Keynesians, neo-Keynesians split on how to re-ignite economy

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Followers of famed economist John Maynard Keynes have departed from the doctrines of their master. Indeed, it may be appropriate to label them neo-Keynesians instead of Keynesians. The main difference lies in their emphasis on how best to jump-start a failing economy.

Keynes constantly stressed
private investment, which at the time he wrote was almost zero. Deficit spending – via the multiplier, he thought – would, if investment incentives were in place, touch off private investment and subsequently provide more consumption and increased employment.

In contrast, neo-Keynesians emphasize deficit spending, especially on consumption, believing that over-spent budgets are a substitute for the private investment spending that is not taking place. Incentives for private investment are virtually ignored. But they also are essential for monetary ease to be effective.

KEYNES’ FUNDAMENTAL equation in his famous General Theory of Employment, Interest and Money was that annual gross domestic product consists of consumption – such items as food, clothing and so forth – plus private investment such as machinery, equipment and working capital. He regarded investment as the more volatile
but also the more important spending component for driving future consumption and future investment. In fact, his diagnosis of the Great Depression was that Western economies had suffered a major collapse of private investment.

While all spending is spending, the difference between consumption and investment lies in the incentives behind each type of outlay. Consumers do not need incentives to eat, while investors require bountiful returns – “real market incentives,” as economists are wont to express it – to undertake risky investments. If so, government should refrain from policies that discourage them.

NEO-KEYNESIANS argue, however, that consumer stimulus spending and bailouts, without regard to stimulating private investment, restore spending even if other government policies discourage them. But if private incentives are not in place, private enterprise will not respond! Private investment incentives require an environment where after-tax profits may be earned. Such profits are not only rewards for risk-taking; they further the financing of future investments.

The chain of business expenditures, which was to be ignited by the Bush-Obama stimulus and accompanying deficits, has not sparked adequate private investment spending. By ignoring or taking investment incentives for granted, our current policy-makers fail to understand their importance in the investment-wealth-producing process – a tragic mistake that would not have passed muster with Keynes.

Entrepreneurs focus on after-tax profits and their riskiness in assessing investment proposals. Profits depend on sales growth and the ability to control costs; but also low-enough taxes, especially income taxes, both individual and corporate. Costs also are initiated by government regulations, not only those requiring direct fees but those affected by bureaucratic restrictions and constraints that force businesses to choose more costly processes, which are not of any interest to bureaucrat-regulators.

Any element – including government regulations – that threatens to increase future costs also increases the riskiness of proposed investments and decreases their expected profits. By the same token, threatened future tax increases, especially income taxes, have similar effects.

IN TODAY’S POLITICAL world, rather than encouraging private investment, policy makers threaten to increase both taxes and government regulations, inflicting even further damage to these incentives. To aggravate the situation, they direct a hostile stance toward those entrepreneurs most likely to undertake high-risk opportunities – venture capitalists and the wealthy.

Over the past several years, economists have presented numerous studies seeking to measure the effects of stimulus spending on various outcomes, totally heedless of the incentive problem. They are needless. The dismal aggregate economic statistics speak for themselves. Not only has GDP growth been disappointing, but private investment spending has been sluggish to stagnant, and woefully inadequate.

To make matters worse, policy -makers have increased minimum wages; enhanced union power at the expense of capital owners; and allowed the Environmental Protection Agency and the U.S. Department of Energy to impose a flood of costly restrictive regulations that have crippled investor incentives.

MONETARY POLICY suffers from the same malady. Monetary stimulus does not speak to real-world incentives in production and distribution – expected profits and their risks. To be effective, monetary stimulus (flooding banks with reserves) requires investment incentives as well. If they are absent, entrepreneurs will not borrow, and some lenders will perceive the same risks as borrowers and, hence, may not lend.

Ironically, neo-Keynesians may now better understand the old saw they once offered in criticism of earlier Federal Reserve low-interest rate policies: “You can lead a horse to water, but you can’t
make him drink.” The truth is that stimulus spending and recent monetary easing by the Fed has been thwarted by tax and regulatory policies of the Obama administration.

In fact, the results of monetary policies have been so dismal that Fed Chairman Ben Bernanke has had to point, embarrassingly enough, to the rise in stock prices as a proud accomplishment. Rising stock prices are not increases in GDP!

IF GOVERNMENT policy is to be helpful, it must constrain its bureaucrats and regulators to policies far less invasive than they are currently practicing, and it must greatly reduce the fiscal burdens that the federal government has imposed on all investment sectors of the economy – including threats of added taxes and new regulatory burdens. Fiscal stimulus, with its debt burden selfishly transferred to future generations, is not necessary.

Free the “animal spirits” that Keynes emphasized, and let monetary policy focus only on maintaining the value of the dollar.

(The writers are professors emeritus of financial economics and of economics, respectively, at the University of Georgia. Dr. Beranek lives in Aiken, S.C.
Dr. Timberlake is the author of the forthcoming
Constitutional Money: A Review of the Supreme Court’s Decisions.)

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TParty
6003
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TParty 11/18/12 - 10:31 am
0
3
Our economy is doing much

Our economy is doing much better compared to the nations in Europe that went the route of austerity.

Our markets are much more free today that they were say, 40-50 years ago- a time when people look back, think of the golden years. Golden years propped up by the regulations and super high taxes which set the foundation of prosperity.

soapy_725
43598
Points
soapy_725 11/18/12 - 10:44 am
0
0
Deep stuff (-:
Unpublished

Much easier to sell the receipt of EBT cards, government cash account cards and the government provides everything. Some people actually get ill when you ask them to think for themselves. Or take responsibility for themselves. Reminds me of children.

Economics, spumonics, ebonics, won't put dope in the veins.

We are way past any concerns for basic economics. 50% have spoken. Eat ,drink and be merry, for tomorrow we die. The latest tee shirt craze.

dichotomy
31619
Points
dichotomy 11/18/12 - 12:44 pm
2
0
"nations in Europe that went

"nations in Europe that went the route of austerity. "

They didn't "went" the route of austerity, they were FORCED to go the route of austerity. That is what happens when you owe so much money you cannot POSSIBLY pay it back......which is where we are today. We too will be forced to take that route if the austerity measures in Europe bear fruit and they start to look better as credit client than we do. The only thing keeping us afloat right now is borrowed money and, looking at our potential to pay that money back, I would not loan us any. We are betting the whole shooting match on our credit record and our credit rating has already been downgraded twice. We could turn it around now with budget cuts for wasteful and duplicated agencies and programs and some revenue increases BUT......if we wait until we are forced then we too will have real austerity measures and the Greek riots will seem like a Friday night HS football game.

Jane18
12332
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Jane18 11/18/12 - 12:51 pm
1
0
Our Going-Down-The-Drain Economy?

That austerity(tightened economy) that you speak of TParty might not be a bad thing if Washington practiced it on a budget---entitlements, stimulus', bailouts, money to other countries, especially the ones that HATE or DISLIKE us! And the only things I can think of that our markets are more free to do is move to other countries, lay workers off, or just plain out CLOSE THE DOORS!

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