If Keynsian economics worked we would see it in the real world, perhaps with shorter recessions? Or mabye with lower inflation? Or perhaps lower unemployment?

Mick, in fact we do see this. Researchers have compared pre-WWII and post-WWII economic performance, and recessions are shorter and expansions are longer after WWII than before.

Economics, like life itself, requires balance.

Conservatives and liberals are close to agreeing on how the economy should work. Both sides need to define their views, compare their beliefs and they will find many similarities.

Conservatives believe that the free market is the way to go. They quote Adam Smith when he iscussed “rational self interest” and competitive markets in his book Wealth of Nations. He envisioned many consumers buying goods and services from many producers with everyone looking out for their self-interest. By keeping markets “free”, conservatives believe if producers pursue rational self-interest they will best meet the needs of the consumers and the citizens of our country. If they do not, they will not survive and consumers will go elsewhere.

Liberals say corporate America has gotten out of control. Producers are looking out for their self-interest at the price of the average consumer/citizen and that “rational self-interest” is not working. Liberals conclude they should tighten control over the producer/corporations.

Liberals and conservatives lost track of a key ingredient that Adam Smith identified as necessary in order for “rational self interest” to work. There must be many producers. In too many industries, the number of producers has shrunk and the ones remaining have gotten “too big to fail”. This is true in the auto industry, the banking industry and will soon be true in the computer software industry.

The liberals are right that regulation is required and conservatives are right that a free market is the best way to meet the needs and wants of our citizens. The common ground is that regulation is essential to make our markets more free. We have too many industries where companies have too much power and they are too big to fail.

Lets’ free our markets, from not only governments but also oligopolies, and watch the American worker and entrepreneurs thrive in the world economy.

I still beleive that a Kelso approach (Binary Economics) would be a better approach for this day and age.

Does Keynes Economics take into account the changing power of the consumer to afford purchaces and not just how the market behaves?

“Will we have another depression? Yes, because the gap between the economy’s production and the power of a mere segment of consumers to earn adequate incomes on a pay-as-you-go basis has reached its limits of sustainability, and so has income redistribution. The stock market gyrations merely evidence the confusion resulting from the sterilization of the mighty purchasing power of the rich (much of whose income cannot be used to purchase consumers goods and services thanks to a lack of desire to consume more), along with the inability of the solely labor- and welfare-dependent masses to earn enough to live well. Pension funds are in the same predicament, because they do not equip either present or prospective pensioners with effective capital ownership; the full earning power of the underlying assets.

Can the depression be averted? Possibly — if we seriously commit ourselves to reconnecting the economy’s vast stock of capital with the 95 percent of individuals and families now disconnected from ownership of non-residential capital and its earning power. This would necessarily involve restoring full private property to capital stock so that each stockholder would fully collect the “wages” of his or her capital (at least a 90-percent payout of corporate net earnings). This vast job will require switching from conventional finance of capital transactions, which merely makes the rich richer, to binary methods. Through the use of one or more of the eight financing techniques built on the logic of the ESOP, all families and individuals can purchase capital and pay for it out of capital’s own earnings instead of labor income.”

–Louis O. Kelso and Patricia Hetter Kelso
Originally published in Management Review, May, 1988.

I’m trying to better understand what a stimulus package means and what will determine it’s success. Where is the money spent and does that make a difference in the success or failure of a stimulus package?

I have just finished reading most of the works of Louis Kelso. My next book I will read is going to be this biography.

A spending spree of a trillion or more dollars by the US government will only harm long term economic health unless the spending is carefully targeted to solve long term infrastructure problems.

The major threat to the future of the US economy is the inefficiency of transportation networks in a $4.00 plus per gallon of gas environment.

The new administration needs to focus every stimulus dollar at sustainable, non-polluting energy development and the re-creation of transportation networks away from the concept of individually owned internal combustion vehicles.

Population centers need to encourage the compression of population density rather than outward sprawl.

For the sake of the country and world,
WAKE UP TO THE REALITY OF LIMITED RESOURCES ON A SMALL PLANET!

