What’s really amazing about the European Central Bank piece is that it stresses that spending cuts are a much better way of closing a budget hole than raising taxes. This is not the kind of analysis you expect from the ECB! FULL ARTICLE by Robert P. Murphy
Source link: http://archive.mises.org/13945/the-empirical-case-against-government-stimulus/
The Empirical Case against Government Stimulus
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Well, I’m not surprised actually. Europeans, when the chips are down, usually do what is right. Greece, as I have said to Anthony Gregory, is really the exception to the rule. While European nations have large welfare states, they at least pay for them with a minimum of borrowing and inflation.
I think the attitude libertarians, whether inside or outside the beltway; anarchist or minarchist; philosophical or consequential etc, should take to Europe is a nuanced one. Both the “left” (with the exception of it’s radicals) and the “right” take a very vulgar and ill-informed perspective. Yes, all European nations have UHC, but they provide for it in different ways. Some better than others.
You’re right, to an extent – economic policy comes from a life philosophy. Do you prefer individualism or collectivism, for example? Europeans seem very comfortable with the notion of group-based, one size fits all solutions (such as UHC) – it is almost a laziness that causes this, I believe. Rather than worrying about the unintended consequences of these approaches (people who can’t afford to leave the country for specialized medicine, for example, because they are on a waiting list in their country), they are content to keep up their lifestyles, going on the same state-sponsored vacations, year after year. I have met a lot of Euro’s, and I always get this from them – things are pretty good, so let’s not worry about these issues. After all, who can turn down a “free” vacation….
To Dave Albin, yes we are more ‘individualistic’ but we humans all need other humans. Very few people can survive on their own wits and resources, let alone be ‘successful’. It always makes me laugh when I hear another Self-Made Man Story. Right.
We draw on others and their resources far more often than we care to admit. In essence we are far more ‘collective’ than we acknowledge to ourselves and far more than our educational propaganda teaches.
And if you have been to Europe, met, and talked a lot of Europeans, than you would know that FAR MORE Europeans discuss politics, and ‘issues’, than most of us North Americans. As to those Europeans who appeared so sanguine to you about the ‘state’ of their Social-Welfare States, and the funding of their services, UHC systems, and pensions? I think they are an endangered species —— if they were not talking (and worrying) prior to now, they most certainly are talking (and worrying) about those ‘issues’ now.
Getting back to Individualism —— What would most of us do if the lights went out tomorrow, forever? What would you do if you had no heating or cooling, or running water? What if the local food store could no longer supply us with sustenance? Well we would probably continue to look to each other (in some form of grouping) for support and those missing life-giving goods and services. Maybe it would be more primitive, yes, but there are only so many animals that you could hunt, or berries that you could pick. We’d have to go to the Amish and Mennonites for help on how to farm the ‘pioneer way’.
I am happy that The West ‘won’ the Cold War, and that the Soviet Union’s economic system (inevitably) collapsed (other than for the inevitable human suffering). But we hardly knew how to make our own Western economic systems a ‘success story’ after 1990. New World Order? Putting the ‘Peace Dividend’ to work? Saving the World from Insecurity and Poverty?
I am not an Obamanite nor do I think that the lazy, haphazard, contentious way that the American UHC proposal was brought into being ensures its long-lasting success, certainly not in its current form.
We can argue about Collectivism versus Individualism ad nauseam.
That people generally congregate into larger groups referred to as ‘Societies’ partly gives lie to anything like the Rugged Individualism of the Old West —— which was probably as close to true hermitic living as we are likely to see on this continent, give or take for a few successful ‘Mountain Men’.
As to Tristan Band’s rather optimistic view of the Europeans doing the ‘right thing’.
Yes, I agree, it cetainly behooves us to take a “nuanced” view and examine their systems carefully. In only that manner can we leverage their successes and failures, in order to better use the knowledge gained to implement and manage our own systems.
But I have to make a contention in response to the statement:
I think, Tristan, it would be wise if you were to reexamine the accumulated federal government-level debts in nations like the United Kingdom, Spain, Italy, Ireland, Iceland, France, to name a few.
Add to that the horrible demographic trends in those nations, and you have a disaster in the making.
Add to that, that the ECB has deviated from its long-held policy of never monetizing the debts of her member nations, and of never buying the Treasury Bonds of those member nations.
These are more than enough worrying observations to make me question your phrase “with a minimum of borrowing and inflation”.
Would you like to rephrase?
I do agree with your observation about Greece. The chances that Greece will repay her emergency loans to the ECB are nil, and those loans will be forgiven by the ECB eventually, and thus fully monetized by the ECB.
The bigger worry is about the other nations that are coming down the stairs, step by step, right behind Greece with their begging cups extended in the direction of the ECB and the IMF.
You are absolutely correct about the self-made man sham – if you “made it” by using something the state propped up (which is a lot of people), you really are not as successful as you think. What I think you are missing is that individuals will freely interact and trade with other individuals to get what they need and want – this has nothing to do with the state, or some artificial group. So, we don’t need some agency to provide food, electricity, etc. People will act to meet unmet needs in myriad ways. That’s the problem with collectivism – the creativity and innovation used to supply these unmet needs will be stifled, or destroyed. We are all worse with collectivism – hence, see what I wrote above about UHC.
BTW, I’ve been to different parts of Europe many times, both as a tourist and on a more permanent basis. Europeans are keen on discussing politics, within the framework that exists (which, I’ll admit is how people in the USA are, too). They really have a hard time picturing their lives without the govt. props. That has repeatedly been my experience – I know my sample size is small.
Thank you Dave Albin for your clarification.
I could not agree with you more.
The state as prop and crutch has gone about as far as it can, IMO.
Our Western governments cannot make their shares of GDP much larger without killing the Golden Goose, that is, the Private Sector.
The trend line in the U.K. is especially worrisome. I read in an essay recently that at something like 52% of the overall economy, the State is well on its way to destroying the U.K.’s Golden Goose.
Maybe the Europeans have been reticent to face this issue in the past (with “not being able to picture their lives without the government props) but, hey like the saying goes, “Reality Bites”, and the longer they put off facing Reality, the HARDER it will Bite.
At some point, with their unexamined assumptions and lifestyles, they WILL face a day of reckoning, which cannot be avoided.
We are in a similar boat, maybe with a fewer number of leaks. That remains to be seen.
To Dave Albin —— I recall now where I read those data points —— it was in a great essay by Chris Leithner at http://www.leithner.com.au/newsletter/jul10_newsletter.pdf
Quotes from Mr. Leithner’s essay follow.
This quote sounds an awful lot like what Robert P. Murphy has sounded the alarm about in his own fine essay.
I wonder how Paul Krugman would respond in his column “Conscience of A Liberal” to the above argument from James Callaghan?
Later, in his fine essay, Mr. Leithner writes:
(In the above, I added some personal comments within square brackets. The italics were also added by me.)
QUESTION: how long does anyone think this approach can last without calamity?
To Dave Albin again.
Quote from you:
This reminded me of another possible ‘sham’. Namely the ‘sham’ of “making it” (to so-called Self-Made-Man status) with money that Investment and Commercial Banks get directly from The FED.
These financial institutions, which are oh-so protected from any buffeting by Reality, are in effect ‘shams’. Bad enough that these institutions use financial shenanigans to ‘make money’, but far worse is that they use funds indirectly stolen from Main Street. After all, what are funds from The FED, other than wealth indirectly (via money printing, a.k.a money inflation, a.k.a. “Quantitative Easing”) extracted from the pockets of Main Streeters?
And possibly another such sham, that you allude to, occurs thereafter as some entrepreneurs get this fiat, FED-provided, money from the Fractional Reserve Banking System that The FED operates.
That entire system falls into the category IMO of what you refer to as “using something the state propped up”.
Because, in the absence of The State’s regulations, exactly what would Free Banking look like?
Certainly not anything like the ineffectual, almost tragical-comical, and bust-prone, banking system we have today?
To Robert P. Murphy, thanks for a great essay!
I have found that people like Krugman are so crazy-glued to their “Weltanschauung”, that it is hopeless to present even genuinely well-crafted and well-evidenced arguments that challenge their world-views.
I agree with your evidence. I made my own effort to logically contradict Krugman, Bernanke, Greenspan, Geithner, et al at Jonathan M. Finegold Catalan’s blog at
http://blog.mises.org/13916/richard-cantillon-founder-of-political-economy/
We may eventually convince The People, but not likely in the current administration, nor during the current cycle of tragic Boom-Busts brought on by The FED et al.
Which is why political activity is a distraction. Even active propagandizing to “the people” rubs me the wrong way. I think a lot can be said for Leonard Read’s Taoist-esque wu-wei; do without doing. Let human curiosity work the way it should. If someone doesn’t automatically gravitate, they aren’t worth irritating to convince otherwise.
Thanks Tristan, you are right of course, I think I will take a ‘breather’.
“An Economist is a person who will tell you tomorrow why what he predicted yesterday did not happen today.” Paul Krugman is the apotheosis of this person. The beauty of the Austrian approach is that it is forward, rather than backward looking. It explained, in advance why we would have a housing bubble. It explained, in advance why the stimulus packager would fail. The key thing is that it is not enough to be right, you have to be right for the right reason.
There is another aspect to Krugman’s critique that should not be overlooked. Almost certainly without realizing it, Krugman calls into question the entire basis for “objective” comparative economic analysis by implying that we cannot make meaningful judgments unless the cases in question are sufficiently similar. The analytical problem resides in the fact that the “sufficiently similar” condition is itself a subjective criterion that is prone to selection bias given that the case outcomes are generally known. Attempts to make the selection filter more objective (over a large parameter set) would most likely reduce the number of comparable cases to either zero or so few as to render the analysis statistically insignificant.
Imagine Krugman and Mises are racetrack commentators. Krugman bets that a horse with 3 legs will win, and gives a whole bunch of reasons why. Mises notes that the horse has never won before, moreover no horse with 3 legs has ever won a horse race, and bets against it. The race is run and the horse loses. Krugman is surprised, he blames the track, he blames the weather, he blames the stall selection, he criticizes the Jockey. Mises, on the other hand, says that the horse lost was because it was lame!
Ha! Good one, but Krugman doesn’t end there! He gets legislation passed requiring every stable in the country to amputate one leg from every horse. He’s fine with the stable choosing which leg though right, I mean, the guy’s not a fascist.
.. and if the horse doesn’t run any faster, perhaps we need to amputate another leg – less weight to carry!
And if amputating one leg doesn’t work, it just shows that the horse was even worse off than thought, that it would have run even slower if the leg hadn’t been aputated, and that further amputation is strongly indicated.
Murphy…Bright guys like Krugman
I see a dark hearted man.
Just came across this snippet:
From “Letzebuerger Land, 2010-july-02″ (translated)
Krugman on European Tour
“Got a buck?” [sic]
Europeans of the Eurozone, go into debt, spend, support the economy! Bearing this message. Georges Sorros [sic], speculator, and Paul Krugman, Nobel prize in economics, are currently touring the EU. Krugman, who gave a speech this monday by invitation of the Alphonse Weicker foundation and the Center of Luxembourg Income Studies, is tirelessly exhorting Europeans to not destroy the support to the economy given by public spending programmes lest they risk another downturn. Germany, France and the UK would now be able to roll over their debt with good conditions and do so they should. Especially now, when Europeans have managed to finally decide on a policy of fiscal discipline, he demands the end of the “Geiz-ist-Geil” (Thrift-is-Hot) mentality.
No wonder then that Krugman considered his conversations with german representatives as “hopeless” and actually refuses to comment on any future projections for the European Central Bank currently lead by the Head of the German Federal Bank, Axel Weber. Could the collective appeals by Sorros [sic] and Krugman as well as other american Economic Greats invite a course change in Europeans, recently chastened by the weight of debts? Does the well-spoken Noble prize winner actually confirm the arguments of the luxembourg labor unions which also warn about spending restrictions that might be going too far and might be coming too early? Especially as, when he somewhat loses control, he is not wont to label the analysts and the recommendations of the OECD as “retarded” (schwachsinnig).
Not necessarily. One has to ask whether the numerous speaking events in Europe and the concomitant appeals to give the european economy additional dope (Aufputschmittel) are not actually meant to support the american economy. Indeed, the american economy has barely shown any signs of growth since its support programs expired – but support for a continuation of those support programs is missing. In the USA too, there are political forces warning against too deep a debt crater. Europeans plan to start their thrift programs anyway only in 2011 – three years after the start of the crisis. Can this be “too early” by any means? Maybe the effectiveness of those programs should be checked. If the multipliers are too low, there won’t be a lot of additional growth and the expectations to cover the additional debt through taxes are poor. Considering this, even Paul Krugman cannot avoid admitting that a policy of thrift, seen individually, makes sense.
