Keynesian stimlulus spending in recessions: does it really work?

The other day I was talking to a PhD economist of a self-professed "conservative" bent. I asked him if he thought Keynesian stimulus spending worked to bring economies out of a recession. I, in listening to some of these conservative news channels, had thought this was a controversial issue. People, especially many conservatives, are still upset that Obama added to the national debt by doing that in this last Great Recession.

Its effectiveness is not controversial, this economist told me. There is no question it works to jump start an economy mired in recession, and mitigate its trauma to the population. No serious economist questions that. The only thing that conservatives don't like is the ensuing debt. I asked him then if the conservative economist would just ride out the full trauma of a recession until things got better on their own, rather than accrue debt in trying to stimulate it back to life sooner. He basically nodded and said yes. Of course, that's not something conservatives would want to come out and directly say to a population hurting and reeling from massive unemployment, loss of homes and businesses, defaulted loans, etc...It would not be politically expedient. So that's where all this "controversy" about whether Keynesian spending works or not comes from.

Is this really true?

The problem doesn't really come from the initial spending, though I believe the stimulus effect to be generally overrated. The problem comes from the fact that the spending is often not suspended when the desired result has either been met or is proved unlikely to be met.

Furthermore, merely pumping more cash into the economy doesn't fix anything. If you want positive results you need to spend the money in areas that are going to generate long term productivity.

But since the economy has been out of a recession, Obama has actually been the smallest government spender in decades. It still isn't enough to keep conservatives from blaming him for "doubling the debt".

Forbes Welcome

Lutherf said:

The problem doesn't really come from the initial spending, though I believe the stimulus effect to be generally overrated. The problem comes from the fact that the spending is often not suspended when the desired result has either been met or is proved unlikely to be met.

Furthermore, merely pumping more cash into the economy doesn't fix anything. If you want positive results you need to spend the money in areas that are going to generate long term productivity.

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Is that not what the government required of Chevy and it looks like Chevy has done just that is doing far better these days, thousands of jobs saved both at Chevy and at the many supporting companies?

Casper said:

Is that not what the government required of Chevy and it looks like Chevy has done just that is doing far better these days, thousands of jobs saved both at Chevy and at the many supporting companies?

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Not exactly.

GM died. Its bond holders were forced to exchange the debt they owned for equity in the new entity. The "loans" provided to GM by the FedGov were only partially paid back (roughly $12 Billion short). The new GM (without all the excess baggage of GMAC and a few less than profitable divisions) is marginally profitable but it's not exactly setting the world on fire.

The bailout also set a precedent as a "too big to fail" entity. That isn't productive and could well lead to even worse decisions in the future. It's just my opinion, but if the FedGov really wanted to help they'd have allowed GM to crash and then offered some form of loan guarantees to other organizations that came in and cannibalized what was left. Doing so would have afforded the opportunity for a MUCH more diverse and agile auto industry in this nation. We may well have seen a resurgence in the industry akin to what we had in the 40's and 50's.

Lutherf said:

Not exactly.

GM died. Its bond holders were forced to exchange the debt they owned for equity in the new entity. The "loans" provided to GM by the FedGov were only partially paid back (roughly $12 Billion short). The new GM (without all the excess baggage of GMAC and a few less than profitable divisions) is marginally profitable but it's not exactly setting the world on fire.

The bailout also set a precedent as a "too big to fail" entity. That isn't productive and could well lead to even worse decisions in the future. It's just my opinion, but if the FedGov really wanted to help they'd have allowed GM to crash and then offered some form of loan guarantees to other organizations that came in and cannibalized what was left. Doing so would have afforded the opportunity for a MUCH more diverse and agile auto industry in this nation. We may well have seen a resurgence in the industry akin to what we had in the 40's and 50's.

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And while I partly agree I am not sure allowing GM to completely fail would have been such a good idea either, many smaller companies would also be forced out of business in the process and in todays world most would not be replaced, loosing more manufacturing jobs might not exactly be a good thing. That said there are some banking and lending institutions I feel should have been allowed to fail, they after all were a major part of why we ended up where we were.

