CIA-fiscal_policy

=Fiscal Policy = = = = Read the two articles below and advance the discussion by making a BRIEF contribution (select the discussion tab above). = = =

5 Thinking Marks (depth of thinking, quality of support, contribution actually advances the discussion)
=Article One =

[|Keynes to the Rescue]
by Forecasting and Analysis Principal Research Associate Economic Services ||
 * [[image:http://sso.conferenceboard.ca/Libraries/CBOCSTAFF_PUBLIC/kip-beckman_sm.sflb width="80" height="80"]] ||  || **Kip Beckman**

The great economist John Maynard Keynes looked around at the debacle in the 1930s and realized that something was wrong with prevailing economic thinking. From 1929 to 1933, it appeared that the invisible hand of Adam Smith's free market was in urgent need of a tune up. The unemployment rate surged from 3 to 25 per cent and national income plunged by 50 per cent in the United States and much of Europe. The Stock Market crash of 1929, with widespread reports of brokers leaping to their deaths became both a symbol and cause of additional economic misery. Workers fought over the few available jobs, soup kitchens became the norm and psychological depression accompanied economic depression. The most popular song at the time was "Brother can you Spare a Dime".

The British Treasury department preached patience and promised a recovery over the long run and stuck with the economic orthodoxy of running balanced budgets. Keynes noted that "in the long run, we are all dead", and in his famous 1936 book the General Theory of Employment Interest and Money Keynes presented a new framework for macroeconomic analysis. Keynes recommended that when consumers and businesses panicked and hoarded money, as was the situation in the early 1930s, the only way to prevent a depression was for the government to increase spending in order to stimulate demand. He saw that it was foolish to attempt to run balanced budgets during a recession. In a recession governments collect less in taxes and, if the budget is to be balanced, either taxes must increase or spending reduced. Both of these polices squeeze the economy even more.

Contrary to popular belief, Keynesian thinking was not a major part of Franklin Roosevelt's New Deal. Deficit spending became a big factor during the 1940s - mainly due to World War II and not necessarily a result of new economic beliefs. The economy responded with fast growth and Keynes' views quickly became accepted all over the industrialized world. However, the stagflation of the 1970s and the inability of governments to "fine tune" the economy by running deficits led to Keynesian thinking quickly falling out of favour. Keynes' views became associated with big, inefficient government bureaucracies and wasteful, out-of-control spending. Of course, it is possible that most of Keynes' critics had likely never actually read the General Theory.

Although Keynes' views have been on the back burner for the past few decades, they have certainly roared back to life during the current economic crisis. The credit crunch has led households and businesses to stop spending and a global recession has taken hold. To prevent it from becoming another depression, governments all over the world have decided to increase spending in an attempt to revive economic activity. We expect that the Canadian government is preparing to run a small deficit to stimulate demand while the new U.S. administration will likely announce a major spending program in 2009. The deficit in the United States will likely exceed $1 trillion next year. The Chinese government intends to spend up to $600 billion, much of it on improving the country's infrastructure.

Keynes would be pleased to see governments following his advice in order to dampen the impact of the global recession. However, he would be shocked to see his name associated with countries that run chronic deficits year after year. Unfortunately, many politicians have conveniently overlooked another one of Keynes's key pieces of advice. While he recommended running a deficit during bad economic times, Keynes was also in favour of balancing the budget during good times. Keynes' prescription implies that the U.S. government should have reduced and then eliminated the deficit after the economy started growing again following the mild recession in 2001. This course of action was not followed and, as a result, the economy will face deficits as far as the eye can see.

 __Things to think about__ :  Do you agree with this article? What evidence do you have to support your position?  Go to the IMF website and quickly look up government budget deficits for canada and the US for the last 20 years. What do they look like? Does this seem like Fiscal Policy working like Keynes would have proposed?

=Article Two =

//Saturday, December 13, 2008//

Renewing the Keynesian disaster

 * Peter Foster, Financial Post** Published: Saturday, December 13, 2008

John Maynard Keynes, whose policies are receiving much lip service in these trying times, presumably wasn't talking about his fans when he wrote of the tendency of "practical men" to be the unwitting slaves of "some defunct economist." Still, it's hard not to think of Keynes' diehard followers when reading his further observation that "Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back."