In reply to the above:
Thank you for pointing out that I was wrong about European fiscal discipline. Especially right now. I suppose I was thinking of the reforms that Ludwig Erhard’s policies, responsible for West Germany’s apparent miracle. Ordoliberalism, while not laissez-faire, is still alright in my book; it’s more about building a framework around the market and society, rather than micromanaging either.
As for the individualism thing; having once been an Objectivist, I know about that kind of ‘superman’ delusion. I have sort of developed a Hayekian-even Burkean-appreciation of acculmilated wisdom built over many years. However, my view of individualism does not exclude the importance of society and benefiting from it. It’s more about keeping a healthy perspective of society itself-as an emergent result of human interaction, not as an entity unto itself. Sort of how what we call ‘mind’ is the result of the firing of our neurons. It’s not that either ‘mind’ or ‘society’ are myths, just that they aren’t what we intuitively think they are.
It is not a question of being an individualist or a social person. Man is a social animal, and nobody will seriously suggest that people can thrive without social co-operation. The question is whether the social interactions must be coercive or voluntary.
Europe’s fiscal situation should be evidence enough that coercive social organization is a failure. It is demonstrated by nearly every country from South Africa to Japan to Tierra del Fuego. Those who hold coercive power cannot issue sound money, cannot balance their budgets, and cannot plan adequately for their citizens’ future.
Most discouragingly of all, those who cling to the ideas behind this hopeless failure insist that their intellectual opponents, since they are against coercive social organizations, must be against society in all forms.
What Keynesian economist ever said that you can’t boost aggregate demand by interest rate cuts when they are (comparatively) high in an environment where there is no global recession? The Keynesian responses to this ECB piece are entirely correct. This time it is different: we had massive global recession and almost zero interest rates in many countries. You cannot slash interest rates when they are already near zero, and in the absence of fiscal stimulus it is highly unlikely that you can get growth in a depressed global economy.
The empirical evidence for the success of Keynesian stimulus is huge. While there are plenty of historical instances over the past 60 years, most recently we have had clear proof of the success of Keynesian stimulus in Australia, New Zealand, China, South Korea, Taiwan, Sweden, and Germany.
Germany’s recovery, by the way, is proof of the success of global Keynesianism and the benefits of boosting global aggregate demand, as both Germany itself and China employed Keynesianism:
http://socialdemocracy21stcentury.blogspot.com/2010/09/germany-success-of-keynesianism-and.html
Even Ireland export-led growth this year is a function of Keynesianism in Ireland’s largest trading partners and the lower Euro, not proof of the success of austerity: http://socialdemocracy21stcentury.blogspot.com/2010/09/irelands-sham-recovery-gnp-versus-gdp.html
“This time it is different: we had massive global recession and almost zero interest rates in many countries. You cannot slash interest rates when they are already near zero”
Erm, doesn’t the question then become “how did we get into a depression as the zero interest rates should have been stimulating the economy”?
Or are depressions like meteors or rain to you, something that just happens.
“Erm, doesn’t the question then become “how did we get into a depression as the zero interest rates should have been stimulating the economy”?
Keynesianism (just as Keynes himself) actually stresses that near zero interest rates will NOT necessarily stimulate an economy in a depression or severe recession, when business confidence is low, banks do not want to lend, businesses do not want to borrow and private spending is depressed. Today we also have massive private deleveraging from debt, which is also depressing demand.
For effective stimulus under such circumstances, you need discretionary spending and fiscal policy.
Ok, so zero interest rates are not the solution, I’m with you there.
What then are the “discretionary spending and fiscal policy” of which you speak, how to they help?
But the question is how and why did the interest rates get so close to zero in the first place? Wasn’t the interest rate lowered to stimulate the economy? And doesn’t the fact that it didn’t work and/or didn’t last more proof of the Austrian Business Cycle theory?
You say:
“And doesn’t the fact that it didn’t work and/or didn’t last more proof of the Austrian Business Cycle theory?”
Nope.
Near zero interest rates will NOT necessarily stimulate an economy in a depression or severe recession, when business confidence is low, banks do not want to lend, businesses do not want to borrow and private spending is depressed.
For effective stimulus under such circumstances, you need discretionary spending and fiscal policy.
Some never stay dead enough for comfort, even in the long term.
Economy of Australia & NZ are intricately tied to the economy of China. You can’t attribute the economic performance of these countries to the domestic stimulus effort.
In china, interest rates were not zero bound. Also, they didn’t attempt any deficit spending. They were just spending the accumulated surpluses from previous years. I might be wrong, but I think China is set for a big crash because of all the Keynesian stimuli. There is no doubt that lot of spending will make the GDP go up, precisely because that’s what the GDP stat measures. Doesn’t mean that it is the desirable policy to pursue.
I didn’t read your posts in detail but I eyeballed it. Several Keynesians have told me that the stimulus in the U.S was not enough. Could you tell me why the stimulus in Germany was adequate. How the stimulus amount created a net stimulus ( against the drop in consumer demand)?
The stimulus packages in Australia and New Zealand had a major impact on domestic demand.
Yes, Australia and New Zealand are “intricately tied to the economy of China.” But that just proves how succesful Keyensian stimulus is for BOTH a domestic country AND its trading partners, doesn’t it? You have just hit on another empirical proof of the success of Keynesian stimulus. If China had pursued brutal austerity, do you think Australia and New Zealand would have seen a surge in exports to China? Part of their growth is a function of Keynesianism in China.
You say:
In china, interest rates were not zero bound.
I know. There is no contradiction here. China’s export markets collapsed in 2008/2009. They created domestic growth by Keynesian stimulus when this happened.
Also, you say:
Also, they didn’t attempt any deficit spending. They were just spending the accumulated surpluses from previous years.
Actually, no, China IS deficit spending, both at the federal and state/local level.
They are issing bonds to the Chinese public:
http://www.chinadaily.com.cn/business/2009-03/18/content_7590231.htm
Some details:
Chinese Budget Deficit
111 billion RMB – 2008
950 billion RMB – 2009 (lagest deficit since 1949)
1 trillion RMB – 2010 (estimated)
http://www.monstersandcritics.com/news/asiapacific/news/article_1538635.php/China-sets-record-budget-deficit-to-fund-economic-change
http://www.chinatoday.com.cn/ctenglish/se/txt/2009-03/30/content_188478.htm
Sure it will be good for trading partners. If government spends money on Roads and Bridges it will be good for construction companies. However it automatically reduces the number of examples you have for sighting the success of Keynesian programs. Do you have any take on the health of the recent chinese GDP expansion?
Do you have any numbers on the net stimulus? Stimulus is supposed to not only increase spending ( which is tautological) but stimulate private demand ( multiplier ) is there a multiplier ? What is the multiplier in China? What was the net reduction in spending and how does the stimulus fare against that decline? in other words what was the net stimulus?
Do you have any such numbers for Germany?
Yous ay:
However it automatically reduces the number of examples you have for sighting the success of Keynesian programs.
This is a non sequitur.
China’s Keynesian stimulus, along with Australia’ stimulus, has benefited Australia.
On the issue of China’s Keynesian stimulus:
http://blogs.reuters.com/columns/2010/03/03/chinas-state-budget-deficit-is-tip-of-iceberg/
Once you factor in the borrowing by China’s local governments (3.8 trillion yuan = $556 billion) from banks, and the 450 billion yuan ($65.9 billion) they raised by bond issues, the stimulus could have been as high as 15% of 2009 GDP.
I don’t want to brush that claim aside. But I must ask, do you have any proof?
Can you show the numbers explaining how critical domestic stimulus in Australia was to Australian economy ( given that Chinese imports have benefitted Australia) ?
Thanks,
Very detailed analysis and proof:
http://www.debtdeflation.com/blogs/2010/08/18/giving-the-bird-to-the-stimulus/
A general article:
here:http://open.salon.com/blog/steven_rockford/2010/06/15/the_australian_economic_stimulus_package_-_it_works
That article doesn’t explain how much government spending was needed against the decline in private spending to create a net stimulus. The employment could have picked up for other reasons. More over, interest rates in Australia was not zero bound. A monetarist might say that employment in Australia recovered purely on the basis of the monetary stimulus.
A monetarist might say that employment in Australia recovered purely on the basis of the monetary stimulus.
Impossible. The Australia private sector is deleveraging and credit growth has fallen through the floor:
http://www.debtdeflation.com/blogs/2010/05/25/deleveraging-returns/
There has been no monetary stimulus via private debt. The net effect of deleveraging
was a massive contraction in demand and investment.
I’m no monetarist. My comment about monetarist claim is only meant as a possible example. I don’t accept the monetarist explanation at all. I don’t know the Australian situation enough to make any comments and reading that Steve Keen article alone (without other research) will not qualify me to make any enlightened remark.
australia’s “stimulus” harmed rather benefited. we got a lot of outrageously bad roof insulation installations, and unnecessary school halls. the debt is of course now on the taxpayers tab.
That is laughable.
The insulation scheme constituted just 4% of the government’s $42 billion stimulus.
One insignificant example of poor spending does not invalidate the Keynesian approach, just as one minor example of a malinvestment by the private sector does not invalidate the idea of private enterprise.
You might as well argue that all of capitalism is invalidated just because you can point to instances of private overinvestment or malinvestment.
to lord keynes: and the “education revolution”, the biggest single item in the “stimulus”? why are overpriced and unnecessary public school halls any more likely to add to wealth than ill-installed roof batts?
also, the 4% for the insulation programme shows you’re not over the numbers. the programme’s remediation will make that figure look small. inspections continue and rectification of the problems will make that number laughable. this disaster is still unfolding.
Hey Krugman,
Did Keynes’s estate say you could use that name as your handle?
Robert P. Murphy says:
‘Do you notice the pattern? The anti-Keynesians point to actual success stories as evidence of the potency of their policies. The Keynesians, in contrast, point to awful economies and claim that they’d be even worse were it not for the Keynesian “medicine.”‘
This is obviously false.
Let me ask Mr Murphy a question: In the face of a massive collapse in their export-led growth economy, what did China do?
They implemented a massive $586 billion dollar Keynesian stimulus – and then got a very impressive recovery, so impressive in fact that with growth in the first quarter of 2010 at 11.9%, there is talk that they may need to cool down the economy.
Australia also implemented a large Keynesian fiscal stimulus, which worked very well, and it benefited from China’s stimulus as well.
I could give you even more details of “actual success stories” where Keynesianism has been tried and worked vey well too: New Zealand, South Korea, Taiwan, Sweden, and Germany.
What does this lame retarted metaphor “need to cool down the economy” actually mean?
Lord Keynes, I would like to see the details for New Zealand please. I’d also like the German examples. I know of no Keynesian success stories there, only hard reforms and political decisions that favour production over consumption.
And the recent Australian stimulus is roundly condemned on all sides as an overpriced joke, a rort and a scam, typical Labor tax and spend policy on the hop. Many mainstream economists believe it to be have been wholly unnecessary.
Correlation is not causation, no matter how much you need to rely on it being otherwise to support your position.
Germany’s recovery is proof of the success of both German domestic Keynesianism and global Keynesianism involving trade partners of Germany.
The details are here:
http://socialdemocracy21stcentury.blogspot.com/2010/09/germany-success-of-keynesianism-and.html
The facts are these:
(1) Germany had two Keynesian stimulus packages that pumped about €80 billion ($104 billion dollars) into the economy. It’s recovery from recession in Q2 2009 was caused by these Keynesian measures. At about 1.6% of GDP, the German stimulus was larger than the G-20 average.
(2) The successful “Kurzarbeit” (“short work”) program gave direct government subsidies to German industries to keep people employed by working shorter hours. You could not have a more obvious instance of the distortion of the free market than this program, but it was clearly highly successful.
(3) The 2.2% growth in Q2 2010 was mainly from export growth, but here the key factor was massive Keynesian deficit spending in China – which led to a surge in Chinese consumption of German goods.
Germany’s export-led growth in Q2 2010 is a function of Keynesianism in China, and to a lesser extent, Brazil, India and Russia.
Thanks for the quick reply. I did not mean to say that the German government had undertaken no stimulus – no government could refuse to and expect to survive politically these days. I was surprised at how you held Germany and particularly NZ up as examples of where Keynesian stimulus worked. There’s no doubt that stimulus will expand the growth as measured by GDP, again, other factors are at work in both countries besides the stimulus: years of supply side reform positioned both countries well to survive tough times, and in Germany, a culture of savings over consumption is particularly important. China’s boom is more to do with unleashing the productive energies of hundreds of millions of people, and while there has been a stimulus there, fears of a housing boom and high inflation are becoming more and more widespread. It remains to be seen what consequences flow from the government’s intervention there.
