Forum Post: In Defense of Keynes: Aggregate Demand, Pump Priming, & "Leakage"
Posted 11 years ago on Oct. 23, 2012, 7:34 p.m. EST by notaneoliberal
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AUGUST 2, 2009 BY: MIKE CHAPMAN;The central theme of Keynesian economics was that aggregate demand drives the economy. This has never been "discredited". To the contrary, it has not only been proven correct, it is taught in colleges and universities today. In stark contrast, the monetarist theories of Milton "disaster-capitalist" Friedman have been discredited. Also discredited, are the supply-side economics of Arthur Laffer—which were a thinly-veiled guise to reduce taxes on the rich. (In contrast to Laffer, some historic supply-side advocates, such as former Reagan appointee Paul Craig Roberts, do make valid economic points. In fact, most of Roberts' recent economics writings are right on target.)
It's sickening to hear Right-wingers label every economic policy as Keynesian, despite them actually being pseudo supply-side, "trickle-down" policies. Giving $24 trillion to the Wall Street Cosa Nostra — among the richest members of our society—is not Keynesian. It's "trickle-down" economics on steroids.
Equally annoying are media attacks on the relatively small $700 billion-worth of true Keynesian public spending— while hearing a proportionately little criticism of the $23.7 TRILLION of "trickle down" handouts to Wall Street welfare queens.
These continuing harangues about "Keynesianism" warrant further discussion.
The foundations of Keynesian macroeconomics are derived from simple common sense. (This author worked out the concept of aggregate demand independently on his own—years before even taking a Macroeconomics course, and years before having read a word of Keynesian economics.) The Keynesian concept of aggregate demand can be derived using common sense by itself. Logic alone provides the greatest support of Keynesian macroeconomics and aggregate demand theory.
Government spending to "prime-the-pump" was but a subset of Keynesian theory. Keynes believed aggregate demand drove the economy, and suggested government spending to prop up aggregate demand when private demand faultered. And though Keynes did advocate government spending to prop up aggregate demand, it was only under limited circumstances. Increased government spending was to be a temporary measure to address a temporary problem. It was never the central theme of Keynesian macroeconomics.
Keynes' proposed public spending was intended only to "prime-the-pump" to re-start the economy—like using starter fluid to start a car. It was never designed to sustain our economic engine indefinitely—like gasoline does in a car.
Also overlooked by today's corporate media shills, was Keynes's recognition that for pump-priming to work, aggregate demand could not "leak" out of the economy into import demand. In fact, Keynes recommended that Great Britain change its trade policies from unrestricted free trade to moderate protectionism during the Great Depression. He knew that if government pump-priming went mostly into import purchases, it wouldn't stimulate British domestic production. It became clear that unless newly-created demand was contained within a country's borders, it would not stimulate domestic production in that country.
The concept of outward demand leakage into foreign import demand seems to have been ignored by our government. Unrestricted free trade and outsourcing—and the ensuing job losses—have been the result.
To put "leakage" in proper perspective, it must be viewed in reference to the economic landscape back in the 1930's. Keynes' pump-priming proposals came at a time when the US trade deficit was minuscule in comparison with today. This means there was little "leakage" of US aggregate demand into imports during that time, and thus little need to control such leakage. (i.e., via tariffs or embargoes).
Such is not the case today. At the present time, US aggregate demand is leaking out into import purchases. Though this is actively damaging our economy, it also provides a potential source of "new" aggregate demand—the recapture and conversion of import demand back into domestic demand.
Since demand IS leaking out of the economy today (at the rate of about $700 billion/year), "plugging" that leak would provide a huge source of additional domestic demand. And plugging the leak wouldn't cost taxpayers a dime. To the contrary, "plugging the leak" by levying tariffs would RAISE Federal revenue. With $1.7 trillion of non-energy related imports, the US has an abundant amount of imports to levy tariffs on, and abundant import demand that could be re-channeled into domestic demand.
The point is that we could easily raise domestic production demand by putting TARIFFS on imports—while increasing Federal revenue at the same time. We could even spend the increased Federal revenue back into the economy, raising domestic demand still further.
NO increase in public spending should occur until we already have "leakage"-plugging tariffs in place. The benefits of any taxpayer-funded stimulus should go only to the American taxpayers who fund it, not to foreign producers who compete for our domestic market, and steal jobs from American taxpayers through unfair trade practices.
Though Keynes is maligned by the plutocrats and banksters who control our government—and deliberately misinterpreted about the role of government pump-priming—he is still right about aggregate demand and about the need to prevent outward leakage of aggregate demand into import demand.
We added $6 trilionto the money supply and that did not raise demand. Keynesian theory has been discredited.
