Wednesday, December 19, 2012

The Keynesian Illusion

"There are three more reasons to doubt the Keynesian view. First, the fiscal expansion has been mostly in the form of temporary tax cuts and transfer payments. Much of these were probably saved, not spent.

"Second, the zero interest rate policy has a risk not acknowledged by the Fed: the creation of another bubble. The Fed has failed to appreciate that the 2008 bubble was partly caused by its own easy liquidity policies in the preceding six years. Friedrich Hayek was prescient: a surge of excessive liquidity can misdirect investments that lead to boom followed by bust.

"Third, our real challenge was not a great depression, as the Keynesians argued, but deep structural change. Keynesians persuaded Washington it was stimulus or bust. This was questionable. There was indeed a brief depression risk in late 2008 and early 2009, but it resulted from the panic after the abrupt and maladroit closure of Lehman Brothers."
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The article goes on to point out that high income economies are shedding workers and buying either automation or offshore replacements. This is a predictable outcome of the fact that "high income economies" make it very expensive to employ the folks in their locale. Health care, FICA, OSHA compliance, mandatory training, and other expenses which make it costly to employ humans.

One note:  saving is as likely as spending to provide a stimulus.

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