Posts tagged John Maynard Keynes

Keynes Enabled?

52
3 months ago
by Michael Weiss in

John May­nard Keynes

Last week, the Bureau of Eco­nomic Analy­sis pub­lished a report indi­cat­ing that the gross domes­tic prod­uct decreased by an annu­al­ized 0.1 per­cent in the fourth quar­ter of 2012. Every­one (at least in pol­i­tics) reacted as if the GDP drop was a bad thing. Democ­rats blamed Con­gres­sional Repub­li­cans. Most Repub­li­cans blamed Con­gres­sional Democ­rats (though some blamed Pres­i­dent Obama). But was the report really that bad?

As with so many eco­nomic ques­tions, the answer depends on one’s perspective.

Part of the prob­lem here is that we typ­i­cally point to changes in GDP as the indi­ca­tor of the econ­omy. It’s not that GDP is a bad met­ric, but, like all eco­nomic met­rics, it needs to be viewed in con­text. The pri­vate sec­tor grew in the fourth quar­ter. Again. And this hap­pened despite draw­downs in pri­vate sec­tor inven­tory.  (more…)

Rapping the Stimulus

88
1 year ago
by Bart DePalma in

Arguably, the two lead­ing west­ern econ­o­mists of the twen­ti­eth cen­tury were F.A. Hayek and John May­nard Keynes. Hayek cham­pi­oned free mar­kets and Keynes pro­vided the intel­lec­tual foun­da­tion for pro­gres­sive gov­ern­ment attempts to fine tune the economy.

Keynes is best known for his the­ory that gov­ern­ment spend­ing cre­ates demand for goods and ser­vices which in turn increases GDP and jobs. Obama placed the Keynes strat­egy on steroids with roughly $4 tril­lion in fed­eral gov­ern­ment bor­row­ing and spend­ing since tak­ing the office of Pres­i­dent. Hayek ridiculed the idea that the gov­ern­ment can cre­ate eco­nomic growth by tak­ing money from one part of the econ­omy, tak­ing a slice for itself and then spend­ing the remain­ing on goods and ser­vices the peo­ple are not demanding.

The group Econ Sto­ries tries to make this all acces­si­ble to the layper­son in a series of videos where actors play­ing Keynes and Hayek are rap­ping about their con­trast­ing eco­nomic the­o­ries. In the sec­ond of the series, Hayek and Keynes debate the Obama stim­u­lus. Enjoy.

Related arti­cles

Keynes Redux

0
2 years ago
by Michael Weiss in

I men­tioned in a com­ment yes­ter­day that I’m work­ing on an arti­cle dis­cussing the rela­tion­ship between income taxes and unem­ploy­ment. Before I fin­ish that and post it, I wanted to fol­low up on my pre­vi­ous fis­cal analy­sis arti­cle.

I got some inter­est­ing feed­back on that arti­cle. One con­ser­v­a­tive responded pri­vately with what amounted to a “well, duh!” He said that my arti­cle boiled down to the fol­low­ing (para­phrased) statement:

Hold every­thing else con­stant, and increas­ing gov­ern­ment spend­ing, which is included in the GDP cal­cu­la­tion, increases GDP.

On one level, he’s cor­rect. It’s pretty obvi­ous that, hold­ing every­thing else con­stant, increas­ing gov­ern­ment spend­ing will increase GDP in the same year. This is why I looked for an off­set impact. If spend­ing this year increases GDP in future years, hold­ing every­thing else con­stant, then you have a more inter­est­ing story. That’s what I was look­ing for.

Keynes Was Right

1
2 years ago
by Michael Weiss in

Much dis­cus­sion has hap­pened on this site regard­ing income tax rates, gov­ern­ment spend­ing, and the health of the econ­omy. Cer­tainly I’ve had some pre­con­ceived notions of what’s best, as has pretty much every­one else here.

I decided to be more open-​​minded and run a more thor­ough analy­sis of the rela­tion­ships among taxes, gov­ern­ment spend­ing, and the econ­omy. I col­lected data on GDP, gov­ern­ment rev­enues, and gov­ern­ment spend­ing, from 1913 to 2008. I also col­lected data on infla­tion and pop­u­la­tion, so that I could nor­mal­ize the results against changes in the real value of nom­i­nal dol­lars, and against the inher­ent growth effects that result from larger pop­u­la­tions. I chose 1913 as the start­ing year because it was the first year of the fed­eral income tax.