You can give dozens of examples of government programs of any scale from the last few years, there’s no doubt. While it’s as much an error reflexively to say that any increase in economic activity is NOT connected with stimuls programs as it is to say that there IS necessarily a connection, there’s a deeper question: what kind of economic activity is being stimulated? Because if it’s just the same froth and churn type of malinvestments as we’ve had for the last 20 years that are being stimulated, what’s the answer then? We wait for a few years and dip back into recession, have another round of stimulus (not having yet paid back the debt from the previous stimulus)? Where does it stop?
Spending a bunch of debt (public or private) does stimulate activity in the short term, it does so by dragging spending forward from the future. In doing so, it risks malinvestment which then leads up a whole new set of problems down the track. Do you see these concerns as legitimate? If so, how do we deal with them?
Actually, I see your website has a lot of articles, in which I dare say some of these questions are addressed. Rather than put you to the trouble again, it’s better for me to scoot over to your page and read at my leisure: although if you post a link to any articles you have on these concerns, that would be helpful.
In the case of Germany, I think the evidence shows that domestic growth is what got it out recession. Keynesianism in China was a big factor causing the surge in exports in Q2 2010.
You say:
China’s boom is more to do with unleashing the productive energies of hundreds of millions of people, and while there has been a stimulus there
Well, China is an export-led growth economy. The sources of growth there before 2008 were exports to the develeoped world . When that collapsed they substituted domestic growth by Keynesian stimulus.You are undoubtedly right to worry about malinvestments. But a I think a properly regulated financial system can fix that
What does this lame retarted metaphor “need to cool down the economy” actually mean?
It has a perfectly obvious meaning: decrease demand, investment, and consumption, if there is too much of it. An obvious sign of an overheating eocnomy is significant inflation.
If asset prices (of property or in financial markets) are rising in a way that looks like a bubble, you need to rein them in.
“It has a perfectly obvious meaning: decrease demand, investment, and consumption, if there is too much of it.”
When is there “too much of it”? If people are exchanging their property and services in line with their own preferences, how can their be “too much” of that?
“An obvious sign of an overheating eocnomy is significant inflation.”
It seems like you are saying that the most obvious consequence of “too much…demand, investment, and consumption” is inflation. Is this true? ARe you saying inflation is not caused by or linked to an increase amount of money in circulation? Or are you saying this is only another of many factors in inflation?
“If asset prices (of property or in financial markets) are rising in a way that looks like a bubble, you need to rein them in.”
That “looks like” a bubble? What are “bubbles” in your view, can you explain them to me and how they come about? This way, we might be able to see how we can examine a rising asset price to see if it is a bubble or not?
If people are exchanging their property and services in line with their own preferences, how can their be “too much” of that?
People in China are not simply “exchanging their property and services in line with their own preferences.”
A major component of Chinese GDP is the government’s huge Keynesian stimulus which has been very successful. If private economic activity and export-led growth resume and create higher growth and excessive inflation, then the government can withdraw its stimulus measures and “cool”
down the economy. Simple process.
Are you saying inflation is not caused by or linked to an increase amount of money in circulation?
Inflation can be linked to money supply growth, assuming certain condition are true.
The quantity theory of money, however, has severe flaws which even some Austrians acknowledge:
http://socialdemocracy21stcentury.blogspot.com/2010/07/quantity-theory-of-money-critique.html
And even the Austrian theory of inflation is subject to serious criticisms:
http://socialdemocracy21stcentury.blogspot.com/2010/04/austrian-theory-of-inflation-myths-and.html
Excessive demand is ONE factor that causes changes in the price level.
“Simple process”? Lord Keynes, look I’m not trying to be difficult or obstructive, but what’s simple about it? It’s not a computer game. If it’s so simple, how have things gone so badly wrong? Why hasn’t all the stimulus worked in Japan, or the US? All this heating up and cooling down seems to have gone very wrong and seems to be so complicated that even the neo-Keynesians who designed it can’t explain with any coherence what’s gone wrong with it. Rather than being a “simple process”, it seems so tremendously complicated that no one has actually got the hang of it yet.
“People in China are not simply “exchanging their property and services in line with their own preferences.”
A major component of Chinese GDP is the government’s huge Keynesian stimulus which has been very successful. If private economic activity and export-led growth resume and create higher growth and excessive inflation, then the government can withdraw its stimulus measures and “cool”
down the economy. Simple process.”
Ok, but you think printing money to allow people to do something other than “exchanging their property and services in line with their own preferences” helps, whereas I think it just trades one immediate problem for another unknown one at a later time and one such problem is an asset bubbles. Printing money (ie. stimulus) creates no new goods and services and is in fact nothing more than price fixing, except it is done in a very strange and roundabout way.
You say on your website link:
“In other words, Mises denied that a given increase in the money supply (say, 5%) would lead to a direct, proportional and mechanistic rise of 5% in the general level of prices. The naïve monetarists believe that there is a “monocausal” explanation of inflation: money supply growth which will cause direct, proportional increases in the price level. This is ridiculous”
You won’t get any disagreement from me on this, expecting “direct, proportional” increases is indeed ridiculous. But come on, I’m not talking about 5% here or there, I’m talking about a doubling of prices every however many years it is for 90 years – I’m not saying that you can relate this preceisly to the amount of money in circulation, but I am saying that this amount is the primary driver of the price level. You also say:
“With respect to asset price inflation, the Austrian view ignores the fact that effective financial regulation can prevent bubbles, especially in real assets like housing and real estate. The US, for instance, had stable housing prices from about 1950 until the mid-1970s, and the same was true in many other countries, because of regulation.”
I think the “because of regulation” is just an assertion on your part and is in fact complete nonsense.
In addition, Mises didn’t claim that a 5% money supply increase would increase prices 5%. There are too many factors at play to make such a broad statement. First, a common feature of a competitive, capitalist environment is decreasing prices through efficiencies. Between these price drops through competitive pressures and the 5% money growth, the prices will not increase by 5%.
Further, the money doesn’t get spread evenly over all holders and segments of the economy. If this was the case, inflation wouldn’t be as big a problem as it is now as no one’s savings would be diluted. However, new money always ends up in the hands of selected individuals and is usually funneled into very specific market segments. Because of this, only a few markets will experience inflation, which will usually be extreme (see housing 1995-2005) with the rest of the market inflating as the new money slowly leaks out of the inflated market at a later date.
In no situation will a 5% growth in money result in 5% general inflation. Mises knew this much.
You say:
“In addition, Mises didn’t claim that a 5% money supply increase would increase prices 5%…. In no situation will a 5% growth in money result in 5% general inflation. Mises knew this much.”
Yes, I know. That is precisely what I said here in the detailed critique of the Austrian theory of inflation:
http://socialdemocracy21stcentury.blogspot.com/2010/04/austrian-theory-of-inflation-myths-and.html
A sample: “In other words, Mises denied that a given increase in the money supply (say, 5%) would lead to a direct, proportional and mechanistic rise of 5% in the general level of prices. The naïve monetarists believe that there is a “monocausal” explanation of inflation: money supply growth which will cause direct, proportional increases in the price level. This is ridiculous. ” In other words, we agree.
You also say:
“However, new money always ends up in the hands of selected individuals and is usually funneled into very specific market segments. “
This point is answered in detail here:
http://socialdemocracy21stcentury.blogspot.com/2010/06/what-is-money-short-analysis.html
Please scroll to the end.
A sample:
“That the “first recipients” of “created credit” were able to obtain a redistribution of resources in their favour was and is fully justified, if these people were engaged in productive investment that will benefit society as a whole and make it wealthier. And this just underscores the need for careful and effective financial regulation that can prevent asset bubbles and channel investment to productive uses. The higher inflation that might (or might not even) happen is the trade-off you get from faster economic growth. And in fact as …, the Austrians are committed to the view that changes in the level of prices depend very much on both real factors and monetary ones.”
“That the “first recipients” of “created credit” were able to obtain a redistribution of resources in their favour was and is fully justified, if these people were engaged in productive investment that will benefit society as a whole and make it wealthier.”
And how do you know if the “wealthier” society has the wealth it wants and what people were actually seeking? What method can you use by which to divine people’s own choices better than they know what they want themselves? This sample shows the insanity of your propositions. You deem to tell everyone not only who is most productive but what kind of wealth everyone should want.
Wealth is not a simple entity that you can easily measure with a stupid braindead figure like GDP. People decide whether they are better or worse by subjective measures of value. Stealing from people via redistribution of resources to take away from their own choices on how they want to use their money is immoral. Imagining that you are truly helping everyone else out betrays a god complex.
“The higher inflation that might (or might not even) happen is the trade-off you get from faster economic growth.”
Might not happen? Are you arguing seriously for no obvious difference in inflation between 1800-1900 and 1900-2000?
“This just underscores the need for careful and effective financial regulation that can prevent asset bubbles and channel investment to productive uses.”
Even if your theory was correct, that you might know people’s desires better than they know their own such that you can allocate resources better than individuals, I’d really like to know where you are going to find these angels who are going to plan it all for us. I certainly don’t see such kind people amongst any political party present today.
And how do you know if the “wealthier” society has the wealth it wants and what people were actually seeking? What method can you use by which to divine people’s own choices better than they know what they want themselves?
You appear confused about a fiat money system under financial regulation.
People will STILL buy whatever commodities they want on the market, based on subjective use value, and production will adjust to demand for goods.
Are you arguing seriously for no obvious difference in inflation between 1800-1900 and 1900-2000?
Of course there is a difference. We had steady low inflation 1945-1973. But superior macroeconomic performance and a less volatile business cycle, and rises in real wages that more than offset inflation to give rising living standards.
“You appear confused about a fiat money system under financial regulation.”
It’s no wonder I’m confused when you have hardly explained what this brilliant financial system is supposed to be such that it can know who should get the extra money that is produced out of thin air.
“People will STILL buy whatever commodities they want on the market, based on subjective use value, and production will adjust to demand for goods.”
You appear to miss the point I was making, that you can’t know who the extra money that you made out of thin air will go to the correct purposes based on aggregation of consumer preferences. If you distribute it to the wrong people those people have different preferences than the economy as a whole, and form bubbles with that money that won’t last once the money stops being put there.
The reason you can’t possibly know is there are far too many factors. People change what they want over time and with different conditions. So even if you could successfully poll the entire population with regularity their preference could change before any distribution was completed.
Government doesn’t move nearly fast enough to allow for this system to ever work even if you had perfect angels. If you make a supercomputer into the government which factors in polling data from everyone you might get close, but how do you know you can trust the programmer/administrator/etc?
“But superior macroeconomic performance”
You can’t know that. You can only guess that based on GDP data from different centuries when the methods of calculation, available data, etc. are totally different between those eras. Even if the methods of calculation and data were exactly the same you still couldn’t know for certain because of all the other conditions in play (technological developments, external and internal political situations, etc.)
Your points are all “best guesses” and you throw them around as if they are absolute fact. Econometrics isn’t useless, and I’m not saying it shouldn’t ever be used to question anything, but you can’t take decades of data and act like you have ceteris paribus conditions.
You say:
Ok, but you think printing money to allow people to do something other than “exchanging their property and services in line with their own preferences” helps, whereas I think it just trades one immediate problem for another unknown one at a later time and one such problem is an asset bubbles. Printing money (ie. stimulus) creates no new goods and services and is in fact nothing more than price fixing, except it is done in a very strange and roundabout way.
But China is NOT printing money! (if you mean monetising its budget deficit).
It is issuing bonds to soak up a corresponding amount of money equivalent to deficit spending.
Stimulus creates badly need infrastructure: railroads, highways and power grids.
I am not sure if you have ever been to China. I can assure you that these things are badly needed there as China is a developing nation.
Another 25% of the stimulus went to reconstruct entire towns in Sichuan province devastated by the 2008 earthquake. All vitally needed projects.
You say:
I’m not saying that you can relate this preceisly to the amount of money in circulation, but I am saying that this amount is the primary driver of the price level.
So what? This might happen under a gold standard too.
Inflation happened under the gold standard from about 1896-1914. Does this prove that the gold standard was evil or immoral? On the contrary, the higher inflation was just a tradeoff for faster growth. The same thing happens in a fiat system with proper financial regulation.
