Sunday, April 29, 2012

About the Keynesian "School"

Redditor otherwiseyep explains the different schools of economics [Source:]
There's certainly an argument against ever running a surplus.
There is, and a very good one, even using conventional economics: if you can borrow at 2% and lend or generate 4% returns, then you should do so indefinitely, and there is no sane reason to ever pay down debt or stop taking on more of it.
So-called "neo-chartalists" would take this a step further, and basically recommend that Barack Obama resolve the debt by ordering the treasury to mint a $15tn platinum coin, and deposit it in the treasury, or some such. Viola, zero debt. This is both legally and technically possible, and would, in fact and practice, bring the treasury balance back to zero. And it's not just nutjobs arguing for it. See here for more on other "heterodox economics", including the Austrian school, and the not-too outlandish ideas of so-called "Market Monetary Theory", which holds that central bankers should not distinguish between real growth and inflationary growth:
If your only econ education comes via internet forums, you might think that there are two "schools" of economics, "Austrian" and "Keynesian". In truth, "Keynesian" is not really a "school", it's what fringe economists accuse mainstream economists of being.
John Maynard Keynes contributed a lot of ideas to econ, but the big one that sticks in the craw of so-called "Austrian" or "classical" economists is the notion that government deficit-spending can boost economic activity. This is absolutely, 100%, uncontested mainstream economics-- no fortune 1,000 company would ever hire a senior economist who did not believe that government spending could impact economic growth. There is no "school of thought" dispute on this point: right or wrong, what Austrians call "Keynesian" is mainstream, and everything else is fringe or heterodox. Economists do not call themselves "keynesian economists" any more than physicists call themselves "Eisenstein" physicists. That's something you get accused of being, by people who want to imply a sense of parity with non-mainstream ideas.
If you only know econ from internet debates, you might think that "Keynesian" is some kind of liberal theory of social justice or something, but it's not. It's a baked-in-the-cake component of mainstream economics that says that governments have the ability to stimulate economic growth through spending.
Without taking a position on the rightness or wrongness, it is fair to say that "keynsian" is mainstream econ, and those who reject it run the gamut from heterodox to "fringe".
Back to the point...
  • From a mainstream, "Keynesian" POV, there is no reason to ever pay off debt, the only consideration is to keep GDP growth higher than debt growth and inflation, long-term, so that the payments are sustainable.
  • From a MMT POV (which is still fringe, but which follows orthodox econ), it's not even necessary to worry about inflation, all that matters is to grow the nominal GDP, and the rest will follow.
  • From a neo-chartalist POV, all this worry about debts and deficits is much ado about nothing. Money is a pure abstraction, representing the good faith and credit of the USA, and if it ever becomes a problem, you can just mint trillion-dollar platinum (or copper) coins, whatever.
  • The Austrian POV (bracing for downvotes) is something like a "real value" notion of money, wherein gov't debt or monetary policy can only, at best, fuel bubbles based on too-easy credit or investment capital. A pure "Austrian" or "classical" economist essentially rejects monetary policy and regards all econ as a system of individual barter transactions or value-exchanges. From the "austrian" POV, there is little or nothing that fiscal or monetary policy can do except impede or distort the real economy. It is often tied up with libertarian ideologies, but they are separate things.
Of the above, it is perhaps only the "Austrian" school that would argue against deficit-spending into a recession, and then only the most die-hard followers who would actually argue that deficit-reduction would lead to faster economic growth.
I will leave the debate over who is right and wrong to others.

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