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Source link: http://archive.mises.org/7788/keynesian-economics-better-late-than-never/

Keynesian Economics: Better Late Than Never

February 15, 2008 by

Bond guru Bill Gross – of Pimco – on resurrecting Keynes and the New Deal:

As Keynes theorized and then Krugman affirmed, when private demand falters, it becomes the responsibility of government to fill the breach. Because it likely will not do so effectively until after a new Administration is elected in late 2008, the U.S. economy and its somewhat coupled global companion will sleep walk for some time and a resumption of prosperity as we knew it will be dependent on reforms of monetary and fiscal policy resembling the 1930s more than our past decade. Better late than never.

{ 9 comments }

Dennis February 15, 2008 at 6:34 pm

While Mr. Gross has been a successful fixed income money manager, his knowledge of economics is sophomoric, at best. Without my reiterating the myriad of fallacies that comprise the imbecilic Keynesian system, does Gross honestly believe that the Bush administration and the Federal Reserve have followed anything but Keynesian policy? The massive money and credit creation from roughly 2001 through 2004 represented Keynesianism par excellence. In fact, while minor variations have occurred, virtually every administration and Fed since at least the 1930s has, to a very considerable degree, implemented Keynesian policy prescriptions.

I would argue that Gross’s comment much more reflects his dislike, from a partisan Democratic perspective, of the dastardly Mr. Bush and his administration and supporters, than any knowledge of sound economics.

A.B. February 15, 2008 at 8:29 pm

On the contrary, Mr. Gross understands economics very well, as a bond holder financing long term debt with short term rates he knows he’ll benefit from money injection – that’s the reason why he advocates a Keynesian stimulus.

John_Galt February 16, 2008 at 12:26 am

I think you give Mr. Gross to much credit (no pun intended). Mr gross does not support Keynesian Economics for any deep epistemological reason; he supports it because it justifies forcing taxpayers to subsidize his debt empire. When government goes into debt to “stimulate the economy” Mr. Gross is there to buy that debt. Keynesian Economics gives tax parasites like Mr Gross a patina of respectability because he can claim he is merely helping the little guy live a better life. There is very little risk to Mr. Gross when the entity paying his P&I has unlimited power to collect the money it pays Mr. Gross. If you think about Mr. Gross praxeologically, it makes perfect sense for him to support Keynesian Economics. By so doing, he ingratiates himself with his customer base.

Please read the following Q&A. (http://singapore.pimco.com/LeftNav/PIMCO+Group+Spotlight/Gross+QA+12-07.htm) Mr Gross loves that tax payer subsidized debt:

Q: Where does PIMCO see opportunity heading into 2008 given the macroeconomic backdrop and the developments in the financial markets?
Gross: In an environment where almost all bonds are viewed with suspicion, we see value in some of the high-quality sectors of the market that have underperformed U.S. Treasuries.

Agency bonds and agency-guaranteed mortgage-backed securities (MBS) have been avoided due to billion dollar write-offs at Freddie Mac and Fannie Mae, and also due to rising supply as homeowners shift from adjustable-rate to fixed-rate mortgages and mortgage lending shifts from non-agency to agency MBS. Agency MBS in particular are extremely cheap, offering 150 to 175 basis points of extra yield relative to Treasuries. We think agency MBS spreads offer very compelling value and the potential for narrowing spreads when the market begins to differentiate between high-quality agency MBS compared to lower quality, non-agency MBS.

Swaps also provide an attractive yield pick up of 70 basis points or more relative to Treasuries, across almost the entire yield curve, even though swaps are very high quality instruments reflecting the rates at which the world’s best banks lend to each other.

U.S. municipal bonds are another example of a bargain in today’s market. Across the yield curve, high quality muni bonds now yield the same or more than Treasuries of the same maturity, and munis are exempt from federal taxes and most state and local taxes while Treasuries are for the most part taxable.

Dennis February 16, 2008 at 7:13 am

I agree. Gross’s views on economic policy can also be explained by the professional financial benefit he perceives in supporting Keynesianism. I gave him the benefit of the doubt, and assumed his support of Keynesian policy rested completely on academic, and not professional, considerations. In a sense, I commented on his position using Mises’s approach. I believe the other comments above took more of a Rothbardian approach, and I certainly believe Rothbard’s approach provides significant additional benefit.

Actually, we can never discern what motivates an individual to act in a particular way. We can only analyze the action and its relation to other facts. And it is clear that Gross and others can professionally benefit from the issuance of large amounts of additional government debt to fund the permanent stimulus plan that he apparently advocates.