“Lord Keynes” wrote:
“Inflation happened under the gold standard from about 1896-1914. Does this prove that the gold standard was evil or immoral? On the contrary, the higher inflation was just a tradeoff for faster growth. The same thing happens in a fiat system with proper financial regulation.”
The difference between inflation under the gold standard and under a fiat system is similar to the difference between natural disaster and mass murder. When a hurricane kills a lot of people, it’s a natural disaster, but it’s not murder, and hence not evil. When a government kills a lot of people, it’s mass murder, and hence evil.
That some elitists should be able to engineer such a “tradeoff” as inflation is immoral because 1) it’s intentionally done by humans, and 2) the “tradeoff” is not just a tradeoff that helps everybody a lot in one way, and hurts everybody a little in another way. It helps some people, at the expense of hurting other people (such as people living on their life savings). If you want to look at it in that amoral a way, a mugging is just a “tradeoff”, too.
You say:
That some elitists should be able to engineer such a “tradeoff” as inflation is immoral because 1) it’s intentionally done by humans, and 2) the “tradeoff” is not just a tradeoff that helps everybody a lot in one way etc
Inflation in a fiat money system is not immoral, precisely because the very idea that inflation rates or rises in the price level are DIRECTLY AND PROPORTIONALLY caused by the rises in the money supply is wrong.
As an Austrian, you are committed to the view that changes in the level of prices also depend very much on real factors, as well as monetary ones:
http://socialdemocracy21stcentury.blogspot.com/2010/04/austrian-theory-of-inflation-myths-and.html
By the way, digging gold out of the ground and monetising is intentionally done by humans too!
(2) Inflation under the gold standard also
“As an Austrian…”
I don’t consider myself an Austrian, although I am sympathetic on some issues.
“By the way, digging gold out of the ground and monetising is intentionally done by humans too!”
Yes, but one can’t control when a new “mother lode” will be found. The fact that a bunch of gold is located at a given spot is sort of an “act of God”; similar to a natural catastrophe (except for the person who found it, of course). One can control the printing of money; that’s the whole point of it, from the point of view of those who favor it. There’s a very real difference.
And most importantly, people decide whether or not to seek and mine gold by interacting with the price system (ie. the price of plant and labour and capital etc.) – which is itself dependent on the amount of gold mined. There is a feedback.
That is, if too many people are mining gold, there is no need for any regulation – some of the projects will simply become unprofitable and the prospecting and mining will stop. There is a natural limit on the amount of gold that can be profitably mined, no need to trust anyone to do anything.
On the contrary, governments can and do decide to print money independent of the price system and there is not cap, they print as and when they need it.
If you don’t see the difference between these – like the difference between regulating the speed of a steam engine by a driver who is reading the newspaper and talking on the phone to his girlfriend and using a governor – then there is nothing more to be said really.
It seems not that you see the difference but think it unimportant, it seems to me you genuinely don’t see why it is important. This is because you know nothing about how complex systems work.
I want to know where you got those numbers from! the 1896 dollar was worth $1.18 in 1913 based on the CPI. Look up measuringworth.org. It was also a period of good economic growth.
See here:
http://mykindred.com/cloud/TX/Documents/dollar/
You can also see inflation rates in the UK:
http://safalra.com/other/historical-uk-inflation-price-conversion/
You say:
It was also a period of good economic growth.
That was my point. Inflation can just be a tradeoff for good economic growth. Just as it was in American from 1945 to 1973 with good macroeconomic policies.
You didn’t get my point. My point was there was a general decline in prices between 1896 and 1913 and yet economy grew. Very different point from you. More over to sight the period from 1896 and 1914 as an inflationary period is disingenuous on your part. It was also the period of progressive era with spanish-american war, when America went overseas looking for dragons to slay.
Your link shows that inflation rates were zero for most of the years you quoted. More over why do you think this method of measuring what farmers paid for stuff is a better indicator of inflation that CPI?Also your pick of years look very interesting – 1896 after a 2 year long deflationary period, prices are expected to bounce. Also 1914, start of world war. What do you think normally happens to prices during war?Between 1801 and 1900 economy grew over 5400%(as measured by GDP). What you could buy for $100 in 1801, you could buy for just $66 in 1900. Between 1901 and 2000, the economy grew around 2300% and dollar lost more than 90% of its value. Industrial revolution still hadn’t come to America in full force at the beginning of 19th century.
The US had inflation from about 1896 to 1914.
See http://mykindred.com/cloud/TX/Documents/dollar/
In 1896, 1 dollar was worth about 26 2010 dollars.
That had fallen to 21 dollars by 1914.
My points were not addressed.
You are clearly misreading the figures on measuringworth.org.
Even Murray Rothbard knows about the inflation from 1896-1914:
The exception was the period 1896-1914, when a mild chronic inflation (approximately 2 percent per year) resulted from unusual gold discoveries, in Alaska and South Africa.
http://mises.org/rothbard/genuine.asp#_ftn1
See footnote 1 in this article.
How can the US dollar have risen in value when there was “mild chronic inflation” ?!!If anyone can answer this, please do.
Okay, lets say that I accept there was a mild inflation between 1896 & 1914. How does that compare with inflation after 1913?
I will say it again:
Between 1801 and 1900 economy grew over 5400%(as measured by GDP). What you could buy for $100 in 1801, you could buy for just $66 in 1900. Between 1901 and 2000, the economy grew around 2300% and dollar lost more than 90% of its value. Industrial revolution still hadn’t come to America in full force at the beginning of 19th century.
Between 1901 and 2000, the economy grew around 2300% and dollar lost more than 90% of its value.
But people’s real wages also skyrocked! Once you factor in real wage gains people were far wealthier in 2000 even after this inflation than they were in 1901.
There was a spectacular increase in living standards in 1945-1973, DURING the era of classic Keynesianism.
Also, the slowing down of real wages post-1979 is related directly to the turn from Keyensianism to neoliberalism, monetarism, Thatcherism, Reaganonomics, deregulated bubble economies etc.
Post 1979 economic devleopments and all their bubble economics have nothing to do with classic Keynesianism, which stressed financial market regulation and the pricking of asset bubbles.
Who said anything otherwise? Except, growth was better in the unenlightened 19th century.
What do you mean by classic Keynesianism? Paul Samuelson predicted the return of the Great Depression ( which had never really left) in 1945. Government cut spending to one third of its 1945 figure and economy roared. FDR died in 1945, and Truman couldn’t get the support for a continuation of the disastrous new deal polcies. Taxes were cut in late 40s, and again in early 60s. A pseudo gold standard was established under brettonwoods.
In your story you somehow skipped 1973 to 1979, and tried to explain what happened in terms of the changes since 1980, and yet you ignored a major change that happened in 1973 – breaking of brettonwoods – which essentially enabled unlimited credit creation.
Deregulation is a myth. Can you tell us how many pages of CFR was eliminated because laws were annulled in this rage of deregulation? What was the net loss of government jobs due to reduced demand for bureaucrats? Did the government spending decline?
As for the period since 1980, it was also known as the great moderation. Goes to show you why it is wrong to just look at a positive GDP growth and say that all is well.
Except, growth was better in the unenlightened 19th century.
That is utterly false.
Here is good graph of real per capita GDP growth in America over the last 200 years:
http://4.bp.blogspot.com/_otfwl2zc6Qc/SYEWtrwK1VI/AAAAAAAAJFY/Mc_qZjrqWkc/s1600-h/gdp.bmp
You can see perfectly well that economic growth was inferior in the 19th century. When the mixed economy and modern macroeconomic policies were introduced in the late 1930s, growth exploded and took off like a rocket.
Government cut spending to one third of its 1945 figure and economy roared.
That’s because the war ended!!
Keyensianism, financial regulation, demand management, the welfare state were all operating post-1945.
Truman couldn’t get the support for a continuation of the disastrous new deal polcies.
This is laughable. Many of the New deal prograsm continued.
By the way, has Truman’s fair deal slipped your mind?:
http://en.wikipedia.org/wiki/Fair_Deal
Most of the Fair Deal was passed by Congress, including the Social Security Act of 1950 and other welfare provisions.
How ever said that cutting taxes was NOT a Keyensian policy?? Keyensianism advocates tax cuts in recessions!
Much to your chagrin, In that chart you posted, per capita GDP growth really really took off after 1980.
Sure, thats why Paul Samuelson prophesied the return of the Great Depression. You know, the very depression that was “cured” by World War II spending? When government was the economy, and after the war when government collapsed that spending?
But did all the tax cuts occur during recessions?
That was poor wording on my part. Galloway/Vedder paper available on this website on the “Depression of 1946″ ( which never was).
But FDR was dead. Read Bob Higgs on Regime uncertainty,
Also, please address these:
Much to your chagrin, In that chart you posted, per capita GDP growth really really took off after 1980.
No, it doesn’t.
The rate of growth for 1980-2000 is the same as for 1960-1980.
I find it strange that you are distracting attention away from your obviously false statements earlier: your misake about inflation from 1896-1914, and your mistake that growth rates were higher in the 19th century.
The 1945-1973 era was one of classic Keyensianism, financial regulation, demand management, and the welfare state. Growth was also explosive. Note that war reconstruction eneded by about 1955, yet rates rates still soared.
No lame denials will change this fact.
US government spending has remained between 30-40 percent of GDP since 1950:
http://www.usgovernmentspending.com/us_20th_century_chart.html
And you think FDR’s death ended big government in America?
Well, to me, chart reads that way. Unless you have data to post.
No distractions dude. You have left a lot of my comments unresponded to, I could say the same thing about you. As for the inflation in that 1896-1914, what is your point? It is rather rare during gold standard wouldn’t you say? never reached any hyper inflation! Whereas what is the record of fiat money? How many hyperinflations have happened? What has been the average inflation rate since 1913?
I didn’t make any mistake about the GDP growth rate of 19th century. You didn’t read my comments properly, or were in a hurry to respond before you did so. I was refering to GDP growth rate, but you were refering to per capita GDP growth rate. The lower per capita growth rate could be due to any number of things – 1) women did household work ( 50% of the populatio) 2. population didn’t live long, had a lot of kids and was, on an average, probably young ( young may have worked, but wouldn’t be as productive as someone who is 15 or 16 and older.) 3. large % of population worked as slaves ( not for monetary compensation )
Actually, 1929 to 1945 was classing Keynesianism, of course, it started with Foster & Catchings. In 1945, Government was the economy, and government spending was not managed down, instead it collapsed and economy roared. That is fact, and none of your distractions will change that.
And you think FDR’s death ended big government in America?
Nope. I said no such thing. FDR’s death ended constant meddling and changes. More over his tirade against businesses ended with his death. After FDRs death, growth of government went back to gradual progressivism rather than constant meddling and changes.
Also, please address these:
I was refering to GDP growth rate, but you were refering to per capita GDP growth rate.
Actually even here you are wrong. The figures for the 19th century are still inferior for GDP. They show that the 19th century DID NOT have faster or better economic growth.
Average GDP growth in the OECD from 1850-1900 was 1.5%.
From 1950 to 1980, the average growth rate was 2.8%.
Even if we strip out 1945-1960 which includes post-WWII reconstruction, we get an average growth rate of 2.9% for the OECD between 1960 and 1980.
So average growth in the OECD were about 86% higher in the Keyensian era than in the gold standard era of the late 19th century.
For figures see here:
http://books.google.co.nz/books?id=A9DAf3OSwbsC&pg=PA50&lpg=PA50&dq=19th+century+GDP+1.5%25+%22growth%22&source=bl&ots=yU6jaWS5qT&sig=Sm0fnL3sU_mO_GaPZocY8SBhfOA&hl=en&ei=gmqZTK3-G8O5cdX-uboP&sa=X&oi=book_result&ct=result&resnum=5&ved=0CCMQ6AEwBA#v=onepage&q=19th%20century%20GDP%201.5%25%20%22growth%22&f=false
We can also see in these figures that in the neoliberal/monetarist/Reaganite era average growth rates have fallen and are inferior to the Bretton Woods/ Keyensian era.
From 1980-2000, the average OECD GDP growth rate was 2%.So in fact average GDP growth fell by 28% (or nearly a third) in the OECD from 1980-2000.
Thus my statement needs to be altered: the rate of growth for 1980-2000 was actually lower than the average OECD rate from 1950-1980!
I have had it with you.
No, I’m not. I was talking about REAL GDP in the U.S between 1801 and 1900 and between 1901 & 2000. I’m not interested in the OECD data. I’m not convinced about the Laissez-faire nature of many a OECD country. Many of them started on their welfare states in the 19th century, were at war regularly, political borders changed frequentlly. None of these countries had nothing resembling the U.S constitution or a culture of limited government. So sorry dude, you don’t need to pull new numbers out of your ass.
