Bradley Bateman writes,
He never said that the government could exactly hit some target. This is an idea that came from one of the first great Keynesian texts published in the late 1940s, Functional Finance by Abba Lerner
Bateman writes in a collection of essays called The Economic Crisis in Retrospect, which tries to ask what great economists of the past might have said about the financial crisis of 2008. It is published by Edward Elgar, which typically prices its products for libraries as opposed to the mass public. I was sent a review copy.
Bateman also claims that Keynes did not believe in running government budget deficits. “In many ways he was Libertarian.” Of course, he was always in favor of public works as a stimulus package, but Bateman claims that Keynes proposed using the government’s sinking fund to finance this. It is not clear to me why this is not deficit spending.
In another essay, on Joseph Schumpeter, Richard N. Langlois quotes from Capitalism, Socialism, and Democracy.
Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary. And this evolutionary character of the capitalist process is not merely due to the…social and natural environment…The fundamental impulse that sets and keeps the capitalist engine in motion comes from new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.
Langlois says that Schumpeter explained the business cycle by saying that it takes a while for signals of obsolescence to reach the firms that are affected. Langlois writes,
They do not stop making carbon paper right away. So there is an economic boom that starts as the new technology spreads. It creates what Schumpeter calls a secondary boom that is artificial. Because what should be happening is that resources should be being withdrawn from carbon paper at the same time they are being put into computers. But that does not happen. The carbon paper is still there because those signals have not yet reached those who finance carbon paper. Yet there is a boom in computers. The whole process is not sustainable.
The book has other interesting essays including one by Perry Mehrling, who gives his view that we need to extend government protection to shadow banking, as well as one by Thomas Sargent, who raises some doubts about that approach.
Although I found the book worth reading, and I may re-read Sargent’s essay (I found a video of Sargent delivering his essay, and I passed it along to Scott Sumner, who seems to have had as much difficulty as I did following it.), I would not put it at the top of your wish list.
Heh.
oops. that was my typo. the original was correct, and I have now corrected the quote
The biggest problem with Keynesian stimulus is that government spending beyond a small fraction of GDP is simply wildly inefficient.
There are three kinds of spending: voluntary, transfer, and involuntary. Except for the environs of usage fees, government doesn’t participate too much in the first kind. On the other hand, transfers such as Social Security and unemployment insurance are significant and may have some stimulative benefits if in fact reducing investment is stimulative.
Everything else the government does is involuntary spending — spending that someone didn’t choose to do with his own money and therefore something that person valued less than it cost. One can fairly argue that some involuntary spending is on authentic public goods that the taxpayer really should have wanted to spend money on, such as actual defense or needed infrastructure improvements. The trouble is that such spending is (a) small potatoes and (b) unchanged by recessions.
So Keynesian stimulus can really only increase spending on things that actively subtract from the economy. Every dollar of stimulus actually makes us poorer because it makes the population pay for something we did not want. A case could be made that the need to keep velocity in money so the recession does not become a depression is so important that it is worth burning 10% or 50% or more than 100% of every dollar spent. But it’s a hard case to make. And you are still left with stimulus not correlating too well with actually increased income.
I wonder is the biggest problem today with Keynesian stimulus is that government is too big. So with government in good times already spending as much as it can safely tax, that leaves insufficient room to increase spending. So before the downturn Gov was 40% of GDP so to slap on another 20% for stimulus and you run up the debt so you need in the future to raise taxes but then you go negative on the Laffer curve but if before the downturn Gov was 15% of GDP and you slapped on another 20% for stimulus, you still can still easily raise taxes to cover it.
Oops myself. See reply above.