You really need to look at the debt overhang. There was vast "wealth" destruction but the debts were NOT diminished and written down because the powers that be did NOT want to recognize the losses.
The U.S. went through this problem of economic stimulation simply squirting out of the country in the 1980s. To jump-start the economy, it does not help that our economic engine cylinders have many leaks out of the country.
True-blood Capitalism would have written down the debts and moved on rather than playing coyly for years with this game of hoping for a rebound of sentiments.
You completely missed the point. Stimulus doesn't work well when "leakage" allows that stimulus to leak out of the economy. Did you read past the first sentence?
http://charlesrowley.wordpress.com/2012/08/06/high-time-to-bury-the-keynesian-multiplier/
Uh, there is NO multiplier effect. I can cite scores of links to prove my point.
From that liberal rag the Daily Kos
http://www.dailykos.com/story/2012/10/22/1148078/-Hide-and-Seek-The-Keynesian-Multiplier
No multipler.
Need i drive another nail in that bullshit Keynesian premise' coffin?
Yes, of course your first link makes non mathematical assertions, based on well, nothing, then goes on to quote Laffer, who is always a laugh. As for the Kos article, it cites "Obamanomics". If you had been paying attention, I just explained why that effort didn't work so well. Then of course, there is the fact that the multiplier effect is quite a separate issue from what these writers seem to think it is. They clearly have no clue as to Keynesian economics has to say, but believe what you want. Of course the ultimate stimulus, WW2 did indeed end the depression, but that is ignored.
canyou cite a multiplier proof? Yes or no?
This is an area where the definition of proof is a bit subjective. The basic premise is that when extra money is put in the hands of someone who is inclined to spend it, it is then re-spent by the next person and then re-spent again and so on. It has to do with with the velocity of money. Maybe this link will help. http://www.unc.edu/depts/econ/byrns_web/Economicae/multipliereff.html
[-] 1 points by notaneoliberal (2063) 2 hours ago This is an area where the definition of proof is a bit subjective. The basic premise is that when extra money is put in the hands of someone who is inclined to spend it, it is then re-spent by the next person and then re-spent again and so on. It has to do with with the velocity of money. Maybe this link will help. http://www.unc.edu/depts/econ/byrns_web/Economicae/multipliereff.html
Thats just a theory. If this were at all true, we would have concrete examples of economic surges following increased government spending, easily, easily quantifiable but we dont. Please Cite measurable examples or remove yourself from any honest discussion. We dont need bulshit.
Your example of the slug eating junk food and us not being able to measure his weifgt gain is an epic fail. We can predict his weight gain practically down to the ounce.We know the average basal metabolic rate for a human, we know how many calories its takes to create one pound of fat so we know precisely what he will weigh after a knwn caloric binge.
Let me help you: I, NOTANEOLIBERAL, AM UNABLE TO FIND ANY PEER REVIEWED PROOF OF A KEYNESIAN MULTIPLIER, SO I RETRACT ALL MY PREVIOUS STATEMENTS RELATED TO SUCH AS FOLLY.
Its that easy.
However, i agree about the effect of tariffs. We dont need stimulus with tariffs.
Well, actually it has been measured. The trouble is, economies have vitually infinite variables Back to the slug on the couch. IF you have ALL the data on intake, any slight amount of exercise, say getting up to get another bag of cheese doodles, his/her individual metabolic rate, etc, etc. then you can be fairly precise. In a real economy, you can never have a "controlled expierment". About the only area where I'm in agreement with some of the so called "classical" economists, is that in economics, mathmatical formulas are generally useless. Intuition is more useful. So all I can say is it seems logical to me. I'm quite happy to keep the focus on tariffs.
Randall Wray: One of the most important concepts in macroeconomics is the notion of the fallacy of composition: what might be true for individuals is probably not true for society as a whole.
That sounds reasonable.
Thats how the right is trained to react any time Keynes comes up. Its the same all over.
It is called brand-conscious syndrome and it afflicts far more than the right.
Agreed.
Yes, they have no idea what Keynes really had to say. Only the distortion of Keynesianism.
Keyesian econ has never been proven, it relies on a multipler effect, and no one can quantify any multiplier.
If you slap on tariffs, you dont need a stimulus, but then you accept the possibility of a trade war.
Actually, it doesn't really rely on the multiplier effect. The fact that it is hard to precisely quantify, though, doesn't mean it doesn't exist. If we were to apply tariffs, it would indeed have a stimulus effect, since trade deficits are effectively anti-stimulus. I always find the warnings against a trade war amusing. We are already in one. We just haven't recognized it. For every dollar we export to China, we import four dollars. Which would you rather have, a dollar or four dollars.