If you still think my numbers are wrong ( I have cited sources), show me my own numbers and tell me why
In 1945, Government was the economy, and government spending was not managed down, instead it collapsed and economy roared. That is fact, and none of your distractions will change that.
US government spending has remained between 30-40 percent of GDP since 1950:
Have a close look at this graph:
You say:
In 1945, Government was the economy, and government spending was not managed down, instead it collapsed and economy roared.
Yeah, I know. See here
http://www.usgovernmentspending.com/us_20th_century_chart.html
US government spending fell from 52.99% of GDP 1945 to 35.87% in 1946 as the war ended.
This reflects the end of the war. There was then a surge in domestic demand for consumer goods which had pent up during the war. Of course, private consumption and growth soared. This is entirely predictable and consistent with Keynesnian economics! Keynesian macroeconomic management continued and managed the economy from 1945-1979.
Government spending remained at 20-23% of GDP in 1946-1950, which was historically very high.
Figures:
Year Spending as % of GDP
1945 52.99
1946 35.87
1947 23.65
1948 20.47
1949 23.47
1950 23.95
1951 22.38
1952 27.88
1953 29.02
1954 29.27
It rose again in 1949-1950, yet econonic growth still surged on.
The US was highly protectionist in the 19th century or have you forgot?
Free trade Britian was more open to trade than the US!
Yet again the figures dont support you:
Average GDP growth in the US from 1850-1900 was 1.9%.
From 1950-1980 it was 2.2% or 15% higher.
If we strip out 1950-1960 and post WWII reconstruction, it was 2.5% or 31% higher.
Again, US growth was higher in the Bretton Woods/Keynesian era.
For figures see here:
http://books.google.co.nz/books?id=A9DAf3OSwbsC&pg=PA50&lpg=PA50&dq=19th+century+GDP+1.5%25+%22growth%22&source=bl&ots=yU6jaWS5qT&sig=Sm0fnL3sU_mO_GaPZocY8SBhfOA&hl=en&ei=gmqZTK3-G8O5cdX-uboP&sa=X&oi=book_result&ct=result&resnum=5&ved=0CCMQ6AEwBA#v=onepage&q=19th%20century%20GDP%201.5%25%20%22growth%22&f=false
You should also admit the fact that it was not the prediction of many a prominent keynesian back then – eg. Paul Samuelson.
Who cares what it was historically. Demand management is about managing fluctuations, and demand fluctuated.
And you accept this because it fits the narrative that you are willing to believe.
http://mises.org/journals/rae/pdf/R52_1.pdf
What have you got against the data for the whole century? Yes, shorter periods are likely to create more fluctuations. In fact, in the early 1860s, the U.S experienced one of the worst devastating internal conflicts in its history. Even then your numbers are wrong.
between 1951 and 2000, the U.S economy grew 419%, whereas, between 1851 & 1900, the U.S economy grew 689% as measured by GDP. (source Real GDP from measuringworth.org)
Lord Keynes (great moniker, BTW),
Please note that it was not WWII that enabled America to climb out of the recession.
There is good evidence that America was starting her climb out well before her entry into the war after Dec. 7, 1941 (a “Day that will live in Infamy”).
Please note that the 1941 deficit was only 4.72 percent of GDP.
But growth rate was already 25 percent year-over-year from 1940 to 1941.
In addition, given the lag that deficit spending has before it gets reflected in GDP statistics, it is clear that America’s entry into the war, was not on its own, the decisive factor.
Besides, as we all know, since deficit spending will eventually be reflected in GDP no matter what, the more important question, as Sandre identifies, is what good that increase in GDP does for the common person?
Cheers!
http://www.nytimes.com/2010/09/06/opinion/06krugman.html?_r=2&hp
http://blog.mises.org/13794/krugmans-war-fantasies/comment-page-1/
Year_____GDP-US_______Deficit_____Unemployment
_________Federal______Percentage__Rate by Year
_________Billions_____________________________
1927_____95.5_________-0.94________4.57%
1928_____97.4_________-0.66________5.02%
1929____103.6_________-0.48________4.61%
1930_____91.2_________-0.87________8.94%
1931_____76.5__________0.13_______13.00%
1932_____58.7__________1.63_______18.80%
1933_____56.4__________1.84_______19.80%
1934_____66.0__________2.06_______21.30%
1935_____73.3__________3.02_______19.50%
1936_____83.8__________3.99_______16.60%
1937_____91.9__________2.61_______14.10%
1938_____86.1__________1.22_______17.80%
1939_____92.2__________2.14_______16.00%
1940____101.4__________3.06_______14.60%
1941____126.7__________4.72________9.90%
1942____161.9_________19.49________4.70%
1943____198.6_________55.71________1.90%
1944____219.8_________49.12________1.20%
1945____223.0_________53.68________1.90%
1946____222.2_________20.13________3.90%
1947____244.1_________-3.23________3.90%
1948____269.1________-11.66________3.80%
1949____267.2_________-3.96________5.90%
1950____293.7__________1.27________5.30%
1951____339.3_________-7.80________3.30%
1952____358.3_________-0.23________3.00%
1953____379.3__________5.75________2.90%
1954____380.4__________1.86________5.50%
1955____414.7__________1.53________4.40%
I’m happy that you worked so hard to say it again. I will cut and paste MY earlier response at 8:35PM:
US Real GDP per Capita
America was going through rapid industrialization in the late 19th century under its system of heavy tariffs and infant industry protectionism. It had higher real GDP growth due to the industrialization process.
The real GDP figures don’t tell you how richer people became on average between 1850-1900.
From 1850-1900, US real GDP per capita rose from 2,131.71 to 5,556.85 (2005 dollars)
Therefore it rose by 160.67%
From 1950-2000, US real GDP per capita rose from 13,224.86 to 39,750.30 (2005 dollars).
It therefore rose by 200.57%
It obvious that economic performance in terms of US real GDP per capita was superior from 1950-2000.
Source:
http://www.measuringworth.com/
US Real GDP per Capita
As for the inflation in that 1896-1914, what is your point?
My point was to show you that the US dollar lost value from 1896-1914, owing to inflation, which you now seem to accept.
If you look at http://www.measuringworth.com/calculators/inflation/result.php, you will see inflation not that uncommon in the 19th century, with inflationary periods in 1825-1827, 1834-1837, 1844-1847, 1852-1855. My point is that a gold standard is no protection against inflation.
Inflation was not nearly a problem under gold standard as it is without such standard. Prices over the longhaul fell. Economy boomed.
How does one determine “demand for money”, btw?
Easy. I’m politically powerful and I demand money, therefore, I will get it.
Ok, I withdraw the “simple process” statement.
We have to look carefully at the underlying structure of an economy to gauge how effective a stimulus will be.
In the case of the US, there are obvious structural problems: a dysfunctional financial system still not cleared of bad assets and non-performing loans; a chronic trade deficit; loss of manufacuring.
On the dysfunctional financial system, see here:
http://socialdemocracy21stcentury.blogspot.com/2009/11/financial-deregulation-and-origin-of.html
Frankly, I think the dysfunctional Japanese financial system after 1992 and an overvalued exchange rate explains most of the lost decade. You might note that Japan actually cut spending in 1996 and attempted budget balancing, causing a sharp downturn right at the time of the East Asian economic crisis.
The US needs macroeconomic policies to fix these underlying problems: effective financial regulation; an industrial policy and addressing the mercantilism of China.
Please don’t think I regard Keynesianism stimulus as a panacea.
Understood I won’t attribute stimulus-as-panacea positions to you. Allow me to say as a general remark and not getting personal, Lord Keynes : I’m increasingly struck by the lengths that neo-Keynesians will go to find other sources for our economic problems other than stimulus programs. Just to use your post here: it’s regulatory, it’s the exchange rate, it’s China, it’s industrial policy. All of these, of course, are policy settings of the state, and implies that the state just hasn’t yet found the right policy mix, but it can and it will. Or else it’s greed, selfishness, LLCs, anything other than the government’s last bungled effort to get the policy mix right.
The whole system’s just too complicated ever to get that policy mix right, and the efforts to do so are destroying us. It seems that the only policy mix that can work is to avoid policy, just set up the institutional framework most conducive to facilitate competition and let go of the controls. I don’t know, but time will tell. I’ve called it here before, and I’ll call it again: we’re going to see years, decades even, of anaemic growth, dipping in and out of recession, persistently high unemployment, steady inflation anywhere from 3-10% stealing money from the pockets of the lowest paid. And the state will use this as a justification to increase its regulatory reach, just making the problem worse. Where will your thinking be if this plays out over the next 5 or 10 years, Lord Keynes? Will you still be searching for the right policy mix?
The moderate US stimulus led to moderate US economic growth. This is undeniable:
http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=USD
China’s mercantilism is not caused by the US government. Which of course raises the question: how would a laissez faire US policy possibly do anything about China’s mercantilism? It would just accelerate the destruction of US manufacturing.
http://www.aolnews.com/opinion/article/opinion-a-tale-of-two-economic-recoveries/19641455
Can you show me numbers as to how much net stimulus there really was?
Thanks,
Depends on whether you include financial bailouts. But since these bailouts were mainly just asset swaps (e.g., excess reserves for toxic CDOs, with the excess reserves then kept at the Fed), the bailouts are not increasing spending or investment.
For analysis:
http://rodrik.typepad.com/dani_rodriks_weblog/2009/03/getting-the-global-stimulus-numbers-right.html
http://rodrik.typepad.com/Stimulus%20packages.doc
Why should I include Financial bailouts in Obama’s 800 billion stimulus package?
Why should I include Financial bailouts in Obama’s 800 billion stimulus package?
You shouldn’t. That’s the whole point of Rodriks’ argument.
“The moderate US stimulus led to moderate US economic growth. This is undeniable:”
1) Prove the “growth” was economically sound, where it did occur.
2) Prove that it has not triggered further malinvestments.
3) Prove that it did not hinder the unwinding of existing malinvestments.
Only if you measure growth by GDP. If I wreck my car GDP goes up. Fantastic. I have a broken car and your figure jumped. Please save us all by wrecking the cars in the whole country please.
You are a brave person, Lord Keynes.
I will refer you to a few (taken from many other) blogs on this site, dealing with Keynesian or neo-Keynesian ‘stimulation’, in the next entry.
But for now, you might be surprised at how difficult it is to use “macroeconomic policies to fix these underlying problems” in any kind of effective way.
Your approach, Lord Keynes, assumes (necessarily) that the Directors of Such A Macroeconomic Policy know, better than The Economy Itself, what TO DO.
(In fact the real Lord Keynes said exactly the same thing, except then he proceeded to call most of the government officials in his day, dimwits, or words to that effect.)
You may or may not subscribe the Invisible Hand notion of The Economy. That is, that we all benefit from the effects of the collective actions of all the economic participants.
In fact the supposition that any one agency, like the government or central bank can actually ‘direct’ The Economy is fallacious.
The Soviet Union gave us that History Lesson. (Mind you, they kept the ‘game’ going for a long time.) So Command Economies, or Centrally ‘Planned’ Economies are oxymoronic, moronic, illogical and counterintuitive.
That is why The FED or The Treasury or any other body cannot ‘save’ anything. Sure, Obama can redistribute wealth, so as to help those victims of these agencies’ past misdeeds.
But Obama and his team cannot ‘save’ The Economy. Only The Economy can do that.
So the ‘proof’ you offer is a mirage.
Let me quote from an example scenario that illustrates why your historical examples may indeed appear to suggest that sometimes, in some places, Keynesian macroeconomic ‘stimulation’ “works”…
This was from one of those references I promised to provide at http://blog.mises.org/11525/illusions-of-the-age-of-keynes/
Lord Keynes if you have time and the inclination, please refer to these links.
The main idea is that Keynes —— in his own mixed-up way and even more in the way that mixed-up neo-Keynesians have chosen to usurp his name and methodologies —— through “Keynesian Macroeconomic Stimulation” will somehow jump-start the Economy from some unnatural slumbering state that it, due to perhaps some Act of God, now finds itself in.
Many have defended Keynes by suggesting that Keynes only prescribed government deficit spending to be counterbalanced by government-saving-of-surpluses during Good Times. And we know how well that approach has gone.
The American government is already deficit-spending to the tune of more than 1 Trillion Dollars annually. Just how much more Deficit-Spending ‘Stimulation’ should America do? That amount is already on the order of 10% of GDP. And as one contributor above noted, you can certainly increase GDP (or GNP) simply by incurring even MORE debt, say 5 Trillion Dollars annually? But that would achieve nothing, other than to condemn all of America’s next generation to live in penury.
