Bloody Keynesians

by Don Boudreaux on August 1, 2011

in State of Macro, Stimulus

Reading Russ’s latest post, in which he quotes Paul Krugman, reinforces the impression that I’ve always had of Keynesian economics and continue to have to this day: it mistakes a symptom for an underlying problem and then proposes to treat the symptom.

It’s as if a person who is bleeding to death because of a gunshot wound in his stomach is brought to a physician.  The physician correctly realizes that the patient is losing massive amounts of blood and, also, correctly understands that such blood loss is dangerous to the patient’s health.

So the physician prescribes massive infusions of blood, period.  If the patient doesn’t recover, the physician orders that the volume of blood-infusions be increased.  If the patient dies, the physician will forever blame himself for not increasing the volume of blood-infusions even further.

If the patient does recover, the blood-infusions will be praised for saving the patient.

The big hole in the patient’s stomach is called a “micromedical” problem.  It might well be a significant problem, the physician concedes, but our physician is  trained to diagnose and cure one specific “macromedical” problem only, which is the problem of bleeding.  Micromedical problems are fundamentally distinct from the macromedical problem, which is insufficient blood coursing through the patient’s body.  (Blood, after all, is vital to a person’s vitality and vigor.)  When a patient who had until recently been quite healthy begins losing blood, the consensus of many physicians is that by far the most important treatment – certainly a necessary one, and, generally, a sufficient one – is to keep pumping more and more new blood into the patient until his health is restored.

Questions of precisely why, where, and how the patient is losing blood aren’t as important as is the realization that the patient is losing blood.  “A bite by a spirited animal” is the famous phrase that is typically used to explain the mysterious bleeding.

It’s very simple, really.

……

Like any analogy, this one isn’t perfect.  For example, in economies, repairing the microeconomic wounds goes a long way by itself toward restoring demand for goods and services, while in wounded human beings (to whom mortality comes much more quickly than it does to economies) blood transfusions often are necessary, even though they are seldom a successful treatment for the underlying problem that caused the loss of blood to begin with.

(I thank George Selgin for helping me with this analogy.)

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Cautious Optimist August 1, 2011 at 4:35 pm

Of course, if you do not give your patient more blood as he is bleeding profusely, he dies even if you patch the hole. In your analogy, the first step in treating the patient is in fact to give him more blood. Then the doctor would be able to address the hole in the stomach while the patient was stable. If you did it in the other order the patient would die from loss of blood.

Your analogy reinforces my impression of the libertarian ethos. Assume that if we just ripped off the stitches the patient would heal itself. Under any circumstance. And if the patient dies, it’s only because we left the stitches on too long.

Subhi Andrews August 1, 2011 at 4:43 pm

Cautious Optimist,

This analogy is meant only to elucidate the folly of Keynesian economics. This analogy doesn’t work with laissez-faire economics.

Kirby August 1, 2011 at 7:09 pm

Yep. It’s more like if clotting would fix the wound entirely faster than if it got stitched

Krishnan August 1, 2011 at 4:48 pm

About “healing” – Oh yes, in many cases, what we think as “medicine” that we think heals, the body heals itself … And yes in many cases, the “medicine” actually delays the healing …

There are many who believe that there are indeed over the counter medicines to cure the common cold – when what those “medicines” do is actually prolong the cold by interfering with the body’s ability to heal.

Russ Nelson August 1, 2011 at 5:19 pm

The analogy only goes so far, since it’s the Keynesian who shot the person in the first place (the fix is the cause of the next depression).

muirgeo August 2, 2011 at 12:03 am

Yeah… with his tax cuts, free trade agreements, union busting, offshoring, stagnant wages, decreased minimum wages, deregulation , financialization, corporate capture, money is speech, corporations are people agenda…

Anotherphil August 2, 2011 at 9:13 am

Hey Muirbot, how do you feel about GE’s CEO being a “jobs czar” when GE has been dropping payroll and paying no taxes on 5 billion of domestic income?

Or are those things ok when the “offender” has his nose up Obama’s butt so far he might pop out his mouth if POTUS stops too quickly in search of a camera

muirgeo August 2, 2011 at 10:06 am

Sucks… a big disappointment but again I don’t care about the politician I care about the policy. If Obama has some grand scheme of triangulation to get the right things done I am not seeing it. I am hopeful. I think he has shown himself more muture and more of a statesman then most but maybe that’s why progressives do not like him for compromising in the middle too much. Many progressives consider him to a bit to the right of center.