Tom, you and your guest are both confused. Despite what you are implying, the market *IS* efficient. The market may not behave the way YOU want it to, and it may not favor your economic choices, but it is efficient. It is ridiculous to believe that an English Lord can make choices that will cause the market to operate more efficiently than it operates when left alone.
The flaw in Greenspan’s conceptual framework is that he expected people and politicians to exercise restraint and behave responsibly. So when, for example, the auto companies spend inordinate amount of money on labor costs (salries and benefits), that cost is reflected in reduced quality in the materials and designs that go into their product. Left to market devices, those comapnies should go out of business. When Barney Frank and his ilk shovel money in the form of loans and mortgages to people who can’t afford to borrow and pay back, the housing market will collapse, as will the institutions holding those loans. The lesson is when you remove moral hazard from the equation people behave irresponsibly. In five years, when this current foray into Keynesian thought has failed and shown itself to be more harmful than good, we’ll look back on this as its final curtain call.

Dear Tom,
Many thanks for such great programming and discussion. I am a freelance journalist who covers town affairs here in Sharon, MA. The crisis is already hitting budgets as I am sure you know. Towns around this country need help to ensure that services remain at a sustainable level. Last night at the school committee I learned that the budget may have to be cut by up to $2 million next year (2010). However, the long term implications need to be addressed. No more free lunches for financiers. I, like many others, am angry that I find myself a shareholder in institutions where I have no real vote. Mine would be to throw out the bosses and employ serious individuals who have the common good at heart.

I am wondering if our fundamental desire to continue with an [unsustainable] growth economy is at the root of our problems. What are we really trying to “grow”; material wealth, human health, quality of life? With 60-70% of the US economy dependent upon consumer spending, can this be maintained in the long term? Aren’t we really overlooking the limits (is “limits” a heretical term in economics?) of the natural services that provide all the materials that go into our linear production systems? Perhaps we are better off pursuing a closed loop economy where the maximization of human well-being is paramount as opposed to accumulation of “wealth”.

I am becoming more convinced that a re-localization; connecting financial, social, and environmental capital with place [bio-regions], is a key part of our creation of economically & environmentally regenerative economies.

According to Thomas the whole down turn in our economy is the fault of the UAW and Barney Frank and his ilk, whatever that might be, for lending to lower income people.

You left out the greed of wall street, the derivative swaps, the fraudulent ratings done by companies such as Standard & Poor’s.

I think there is plenty of blame to go around for this mess. Enough for both political parties to hang there heads in shame. I wish we could through the whole lot of them out. This wont happen.

However Thomas’ view points are so skewed in right wing propaganda and filth that it makes my skin crawl.

Enough already with pointing fingers at the poor and middle classes.

In the last few days we saw the Madoff scandal unfold.
This was a clasic Ponzi scheme, well one could argue that large segments of our economy is a Ponzi scheme.

It’s not over, the credit card defaults are now starting.
Now comes the real hard fall, then real end of credit.

Near the end of the program ,Mr. Sidelsky made a dig against socialism, which we hear alot of on “public” radio. Fine, that’s his right but why dosen’t “public” radio ever feature any socialist on its programs? Isn’t this in violation of its mission statement to include ALL voices at the table, especially alternative ones?I would especially take issue with his uncritical acceptance of America as the “land of opportunity” where people are willing to accept inequality as long as they have a chance to “get to the top”. Please! That is one big lie. Success is a bottleneck and the remote possibility of it does NOT justify the inequalities inherent in a capitalist society.Furthermore,I would have liked to hear about the theory of “Military Keynesism(sic?)discussed. So then, where were the socialists on the program to present a different take on today’s finacial and economic crisises?

Dana do you really think socialism works? It has failed in every country that has tried it.

I’m not against some of the ideas, such as universal health care, but socialism does tend to take the edge out of economies, people become complacent.

We need a change, but one as drastic as socialism is not it.

I agree completely with your longer post above, Jeff, especially as it relates to legalized funny money and Ponzi schemes such as credit default swaps, derivatives and other fictional and fantasy financial instruments, abetted by meaningless ratings by useful idiots such as S&P, an SEC that enables abuse and an Administration that believes regulation of any kind is a brake on the unfettered wonders of the free market.