You conflated 2 issues. Typical. First you suggest a multiplier effect that cant be proven. Seriously?! Cmon, thats lame. It should be easy to quantify, lets just be honest, it doesnt exist.
Tariffs however are an interesting idea. Concentrate on that and drop the foolish and stupid Keynesan bullshit.
The point is, if Keynes were around today, he would support protectionism, as he did for Britain. I'm not that hung up on the multiplier effect, but here's an analogy. If you stuff yourself with junk food, sit on the couch and get no exrcise, you can be pretty sure you will gain some weight. It can be hard to say exactly how much you will gain, but gain you will. Just because you don't have a precise formula won't prove you didn't gain.
I am glad to see that you're in agreement with tariffs
Razor.
For one, let's drop the cheap shots and at least pretend to be mature adults here .. ok?
Second, there is no precise quantification of this so-called multiplier effect. But to help simplify what I believe is being discussed here is what you may call the "life blood" of the economy. That is the circulation or movement of money. The more money that the "average" person has, the more they have to spend. The money that's spent then goes into the hands of someone else and they spend it, etc.
What do you "spend" your money on? A combo meal at McDonald's? Gaming equipment? or racing / power adders for your sports car? Or ... purely service stuff beer, wings, and tips for the hot hooters waitress. Whatever you spend your money on. they in turn spend that money, etc etc.
The idea is that the money moves.
The more money that someone makes, the more money they have to move / spend. It snowballs. It get's bigger.
The force of a car moving 80 m.p.h. is MORE THAN DOUBLE the force of a car moving 40 m.p.h.
Yes, there is a money accelerator, but not with borrowed money. The accelerator occurs with value added production. Borrowed money has to be paid back, which s a negative.
with being the issuer and user of your own fiat currency as the United States is, then by definition it is not borrowing money. It creates its own money, and America can decide how much money to print, and what infrastructural projects it can go into. It can determine to a significant extent the velocity of money and so outweigh the concern of inflation and a depreciating dollar, which seems like pure nonsense.
multiplier effect has to do with how many times the money goes from one hand to the next .... or the circulation of money....or how quickly it moves; velocity.
Value added production is one of our core problems but is seperate from the multiplier effect. Value added production is what we need. That is the manufacturing of our goods and the jobs that comes along with that.
So we can come up with the following formula: bring back our production of goods (value added production .. i.e. taking raw materials and making things of real value,: i-phones, microwaves, tires, video games, power tools, women's make-up, you name it) and the velocity of money - or accelerator - will re-build our middle class.
Let me be more clear: Iron ore is worthless, has zero value until mined, milled, and made into something. The value added far exeeds the work put into it,so the exess is used to create other jobs
You dont quite understand. There is no multiplier except that which is the excess of value added to raw materials.
I dont think he ever imagined a scenario like this where the people were being robbed blind right in front of them, and did nothing.
""By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls . . . become 'profiteers', who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished not less than the proletariat. As the inflation proceeds . . . all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless."
I think that is a separate issue. I think we may have had this conversation. If you believe that inflation has been the culprit in the destruction of the poor and middle class, I have to disagree.
I agree with notaliberal. Inflation, lol, like Zimbabwe or Weimar Germany, hah, not the same at all.
Thanks.
I dont think it has. Thats not to say that its not coming here soon. I think a lot of what he says about leakage can be tied to the uprising in the ME because of skyrocketing food costs.
All the leakage is going into commodities perhaps? Since thats one of the only safe bets? I think it just hasnt come back here yet.
Maybe it will, maybe it wont. Tough to say, because the market is so centrally controlled.
If you're talking about hyper-inflation, that indeed is a very destructive thing. So far, the US has not experienced that. The idea of leakage is that money is removed from circulation within the economy. He (Keynes) describes 3 kinds of leakage. 1 Savings, since if it just sits in a bank it doesn't circulate. 2 Taxation (depending on whether it is re-spent into the economy). 3 Trade deficit, which is money drained from the economy, often never to return. In 2011 the US had a 558 billion dollar trade deficit. We are running 40 to 50 billion a month in the red. (44 billion for August, 2012) http://www.americaneconomicalert.org/ticker_home.asp http://www.economicpopulist.org/content/2011-annual-trade-deficit-37-us-gdp-china-goods-2-us-gdp
So far?
Greece and Argentina weren't having economic crisis, riots and consternation until they were, right?
Are you really counting on "so far"? Rethink that.
Savings usually does not just sit in a bank. They allow banks to leverage to loan out far more new "money." The problem that we have in the U.S. is that in spite of so much 0-interest credit creation, our zombie banks did not have the gumption to indulge in this economy-propping effort because they SEE and understand what damages they had done to their own and others' balance sheets, so they just bide their time. When those underwater mortgages have realized their final values, the fog of financial uncertainty about the Himalayan-size derivatives will clear up but it will take many years.