The Other Eric August 2, 2011 at 1:59 pm

Your gullible acceptance and repetition of talking points is remarkable :
tax cuts– on balance it’s a good thing to lower tax burdens. (According to even liberal economists roughly half of all taxes are wasted, stolen or misspent.)

free trade agreements- good things that marginally improve trade.

union busting– hasn’t happened in 20+ years; unions are suffering from 19th century design.

offshoring– actually called trade; began in 1500s; stupid term used by stupid people.

stagnant wages– not true (except with mis-applied statistical methods and faulty quantitative reasoning).

decreased minimum wages– lie; utterly untruthful propaganda.

deregulation– lie; in no part of the modern economy has regulation decreased for 64 years.

financialization– incomprehensibly stupid term; so meaningless it’s not even wrong.

corporate capture– polysyllabic stupid term.

money is speech– true; it is also time, leisure, and the only source of influence in Democratic Party politics (see: Tony Rezko, Blair Hull, Peter Buttenwieser, SEIU, NEA, AFT etc.).

corporations are people– mistaken conclusion based on faulty understanding of corporate law and property rights.

Chucklehead August 2, 2011 at 4:40 pm

Corporations are associations of people, and therefore still covered by the first amendment.

Methinks1776 August 1, 2011 at 6:18 pm

Sweet Jesus! Even with a caveat by the author, you’re still whining about the imperfections of the analogy only to analogize your own straw man in the next paragraph. As imperfect as analogies are, at least (unlike you) Don understands what he’s analogizing.

Anotherphil August 2, 2011 at 12:51 pm

Note: Muirbot failed to answer the question about GE and instead waxed inartfully on a tangent, making the utterly absurd claim that Obama is “mature”, which wasn’t at issue.

Even those you didn’t spell it correctly, I believe that “manure” would apply more to Obama’s deportment than “mature”.

Methinks1776 August 2, 2011 at 1:20 pm

You’re right, of course, but I was responding to CA, not the resident idiot.

vikingvista August 1, 2011 at 11:51 pm

What he didn’t tell you, is that the blood being transfused was, at the same time, being taken from the same patient.

Steve_0 August 2, 2011 at 12:31 am

Brilliant.

indianajim August 2, 2011 at 8:29 am

Ditto

Martin Brock August 2, 2011 at 8:41 am

If spending is the life blood of the economy, then reduced spending during a recession has remedies other than deficit spending by the state imposing debts regardless of any value to the debtor and organizing vast resources otherwise available to hundreds of millions to suit a committee of hundreds.

Your caricature of a “libertarian ethos” is nonsense, because it simply ignores countless libertarian alternatives to the One Big Plan, state deficit spending, that Keynesians advocate. Expedited bankruptcy reorganization, sans bailout, combined with free banking can free and then reorganize capital locked into unproductive rent delivery networks, while Keynesian “stimulus” simply pumps more money into existing networks by imposing more rents.

I can hardly imagine a more pro-state, pro-wealthy, anti-consumer, anti-worker, anti-common man solution to the problem. By making the state the primary benefactor of the poor, you can pretend to protect the poor this way, but as it sustains and multiplies rigid, stultifying, established systems of forcibly imposed rent, this feudalistic approach to “helping the poor” is more illusory than efficacious. Beneath the platitudes, revenue from these rents flow far more to the rich than to the poor.

Even if we accept the premise that spending fueled by credit is necessary to lift an economy out of recession (and I do accept it), questions remain. Who extends the credit? Who decides the price of capital purchased? Who reorganizes this capital? What is the goal of the reorganization, satisfying a few central planners chosen in biannual plebiscites or satisfying many consumers choosing daily?

By simply ignoring countless answers to these questions other than the stock, Keynesian answer, you simply assume the “libertarian ethos” of your counter-Keynesian straw man.

morganovich August 2, 2011 at 4:51 pm

actually, i think the better analogy might be to 18th century quacks who bled their patients to cure illness.

keynsianism not helpful like a blood infusion, but rather harmful, like being bled of quarts.

it does not stabilize, it destabilizes.

fresno dan August 4, 2011 at 2:30 pm

leeches! more leeches. ill humours of the blood demand leeches!

Ike August 1, 2011 at 4:35 pm

Don, I think you had a good idea here, but I reject the appropriateness of your example. Allow me to modify it:

The patient is a bleeding hemophiliac, and Dr. Krugman keeps touting prescriptions for leeches.

muirgeo August 1, 2011 at 6:08 pm

Again Ike what’s the bleeding? The deficit? That didn’t cause our problems much as the media has been successful convincing America so. It is a symptom of a poor economy… a symptom of poor production.

