Audacity itself as economic experiment: "an unparalleled test of Keynes' decades-old idea"

[DeepModem Mom]

LAT: Audacity itself as economic experiment
President-elect Obama proposes an unparalleled test of Keynes' decades-old idea: that deficit spending on a grand-enough scale can inspire the confidence to right a sinking economy.
By Peter G. Gosselin
January 11, 2009

Reporting from Washington -- In a measure of how quickly its options are shrinking, the United States is about to embrace an economic theory that was widely thought for most of the last generation to have been discredited: the idea that great bursts of deficit-funded government expenditure can jolt an economy back to growth. And the nation is poised to put this theory to the test on a scale untried in peacetime by any developed country on Earth.

President-elect Barack Obama will soon unveil a package of tax cuts and spending increases that, combined with already planned spending, would push Washington's 2009 deficit to between $1.5 trillion and $2 trillion -- more than 10% of the economy's output. And he will argue that this tidal wave of federal expenditure should continue into next year, and perhaps beyond. Only during World War II did U.S. government expenditures account for a greater share of economic activity, according to federal statistics. That's also true for virtually every other developed country....

The sheer size of Obama's plan and the considerable support it is generating among economists as well as the public are testament to the frightening dimensions of the global economic plunge -- and to the fact that, to date, efforts by government policymakers have done little more than slow the fall.

Obama's plan represents an unexpected comeback for the ideas of the late British economist John Maynard Keynes, who argued in the 1930s that governments could end the Depression by spending heavily to maintain demand for goods and services until frightened consumers and damaged businesses gained the courage to resume buying and selling on their own.

The secret, Keynes argued, was not so much the amount of money the government spent, but how convincingly it signaled that the economic game was reviving -- and thus enticed players in the private sector to overcome their fears and begin playing again. In this regard, timing and the political atmosphere when the government acted were critical: The size of the stimulus had to be large enough to seem likely to have an effect, and action had to be taken quickly and decisively -- without the kind of political haggling that could undermine confidence.

Experience also suggests the stimulus strategy must be accompanied by steps to fix the damaged financial system, especially credit, economists say....

For decades, conservative economists have dismissed Keynes as misguided. What has suddenly revived interest in his ideas is the shattering speed with which the present economic crisis has developed....

http://www.latimes.com/business/la-fi-econ11-2009jan11,0,3306682,full.story

[JDPriestly]

1. Corporations Law 101: Trust is the foundation of the economy.

Law, especially law that insures full disclosure, makes due diligence possible and enforces contracts, is the basis for trust. Without law, without rules about disclosure and honesty, without the enforcement of the law and the rules about disclosure and honest, capitalism fails -- and the government has to intervene to once again establish faith in the rule of law.

Libertarianism fails to understand this essential point -- Most people may be honest and trustworthy. But it only takes a couple of crooks to bring down the economy. Government oversight and the rule of law -- The essential factors in a successful economy.

I think someone posted a Max Keiser show video on DU in which that point was made.

[bstender]

4. laws and govt.

Libertarianism fails to understand this essential point -- Most people may be honest and trustworthy. But it only takes a couple of crooks to bring down the economy. Government oversight and the rule of law -- The essential factors in a successful economy.

Libertarianism understands that fine, the additional thing they undersand is that "government" is a collection of the same human beings, some of whom are also crooked. and possibly in a position to wreak even greater public harm than as free agents, employed by people who care about what happens. it is made worse in that most govt operations have no compelling incentive to do their job well, it is almost a joke how corrupt some of these offices are, city state and federal levels.

the point being that while you certainly need law and enforcement, empowering a bureaucracy to oversee things is far from a panacea, you still need real private concerned citizen oversight to do the job right. any community activist in any area will back me up on this. government can end up being a nightmare of obstacle to enforcement rather than saving the day, almost ALL legislation is bought and paid for don't forget. government starts out good on paper, but reality is very different.

[JDPriestly]

5. You are, of course, correct. It takes government that answers to the people.

But trust disappears in the absence of such a government.

[bstender]

2. confidence game

the alternative being to let bad investments go bad, rebuild new viable interests from the ground up instead of putting a terminal petro-consumer lifestyle on life support. even if we manage to get it to cough up another 5 year bubble of some sort, we're back here again with a deeper hole.

[bemildred]

3. It all depends on how the money is used. nt

[teknomanzer]

6. Exactly right...

If any deficit spending is made at this point (given the already already outrageous size of our national debt) it should be spent on building the next generation of infrastructure, employing the best and brightest engineers who are focused on renewable and sustainable energy sources with full consideration of environmental impacts. The rest should be spent on providing opportunities to the next generation of undiscovered brilliant minds wasting away in poverty somewhere.