The Curse of Fiat Money
Krugman’s War Fantasies
Richard Cantillon: Founder of Political Economy
You say:
The American government is already deficit-spending to the tune of more than 1 Trillion Dollars annually. Just how much more Deficit-Spending ‘Stimulation’ should America do? That amount is already on the order of 10% of GDP.
Actually, MOST of that deficit is just cyclical, caused by the collapse of tax revenue. It is an automatic stabilizer, not discretionary spending designed to stimulate the economy.
To see how foolish it is to simply focus on the budget deficit as a percentage of GPD, take a look at Ireland: in Ireland they have engaged in actual austerity and cut the budget.
The result is GDP has collapsed and tax revenue has collapsed driving the budget deficit to
15.7 percent of GDP!
That budget deficit is NOT stimulating the economy, but putting a floor under which GDP will not fall. A large budget deficit is not necessarily an instance of Keynesian stimulus and deficit spending at all.
What is magical about GDP? yes GDP measure spending, including government spending. If government cuts spending, its effect will be reflected in a measure that measures all spending. That says nothing about medium to long term health of the economy.
I advise you to read this about Ireland:
http://socialdemocracy21stcentury.blogspot.com/2010/09/irelands-sham-recovery-gnp-versus-gdp.html
You didn’t address my question. Your comments didn’t explain why short term fluctuations in GDP actually measures the well being in the medium to long term.
Lord Keynes SEZ:
Yes you are quite right, that is what the statistics show.
But my question still stands —- namely how much MORE?
The idea that fiat money is inherently bad is answered here:
http://socialdemocracy21stcentury.blogspot.com/2010/06/what-is-money-short-analysis.html
Lord Keynes: “The idea that fiat money is inherently bad is answered here”, not unsurprisingly, by the one and the same Lord Keynes at
http://socialdemocracy21stcentury.blogspot.com/2010/06/what-is-money-short-analysis.html
Your analysis does not address the problem that fiat money suffers under when it is subject to its quantities being manipulated by politicians and their lackeys, their supposedly “independent” central bankers.
Your “Unit of Account” has then no real basis in value, because the supply of money is changed, and the pricing information that money would normally convey is lost. Thus we get booms and busts due to over-investments and malinvestments.
Yes, I know that commodity money can suffer the same changes in supply, but those are rather few and far in between in relative terms.
That is one major advantage of commodity money. If you could give me a fiat money system that was not so Money-pulatable then I would not have the same concerns.
Also the (price) deflation that you so worry about is NOT an act of God —— it comes as a result of those earlier money-machinations by fiat-money-scam operation-running central bankers as part of the inevitable bust —— which is as much ‘engineered’ by these well-intentioned Social Engineers as is the preceding boom.
When their phony-baloney booms bust, price deflation is the result.
The question is, why would you prefer a system that lends itself so easily to such mismanagement?
And to such subsequent human suffering?
Yes, I know that commodity money can suffer the same changes in supply, but those are rather few and far in between in relative terms.
This is false:
http://socialdemocracy21stcentury.blogspot.com/2010/06/fractional-reserve-banking-evil.html
Triffin (“Myth and Realities of the Gold Standard,” in B. Eichengreen and M. Flandreau (eds), The Gold Standard in Theory and History, Routledge, London and New York. 1985. 152) estimates that in 1800 bank money or credit money probably constituted less than 33% of the money supply. But by 1913 paper currency and bank deposits accounted for 90% of overall currency circulation in the world, and actual gold itself for not much more than 10%.
Even the classical gold standard is a myth. It did not prevent massive creation of fiduciary media over and above commodity money.
Dear Lord Keynes, you are missing the main point. Your argument is going off tangentially into outer space. Bring it back to Earth please.
No Money System is perfect, but commodity-based systems don’t have the same degree of tomfoolery associated with them. They can be manipulated, they can have their supply of money changed, and yes, historically, they have had varying degrees of paper money artificially pyramided on top of that ‘base money’.
What we are reaching for here, for the future, is a system that is free (as much as humanly-possible) of such weaknesses.
The idea is that money, in the future, not be subject to the whims of politicians and central bankers, but only to the ‘whims’ of The Economy.
The whole idea is to free money from as many distractions, and influences, that cause it problems in fulfilling one of its primary purposes —— and that is, as here being discussed, to convey Price Information through The Economy.
When the actors in The Economy cannot rely on the ‘Unit of Account” that money represents, because the value of that unit changes month to month, year to year, and because the Price of Money itself (via the ‘borrowing price’ as indicated by prevailing FED-set interest rates) changes, then The Economy has one more handicap in figuring out where best to allocate resources.
A Unit of Measure like a yard or a meter is relied upon precisely because it does not change. How could cars or buildings or bridges be built properly if these units are subject to unforeseen and incalculable and unpredictable warping? What happens is a Hubble Space Telescope that cannot “see”, that is what happens. What happens is a rocket that drops out of the sky on launch.
The idea is to communicate to all the players, as accurately as possible, what the real undistorted price of all goods and services, commodities, investments, and risks are when it comes to the carrying out the Supply and Demand functions of The Economy. The only ‘distortion’ should come from pressures put on prices from supply and demand constraints.
The idea is to convey in the clearest terms possible to an actor on one part of The Economic Stage, what others (actors, goods & services, commodities, etc.) on other parts of that stage are up to.
That way, the best decisions are made, using the data from the Economy’s Information System (via Money) to prevent misallocation of resources —— this is the money function that to the best of our ability we are tasked with protecting —— so as to enable the entire system to operate as effectively as possible.
Only when the tomfoolery is done away with, so as to allow Money to fulfill this function, do we stand a chance of moving away from a history of booms and busts, a history that has caused incalculable human hardship, via Depressions and wars.
Don’t kid yourself, History and Money are tied together in ways most of have not even thought of.
Sure, there are bankers and financial ‘wizards’ in the background who know full well what can be done to Money and what it can do for them —— especially in the current regimes of central bank-operated Fiat Money Systems and the associated Fractional Reserve Banking Systems.
The tragedy is that most of us do not, and thus Main Street occasionally, historically, gets fleeced by these ‘financial gurus’.
The idea is to level the playing field, and stop people from gorging on the artificially-create ‘arbitrage’ profits that are available in an unfair setup between central banks and financial institutions that hurts the rest of us.
Sure we need a well-functioning Financial Sector, because that sector facilitates the operation of bringing money from savers together with those people and institutions that need to borrow funds.
But does the Financial Sector need to make (take) 40% of all the profits made by all companies in America? That seems kind of high for a Facilitation Service, doesn’t it?
Why should The FED for example, subsidize the Borrowing Class at the cost of the saver —— some of whom are just trying to save for their retirement, and are not all rich folks?
No, this is not good enough for the Financial Sector —— that sector decides that we’ll just mess with the little guy and force him/her to take huge risks by investing not in Savings Deposits, but because we have driven those returns down so low, we’ll give the little guy NO CHOICE —— that Little Guy will just have to buy risky stocks and bonds, or better yet even more Real Estate, or better yet, “high-return” Mortgage-Backed Asset securities.
What a scam! What a lark! Rejoice, we are all on Easy Street, and the suckers (the Little Guys) did not even know what hit them!
I agree with you that we need a well-functioning financial sector. but the key to that will be effective financial regulation, just we had from 1945 to the 1980s.
You say:
When the actors in The Economy cannot rely on the ‘Unit of Account” that money represents, because the value of that unit changes month to month, year to year, and because the Price of Money itself (via the ‘borrowing price’ as indicated by prevailing FED-set interest rates) changes
But this is precisely what happened in the 19th century when there were wild swings in the price level from month-to-month and year-to-year. All of your subsequent remarks could just as easily be applied to the gold standard “unit of account” too.
Only when the tomfoolery is done away with, so as to allow Money to fulfill this function, do we stand a chance of moving away from a history of booms and busts, a history that has caused incalculable human hardship, via Depressions and wars.
The trade cycle/business cycle existed under commodity standards as well. The belief that the business cycle is simply caused by fiat money/unbacked fiduciary media has little evidence to support it.
Our business cycle in the Bretton Woods/Keynesian era was much more stable than the 19th century gold-standard business cycle.
Lord Keynes thank you for your reply.
I guess we agree then —- that History confirms (apparently for both of us) that the current Money System is Broken (and has been for a long time).
If I can restate one more time what my personal main objective is:
On your other point —-
Here I have to take exception.
Most all booms and busts (even including TULIPMANIA) are related IMHO to the tomfoolery I referred to.
Please see
Early Speculative Bubbles and Increases in the Supply of Money at
http://www.cobdencentre.org/2010/05/early-speculative-bubbles-and-increases-in-the-supply-of-money/
Lord Keynes perpetrates the deregulation myth…
WHat happened since 1980s? You yourself said that there hasn’t been any substantial change in government as a percentage of GDP. How many pages of CFR was eliminated due to deregulation? What specific bureaucracies were dismantled? What was the net change in the pages of the financial section of CFR? What is the net change in the size of CFR since 1980?
Your BS has a intensely penetrating stench.
Nowhere did I say there was “no regulation”.
What we had was a SYSTEM of highly ineffective regulation.
Contrast the US system with Canada’s:
In 2008, the World Economic Forum ranked Canada’s banking system as the soundest in the world. The U.S. system was ranked at number 40 and Germany and Britain ranked 39 and 44. Canada’s banks have required no bailouts to save financial institutions.
Why? The answer is fairly simple: Canada, unlike many other Western countries, still has tight and effective banking regulation.
Bull shit! What are the regulations that Canada has that the U.S doesn’t have? How did it help in this case?
For the myth of all the deregulation talk from the left, the only thing they come up with all the time is “Glass-Steagal”. Well Canada doesn’t have any equivalent of Glass-Steagal, and they never had it.
Bull Shit again. I never suggested that you said “no regulation”. But you did say deregulation.
http://socialdemocracy21stcentury.blogspot.com/2009/11/financial-deregulation-and-origin-of.html
My question is very specific. I wanted you to quantify net loss of regulation in terms of net loss of effective regulations from the CFR, net loss of bureucratic jobs from govermnet, and cut in budgets, number of regulatory agencies eliminated.
Not a single bank failed in Canada during the great depression. Canada didn’t even have a central bank until 1935.
Not a single bank failed in Canada during the great depression. Canada didn’t even have a central bank until 1935.
That’s because even in the 19th century the Bank of Montreal – where the government deposited its money – acted as an informal central bank, bailing out any large banks. From 1907 the government would intervene to help by banks, in an asset buying program in times of crisis to increase liquidity, just like central bank open market operation. There was an also implicit government guarantee that depositors would be protected from loss, as Kryzanowski and Roberts has shown.
So government is the key to why there was not one failure there. Hurray for government!
Lawrence Kryzanowski and Gordon S. Roberts, “Canadian Banking Solvency, 1922-1940″ Journal of Money, Credit and Banking Vol. 25, No. 3, Part 1 (Aug., 1993), pp. 361-376.
If all it took was implicit guarantee and informal bail outs to have such a wide disparity between bank failures ( 9000 versus 0 ) shouldn’t the lesson of the great depression be that eliminate Fed and replace it with gold standard, some sort of unwritten implicit guarantees, and let a private bank bail out other large failing banks? If that’s what made all the difference?
Hurrah to private free banking.
What are the regulations that Canada has that the U.S doesn’t have?
Simple. You can find the answer to that question with 10 minutes of research.
Canada’s banks were highly restricted by regulators from mass securitizing of mortgage debt. Canada’s banks also were prohibited from taking on high levels of leverage to make larger and riskier loans.
The Canadian mortgage industry was regulated to maintain high lending standards, instead of lax ones allowing an explosion in sub-prime mortgages.
As I said, it is the system of regulation.
A highly inefficient US system led to disaster.
http://www.nuwireinvestor.com/articles/canadas-highly-regulated-banks-helped-it-sidestep-the-financial-crisis-55555.aspx
Yes, it is simple. Except, you haven’t cited a single canadian regulation and connected the dots to its effect. Yes, the U.S system is highly inefficient because the system was regulated to death. In the U.S, the regulators regulated the mortgage industry ( forcing them ) to lend money to the deadbeat, encourage them to make imprudent loans.
you haven’t cited a single Canadian regulation and connected the dots to its effect
Easy:
The last revision of legislation governing banks was Bill C-8 passed in 2001.