Production is down because demand is down. The problem is not the bleeding it’s that the bone marrow is shut down and not making new blood. The private sector does not want to use its blood because it sees no demand. Cutting government spending/ jobs just cuts demand further and increases the deficit. A government transfusion is a temporizing measure until the bone marrow is replaced… as in structurally changing the problems that have lead to decreased wages and decreased jobs.

Ike August 1, 2011 at 6:21 pm

I would not submit that the deficit is a symptom of a poor economy. We’ve run deficits in good economies and in bad ones.

The deficit is a symptom of a failure of political will, and of our inability to shake a system of perverse incentives that reward unsustainable behavior.

I addressed the analogy below.

Kirby August 1, 2011 at 7:13 pm

The Keynesians broke the person’s bone and caused their marrow to die, and now are attempting to draw bone marrow from the patient in order to sustain a steady infusion… of bone marrow.

muirgeo August 2, 2011 at 12:07 am

LOL… at least make some analogy with the actual economy…. duffs. You just described some one getting beat to hell with no keynesian economic corresponding action.

Kirby August 2, 2011 at 10:46 am

My point is, you are raising taxes and stealing money from the citizens…. so that you can give the money right back to the economy, in the hopes that it raises demand.

Greg Webb August 1, 2011 at 4:38 pm

Nice analogy! It works because the first thing that you do, even before giving the patient a transfusion, is stop the bleeding. That is basic first aid. The transfusion may, or may not, be necessary.

muirgeo August 1, 2011 at 5:30 pm

Greg,

What is the economic policy response equivalent to stopping the bleeding?
What does the bleeding represent in our economy?

Ken August 1, 2011 at 6:09 pm

Runaway government spending. The spending either requires money to be taken from one part of the economy, then part of it put into another part of the economy, after the government skims it’s part, or the money is borrowed and US citizens are put on the hook for irresponsible government spending.

Either way, this puts enormous pressure on the average American by reducing take home pay and reduced opportunity for a job.

Regards,
Ken

Kirby August 1, 2011 at 7:15 pm

To reiterate my example in terms of blood, the Keynesians are requesting that the patient donate blood to stimulate his blood pressure, causing him to lose more blood.

Seth August 2, 2011 at 10:19 am

The bleeding represents the over investment in housing that was caused by the distorted market. Government helped distort the market by encouraging subprime lending with its contribution to relaxing lending standards (through Fannie and Freddie) and easy money policy of the Fed.

Stopping the bleeding would be to allow these things to operate without the interference of government.

Greg Webb August 2, 2011 at 12:02 pm

George, please see the comments from Ken, Kirby, and Seth for my response. I agree with them all.

DG Lesvic August 2, 2011 at 3:45 am

Greg,

I still haven’t seen your apology to Don or myself.

Apparently you still feel free to take advantage of his hospitality to slander him. He will not defend himself but I will. He is not the parasite of economics that you have made him out to be but the finest man in the field today. Do not think that your slanders will go unchallenged. I shall be there to remind you and everyone else of them wherever you raise your head, until you retract and apologize for them.

Greg Webb August 2, 2011 at 11:58 am

DG, I see that you continue your despicable and disingenuous behavior here on Cafe Hayek by not complying with your promise to Don Boudreaux to “leave Cafe Hayek never to return” once Don provided your requested example of mathematical economics.

Greg Webb August 2, 2011 at 12:08 pm

DG, you owe Don and many other commenters at Cafe Hayek an apology for breaking your promise “to leave Cafe Hayek never to return. You owe your children an apology for implying that they have “horns,” “hooves,” and “tails.” You own your wife an apology for demeaning her by saying that she is “an unreasonable and illogical creature.” You own me an apology for sleazily mischaracterizing my previous comments. But, I don’t want an apology because you have proven many times that you never mean what you say.

DG Lesvic August 2, 2011 at 12:56 pm

Greg,

You wrote, at a previous thread:

“Then, you breached the contract by imposing conditions that you never mentioned before Don accepted your offer.”

Just what was that contract I breached and what were the new conditions that I imposed and had never mentioned before Don accepted my offer?

And why had Don not objected to my actions as you have if he thought I was being unfair? Why, rather than object, and try to hold me to the original terms, would he walk away from the discussion without a word and leave the impression that I had won the argument?

What was it about my conduct that kept him from defending his conception of economic truth, and was more important to him than economic truth and error?

And, whatever it was, how do you know that? Are you God or a mind-reader? Do you know what is really in everyone’s mind, or just Don’s.