As to inequities in the system, I still have to wonder. A guy holds up a gas station and goes directly to jail to await trial, as any criminal should. Another guy single-handedly puts the icing on the cake that will shortly melt into Great Depression 2.0 and he awaits trial in his $7 million luxury apartment under house arrest. What is wrong with this picture?

Lord Skidelsky and Tom Ashbrook took issue with the figure of $8 trillion dollars I cited when asked about the downside risk to U.S. credit during the program. Both guest and host cited the well-known and much smaller $700 billion TARP. However, according to the New York Times,

“The government has assumed about $7.8 trillion in direct and indirect financial obligations. That is equal to about half the size of the nation’s entire economy and far eclipses the $700 billion that Congress authorized for the Treasury’s financial rescue plan.”

And these commitments are not transparent. Bloomberg estimates $7.76 trillion of taxpayer responsibilities — $24,000 for every American.

This is the true cost of the bailout so far — about $8 trillion — whether in the form of direct liquidity injections, guarantees made to non-government investors against defaults, and loans made to financial institutions accepting troubled financial instruments as collateral. The NYT’s graphic illustrating the allocation of this $8 trillion dollar bailout is here and worth examining.

Observers may draw their own conclusions why Lord Skidelsky was an order of magnitude off in his citation of taxpayer commitments in this bailout.

Another illustration of this bailout compared to previous huge government spending programs — the New Deal, the Moon Landing, all major U.S. wars since Korea, the Louisiana Purchase — is given by Barry Ritholtz. The current bailout is larger than all of these combined.

Anyone concerned about this subject should familiarize themselves with these taxpayer commitments, and why they lack transparency.

Well that’s not how it works. If the robber of the gas station can post bail he can sit at home until he waits trial. However if they are flight risk then bail will be very high or denied.

Madoff seems like a very high flight risk to me.
He did post bail.
He should be in jail at Rikers island.

The problem is to many politicians are in on this, Schumer is one of them and this is a problem.

Our elected officials are not doing the job they were hired to do.

My favorite senator Bernie Sanders from Vermont tells it like it is:

http://www.youtube.com/watch?v=BT9BDItae94&

Jeff,
Take it easy. I’m not sure what the ‘right-wing filth’ is that you accuse me of spewing; I said the market is efficient. I also don’t understand what Madoff has to do with a debate on Keynesian economics. The criminal actions of which he is accused are outside any economic philosophy. If he is found guilty of those crimes, I think the death penalty is appropriate, considering the lives he has permanently ruined.
You also accuse me of blaming the poor and middle-class — based on what? You seem to think that the greed and incompetence only apply to the corporate executives. That greed and incompetence extends to Congress and the UAW too. For the record, I live in genteel poverty here in the worker’s paradise of Quebec. Here we have universal health-care, universal day-care, and universal education, and exorbitantly high taxes to fund it all(and timely access to none of it), which keeps most of us here on the edge between working poor and lower-middle class. You may get a taste of it in the next eight years. As for Bernie Saunders, his heart is in the right place, but my cat has a better grasp of economics than he does.

Thomas you used language that was used by the Republicans to pin most of this on Fanny and Freddie. Blaming the middle class and the workers of this country for the housing bubble and the economic downturn that resulted.
That’s not to say some people did bad things, everyone has the capability to be greedy.
However the system was rigged to let this happen. It was not rigged by Fannie and Freddie it was done by Wall Street and the lobbyist who represented the banks and loan companies.

That was what I was basing my opinion and comments on. While these companies were partly to blame for this, the bulk of this falls on wall street and wall street alone. I know, I have friends who work in the business. It’s a lot worse than what people think.

The Madoff case is a a result of lack of oversight and proper regulatory rules to prevent this man from doing what he did. The death penalty is a but much, don’t you think? I would think life in prison without parole or condoms will do.

Your Canadian and your poor? Interesting, the fact that your health care system does not work well is not a the fault of the type of system its the fault of how it’s run. I used to live in Scotland and I had no problems with the national health care system whatsoever.

