Monday, 28 December 2009

Five questions for a Keynesian

At at PBS's Nightly Business Report, Steven Horwitz has Five Questions for a Keynesian. Should you, over the Christmas period, be involved in a conversation at some social event with a Keynesian type, Horwitz suggests these five questions to get the argument really going:
1. Why did Keynes think savings was bad if when people save through financial intermediaries they give control over resources to the banking system, which in turn will lend that out to firms to create capital and new jobs?

2. How does government spending create jobs and wealth if the resources that government spends must ultimately come from the private sector, through taxes or reduced borrowing due to government borrowing more (or inflation), and the private sector would have spent it either on consumption directly or on investment through savings anyway?

3. If one of the problems of the housing boom is that we put too many resources into housing and finance, how will a Keynesian government spending package know where that spending should have gone instead?

4. Keynes frequently wrote about the importance of the uncertainty of the future and the way that made things difficult for private investors and for the connection between savings and investment. Why doesn't that same uncertainty prevent governments from knowing exactly how much and where they should be spending in a recession, especially because markets have prices and profits as signals to help entrepreneurs navigate that uncertainty while government bureaucrats do not have similar signals?

5. Given the enormous role that government interventions played in causing the current recession, from the expansionary policies of the Fed to GSEs like Fannie and Freddie, to misguided regulations in housing and banking, why should anyone believe that the same government actors will know how to solve it?
Feel free to report here any and all answers you receive to these questions.

1 comment:

Crampton said...

1. In liquidity trap, banks don't want to lend so just build reserves.

2. Govt MPC > private MPC; banks sit on reserves.

3. Shovel-ready projects, basic infrastructure. Any project with positive net benefit well worth undertaking: roads, fiber optics, etc.

4. The set of projects where private benefits > private costs is smaller than the set of projects for which total benefits > total costs; uncertainty may well knock out a similar proportion of both types, but there'll still be more total projects possible of the second type. If we only see them with some probability, the greater number of the latter are more easily found.

5. Sure, all those things are bad. But if we're in a liquidity trap, just about any project is worth undertaking so long as it's of positive expected value.

Those are the answers I'd expect from a Brad DeLong type (Brad's pretty much said as much on #s 3 and 5). I tend to disagree, of course, but those are the answers I expect.