Now, Greg, I am repeating my offer, to leave the Café if anyone can provide an example of mathematical economics. And just so there will be no misunderstanding, I am asking for an actual and not just purported example, and require more than just someone’s declaration that it has been provided. I require argument for it, and counter-argument to all of my arguments against it, and without any excuses for non-compliance.

Of course I am not putting my fate in anyone else’s hands, who could then arbitrarily decide whether I stay or go. I must keep that final decision to myself. It would be wonderful if we had God to decide the matter, but since we don’t, how and why should I do otherwise?

And what difference does it make? What is this really about, economic truth and error or whether or not I depart the Café?

How does my deciding whether or not to do so prevent anyone from making the case for mathematical economics, and the readers from seeing it?

Now here is your chance to back up everything you have said against me and for your position. Give us your example. I can’t stop you. I can’t keep the patrons of the Café from seeing your words, and believing yours over mine. I can’t keep the real triumph from you. Only you can do so, and have been, by the red herring you have dragged into this.

Get back to the point, if you dare.

Prediction: you won’t, but will drag in another red herring.

Greg Webb August 2, 2011 at 2:07 pm

DG, now you are being obtuse.

Don Boudreaux already provided you with the example that you requested, then you weaseled out by providing after-the-fact conditions to your promise. If you did not mean what you said then, why should anyone believe your promise now.

The issue is whether mathematical economics has value to understanding the field of economics. It does. And, I will restate my previous acceptance of your offer to debate this issue once you set up a debate blog so that we no longer interfere with the patrons of Cafe Hayek by discussing an issue that is not the subject of the posts by Don and Russ.

DG Lesvic August 2, 2011 at 5:57 pm

Greg,

You wrote,

“Don Boudreaux already provided you with the example that you requested.”

But was it valid or not? You simply beg the question.

You wrote,

“then you weaseled out by providing after-the-fact conditions to your promise.”

Exactly what was the promise and exactly what was the “after-the-fact condition?”

Prediction: you will never answer this question.

You wrote,

“If you did not mean what you said then, why should anyone believe your promise now.”

The promise to depart the Cafe was meant merely as a gimmick to promote discussion and not as the impediment it has become. So I shall remove the impediment, retract the promise, and reissue the challenge without it.

You wrote that you would debate the issue with me if I set up a special blog for it.

Is there anything else you’d like me to do for you, pick up your clothes from the cleaner, take out the trash?

I have a better idea. You set up the special blog.

If you’re not just trying to evade the issue here, before everyone’s eyes at Cafe Hayek, and are really so anxious to debate the real issue with me, why didn’t you do so when you had the chance? There was nothing I did or could have done that would have prevented you from doing so. Even if everything you have been saying about me had been true, that I went back on my word, changed the rules of the game, you didn’t have to abide my rules, you could have gone right on and defended Don’s purported example or provided another of your own. But you chose not to do so, to drag in a red herring, just as you’re doing now.

The discussion you’re engaged in with me right now is off-topic too. But that hasn’t stopped you. All of your personal attacks upon me have been irrelevant and off topic too, but that hasn’t stopped you. You are ready at all times to go off topic in order to attack me personally, but never even when it’s on-topic to attack my ideas.

At any time that we were off-topic, and our hosts didn’t like it, they could put a stop to it. But I haven’t seen them objecting to this off-topic discussion so far, nor any reluctance on your part to engage in it, so long as it was about me rather than the real issue. It is only when the real issue is brought up that your scruples kick in. I wonder why.

It looks to me as though you’re trying to be the Arnold Scharzenagger of economics, an intellectual action figure, the Prevaricator.

I’m sure nothing will ever stop your prevarication nor anything drag you into a debate on the real issue.

So far, logical economics has won and mathematical lost.

But you or anyone else will have plenty of opportunity for resuming the fight.

Prediction: you won’t dare and neither will anyone else.

You’ve already seen what’s in store for you, and that all you’ll ever be able to muster is more red herrings, ad hominems, and downright ludicrous lies.

Krishnan August 1, 2011 at 4:59 pm

I am so glad that Congress and the White House has not legislated how to teach arithmetic. Imagine something with a value of 100 – a 5% cut in it’s value would mean that it would now be worth 95. Congress on the other hand, increases the 100 to 110 (automagically) and a 5% cut would mean that the value is now 104.5 and hence an INCREASE from 100 to 104.5 is seen as a CUT of 5%.