Assuming they do have some reverence for science and accurate historical knowledge, Gross (and Krugman) can help matters if they read and absorb the lessons contained in works such as Rothbard’s “America’s Great Depression” and Flynn’s “The Roosevelt Myth.”

Too busy couting fibs. February 16, 2008 at 9:38 am

Motivation and personal gain aside. I inferred these whoppers from his piece:
1. Biggest. Government spending and infrastructure building in Japan got it out of its deep recession in the 1990s. This is an outright lie. The zero interest rates (he did mention the failure of that policy.) did nothing. The spending made things worse. The government created demand for things the economy would not have wanted otherwise. Investors flocked to these things leaving investments in consumer preferred goods alone. This turned a 2 year recession into a 10 near depression.
2. Rosevelts policies saved us from the Depression. This is a lie. They made it worse. Labor regulation and tariffs (Both started under Hoover) were continued and that killed the economy. The public works foolishness kept the theft of investment capital going for 8 or 9 years longer.
3. This is a demand problem. This is not true and the author notices it then attemps to refute it. There is plenty of demand. The issue is that there are so many bad investments from 1% interest rates that until the economy can clear these, lenders will be skeptical about lending money.

J.C. Ernharth February 17, 2008 at 11:35 am

Gross talks his book as much as the next guy.

Stephen Grossman February 18, 2008 at 5:03 pm

Too busy couting fibs.
>The issue is that there are so many bad investments from 1% >interest rates that until the economy can clear these, lenders will >be skeptical about lending money.

Assuming that lenders are not stuffing money into mattrasses, what are they doing w/it? I find it difficult to believe that they are not putting teir money to work somehow. And we haven’t reached the stage of the 1923 German inflation in which coo-coo clocks became a store of value (between morning and evening).

Consumptionist Robert Reich (NYT, OpEd, Feb13) damns the rich for a lack of conspicuous consumption (Why don’t they buy more mink coats for their mistresses, damn them?!) and for not investing more in America. He wants them taxed so the poor can (politically) demand more and thus, allegedly, cause production. George Reisman says this only consumes past production and decreases investment for future production.

The Ayn Rand Letter has some excellent essays on productionism vs. consumptionism (18-21).

http://home.att.net/~sdgross

Stephen Grossman December 2, 2008 at 11:04 am

>[Bill Gross]…when private demand falters…

This is quantum economics in which markets exist only when observed by interventionists and science is the arbitrary and non-causal description of the immediate, experience of a flow of random events.

Alberto May 14, 2009 at 2:45 am

I probably shouldn’t be posting anything seeing as I am partly disappointed with the implicit free-market prevarications spewed on this blog. My first point of contention is that a.) with all this talk of the “Roosevelt” myth, and the ostensible force majeure that is the “free-market”, do you not remember that what got us into this mess wasn’t the faux-keynesianism sir Dennis alleges it to be–perhaps tacitly, since “The massive money and credit creation from roughly 2001 through 2004 represented Keynesianism par excellence.”–but rather that mr. milton friedman’s free market advocation of the de facto infusion of financial markets with capital that would be utilized for long-term capital investments (this of course pre-supposes tax cuts for the wealthiest 1% of the country who earn–and i could be getting this wrong–35% of the income in the country). What of course Mr. Friedman forget to predict was that deregulation tends to precipitate the over-leveraging of securities, Collaterized-Debt-Obligations, and so forth, of which the risk far outweighs the opportunity cost of high investment yields. Remember the basic syllogism that accounted for the great depression: Over-leveraging + deregulation=calamity….The constant roosevelt bashing is tragic, especially considering that inteded or not whether the new deal got us out of the depression is nill, given that it gave us Dams, the Tennessee Valley Authority and schools, roads, etc that are still being utilized till this day–these are thigns the private market is decidely ineffecient at providing. Yes the New Deal didn’t “get” us out of the depression but the numbers don’t lie, it certainly ameliorated the condition itself. As is en vouge among neocons, yes the war got us out of the war but was it not Keynes himself who pointed out thaty the New Deal wasn’t enough, essentially stating that the war for all intents and purposes was the New Deal on steroids so to speak with the private control of production being HEAVILY subsized by the federal government debt, whereby the production of munitions, tanks, and planes could all have been thrown into the ocean and the result would have been the same. There’s a reason we keep ending up in this cyclical quandry, and its not because of Keynes. Heck, no deregulation in its most pristine maninfestation would mean no federal regulation against monopolies, as they organic byproducts of any market system with decidly less equitable results than those espousing the free-market advatanges would like to admit.

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