But even so called "conservatives" are all for spending on infrastructure now- of course now that Obama is going out. Isn't that a little strange? When the economy was struggling to recover from the recession, and Obama was standing in front of a failing bridge begging congress to invest in national infrastructure to help invigorate the recovery a little more, the Tea Partiers adamantly refused. They said government had gotten too big. They called him a big government spender. And so the economic growth was more anemic than it should have been, which worked out because they then blamed that on Obama. They wanted to maximize the pain on the nation while Obama was in office to make him look bad.

But now that Trump is in office, they can't wait to enact his plans of more infrastructure spending. It's no longer about "interfering in the free market", or "big government spending", but a strong leader that is finally going to make America Great Again. Hmmmm. Excuse us if we roll our eyes a little and ask:

Is this really as politically dirty as it looks?

ataraxia said:

The other day I was talking to a PhD economist of a self-professed "conservative" bent. I asked him if he thought Keynesian stimulus spending worked to bring economies out of a recession. I, in listening to some of these conservative news channels, had thought this was a controversial issue. People, especially many conservatives, are still upset that Obama added to the national debt by doing that in this last Great Recession.

Its effectiveness is not controversial, this economist told me. There is no question it works to jump start an economy mired in recession, and mitigate its trauma to the population. No serious economist questions that. The only thing that conservatives don't like is the ensuing debt. I asked him then if the conservative economist would just ride out the full trauma of a recession until things got better on their own, rather than accrue debt in trying to stimulate it back to life sooner. He basically nodded and said yes. Of course, that's not something conservatives would want to come out and directly say to a population hurting and reeling from massive unemployment, loss of homes and businesses, defaulted loans, etc...It would not be politically expedient. So that's where all this "controversy" about whether Keynesian spending works or not comes from.

Is this really true?

Click to expand...

Gov't spending is like having two swimming pools and using the water from pool B to fill pool A, but filling poll B from city water. When all you look at is the cost of filling pool A, of course it makes sense. But as soon as you step back figure out that you still have to pay for pool B's water and the pumping equipment, the power to run the pumps and the maintenance on the pumps, suddenly it's not such a great idea. Yes, you filled Pool A at very little cost, but pool B is now empty.

Casper said:

Is that not what the government required of Chevy and it looks like Chevy has done just that is doing far better these days, thousands of jobs saved both at Chevy and at the many supporting companies?

Click to expand...

Had that bailout never happened, GMC would have still been running, it just would have gone through some re-organization and we'd still be seeing 2016 Corvettes...

faithful_servant said:

Gov't spending is like having two swimming pools and using the water from pool B to fill pool A, but filling poll B from city water. When all you look at is the cost of filling pool A, of course it makes sense. But as soon as you step back figure out that you still have to pay for pool B's water and the pumping equipment, the power to run the pumps and the maintenance on the pumps, suddenly it's not such a great idea. Yes, you filled Pool A at very little cost, but pool B is now empty.

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Why is it that, when trying to explain the downside of government spending, you always fall back on these silly analogies? Why don't you put your position in concrete economic terms, and back up your claims with some data?

That said, your analogy doesn't even work, based on things we should be able to agree on. Taking water out of the pool would be taxation - you are talking about fully-financed government spending, a balanced budget, when in reality we all know that the government deficit spends pretty much every year. I have been asking you guys for years for some demonstration that deficit spending is harmful, but nobody can come up with a cogent argument. Just silly analogies.

ataraxia said:

The other day I was talking to a PhD economist of a self-professed "conservative" bent. I asked him if he thought Keynesian stimulus spending worked to bring economies out of a recession. I, in listening to some of these conservative news channels, had thought this was a controversial issue. People, especially many conservatives, are still upset that Obama added to the national debt by doing that in this last Great Recession.