Even with these 2.4 or 2.7 or whatever trillions in “cuts”, the fact that the US debt INCREASES to 17 or 18 trillion dollars in the next two years does not seem to bother many – they are all celebrating the deal … while there are some upset at the “cuts” …

I wonder if the IRS would accept this Congressional Math – In any year, if the taxable income were to increase by 5% and the expected increase was 10% – would the IRS accept that as a cut and so lower the taxable income?

Slappy McFee August 1, 2011 at 5:01 pm

Don:

Make sure you head over to econlog and read Max Border’s argument against the “Economy as a Machine” fallacy.

It fits quite nicely with yours and Russ’ Keynes posts today.

*a conspiracy theorist might suggest that there is an Anti-Keynes messaging campaign today…

Russ Nelson August 1, 2011 at 5:20 pm

Every day is an Anti-Keynes day.

Justin P August 1, 2011 at 5:23 pm

That’s because everyday is reality.

Methinks1776 August 1, 2011 at 6:18 pm

touche

Ike August 1, 2011 at 5:28 pm

Today is indeed an “Anti-Keynes” day, just like it is a “Gravity” day, a “Light Travels 186,000 Miles Every Second” day, and a “SNL is Going to Tease You With An Opening Sketch That is Just Funny Enough to Trick You Into Watching All the Way Through Weekend Update, But in the End Isn’t Going to be All That Satisfying” day.

I would suppose Don and Russ and Max and Tyler and the rest of the gang would spend their time puncturing the fantasies of Flat Earthers, if indeed the Flat Earthers were embarking upon economic policies that were downright backwards.

Slappy McFee August 2, 2011 at 9:35 am

As someone that barely admits that ‘demand’ exists, I will gladly acknowledge that everyday is Anti-Keynes day. Yesterday I just happen to notice that there almost appeared to be “marching orders from up on high” to refute Keynsian interference. I will now admit that it was a poor attempt at tounge-in-cheek humor (hence the *).

muirgeo August 1, 2011 at 5:47 pm

The first step is indeed to stop the bleeding. That can be done in the field before blood is available. But what does the bleeding represent in our current economic situation? What is the symptom?

Stagnant wages are the gun shot wound… decreased demand is the blood loss…. job loss, decreased productivity and increased deficit are the the shock like sings and symptoms. There is lots of blood to transfuse ( the corporations sitting on trillions).

Increase wages (close the hole in the wound and prime with some blood) and demand ( blood volume) increases. Increasing GDP, decreasing unemployment and decreasing the deficit.

The deficit to the neoliberal has been pointed to as the problem when in fact IT is the symptom. Oh and the gun that caused damage and bleeding is neoliberal ideology and the bullet is their policies put into effect ever since Reagan and Thatcher and Freidman.

Craig S August 1, 2011 at 6:04 pm

What was the gunshot of the 1970′s? What were the economic policies pursued in the US and UK from 1930-1980 more or less? Where those classical liberal policies in the 50′s and 60′s that lead to high inflation and high umemployment, which the Kenysians said could not happen?

You can not have it both ways.

Ike August 1, 2011 at 6:19 pm

We agree — the deficit is a symptom of a larger issue. But I doubt we agree on much else.

The gun is the silly system of perverse incentives that allow the governing class to buy the votes of the governed using their own money.

There is NOT just one bullet — there is a new one fired every year when a budget with a deficit is passed.

We need to not only close the wounds, but also to take away the gun.
——————————-
Now to highlight some of your ideas:

Increase wages (close the hole in the wound and prime with some blood) and demand ( blood volume) increases.

Really? Closing the hole and priming with blood will somehow create more blood? The body makes blood all the time, and doesn’t need “new blood” to facilitate that.

There is lots of blood to transfuse ( the corporations sitting on trillions).

The idea of ‘repatriation’ of money is nothing more than an elaborate multi-year tax dodge scheme. Huge moral hazard here.

Not to mention the fact that we’re talking about the equivalent of tapping the patient’s right leg to supply the left!

(The corporate money that IS overseas is there because some people are leaving the hospital before we plunge ice picks into them…)

Mesa Econoguy August 1, 2011 at 7:17 pm

Not sure why I’m bothering, but the bleeding is spending.

We are now on an exponential spending trajectory. GDP growth is not.

This is a problem. The ratings agencies consider faster debt growth than GDP growth to be a major red flag signaling inability to pay back debt.

We will be downgraded, the questions are when and how far.

muirgeo August 2, 2011 at 12:12 am

Bleeding is spending….. OK then I guess you can share with the class the biggest new program since 1/2009 that has added to the current spending. Which program is that and how much did it add to the 2010 budget and how much will it add to the 2011 budget?