In some cases, I have nor­mal­ized gov­ern­ment rev­enues and spend­ing as a ratio to over­all GDP. Where I did this, the intent is to rec­og­nize that the effect on the econ­omy of gov­ern­ment col­lect­ing taxes or spend­ing money will nec­es­sar­ily be related to the size of the levies and expen­di­tures rel­a­tive to the over­all econ­omy. That is, gov­ern­ment spend­ing $1B in a $3B econ­omy should be expected to have a sub­stan­tial impact, while spend­ing the same $1B in a $3T econ­omy should be expected to have min­i­mal impact, being a thou­sandth as much a part of the economy.

In all cases, I looked at GDP in the same year as inputs, as well as one to five years off­set, to account for the time it takes for eco­nomic impact to prop­a­gate through­out the economy.

I per­formed regres­sion analy­ses against a num­ber of pos­si­ble inputs, look­ing for a sta­tis­ti­cally sig­nif­i­cant cor­re­la­tion between the input and the out­put of year-​​over-​​year change in per-​​capita GDP in real dol­lars (i.e., adjusted for inflation).

It took numer­ous iter­a­tions, which I will be happy to explain if I’m asked to, but I don’t want to bore you with the details oth­er­wise. Per­haps a side­bar arti­cle is in order, if you all want to read it.

The most sig­nif­i­cant cor­re­la­tions I found were when com­bin­ing spend­ing as a per­cent­age of GDP at an off­set of two years (S%GO2), and income tax as a per­cent of gov­ern­ment rev­enues with an off­set of one and two years (IT%RO1 and IT%RO2). The com­bined R2 was 0.36, indi­cat­ing that these com­bined inputs accounted for 36% of the vari­ance in GDP growth. The spend­ing coef­fi­cient was 0.26, mean­ing that each increase of 1% in gov­ern­ment spend­ing rel­a­tive to GDP cor­re­sponded to an increase of roughly 0.26% in GDP growth two years later. Oddly enough, the coef­fi­cients for income tax as a per­cent of gov­ern­ment rev­enues were nearly equal but oppo­site for off­set years one and two. That is, for a one-​​year off­set, higher per­cent­ages of gov­ern­ment rev­enues com­ing from income taxes cor­re­sponded to a decrease in GDP growth, while the oppo­site is true for a two-​​year off­set. You can see what I mean in the below table.

Coef­fi­cients Stan­dard Error t Stat P-​​value Lower 95% Upper 95%
Inter­cept –0.02851 0.020875 –1.36562 0.1755 –0.06999 0.012971
S%GO2 0.260125 0.066184 3.93033 0.000167 0.128619 0.391631
IT%RO1 –0.3683 0.073444 –5.01478 2.69E-06 –0.51424 –0.22237
IT%RO2 0.376671 0.083202 4.52721 1.84E-05 0.211351 0.541991

I could find no sta­tis­ti­cally sig­nif­i­cant cor­re­la­tion between GDP growth and any of the following:

  • Income tax as a per­cent­age of GDP
  • Over­all tax rev­enues as a per­cent­age of GDP
  • Non-​​income tax rev­enues as a per­cent­age of GDP
  • Deficit spend­ing as a per­cent­age of GDP
  • Bot­tom and top income tax rates

I also tried includ­ing and exclud­ing the size of the national debt as a per­cent­age of GDP. While the size of the national debt was bor­der­line sta­tis­ti­cally sig­nif­i­cant, it had a tiny R2 (0.003) and it didn’t impact the mul­ti­vari­able regres­sion analy­sis.

I ran one other set of tests, look­ing for a cor­re­la­tion between increases in gov­ern­ment spend­ing and changes in pri­vate sec­tor spend­ing. Specif­i­cally, I was look­ing for evi­dence that increased gov­ern­ment spend­ing crowds out the pri­vate sec­tor, a the­ory that has been brought up repeat­edly in the com­ments on this site. Again, I looked at off­sets from zero to five years. For this set, because income tax was not impor­tant, I went from 1794 to 2008, so as to have more data points. I could find no sta­tis­ti­cally sig­nif­i­cant rela­tion­ship between the two.

The regres­sion analy­sis sug­gests that the most impor­tant thing the fed­eral gov­ern­ment can do to improve the econ­omy (among the fis­cal levers of spend­ing, tax­ing, and run­ning deficits) is to spend money. It doesn’t mat­ter whether it’s spend­ing money col­lected via taxes or cre­ated via deficit spending.

So, based on nearly a cen­tury of data, we can con­clude that there is sta­tis­ti­cally sig­nif­i­cant evi­dence to sup­port the hypoth­e­sis that Keynes was right, at least within the range of val­ues expe­ri­enced over the past cen­tury. More gov­ern­ment spend­ing cor­re­sponds to more growth in the economy.

Related Arti­cles
Go to Top