The Canadian Office of the Superintendent of Financial Institutions (OSFI) was the federal agency principally responsible for supervising all federally regulated financial institutions:
http://www.fin.gc.ca/toc/2003/property_-eng.asp
Canada’s banks were prohibited from taking on high levels of leverage to make larger and riskier loans. Unlike the US, all significant off-balance sheet assets were included.
You can get an excellent summary of specific regulatory measures on the Canadian Office of the Superintendent of Financial Institutions website:
http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?DetailID=527
Subsection 485(1) of the Bank Act (BA) and subsection 473(1) of the Trust and Loan Companies Act (TLCA) require banks and trust and loan companies to maintain adequate capital.
You can find the rest of relevant regulatory requirements there.
In the U.S, banks are required to maintain adequate capital, but then the subprime mortgages were rated AAA by a government granted cartel of rating agencies. Enabling them to maintain low reserve ratio. In a Rothbardian banking system, the reserves would be 100% against demand deposits.
Lord Keynes, please make sure you don’t miss that great video of your economic philosophy (My, you do look so very dapper and dashing!!!) at
"Fear the Boom and Bust" a Hayek vs. Keynes Rap Anthem
And also, please read Doug French’s essay (if you have time — I know you are a particularly busy, and oh so very important person) at
Illusions of the Age of Keynes
Lord Keynes,
If you will allow me to impose one last time, please examine the overbuilding in your example of China, since you are so enamored by that country’s exceptionally large (relative to GDP) “Stimulus”.
Would you not agree that there is some danger of human decision makers making huge malinvestments, along the road to Economic Salvation?
Dear Sir: Thank you for your patience and time.
http://www.youtube.com/watch?v=uQGrxfzqSCI
http://www.youtube.com/watch?v=iaPYgzbqUKc&feature=related
http://www.youtube.com/watch?v=0h7V3Twb-Qk&feature=related
http://www.youtube.com/watch?v=1sjMJXJkpAo&feature=related
Just because you have found some instances of overinvestment does not in any way refute the general success and effectiveness of Keynesian stimulus.
Let’s apply your same argument to capitalism. Capitalism can a lso create vast malinvestments: e.g., the US had vast overinvestment in railways in the 1860s (mainly from British investment capital), which set it up for a depression from 1873-1879. Does this prove that private investment is etterly useles, and should be all be scrapped and is never any good? Not at all.
But that it is exactly the type of sloppy reasoning employed in your own statements above.
By the way, overcontruction in China still builds real assets of use to people – people can easily be moved into an empy apartment. A empty office building can be given to a new company and be made useful.
Contrast that with financial market overinvestment: nobody can do anything with an overvalued share: you can’t eat it or live in it.
If you look at the details of China’s stimulus, the major parts were on infrastructure: almost half of went on infrastructure spending on railroads, highways and power grids, badly needed as China is a developing nation. Another 25% went to reconstruct entire towns in Sichuan province devastated by the 2008 earthquake. All vitally needed projects.
See http://www.ourfuture.org/blog-entry/2010041727/lessons-chinas-stimulus
Railroad bubble of 19th century was a government subsidized bubble. and then you go on to say…
Implying that these are unlikely to create malinvestments of the kinds that financial instruments create. Actually financial instruments themselves are created from some asset with some underlying value or an expectation of return like a tech company or real estate. Malinvestment is always occurs at the real resources level, even though bubbles can manifest in financial instruments.
Further more, there was no long depression from 1873 to 1879. You can look up the GDP data for that period on measuringworth.org .
Implying that these are unlikely to create malinvestments of the kinds that financial instruments create.
Correct. China is a developing country. These infrastructure projects will increase private economic activity and business. As for the earthquake repairs, they are also badly needed,
Where is your evidence that the “railroad bubble of 19th century was a government subsidized bubble.”
On the issue of 1873-1879 recession, there is some evidence that some sectors recovered before others. The belief that there was no recession is simply ridiculous
But that statement is in direct contradiction with your citation of the 1870s railroad bubble. We were a “developing” country back then. A reasonable case could have been made that these railroads would have been useful for AMerica in the following years, yet malinvestment happened. Even the cables that GlobalCrossing laid across the globe during the dotcom bubble is useful, yet it was malinvestment. Because use has to beconsidered in the context of alternate uses of such resources.
I am inclined to agree with that statement. However I take exception to the insinuation because I never implied that there was no recession.
You have no proof that infrastructure projects in China ARE malinvestments.
On the contrary, they are badly ndeed now, just as earthquake repair was.
I can’t say with any certainty that there is a bubble in China or for that matter some certain kinds of malinvestment. I’m not smart enough to make any such prophecy. However, I do look at some signs, just as I was looking for similar signs here a few years ago. Those signs include, empty building, easy money, rampant reckless speculation etc. I see similar stories from China. Now, with China, I don’t have first hand experience because I don’t live there. However, I do ask people who have closer connection with that region, I do read news stories, and I do watch video/news clips.
I anticipated the U.S housing bubble ( not with 100 % certainty), and I anticipated the Dubai real estate bubble, I didn’t think that commodities will collapse as much as it did. Now I’m anticipating a bursting of China bubble ( not with 100 % certainty). We will see how it goes.
A city no one lives in isn’t proof of malinvestment? What is proof for you…?
Mathew,
It is malinvestment. The term malinvestment in this context was used to mean something that could potentially cause a business cycle. I think it is widespread, but don’t know the exact scale for sure.
Sandre wrote:
“It is malinvestment. The term malinvestment in this context was used to mean something that could potentially cause a business cycle.”
The point is, the fact that the cities are uninhabited (and thus, obviously unneeded) is proof that they were a malinvestment. Whether or not they are the same exact kind of malinvestment that causes business cycles, or have the same exact cause, is irrelevant. (Yes, the ultimate cause of the malinvestment, government intervention, is the same.)
Given that Chinese GDP is huge, these malinvestments are likely to be a very small and comparatively insignificant percentage of the stimulus.
Just because you have found some instances of malinvestment does not in any way refute the general success and effectiveness of Keynesian stimulus.
Capitalism can also create vast malinvestments: e.g., the huge property bubble in Australia in the 1880s under Australia’s free banking sytem. Australia had no central bank, virtually no regulation, a gold standard in the 19th century, yet its expereince with free banking ended in complete and utter catastrophe.
China property bubble
http://www.youtube.com/watch?v=zXNr46HTYkw
This is a hedge fund manager’s personal report on commercial property bubble in China
http://www.youtube.com/watch?v=ektMQGbW3wk
Largest mall in the world is empty.
http://www.youtube.com/watch?v=emzKAa9rKgU
It is more widespread than you think.
Does any of the free-banking economist accept your claim that Australia had a free-banking back in 1880s? Besides, how far do you have to go back to find such a rare episode of malinvestment?
Yep:
Kevin Dowd, Laissez-Faire Banking:
http://books.google.co.nz/books?id=VfTSxZsKKCUC&pg=PA117&lpg=PA117&dq=%22free+banking%22+1880s++australia&source=bl&ots=c7e4MKtZVy&sig=cUQ_5UEsePqWppqGz-8rjTlpX-0&hl=en&ei=DouZTOuPFYPEvQORw6GADQ&sa=X&oi=book_result&ct=result&resnum=2&ved=0CBgQ6AEwAQ#v=onepage&q=%22free%20banking%22%201880s%20%20australia&f=false
Lord Keynes,
Congratulations. You may have found an imperfection in Laissez-faire banking, last one occuring back in 1880 in some part of Australia. LOL. This is equally hilarious as your attribution of inflation to the gold standard. Funny! We all know what the long term trends in prices were under gold standard and we know the trends without that standard.
Sandre, the point I was responding to was the one by Lord Keynes that “no proof that infrastructure projects in China ARE malinvestments”
Note I didn’t say that ALL infrastructure projects are malinvestments. I only contested that there is no proof that there are any projects that are based on the clearly underutilized city that was made. If it’s used later, it still doesn’t make it any less of a malinvestment now since other things could have been produced with those resources instead that are usable in the immediate future.
Personally, I think having 100% reserves for storage/saving accounts is the only thing that makes sense.
That said, the way to get there may involve some bank failures/panics/etc. Austro-libertarians or anarcho capitalists both do not believe that they are creating a utopia. So the fact that freer banking may have panics does not lead us to conclude that freedom is the problem. As long as failure of poorly run institutions is allowed and restructuring is done without government imposed favoritism (bank holidays, dividing remaining assets in an inequitable way, etc.) people and businesses will learn from their mistakes provided that the incentive not to fail is huge for everyone.
It’s huge to customers because they don’t want to lose their money, and for banks because they want to stay in business, and for executives of banks because they would have significantly more liability in a free system (in my view, but I imagine true for others here as well) than they get in our current government system where the whole structure can be bailed out with free money created out of thin air.
Not allowing failure is the biggest thing the government does that ensures continual ruin.
You have your religion, Lord Keynes, and it is good to see a man who is true to his beliefs.
Why China’s Housing Bubble Is Unsustainable
China has empty cities
http://www.youtube.com/watch?v=0h7V3Twb-Qk
You may think it is just a matter of forcefully moving people into these structures. Totalitarian governments might be able to do it. GDP may go up, that says nothing about the well being of the people.
Nowhere did say it is a mattwr of “forcefully moving people into these structures.” This is a silly straw man argument.
You clearly canot refute that fact that overcontruction in China still builds real assets of use to people – people can easily buy a empty apartment. A empty office building can be given to a new company and be made useful.
I don’t consider an empty city of much “use to people”.
No, but it easily be: that is my point.
These are real assets that people can live or work in.
It could be a real asset, and that only time can tell. That doesn’t mean that resources were misallocated at this given time in history. Sure, as prices fall, some of these properties could get occupied ( so will in the U.S), but that doesn’t rule out a painful readjustment (a direct result of Keynesian demand management).
*resources were NOT misallocated*
So what about the “bridge to nowhere”? It’s useful as long as 1 person ever drives over it? And we should all just accept that these things aren’t so bad as long as we get 99 good projects and 1 bad project or some other percentage, right?
Well my question is, how do you rate the 99 good projects? What method do you use to determine that those 99 projects were actually good. You’ve altered the private system by misallocating resources via distribution of fiat money created out of thin air, so price signals could be lying to you. You have to trust in your regulations to every single detail and if there is even one thing you do wrong you screw the whole damn thing up.
It’s pretty easy to screw it all up given you have to hand every one of these minuscule changes off to a horde of politicians and special interest groups to write the laws, which are later turned into thousands of regulations.
It’s clear that the root of Lord Keynes’ problem here is his rather obvious blind spot – he doesn’t, and refuses to, understand the concept of malinvestment. Yet another person who just forgets their common sense in order to defend their delusional political opinion.
If I was helping with the cooking at Lord Keynes’ house (not an event I anticipate) to make up time because he was running late, but used his fork to cut the carrots and his knife to lift the spaghetti out of the pan as the guests were arriving, would he think I was stupid? Why – you “can” do this? What’s the problem?
No’one is saying it isn’t possible to dice carrots with a fork. It is that it is a significantly sub-optimal use of the fork and knife and my time. There are other more productifve ways to proceed – do you understand “opportunity cost”? The cost of doing it in this stupid fashion is the wealth you would have created (but now have not created) by using the knife and fork in the correct fashion (ie. taking half the time to do the task).
It’s just seen versus unseen once again. It’s harder (for the dimwitted) to see – because you didn’t destroy something, you actually did something (diced the carrots and moved the spaghetti) – but this doing something was sub-optimal and so has a cost.
Similarly, no’one saying that the city can’t be used, only that the time and materials spent in its constuction had other more productive uses, as proved by it being, erm, empty. In your desire to defend the interference of the state, you just totally ignore this.
Except they don’t want to. People have other preferences and the political allocation of resouces ignore those preferences.
If 10 years from now, people become willing to occupy that empty city, it would have been much better if it got built at that time in the future. Resources human, capital, raw material that went into building those empty structures had alternate uses. These structures may ultimately be occupied, just as global crossing’s fiber optic cables are being used to make customer support calls to India, but that doesn’t mean that China will not go through a painful readjustment ( all due to Keynesian propensity to blow air into bubbles through stimuli)
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Have you ever been to China?
I can tell you that the demand for housing is voracious there.
As housing prices fall, people will snap them up.
What?? Actually allow prices to fall? What about about the deflationary spiral? (Too bad they don’t let that happen in the U.S.)
Lord Keynes SEZ:
Who are these “voracious” buyers? Are they man-eating Piranha?
http://www.imdb.com/title/tt0464154/
It is just like here —— the average person has already been “priced out of the market”.
