Comments on: Which is Best, Monetary Policy, Government Spending, or Tax Cuts? http://wallstreetpit.com/1406-which-is-best-monetary-policy-government-spending-or-tax-cuts Tue, 22 May 2012 19:21:52 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Simon http://wallstreetpit.com/1406-which-is-best-monetary-policy-government-spending-or-tax-cuts#comment-8346 Simon Mon, 15 Dec 2008 06:28:23 +0000 http://wallstreetpit.com/?p=1406#comment-8346 Toma and Skidelsky are editing history in interesting ways. Keynes indeed showed that low interest rates could not solve demand deficiency in certain conditions. The neo-neo-Keynesians neglect to mention a few details: (1) The context for Keynes was the policies which contributed to the great depression - namely fighting red ink in the government's books or the nation's books. This drove down demand and interest rates did not provide an escape from the consequent liquidity trap. By contrast now, both the U.S. government and nation are very well into the red already. There is zero danger of falling into depression era solutions. (2) When Keynesian solutions were persistently applied later on, they led to (a) spiralling government debt; (b) crowding out of real activity from the private sector ; (c) inflation. Which is why they were dropped. Today we already have (a) and (b), and just lack (c) for the full set. (3) After the failure of Keynesianism and of monetarism, we moved to the Greenspan era of just focussing on inflation and letting the markets handle the rest, notably pricing risk. As we now all know, this didn't work too well. But aside from markets, let's remember the contribution of (a) the Chinese being willing to sell stuff on tick (i.e. buy $s) so as to keep their industry growing, and (b) U.S. politicians (notably Senator Obama) relentlessly pushing mechanisms to fund property ownership by the poor through Fannie Mae et al. In short, a double credit binge. So, the anti-red ink approach, Keynesianism and Greenspan have all failed, leaving the U.S. hugely in debt. If the GAAP method of accounting is applied to U.S. government books, debt was being ratcheted up at a trillion plus a year before the present mess. So, having amassed vast debt for consumption or poor quality investment, now amass lots more? The only instance where this would be wise is if the U.S. intends to default on its debt - as it may well have to. Why not max out on the credit card first. Trouble is the U.S. can't then collectively hide out in Mexico. Pity about the grand-kids too. Toma and Skidelsky are editing history in interesting ways. Keynes indeed showed that low interest rates could not solve demand deficiency in certain conditions. The neo-neo-Keynesians neglect to mention a few details:
(1) The context for Keynes was the policies which contributed to the great depression – namely fighting red ink in the government’s books or the nation’s books. This drove down demand and interest rates did not provide an escape from the consequent liquidity trap.
By contrast now, both the U.S. government and nation are very well into the red already. There is zero danger of falling into depression era solutions.
(2) When Keynesian solutions were persistently applied later on, they led to (a) spiralling government debt; (b) crowding out of real activity from the private sector ; (c) inflation. Which is why they were dropped. Today we already have (a) and (b), and just lack (c) for the full set.
(3) After the failure of Keynesianism and of monetarism, we moved to the Greenspan era of just focussing on inflation and letting the markets handle the rest, notably pricing risk. As we now all know, this didn’t work too well. But aside from markets, let’s remember the contribution of (a) the Chinese being willing to sell stuff on tick (i.e. buy $s) so as to keep their industry growing, and (b) U.S. politicians (notably Senator Obama) relentlessly pushing mechanisms to fund property ownership by the poor through Fannie Mae et al. In short, a double credit binge.

So, the anti-red ink approach, Keynesianism and Greenspan have all failed, leaving the U.S. hugely in debt. If the GAAP method of accounting is applied to U.S. government books, debt was being ratcheted up at a trillion plus a year before the present mess. So, having amassed vast debt for consumption or poor quality investment, now amass lots more? The only instance where this would be wise is if the U.S. intends to default on its debt – as it may well have to. Why not max out on the credit card first. Trouble is the U.S. can’t then collectively hide out in Mexico. Pity about the grand-kids too.

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