You are correct in thinking that money does not have to just sit in a bank. The problem we seem to have is- a lack of aggregate demand. Why? Because we have lost so many real wealth generating manufacturing jobs which has also created a general labor surplus, thereby driving down average real wages throughout the economy. There is no impetus to start new businesses in the US when there is such a shortage of expendable income in the hands of the majority.
I agree -- and we HAVE to thank not just the Republicans but the Democrats, too, for the demise of the working class. There was the Republican "Revolution" of 1994 taking over Congress by the "Contract with America" pledge. Subsequently we had the Bill Clinton free-trade mania. Sure, it played right into the hands of the likes of Walmart which I remember as being PROUD (yes, I am not kidding you!) of its squeaky clean all-American middle-America image. Nowadays, virtually everything sold there is "Made in China" and Walmart was sued for unjust labor practices and sexual discrimination.
There is such a shortage of expendable income because of the INFLATED debts that are not written down.
There is a relationship between the bubble economy and the deindustrialization of the US. In the the quest for profits, the investor class, sought ever more risky and downright foolish investments. The results are in.
The investor class was correct though because in the end the governments stepped in to make them somewhat whole again. The foolishness came from the government providing unsaid but implied guarantees. Instead of letting failures die, our government keeps them alive in suspended animation on a trip to Alpha Centauri or better yet Sirius.
I can't disagree with that. (Yes Sirius-"the dog star" seems appropriate)
Wow, you know astronomy well - I am impressed! We are all aptly accompanying on this starry-eyed trip to the "dog star" for a much brighter new "sun" with vastly shorter longevity.
Not to be forgetting the Norquist pledge that most of the GOP party have made.
http://www.youtube.com/watch?v=B3zb12jdxqU
The no-tax pledge is plain stupid. Everything needs to be viewed in context. Is water good or bad? In a drought, it is great but in a flood, it is a curse. GOP politicians went off the deep end when they signed up to that pledge but of course, the fault had to lie with their constituents because they are the ones who held the keys.
What do you think could be the events that could cause hyperinflation? Because honestly, at this point, it kind of seems like everything is so centrally planned that its just going to be a slow road to the bottome...
Yes, thank God AND Allah that Europe has not gotten its acts together yet so the U.S. dollar remains the world's reserve currency for now. The prelude to financial hell for the U.S. will start with the repudiation of the dollar, markedly higher interest rates to attract the funding still needed by our government, greatly slowed economic activities, very high unemployment rates, diminished tax revenues, and even higher interest rates to attract the funding needed unless austerity measures or massive dollar devaluation have already turned things around. This seems awfully like what has happened and is still happening in the southern European countries in the euro area (PIGS R US -- Portugal, Ireland, Greece, Spain, Rome, and for the grand finale not a euro-area country, the U.S.).
The dollar devaluation can lead to hyperinflation but I certainly hope NOT! Dollar devaluation will cause great demand to print more money for circulation until no one could keep track of how much the money is really worth so trust disappears and the economy collapses causing great misery all around for ALL.
We may be able to navigate this catastrophe by applying repeated renormalization, to borrow a technique from particle physics to deal with infinities to obtain sane answers.
If there was a total rejection of the US dollar as the world reserve currency it might be possible. I agree we are on a slow road to the bottom. This can happen without hyper-inflation, as we've seen.
When there is a perceived, though at times well-justified, perception that the powers that be are trying to redistribute the losses (largely to the elderly on fixed incomes and savers - the folks who have either toiled for their lives or virtuous embodiments of work-and-save), the fast-and-quick ones dart into commodities. One can do vast damage to the proper functioning of a food commodity's market if one pumps in billions of newly created credit fast. It can cause major problems for poorer folks around the world but in the U.S. food costs are rather small relative to mean income so it is not felt keenly here as much. Nonetheless, I think our elderly are at least aware of its effects although perhaps not its causes.
"Mild" inflation allows "magical" performance of the U.S. economy by charming producers with larger numbers. Of course, they will not mean a thing when costs catch up as well eventually. There will always be a lag, though, because we CAN count on SOME people not being shrewd enough to see far into the future so churning out larger numbers pleases everyone. It is truly a "something" for "nothing" scenario except that it sets in motion a positive feedback loop that requires more and more "priming of the pump" until even the Federal Reserve privy to secretive data and financial foresights could not ride it any longer and tap or slam on the brakes. Sorry, everyone, there is really NO free lunch but we CAN rescale the numbers to any level to please everyone and collapse the economy when trust disappears.