These “Piranha” are “investors” —— sound familiar?
As from “IS CHINA’S GREAT WALL OF LIES ABOUT TO CRUMBLE?” at http://www.express.co.uk/posts/view/194726/Is-China-s-great-wall-of-lies-about-to-crumble-
The demand for housing in Chian is explosive. Millions of people are moving form the country to the cities, and a middle class is growing . It’s called industrialization.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aUZdrGgI10co&refer=india
http://www.businessweek.com/news/2010-06-15/china-s-housing-market-isn-t-overheating-roach-says-tom-keene.html
http://news.bbc.co.uk/2/hi/business/8487390.stm
I have no doubt that the Chinese middle class does want better housing. That doesn’t rule out an adjustment at this point in time.I had heard very similar stories about housing and realestate here in the U.S back in 2004,2005 & 2006. Of course, scale might be different, but sentiments were very similar.
http://www.amazon.com/Real-Estate-Boom-Will-Bust/dp/0385514352/ref=sr_1_1?s=books&ie=UTF8&qid=1285111259&sr=1-1
America isn’t a third world country undergoing massive industrialization and population movements and an exploding middle class.
China is.
Hence I said ” Of course, scale might be different, but sentiments were very similar.”
America had gone thorugh many painful correction (including the time period 1945-1973) that doesn’t mean that America stopped industrializing at any of those contractions.
The FED and the Federal Government will do exactly what Lord Keynes proposes. So The Lord will get His Way.
So we will see how successful yet another Turn of The Monetary Screw is.
I suspect we know the result of this next experiment —— exactly the same as last time.
Does Lord Keynes really have such a short memory?
Well I cannot blame only Lord Keynes, for his servants, including Ben Bernanke, still make the same silly noises about “fighting [price] deflation” and the need for more stimulus.
This is Doug Noland on July 25, 2003 from his essay “Struggling Team Greenspan/Bernanke” (well before Ben Bernanke became Head of The FED) at http://www.safehaven.com/article/878/struggling-team-greenspanbernanke
This is the worst thread ever. I miss michael, at least his insanity had charm. Seriously: read more, post less…
I thought that Lord Keynes WAS “michael” back in new garb.
Nop, michael is a little more colourful (I used the British spelling, in an effort to be more “colourful”) and free-spirited (annoyingly); Lord Keynes is like a living, breathing, typing straw man-beast that I thought never actually existed outside of the psuedo-caricatures portrayed in polemics–until now!. The more you know.
This is exactly why the “Misesian tradition stress(es) the primacy of theory in the social sciences”… There is no way to resolve these questions simply by looking at arbitrary figures from a specific, unique and non-replicable period in the past. That is why Mises argued that the study of economics must take place via logic based on praxeology.
Human Action deals with the division between economic history and useful economic theory… I would recommend that anyone who wants to gain a deeper understanding of the appropriate role of economic theory (and to understand what the arguments made by “Lord Keynes” above are at best irrelevant) should start there.
I am well aware that the pure Austrian approach is a priori and the founding fathers of Austrian economics like Ludwig von Mises seriously believed that their theories were not subject to empirical testing.
Or as Hayek argued: Austrian economic theories can “never be verified or falsified by reference to facts. All that we can and must verify is the presence of our assumptions in the particular case.”
Yet here we come to the devastating problem with Austrian economics: many Austrians actually use empirical evidence in support of their claims.
What is the point of Robert P. Murphy writing an article called “The Empirical Case against Government Stimulus” to prove the Austrian position when the Austrian position is “a priori” and cannot be proved by empirical evidence, according to Hayek.
Either empirical evidence is valid (in which case ALL of my arguments are just as valid as Robert P. Murphy’s) or it is not (and Robert P. Murphy’s “empirical” arguments are as irrelevant as mine).
It is hard to imagine anyone getting the Austrian position more backwards. The validity of any particular empirical datum has nothing to do with the Austrian argument, and there is no reason Austrians cannot point to empirical data as suggestive support for their theory.
The point is that economic theory must be built on unassailable logic in the context of physical reality. An economic theory cannot be constructed and confirmed with empirical evidence by the usual scientific method because the system under study is too complex to admit it. Actual historical outcomes are no more meaningful to the establishment of an economic theory than would physical measurements of pi be in establishing its irrational, non-repeating value.
An argument or theory made a priori can be refuted if its starting axioms are wrong.
And the foundational axioms of Austrian economics are questionable, as Paul Davidson, (1989). “The Economics of Ignorance or Ignorance of Economics?”, Critical Review, V. 3: 467-487, has shown.
For example, Austrians claim that they deny the neoclassical neutrality of money idea, but this is clearly false and Austrian theory relies on the neutral money axiom, as shown by Davidson 1989.
I am glad to see that you have conceded my point by changing the subject. Based on your description of Paul Davidson’s thesis I can see that he does not understand the praxeological basis of Austrian Economics any more than you do.
I’m sure Davidson is also full of shit though.
Rizzo and O’Driscoll hardly have unqualified support within the Austrian school, even from Kirznerians. What are Davidson’s specific claims re. Austrian views on monetary neutrality? I assume he’s discussing Hayek’s admittedly flawed framework for ABCT? Again, hardly decisive criticism.
With his characteristic insight, David Gordon disects Davidson here:
http://mises.org/daily/3756
Far from dissecting Davidson, Gordon shows a poor grasp of Post Keynesian ideas. He claims that Davidson “has little use for free trade,” but on the contrary Davidson is well known for his work on Keynesianism in open economies, and his work on international payments systems that would allow better international trade.
??? Assuming Gordon is in fact unaware of Davidson’s work on trade (he was reviewing a specific book, not Davidson’s work as a whole), what does this have to do with his understanding of post-Keynesianism? At any rate, Gordon does nicely pinpoint the main flaw in this school of thought: their neglect of the fact that money has a purchasing power. Let me say it more simply: money is NOT credit.
Also, do you plan to address my previous comment, re. Davidson’s claim that Austrians adopt the “neutral money axiom?”
Your statement that I have “conceded [your] point by changing the subject” is false.
Both of my points are valid.
Mises held that the starting axioms of Austrian economics that are synthetic a priori truths.
But the very existence of synthetic a priori propositions is disputed in modern analytic philosophy.
If you accept the arguments against the existence of synthetic a priori propositions, then Mises’ methodology collapses as well.
Not sure about that. Rothbard disagreed with Mises that economic axioms were synthetic a priori. He argued they were ‘broadly’ empirical – known by experience but non-falsifiable. Yet, this did not invalidate the methodology.
Richard Moss,
Rothbard is an interesting case. He called himself a Aristotelian neo-Thomist, and held an objective natural law/natural rights view of ethics.
This his nonaggression axiom was justified by appealing to natural law.
But even here philosophy of ethics is important. There are powerful arguments against the idea of natural law. Anyone who accepts such arguments has no reason to accept Rothbard’s ethics or his system of economics derived from it.
I do not see how Rothbard’s system of ethics compromises the what he saw as the basis for economic axioms. Rothbard held that economics is ‘value free’ just as Mises did, but that ethics is not. I do not see how his views on the latter corrupts the validity of his views on the former.
If you want to keep trotting out how this or that theory of epistomology is ‘in question’ I do not see the point. It is ‘empirically evident’ there is hardly agreement on which theory is correct. It might be more useful to argue why you reject the axioms Austrians employ, etc.
LK,
Perhaps I should better clarify;
You wrote “Anyone who accepts such arguments has no reason to accept Rothbard’s ethics or his system of economics derived from it”.
Rothbard did not derive his system of economics from a system of ethics. Nowhere did he inject ‘individuals have natural rights’ as an axiom to derive economic laws.
If anything, he suggested that the ‘value free’ science of economics implies there is a science of ethics.
I think you need to google the term, “non-sequitur.” Thanks.
For Lord Keynes classic Keynesianism ended in 1973, not in 1980, even though, he thinks changes happened after 1980. The period from 1974-1980 doesn’t exist, because it is too inconvenient for Keynesians. Not to mention all the sharp business cycles that happened in the 70s and in the 50s.
S Andrews,
For Lord Keynes classic Keynesianism ended in 1973, not in 1980, even though, he thinks changes happened after 1980.
Wrong.
Neoclassical synthesis Keynesianism as the mainstream macroeconomic theory was replaced by monetarism, New Classical economics and neoliberalism from about 1979 onwards.
The Bretton woods era lasted from 1945-1971, and the era of real wage gains occurring in line with productivity growth ended in 1973 (when real wages in the US peaked).
Of course, as an Austrian, you should know well that wasteful military Keynesianism was practised by Reagan, whose budget deficits were chronic. Other countries (particularly in continental western Europe, or Australia) were more pragmatic and did not accept all of the policy prescriptions of monetarism/Thatcherism/neoliberalism, escaping some of the disastrous consequences of these systems.
As for era of stagflation, that was problem for neoclassical synthesis Keynesians, with their flawed Hicksian IS-LM models.
Post Keynesians never had any difficult explaining stagflation and offering effective cures for it.
One of the best analyses of stagflation is by Nicholas Kaldor, (1976) “Inflation and Recession in the World Economy,” Economic Journal 86 (December): 703–14.
See:
http://socialdemocracy21stcentury.blogspot.com/2010/07/three-varieties-of-keynesianism.html
This thread is absolutely awful. Lord Keynes, by jumping around and attacking anything and everything you think is Austrian, you are not convincing anyone.
Keynesianism and its derivatives are a complicated morass of theories than nonetheless share fundamental principles, one of which is government spending in a “recession” will cause an economy to “grow”, that is increase total wealth.
This basic principle is easy to dispatch. If consumers are spending less than before for a given mix of products, it is because they do not value those products as much as they used to, ceteris parabis. Philisophically and realistically, the consumers’ subjective motivations and valuations are inscrutable. Thus, it is impossible for the government, or anyone else, to second guess the level of spending as “inadequate” to sustain some arbitrary number of desired jobs.
Referencing animal spirits or irrational exuberance is unprovable and ad hoc nonsense. Furthermore, even if these ad hoc boogeyman concepts had any meaning, if they are part of human nature, it is on Keynesians to demonstrate why human nature should not be followed.
Because all wealth is subjective, the maximizaton of “wealth” is a matter of respecting consumer preferences. Even if Keynesianism caused the results it purports to cause such as an increase in GDP, a crude measure of dollars spent or invested (particularly when the government is the spender) has nothing to do with consumer preferences.
But Keynesians are generally not logicians or philosophers. As shown, their economic system by definition imputes subjective values into their “scientific” analysis (e.g., consumers *should* be spending more) rather than just policy prescriptions working from a common set of cultural assumptions.
*”recession” is a synthetic term with its own value imputations, something economists should not do
Well stated, Perry…
Millions of individual decision makers deciding for themselves what is best will always result in a better outcome than a few “planners” making decisions for everyone, because there is no objective “better” or “worse” state of affairs independent of the preferences of individual people.
Millions of individual decision makers deciding for themselves what is best will always result in a better outcome than a few “planners” making decisions for everyone
The belief that people on the street or sinking under debt are “deciding for themselves what is best” is a sick joke. If you get a job via a government program you are perfectly “free” to chose what commodities you purchase. No planner is telling you what to consume.
This basic principle is easy to dispatch. If consumers are spending less than before for a given mix of products, it is because they do not value those products as much as they used to, ceteris parabis.
People who are unemployed did not suddenly stop purchasing commodities because the utility they derive from commodities has radically changed. They do so because their income is gone or has been severely reduced.
If I have no money, by definition I can’t purchase any commodity. Whatever *changes* there might be in my use value evaluations of commodities is irrelevant, if I can’t purchase anything.
Guys, Robert Murphy is right-on here.
We need to get a Hayekian superbowl commercial.
Alright, I’ll pass the hat around. We just need $2 million for a 30 second spot just to buy the airtime. Add another $75,000 to actually make it.
Yes, spending cuts are stimulative. Why? Because in most modern governments, spending is predominately consumption oriented. Economic growth is driven by investment: allocating income to create the means to produce the goods and service people want to buy. By cutting government spending a nation makes available more of its income for private investment. This is especially true when the spending cuts reduce government borrowing since government borrowing diverts the very income a nation has set aside for investing. The most stimulative thing any government could do would be to cut spending to the point of surpluses.
See
http://forio.com/simulate/simulation/keubanks/macro-economics-101
This is a macro economic simulator designed to explore how growth in population, the money supply and government spending might affect capital accumulation, income and employment. It is built upon an economic growth model of the Solow theme with endogenous prices, employment and savings. Check it out if interested in this blog topic.
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