Take Joseph Stiglitz.

According to Professor Stiglitz, a Nobel Prize winner and staunch statist, "We are all Keynesians now." Ironically, these words -- written in an article this week in the Sydney Morning Herald -- are conventionally attributed to president Richard Nixon. Tricky Dickie was speaking early in the decade of the 1970s, which, ironically, registered the high water mark of Keynesian policy hubris and failure.

Professor Stiglitz -- a consistent biter of the Invisible Hand -- misses the irony, and much more. "Even the right in the United States," he claims, "has joined the Keynesian camp with unbridled enthusiasm and on a scale that once would have been truly unimaginable."

But then Professor Stiglitz's idea of "the right" seems to consist of George Bush and Henry Paulson. The desperate flailing of politicians in no way establishes the veracity of Keynesian theories any more than deathbed conversion establishes the existence of God.

Professor Stiglitz displays a positively nauseating triumphal-ism about Keynes allegedly being brought back from "the wilderness" after three decades. "At one level," writes Mr. Stiglitz, "what is happening now is a triumph of reason and evidence over ideology and interests."

Or could it be expediency over history?

It is important to emphasize why the noble lord was put out to intellectual pasture in the first place: Keynesianism was a disaster. The reason it has always been so eagerly embraced by activists -- despite its record of promoting stagflation and runaway government deficits -- is precisely because it is a justification of, and recipe for, activism.

Professor Stiglitz claims that current events establish that free markets are not "self correcting." But markets have never been free, and the fettered version that we have has never been allowed to self-correct.

Professor Stiglitz appears unable to distinguish between free markets and bad policy, a trait particularly obvious in another piece he wrote for the current issue of Vanity Fair, titled "Capitalist Fools." But how could the constantly changing Paulson bailout package, which started with the "cash for trash" notion of loading toxic debt onto taxpayers, have anything to do with free markets? How could the deficiencies of Sarbanes Oxley, the follies of forced subprime loans, interest deductibility, or auto industry bail-outs have anything to do with self-correction? What about the role of Fannie Mae and Freddie Mac? Mr. Stiglitz's response to their central role in the global financial meltdown is to claim that these organizations are only fingered by "the right." He criticizes the compensation of Fannie Mae executives, but not the organization itself, perhaps because that comes too close to the fatally-flawed nature of his we're-so-smart/ do-good interventionism.

As a dyed-in-the-wool interventionist and scourge of the rich, Professor Stiglitz pooh poohs the potentials of tax cuts, and instead calls for Keynesian correction of an alleged "legacy of underinvestment in technology and infrastructure, most notably of the green kind." Typically, he cherry picks to support his biases. He warns against tax cuts as likely to be ineffective, and quotes Japan in the 1990s as an example. He fails to mention, however, the failure of Keynesian infrastructure spending in Japan.

Professor Stiglitz also warns that the "new Keynesian doctrines" (which look awfully like the old ones) might be abused by the same "interests" that have brought us to this pass. Presumably he means the fat cat neo-liberal deregulators, not the political bozos who forced banks to make bad loans and then proceeded to underwrite them and encourage their packaging.

Economics isn't like bell-bottom pants, a mere fashion destined to return at uncertain intervals. Soaking the rich and letting public spending rip had a terrible record both in the 1930s and the 1970s, and will always have such a record. Keynesianism inevitably led to stagflation and deficits. The suggestion that recent global events somehow exonerate it and justify a new round of similar policies is analogous to suggesting that since the world is not perfectly round, it must be flat after all.

The good news is that despite all the talk of Keynesian "stimulus," politicians may be much less committed to big spending programs than they declare, realizing that they will do more harm than good. Another positive sign is that president-elect Obama hasn't found a spot for Professor Stiglitz among his economic advisors.

 __Things to think about__ :  Do you agree with this author's position? Does this article support or contradict the first article? Is there bias? What do you know about the Financial Post or this author?  Are there any expressions or terms that you don't understand? How could you resolve this?