Its effectiveness is not controversial, this economist told me. There is no question it works to jump start an economy mired in recession, and mitigate its trauma to the population. No serious economist questions that. The only thing that conservatives don't like is the ensuing debt. I asked him then if the conservative economist would just ride out the full trauma of a recession until things got better on their own, rather than accrue debt in trying to stimulate it back to life sooner. He basically nodded and said yes. Of course, that's not something conservatives would want to come out and directly say to a population hurting and reeling from massive unemployment, loss of homes and businesses, defaulted loans, etc...It would not be politically expedient. So that's where all this "controversy" about whether Keynesian spending works or not comes from.

Is this really true?

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Well, sure...you pump money into an economy it will help in certain aspects. The problem comes that it doesn't solve the underlying problem and the bill will come due eventually. The reality is the Keynesian economics is not viable in the long term. Even Keynes himself didn't think his ideology was viable in the long term:

"In the long run we are all dead. But this long run is a misleading guide to current affairs. In the long run we are all dead." - John Maynard Keynes

Unfortunately, countries last longer than a generation or two (hopefully), which means that pumping stimulus money is just kicking the can down the road to some future generation to deal with an even larger economic fallout, when the time comes that it cannot be kicked any further.

Finally, his entire premise is only viable in an environment that is artificial in construct, not due to it's inherent viability. What I mean when I say this is that the U.S.'s economic model is artificially propped up by outside factors. If any of these factors takes a hit, or situations change, we will be buying a loaf of bread with a wheelbarrow of cash:

1. The Petro-dollar: The petro-dollar has trillions of U.S. dollars floating around out there in trade, which is propping up the dollar and keeping massive inflation from taking place. If countries were to move away from the petro-dollar, we would have an economic collapse that would beggared the Great Depression.

2. Trade currency: This is similar to the petro-dollar but less specific and for international trade in general. If countries moved away from using the dollar the same thing would happen in #1, wheelbarrow of cash = loaf of bread.

And all this will be backed by any western nation because the U.S. is the only one providing them with real national security. If the U.S. tanks then the rest of the western world will tank.

JohnfrmClevelan said:

Why is it that, when trying to explain the downside of government spending, you always fall back on these silly analogies? Why don't you put your position in concrete economic terms, and back up your claims with some data?

That said, your analogy doesn't even work, based on things we should be able to agree on. Taking water out of the pool would be taxation - you are talking about fully-financed government spending, a balanced budget, when in reality we all know that the government deficit spends pretty much every year. I have been asking you guys for years for some demonstration that deficit spending is harmful, but nobody can come up with a cogent argument. Just silly analogies.

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That's because the fact that you think that gov't spending is long term beneficial means that you lack the fundamental understanding of economics needed for such a discussion. So I dumb it down so that you can see just how ridiculous the idea is. My next step would involve crayons, blocks and stick figures. Beyond that, I just couldn't dumb it down any more....

ataraxia said:

The other day I was talking to a PhD economist of a self-professed "conservative" bent. I asked him if he thought Keynesian stimulus spending worked to bring economies out of a recession. I, in listening to some of these conservative news channels, had thought this was a controversial issue. People, especially many conservatives, are still upset that Obama added to the national debt by doing that in this last Great Recession.

Its effectiveness is not controversial, this economist told me. There is no question it works to jump start an economy mired in recession, and mitigate its trauma to the population. No serious economist questions that. The only thing that conservatives don't like is the ensuing debt. I asked him then if the conservative economist would just ride out the full trauma of a recession until things got better on their own, rather than accrue debt in trying to stimulate it back to life sooner. He basically nodded and said yes. Of course, that's not something conservatives would want to come out and directly say to a population hurting and reeling from massive unemployment, loss of homes and businesses, defaulted loans, etc...It would not be politically expedient. So that's where all this "controversy" about whether Keynesian spending works or not comes from.

Is this really true?

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Lol !

Its effectiveness is absolutely controversial and I sincerely doubt your supposed discussion with a Conservative economist ever happened

Japans lost decade
http://www.heritage.org/research/reports/2012/03/japans-national-budget-time-to-give-up-on-keynesianism

faithful_servant said:

That's because the fact that you think that gov't spending is long term beneficial means that you lack the fundamental understanding of economics needed for such a discussion. So I dumb it down so that you can see just how ridiculous the idea is. My next step would involve crayons, blocks and stick figures. Beyond that, I just couldn't dumb it down any more....