Ike August 2, 2011 at 8:48 am

Many of us here have been railing against over-spending for a couple of decades now.

Not a SINGLE person in this thread has pointed a finger at our current President, nor said that this was caused by our current Congress.

That Twinkie didn’t make you fat… it was that Twinkie along with the 5,000 that came before.

BonnieBlueFlag August 1, 2011 at 5:52 pm

For crying out loud, it is a simple analogy. Why so pedantic?

DRDR August 1, 2011 at 6:38 pm

I agree this analogy works well against Krugman’s most common rhetoric, but there’s also the idea (pushed often by DeLong & Stiglitz) that we should massively increase public investments at a time when labor costs & borrowing costs are low. Aren’t there good micro reasons to invest in more public projects when costs are low?

So to carry the analogy further, when the government tries to supply the sick patient with readily available blood, they’ll spend months fighting over what kind of blood type to provide. In the end, they’ll end up supplying the wrong type of blood at above market value. If the patient by some miracle survives, the wrong blood type will continue to be supplied — only ceasing once the blood suppliers retire in their 50s with six-figure pensions.

Mike Sproul August 1, 2011 at 7:48 pm

Don:

A true Keynesian would transfuse the blood into the patient’s right arm, while taking it from his left arm.

Subhi Andrews August 1, 2011 at 9:15 pm

I have heard that from Peter Schiff.

Surfisto August 1, 2011 at 10:16 pm

Mike,
I am not sure I get the analogy. It seems from the blood transfusion there is potentially unlimited supplies of blood that will stimulate the patients life and it should be used. If there is no “extra” blood from the same body how can you stimulate? I also had a Mike Sproul as a econ teacher at in 1999.

Mike Sproul August 1, 2011 at 10:47 pm

Surfisto:

That econ teacher would have been me.

The problem is that the stimulus spending has to come from somewhere. If it comes from taxes, taxpayers have less while stimulus recipients have more. Same with borrowing. If the money comes from the printing press, then that money is just a disguised form of borrowing, so once again the increased spending in one area is offset by reduced spending in another. Of course, if you think of this from a microeconomic perspective, stimulus spending makes no sense at all.

vikingvista August 2, 2011 at 2:12 am

Surfisto,

What happens to the supply of private investment funds when the government decides to engage in massive deficit spending? What happens to resources useful for building a new economy when the government is maniacally trying to force their continued misallocation?

The government doesn’t have an external source of “blood” from outside the patient/economy, and it can’t create it. All it can do is force it from one part of the patient into another.

Surfisto August 3, 2011 at 1:10 pm

Viking Vista,
Thank you for the response. Two part question.
The external source would not be the printing press? That should cause inflation, which acts like a tax that, which would force the blood from one part to another, but with the absence of inflation (for now), is the printing press not an external source? Your answer will determine my next part of the question.
Thanks

vikingvista August 3, 2011 at 1:26 pm

No. The printing press isn’t printing resources, only pieces of paper (and digital equivalents). The use of those pieces of paper ONLY serves to redistribute existing resources.

Surfisto August 3, 2011 at 7:25 pm

I could not reply below, so basically the second part is not that related. Just a confusion about how the government can stimulate the economy with interest rates. So how I understand the treasury can engage in open market operations and buy bonds to increase the money supply which lowers the interest rate and should stimulate the economy. Now people/governments can also buy bonds to help the government spend, which I fully agree is wasteful and they don not stimulate by spending. This gives the money not to the treasury but to the coffers of the government? Because when the treasury sells bonds they take money out of the economy and the government does not spend those bonds? Not sure if you can see where I am going with this.

Lee Kelly August 1, 2011 at 8:41 pm

Of course, the politicians would keep infusing the patient with blood even after he has gotten better … so he won’t stay better for long. Hey, look, the analogy still works!

Jeff neal August 1, 2011 at 8:43 pm

How many people – aside from Krugman, I guess – really believe that $3,600,000,000,000 federal spending isn’t enough? And who thinks that the politicians should be rewarded for ‘preventing’ the disaster that would have been caused by failure to increase the debt limit.

I elaborate here > http://wp.me/p1jTK0-90

Economiser August 1, 2011 at 10:35 pm

Any budget deal that involves more spending today offset by spending cuts in the future is a charade. Putting aside the shady accounting, a Congress today can’t hope to obligate a future Congress 5 or 10 years down the road.

Making the “tough choices” has to involve real spending reductions today as well as tomorrow. Anything else is a joke.

