The Argument for Keynes and Deficit Spending (posted by DT)

I had some exciting email correspondence with my conservative group on the topic of Keynes and whether recent events have proved him wrong or right. Here's an edited version of my argument. I'm not very good with the layout on this site, so the graphs are at the top instead of where I want them- sorry!

I keep hearing how Keynesian economics is dead from those who don't seem to understand it. But the history of the last 80 years is great evidence that Keynes was right, that governments should run deficits during recessions and stimulate the economy. Let's start with the Great Depression. See the second graph above, with GDP charted during the period.

As you can see, FDR took office in 1933 when the Depression was at its nadir. He started Keynesian deficit spending and voila!, the economy started recovering. But there was a second recession in 1937-38; did government overspending cause it? Let's look at the federal deficit during the depression- see the top chart for when the feds were using deficit spending.

Notice that the deficit goes way up starting in 1932 (I guess Hoover gets some credit too! I didn't know that), and then dips severely starting in 1936, just in time for the next recession. Then it goes through the roof for WW II (in fact that peak is WAY higher than the current deficit), and yet the economy came roaring back.

So the Depression is a perfect example of how deficit spending helps an economy in recession.

How about since then? Well, recessions after 1945 have been much shorter in duration (on average) than recessions were before that time- recessions starting in 1900 lasted 23, 13, 24, 23, 7, 18, 14, 13, and 43 months. The recessions after 1945 lasted 8, 11, 10, 8, 10, 11, 16, 6, 16, and 8 months (the last listed here is the early 1990s one). Why is that? Because of Keynesian spending- we learned how to deal with deficits, and so now we spend our way out of them.

I've yet to hear any other convincing explanation for these numbers. Can we please stop arguing about whether Keynes was right?

Extension of the Bush Tax Cuts (posted by DT)

I've been having and listening to a lot of arguments about the extension of the Bush tax cuts lately, and it occurs to me that to a great extent we're arguing around each other. Last night, for example, I was talking with some family members, and the argument went something like this:

Liberal: These lower tax rates for the rich are unnecessary- they
don't need it and will hardly notice an increase
Conservative: The way to create jobs is to make sure the Rich have
money, since they're the ones who create jobs.

I strikes me that these arguments could theoretically both be correct. It could be that, while the Rich don't really need a tax break, having lower taxes would still create jobs and it would therefore be worth it to keep taxes low. In fact, if both these arguments are right, then the conservative wins the argument because the goal is to get the economy moving. If both arguments are wrong, then the liberal wins, because while the Rich might be unhappy and harmed by the increase, the economy as a whole would be benefiting (or at least not be harmed) and the federal deficit would be reduced.

So let's look at the facts. What's going on now in the economy? It seems that what's happening now is that the Rich (including rich corporations and banks) have mountains of capital in hand. Corporate profits have been stratospheric this year, and companies are sitting on large amounts of cash that they're not investing. Why not? Because there's not enough demand for products, and companies are not confident that this will change soon so they don't want to risk their cash.

So would a 4% tax hike on high earners change this dynamic? I don't really see how. If the argument is that the Rich need to take home more of their money to create jobs, then that assumes that some don't have quite enough cash in hand to create them now, or that they'd invest less money if more taxes were taken. But they're not investing right now, with these historically low rates! We've now gone through nearly a decade of these lower tax rates, which coincidentally has seen the least growth of any decade in modern history.

I think that if conservatives want to make the argument that the Bush tax rates create jobs, they should at least be required to point out some evidence showing that they've done so in the past.

So what are we left with? Everyone wants his/her own taxes lowered. Conservatives are left with a moral argument that this is "my money", not "the government's", and that the government doesn't know how to spend this money as well as the magic of the Invisible Hand. Except the Invisible Hand just created a huge recession, which would have been a second Depression but for federal government spending and policies.

So I know this isn't much of a shock to read on this blog, but liberals are right and conservatives are wrong. Marginal tax rates on high earners should go back up at least to Clinton-era levels. If conservatives want to make the case for lower taxes than that, they need to show it working, and the last 10 years have proven just the opposite.