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No, you certainly could not. My question is, are you capable of smartening it up? Because I don't think you have the knowledge to do so. Like most conservatives on DP, you rely on analogies and gut feelings.

So I'll ask again - put your argument in real economic terms, or admit that you don't know enough about the subject to discuss it like an adult.

Fishking said:

Well, sure...you pump money into an economy it will help in certain aspects. The problem comes that it doesn't solve the underlying problem and the bill will come due eventually.

Click to expand...

1. Please expand on what you think the underlying problem is, and,

2. Take us through the process of "the bill coming due." What, exactly, happens?

"

faithful_servant said:

Gov't spending is like having two swimming pools and using the water from pool B to fill pool A, but filling poll B from city water. When all you look at is the cost of filling pool A, of course it makes sense. But as soon as you step back figure out that you still have to pay for pool B's water and the pumping equipment, the power to run the pumps and the maintenance on the pumps, suddenly it's not such a great idea. Yes, you filled Pool A at very little cost, but pool B is now empty.

Click to expand...

"

Not quite. In the specific case of government spending to help dig out of a painful recession, I see it as more of a big loan to pay for college. Sure it creates some debt, but it is often worth it. Without stimulus spending, there is no guarantee we would still not be in the depths of a profound national recession, if not a global depression- even now.

Toward the end of 2008, as the great depth of the recession was yawning before a conservative president, here is what he was saying (you can tell they were really soiling their pants):

"I readily concede I chucked aside some of my free market principles when I was told by chief economic advisors that the situation we were facing could be worse than the Great Depression. So I've told some of my friends who said -- you know, who have taken an ideological position on this issue -- why did you do what you did? I said, well, if you were sitting there and heard that the depression could be greater than the Great Depression, I hope you would act too, which I did."

And is there anyone more "conservative" than Glenn Beck? Here is what he had to say, talking about the Bush stimulus, right before he knew that Obama was going to be the next president:

"While it takes everything in me to say this, I believe the stimulus was the right thing to do".

ataraxia said:

But even so called "conservatives" are all for spending on infrastructure now- of course now that Obama is going out. Isn't that a little strange? When the economy was struggling to recover from the recession, and Obama was standing in front of a failing bridge begging congress to invest in national infrastructure to help invigorate the recovery a little more, the Tea Partiers adamantly refused. They said government had gotten too big. They called him a big government spender. And so the economic growth was more anemic than it should have been, which worked out because they then blamed that on Obama. They wanted to maximize the pain on the nation while Obama was in office to make him look bad.

But now that Trump is in office, they can't wait to enact his plans of more infrastructure spending. It's no longer about "interfering in the free market", or "big government spending", but a strong leader that is finally going to make America Great Again. Hmmmm. Excuse us if we roll our eyes a little and ask:

Is this really as politically dirty as it looks?

Click to expand...

Us "Tea Party" types never opposed spending on necessary infrastructure. What we opposed was additional spending because the funds which had already been allocated had been mismanaged.

Fenton said:

Lol !

Its effectiveness is absolutely controversial and I sincerely doubt your supposed discussion with a Conservative economist ever happened

Japans lost decade
http://www.heritage.org/research/reports/2012/03/japans-national-budget-time-to-give-up-on-keynesianism

Click to expand...

----------------------
Its effectiveness is only questioned in propaganda pieces for public consumption for sources with other agendas (like wanting to make Obama look bad), not by serious economists. The only serious question on Keynesianism among serious economists is whether the shortened duration of pain is worth the ensuing debt.

JohnfrmClevelan said:

No, you certainly could not. My question is, are you capable of smartening it up? Because I don't think you have the knowledge to do so. Like most conservatives on DP, you rely on analogies and gut feelings.

So I'll ask again - put your argument in real economic terms, or admit that you don't know enough about the subject to discuss it like an adult.