Randy August 2, 2011 at 7:01 am

Its an interesting analogy… The problem (following Arnold Kling’s PSST lead) is that if the patient is the economy, then from time to time bleeding, even severe bleeding, is a natural and ultimately beneficial part of the process. E.g., the “economy” is now in “recession” because “wrong” decisions were made. Not “bad” decisions, just “wrong”. And the bleeding isn’t “good” – just “necessary”.

indianajim August 2, 2011 at 8:48 am

Miscarriage is a natural occurrence that causes bleeding; maybe this will help you extend the analogy to follow Kling’s PSST.

indianajim August 2, 2011 at 11:07 am

And miscarriage is akin to an entrepreneurial mistake by investing in the creation of a new product that either ends up not being demanded sufficiently to warrant revealed costs.

Slappy McFee August 2, 2011 at 9:39 am

Old blood cells die off and are expelled out your colon. New ones then are born. So yeah, PSST does fit.

John Sullivan August 2, 2011 at 8:22 am

The sickness of an economy is always caused by outside interference. If the interference is removed, the economy will improve. Poor economies suffer from an inefficient allocation of resources. This happens when power allows a few people to substitute their limited intelligence for the combined intelligence of the many.

Individual human action is never powerful enough to make an economy sick. Mistakes in individual human judgment, or mistakes in what we’d call economic calculation, that result in wasted investment and the misallocation of resources are frequent, but never systemic. It is impossible for huge groups of individuals to simultaneously err in economic calculation unless there exists some sort of collective control over those individuals by an outside agency.

The effciency of economies is due to the employment of all the specific knowledge of the participants. If the knowledge of the many is, through compulsion, replaced by the knowledge of the few, the efficient allocation of resources diminishes accordingly.

The argument that a planned or managed economy, or any part of it, such as the government controlling money, interest rates, the health sector, banking, finance, or whatever, can be reduced to an argument for totalitarianism to replace liberty. With economic liberty, there could never be recessions or depressions becuase there could never be a systemic misallocation of resources.

To enslave people economically, which is what all govenrments due to varying degrees, is to screw with nature. And when you screw with nature, you pay the price.

All economic management by central authorities are totaltarian abuses of power that lead to poverty in exact correlation to the degree that freedom of individuals to make decisions for themselves has been restricted.

An ounce of planning is an ounce of dictatorship resulting in an ounce of poverty. A mixed economy is a partial dictatorship with partial poverty.
The mathematical equations are as follows:

Poverty(P)

Interference (I)=Regulations (R)=Dictatorship(D)

D=P

10% of D = 10%P–a perfect correlation. If you remove one part of indivdual planning from the recipe, it can’t be replaced by central planning because the central planner didn’t know what that individual knew. The central planner knows very little when compared to all the individual planners. If there are 50 central planners who act for 50,000 individuals, the intelligence of 50 people is substituted for 50,000. Why would anyone think we’d be better off?

Nature provides humanity with an abundant source of potential, if we can keep it.

John Sullivan August 2, 2011 at 8:28 am

Do any of the central planners here, the totalitarians among us, know what ‘thymology’ is?

Are any of you intelligent enough to make a post regarding its application to the health (efficiency) of an economy?

Does anyone live in a town where they know many shortcuts to where they are going? Would they get around a little more effciently than, say, someone who popped in from a different country, who perhaps even spoke a different language?

Oh, but what the hell do individuals know when we have Paul Krugman.

Jeff neal August 2, 2011 at 8:25 am

Did I miss it or has someone made the point that the blood has to come from someone else, and, to paraphrase Maggie Thatcher, the problem with blood infusions is eventually you run out of somebody else’s blood.

Our politicians (R and D) think that government spending/infusions/stimuli/pump-priming are free. My sons resent the theft.

muirgeo August 2, 2011 at 10:11 am

Jeff,

I recommend you listen to Russ’s most recent and excellent Econtalk interview with Anat Admati of Stanford University on financial regulation. Then tell me the banks aren’t the ones borrowing and lending others blood. THAT is where the playing field is tilted from the start.
Why do you guys hate regular people and assume THEY are the ones stealing and then assume those with all the money MUST have earned it???

http://www.econtalk.org/archives/2011/08/admati_on_finan.html

Gordon Richens August 2, 2011 at 10:35 am

“borrowing and lending others blood”

I have a nephew in his 40′s whose adult life is nothing more than a string of abandoned projects; for each he has crafted a narrative that imputes the blame for its inevitable failure on others. As a result, his personal resources have steadily shrank to the point that his personal choices are now uncomfortably limited.