Saunders makes very valid points that you seem to gloss over. For instance that wages in this country have been stagnant for almost a decade while the top 10% have gotten richer and richer not due to work, it’s due to dividends and corporate greed. There used to be a time when a CEO made no more than 20% to 30% of what the lowest wage earner made. Now it’s 200% and sometimes 300% higher. This is wrong, period. Instead of giving people better wages the CEO’s payed themselves with higher and higher salaries.

Of course your going to blame the UAW, it’s always the working guys fault. I’m not a big fan of the unions, but in the case of GM and Chrysler, it was management that screwed up not the UAW. They only make $10 more and hour than the auto workers in the non-union plants in the South. Get the facts straight.

Chrysler is owned mostly by Cerberus Capital Management who is trying to rip off the American tax payer. They have more than enough capital to prop Chrysler up. This is a scam and our government fell for it. They used the threat of putting all these people out of work, and closing down Chrysler. It’s like a poker game and Cerberus just called the US governments bluff and won, for now.

When we have a Dow that is now about a thousand points lower than it was on November 4th (9625), I wonder how anyone can say anything good about the proposed Detroit bailout, much less about Keynesian economics. Clearly, the “bad news” which generated the mortgage-related financial sector bailouts was clearly very old news by Nov. 4th (about six weeks old), so it’s rather difficult to blame most of the bad performance of the stock market since Nov. 4th on Bush or on anyone else except the Democrats and our upcoming President Obama. The big policy news story since Nov. 4th is the Detroit bailout, and clearly the market is seeing that as a bad idea. That’s because Keynes’ notion that you could literally spend your way out of a recession even if it was via digging up holes and then filling them in was idiotic, insane, and ignorant. We’ve literally been doing that in this country during the Iraq war – digging up holes for the cargo coming back from Iraq via Dover AFB, filling the holes with that cargo, and putting the dirt back on top of it. We’ve blown $120 billion a year for five years in a row on such nonsense along with even greater amounts of deficit spending for Leaving No Child Behind and the Prescription Drug Parte D nonsense. Has it worked?

The underlying debate of this program centers on the question “to what extent should the free enterprise system be left to self-regulating?” Analogies have been used to help define the limits of the “free” part of the equation, such as Darwin’s theory of evolution and the survival of the fittest. Perhaps the best analogy is our democracy.

Just as a pure democracy is not a just system – the majority can not be allowed to dictate to the minority in overriding basic liberties, likewise the free enterprise system needs safeguards, as well as practical checks and balances.

I clearly remember shaking my head when hearing that so-called outdated banking regulations were being “eased” or thrown out. The promise of more growth in the late 1990s fed the mind-set that growth, at any cost, must certainly be a good thing.

The banking laws were written and put in place to provide a much needed check to the potential abuses to our financial system. They should not have been thrown out, any more than articles of the Bill of Rights should be deemed to be obsolete and “eased” with the promise of greater freedom.

Thank you,
Bill Donahower

It seems to me that the American economic paradigm must make a dramatic shift from a consumer society to a conserver society. It will will be a difficult, if not wrenching, change, but one that is absolutely necessary. The reality of the finite resources of this planet must finally be confronted, and the absolute need of preserving the biospheric conditions that makes our lives possible must be addressed.
I think that if Keynes were alive today, he would support and promote a “green” infrastructure program as a major component of the stimulus package. Subsidizing the development and use of solar, wind and geothermal energy, and of course, efficient public communications and transit systems. But most important of all is the change in the economic paradigm from consumption to conservation.

I’m a bit late to the party, but I have to address a few things.

First off:

Mick: Keynesianism fell out of fashion in around the 60s-70s (around the period of Reagan/Thatcher) and thus his policies haven’t been in action.

I personally believe that a Keynesian stimulus is indeed required, but the problem is that the governments will not do them right.

Keynes himself said that his policies will not work unless:

1)Regulation by the government
2)Closing the budget deficit after the recession is over (through spending cuts and tax hikes)

As I doubt the government will do either, I am afraid for our fate when it comes to inflation and the future (and even more debt, of course).

Of course, if the stimulus works without a hitch, then happy birthday. It worked.