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I honestly don't think that anyone who thinks that Keynesian concepts can work are capable of understanding real economic terms. It is a simple concept that money doesn't simply show up from nothing that most liberals fail to understand. Gov'ts do not create growth, they can only move it around and with every move that's made the money loses value within the economy. Putting money in consumer's hands to increase demand while strangling the abilities of the suppliers of that demand through taxation just pushes the suppliers out of the country. Adding more debt to the nation, just creates more debt with no benefit, since you didn't do anything to create more wealth, you just moved money from producers to consumers, which stops production. These are simple concepts that most 5th graders can understand and few liberals will ever choose to accept. So I can show you all the facts, science, truth, reality in the world and you will still choose to ignore all of it. You've been told by people who start with flawed assumptions and goal-based research that something is true and you will deny the truth until the bitter end because to do otherwise means you have to admit that you are wrong.

ataraxia said:

The other day I was talking to a PhD economist of a self-professed "conservative" bent. I asked him if he thought Keynesian stimulus spending worked to bring economies out of a recession. I, in listening to some of these conservative news channels, had thought this was a controversial issue. People, especially many conservatives, are still upset that Obama added to the national debt by doing that in this last Great Recession.

Its effectiveness is not controversial, this economist told me. There is no question it works to jump start an economy mired in recession, and mitigate its trauma to the population. No serious economist questions that. The only thing that conservatives don't like is the ensuing debt. I asked him then if the conservative economist would just ride out the full trauma of a recession until things got better on their own, rather than accrue debt in trying to stimulate it back to life sooner. He basically nodded and said yes. Of course, that's not something conservatives would want to come out and directly say to a population hurting and reeling from massive unemployment, loss of homes and businesses, defaulted loans, etc...It would not be politically expedient. So that's where all this "controversy" about whether Keynesian spending works or not comes from.

Is this really true?

Click to expand...

Nice piece and your economist friend was quite right, though, it doesn't quite give the whole story. That is understandable. It is quite complicated and there are a lot of variables. So, I won't try to do the complete dance either.

While it is absolutely true that Keynesian measures will work c.p.. The will have negative repercussions later if, if they are overdone. Staying in overspend mode loses its impact, asset bubbles, inflationary pressures or other will result. Which it is, depends on the domestic and external circumstances at the time.

It is this that makes it less helpful to look at the the absolute numbers without reference to the conditions prevailing at the time concerned and prior to it. In general it will be necessary to use stimulus spending only, when it is absolutely necessary and to run down the debt to an acceptable level, when it is possible.

It is this latter point that is relevant to the Obama debt. The economy was running along okay, but the debt rose considerably instead of stagnating. A sign that this might be becoming a problem might be seen in the fact that in spite of the FED trying to stimulate all out, the only effect seems to be a run up in asset prices and not a booming real economy.

Lutherf said:

Us "Tea Party" types never opposed spending on necessary infrastructure. What we opposed was additional spending because the funds which had already been allocated had been mismanaged.

Click to expand...

Pretty imaginative twist on the story there. But that's not what happened, and not the reason Tea Partiers gave in rejecting the infrastructure bill proposed by Sanders- which was supposed to be budget neutral, right when our nation needed it the most.

Here is an article from the time:

"Former Treasury Secretary Lawrence Summers recently noted that total federal, state and local government investment in infrastructure is just enough to cover repairs and upgrades of bridges, roads, airports and rails. There’s practically nothing left for expansion.

Senate Democratic Whip Richard Durbin of Illinois called the political stalemate a major disappointment. “This used to be the easiest bipartisan issue before Congress,” he said Tuesday. “There was a time when the Public Works Committee in the House had the largest membership of any committee. Members of both parties couldn’t wait to get on there because this bill enabled them to do things for their districts.”

“Now,” he added, “this has unfortunately become a topic for debate of the Tea Party as to whether the federal government should do anything when it comes to infrastructure. It’s a sad day for the party of [former president] Dwight David Eisenhower and the interstate highway system to have reached this point.”