Essentially, his model of the world has worked to curtail his freedom to *choose*. As a result, he places no value in the freedom of choice for others. Compulsion by the state or a free exchange between individuals, it’s all the same to him.

Slappy McFee August 2, 2011 at 11:05 am

Doctor:

You may want to fast forward to the 45 minute mark and listen again.

Jeff neal August 2, 2011 at 11:48 am

I hate no one and see nothing in my post that makes it logical that you would infer such a thing.

The banks may be part of the blood-letting, but they are enabled by the government’s back-stopping their losses.

I didn’t say “regular people” are stealing anything. Are you projecting?

John Sullivan August 2, 2011 at 3:15 pm

This is true. Those with money often obtained it due to laws that favored them, but most of them are advocating a continuance of those laws. Most people here want to end those laws.

The financial industry is supported by Washington. Their profits are all questionable, but Muigeo doesn’t know how to reform it, or where to begin because he doesn’t grasp the economic principles being violated.

Further coercion is the only method suggested by him. Everything he advcates on this site is blatantly anti-consumer. In every case, his preference is to enslave the consumer to pay higher prices for things without the slightest regard that at the end of the day, the consumers will have to forego consumption of certain things because they’ve run out of money. What they forego will cause layoffs in the industries that supply those goods and services.

At the end of the Muigeo day, the 50 jobs he saved at one plant will be lost in 10 others and the net result will be that the society will have less total goods and services available for consumption than they had at the start of it. This process, which he diligently argues for on every one of his posts, is none other than the unraveling of the division of labor. It is the undividing of man’s labor that he wishes for.

Here how it works: 1000 people in a society can through the dividing of their labor make 10,000 products that everyone can afford to use in varying degrees. But Muigeo is against the act of anyone losing their job, or being displaced. He argues not only that the competition that allows for the division of labor be regulated so that it can’t happen further, he demands its reversal. The logic of having a country make every thing that they consume is reducible to having every family make everything that they consume. This makes trade and exchange the enemies of mankind, since it may result in someone having to employ their labor doing new things.

The logical mistake he makes is that he measures the health of an economy by whether or not labor is holding down their jobs, rather than from a consumer perspective of what the purchasing power of their income can bring to them in goods and services. It doesn’t occur to him that high unemployment rates are caused by regulation of the labor markets–a key factor of production. Rather, he blames it on the division of labor, which he considers immoral and thinks should be illegal.

Stephen A. Boyko August 2, 2011 at 10:24 am

“Questions of precisely why, where, and how the patient is losing blood aren’t as important as is the realization that the patient is losing blood.”

So to with the folly (SOX and DF) that has befallen capital market governance.

Markets are complex adaptive systems. If there is complexity, there is uncertainty. Having One-Size-Fits-All deterministic metrics treat both determinate and indeterminate issues is similar to having one set of driving regulations for both the US and UK. See http://viewer.zmags.com/publication/d53fc76e?page=31#/d53fc76e/31.

Anotherphil August 2, 2011 at 1:01 pm

Posted by Gregg Webb on the Innovation Thread:

EG, do not be fooled by the liars that controlled the former communist countries. It was never about ideology. It was about a few controlling the many in order to reallocate resources to the controlling few. The communist ideology was the lie told to the many to get them to accept less…much less I am sad to say. Or to paraphrase, communist ideology was the opiate of the subjugated people and the sedative the nonmenclatura used to sooth their guilty consciouses.

Insert “Keynesianism” for “Communism” and you’ll see its nothing but a specious justication for the Ruling Class to acquire, use and maintain power.

Thomas A. Coss August 3, 2011 at 12:44 pm

Russ, outstanding analogy.
Prior to the publication of De Motu Cordis in 1962 by William Harvey, medicine worked under a Galenic notion of circulation (from the first century physician Galen) where blood was produced in the liver, circulated about and was excreted. William Harvey did some simple math, he filled the left ventricle of a human heart and measured how much it would hold, about 3 ounces, but squirts out a little over half that (about 70ml) with every beat, then some simple math (70 beats a minute X 60 minutes in an hour X 24 hours in a day X70ml) then apply what we learned in elementary school (pint a pound the world around) and voila, about 540 pounds in William Harvy’s case, but the patient weighed less than 150 pounds! An immediate conflict between what was truly “known” to be true at the time, and reality.

Under the Galenic circulation, if your stabbed on the battle field and bleeding, no problem; under Harvey’s closed system…. big problem.

Ideas have consequences, there are no “Keynsean” surgeons.

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