

John said...

Sean,
I read a fair amount of Krugman back when we were discussing different conflicting economic theories. Laurie is a fan of his.

Hiram,
Please clarify what you are saying here. You lost me.

"Going forward, it is going to be very difficult to maintain programs like Obamacare and Social Security where going on the wagon seems to be the default position of the government. With respect to what government spends money on, we are fighting cuts not expanding them."