$478B Infrastructure Bill Blocked by Senate GOP - Yahoo Finance

ataraxia said:

----------------------
Its effectiveness is only questioned in propaganda pieces for public consumption for sources with other agendas (like wanting to make Obama look bad), not by serious economists. The only serious question on Keynesianism among serious economists is whether the shortened duration of pain is worth the ensuing debt.

Click to expand...

Yes, it actually being effective at bootstrapping a economy into self sustained growth is whats propaganda

Fiscal stimulus simply doesn't work primarily because it doesn't address the underlying issues that are causing stagnation

Thing is its all been done before and with expected results.

The Japanese blew through 10 separate stimulus initiatives in 10 years spending over 100 Trillion yen, much of it on " infrastructure investments " as a way to boost economic production.

All it did was grow Japans GDP to debt ratio to the highest in the world as the Japanese economy continued to struggle

People that push the Fiscal stimulus narrative are typically ignorant when it comes to growing healthy market based economies

This is why HACKS like Paul Krugman support it

ataraxia said:

Pretty imaginative twist on the story there. But that's not what happened, and not the reason Tea Partiers gave in rejecting the infrastructure bill proposed by Sanders- which was supposed to be budget neutral, right when our nation needed it the most.

Here is an article from the time:

"Former Treasury Secretary Lawrence Summers recently noted that total federal, state and local government investment in infrastructure is just enough to cover repairs and upgrades of bridges, roads, airports and rails. There’s practically nothing left for expansion.

Senate Democratic Whip Richard Durbin of Illinois called the political stalemate a major disappointment. “This used to be the easiest bipartisan issue before Congress,” he said Tuesday. “There was a time when the Public Works Committee in the House had the largest membership of any committee. Members of both parties couldn’t wait to get on there because this bill enabled them to do things for their districts.”

“Now,” he added, “this has unfortunately become a topic for debate of the Tea Party as to whether the federal government should do anything when it comes to infrastructure. It’s a sad day for the party of [former president] Dwight David Eisenhower and the interstate highway system to have reached this point.”

$478B Infrastructure Bill Blocked by Senate GOP - Yahoo Finance

Click to expand...

GOOD ! Fiscal stimulus doesn't work

faithful_servant said:

"It is a simple concept that money doesn't simply show up from nothing that most liberals fail to understand. Gov'ts do not create growth, they can only move it around and with every move that's made the money loses value within the economy. Putting money in consumer's hands to increase demand while strangling the abilities of the suppliers of that demand through taxation just pushes the suppliers out of the country. Adding more debt to the nation, just creates more debt with no benefit.

Click to expand...

That kind of thinking is probably why conservatives want to slash educational loans and grants to college students as well.

JohnfrmClevelan said:

1. Please expand on what you think the underlying problem is, and,

2. Take us through the process of "the bill coming due." What, exactly, happens?

Click to expand...

1. The underlying problem varies per country and they are innumerable. The obvious thing to point out is the fact that something broke to cause the recession or economic draw-down to begin with. In the U.S. there are many things wrong. One of the bigger problems is the gutting and off-shoring of our industries, which has gutted the middle class. Our economy is moving more and more to service industry jobs, which just don't pay well. There are also the matter that there is too much reliance by the private sector on public spending, which is money that has to come from the private sector to begin with...

2. Eventually the debt to GDP ration will become too much to support and will result in economic collapse. Right now we are spending $229.15 billion just on the interest of our debt, let alone actually paying any of it off. For the sake of simplicity (I'll even err on the low side), I'll round down to $200 billion and multiply it by 13 (the years since the Iraq invasion). People complain about all the spending we did in Iraq but just what equates to the minimum payment on our credit card equals $2.6 trillion. That's about the total costs of the Iraq and Afghanistan war combined.

I see people whinge about how expensive the wars were but don't seem to care when an equal or greater amount has been spent solely on interest for our debt. There is literally nothing to show for that. It's just gone. Hell, if I wanted to be callous I could at least say the spending on the wars has stimulated our economy with good paying jobs in the defense industry. I can't even say that for interest payments.