I have been recently trying to better understand where I stand on financial economics and have been quiet for some months. Time to begin blogging again. After spending my youth as a Friedman libertarian then moving on to Hayek (whom I still admire in part, while disagreeing with most contemporary "Austrian economists"), I'm now working to better understand Keynesian philosophies, particularly as practiced by those most label post-Keynesian. In particular I spend a bit of time these days reading Economic Perspectives from Kansas City and Bill Mitchell's Blog, along with Steve Keen's Debtwatch along with other favorites.
Over at Economic Perspectives from Kansas City, Eric Tymoigne recently asked Can we spend our way out of recession? Is the fiscal deficit unsustainable? Is it time to cut government spending?. His answers, in short: Yes. No. No, not yet. I'm in agreement, but add that we dare do it — in the face of a mountain of debt — only if we are also going to re-regulate the banking and finance (and insurance) industries. And if we are going to claw-back some of the excess profiteering that went on. And if we are going to seriously investigate the fraud that was no-doubt part of the problem. And if we are going to begin to reign-in the medical industrial complex (and related so-called insurance), and reign-in the energy industrial complex, and reign-in the military industrial complex. What else?
Here is a bit of Tymoigne's reasoning:
So can we spend our way out of a recession? Yes we can; provided that spending is high enough. Will a sovereign government go bankrupt by doing so? No, it will not. Does government spending lead to inflation? No, it does not. Does bigger government spending mean that the government will take over the economy? No, it does not. Does it mean that all types of spending are equally beneficial? Definitely not. Government spending can be wasteful if there is no improvement in the welfare of society through infrastructure spending, better social programs, and other government spending, preferably employment-enhancing, that improve the standard of living of the population. …
In the early 1930s, President Roosevelt first criticized President Hoover for engaging in deficit spending and driving the country down the road to ruin, and then proceeded to implement policies that further increased the fiscal deficit of the federal government to about 5% of GDP (a historical record at that time). These policies greatly helped the economy to get out of the Great Depression, but were the subject of ferocious attacks on the ground that the "massive" deficits would lead to the insolvency of the country, uncontrollable inflation, wasteful spending, the taking over of the economy by the government, and, ultimately, the rise of Communism. …
Did any of those problems actually materialize? As the saying goes "the proof is in the pudding." There was no government takeover, no rise of Communism, and no insolvency. In fact, Roosevelt proceeded to increase government deficit over 20% of GDP during WWII without any of those problems arising. …
The overall cost of running [US depression era] programs was extremely small, less than 1% of GDP. Despite their limited scope, they helped millions of people to make a living, helped to avoid waste of resources (if they had been left idle), and promoted the growth of U.S. infrastructures. In addition, the large deficit spending flooded the private sector with cash; thereby, restoring profitability and willingness to employ. War deficit spending reinforced this trend by flushing banks and private businesses with money and by creating a long period of financial stability. All this without any sign of insolvency of the federal government.
A final complaint is usually that government deficit always creates huge inflation and even hyperinflation. There is here a ton of data going against this argument. One just needs to look at Japan over the past 20 years: massive debt, very low interest rate, deflation or stable prices. But we do not have to go that far. Here is the United States, the "massive" deficits of the 1930s and 1940s did not generate high inflation. …
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