# IMF study says it was wrong about Keynesianism. **URL:** \ **Category:** Great Debates\ **Created:** [January 8, 2013, 6:38am UTC](https://boards.straightdope.com/t/imf-study-says-it-was-wrong-about-keynesianism/646457 "2013-01-08T06:38:25Z")\ **Posts on this page:** 16\ **Page:** 3
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [January 10, 2013, 1:56am UTC](https://boards.straightdope.com/t/imf-study-says-it-was-wrong-about-keynesianism/646457/41 "2013-01-10T01:56:16Z")
> [@Richard\_Parker](#): > > I also have two questions that don’t merit their own thread, but maybe someone here can answer: > > Is it true that, right now, if the U.S. borrows $1 in 2013 dollars, it will have to pay that debt back in the future with less than $1 in 2013 dollars because we have an effectively negative interest rate? > > If that’s so, shouldn’t everyone agree that the thing to do is, at least temporarily, replace tax revenue with borrowing? I think that’s probably wrong on a couple levels. Even if the US was a business, I think what matters is whether you can make more with what you borrow than what you’re charged in interest. Not whether the interest rate is lower than inflation. So for example, if you can earn 20% on an 18% loan, it makes sense to borrow. If you earn 2% on a 3% loan, it doesn’t. The inflation rate just doesn’t come into it. Of course the US is not a business. So even if it were possible for the US to make a profit by borrowing, you wouldn’t want to do it - at least not in a recession. Because the profit would come from the private sector - (where else could it come from?) and the point is to increase private sector wealth. Not make people poorer. ---
**Author:** ![IClaudius](https://avatars.discourse-cdn.com/v4/letter/i/c37758/32.png) [@IClaudius](https://boards.straightdope.com/u/IClaudius)\ **Post date:** [January 10, 2013, 2:42am UTC](https://boards.straightdope.com/t/imf-study-says-it-was-wrong-about-keynesianism/646457/42 "2013-01-10T02:42:19Z")
> [@LinusK](#): > > Of course the US is not a business. So even if it were possible for the US to make a profit by borrowing, you wouldn’t want to do it - at least not in a recession. Because the profit would come from the private sector - (where else could it come from?) and the point is to increase private sector wealth. Not make people poorer. There’s no evidence that all public sector activities crowds out the private sector in all situations. You’re taking a very qualified idea from micro-founded public choice theory based on simplified single-agent models, which is anyway subject to many exceptions in theory and behavioural science, and creating a massive over-generalisation. This idea that the private sector always produces positive sum wealth and the public sector is always negative sum is magical thinking dogma. Even outside the business cycle, which is subject to variation including idling resources and underutilised capacity which preclude normal crowding out effects, public goods and positive externalities exist. ---
**Author:** ![Tabby\_Cat](https://avatars.discourse-cdn.com/v4/letter/t/6a8cbe/32.png) [@Tabby\_Cat](https://boards.straightdope.com/u/Tabby_Cat)\ **Post date:** [January 10, 2013, 2:43am UTC](https://boards.straightdope.com/t/imf-study-says-it-was-wrong-about-keynesianism/646457/43 "2013-01-10T02:43:14Z")
> [@LinusK](#): > > I think that’s probably wrong on a couple levels. Even if the US was a business, I think what matters is whether you can make more with what you borrow than what you’re charged in interest. Not whether the interest rate is lower than inflation. So for example, if you can earn 20% on an 18% loan, it makes sense to borrow. If you earn 2% on a 3% loan, it doesn’t. The inflation rate just doesn’t come into it. > > Of course the US is not a business. So even if it were possible for the US to make a profit by borrowing, you wouldn’t want to do it - at least not in a recession. Because the profit would come from the private sector - (where else could it come from?) and the point is to increase private sector wealth. Not make people poorer. Was there a point to be made in your post? Your second paragraph refutes your first, and even if either were true, neither answer the question. Do you think that the government exists to turn a profit? ---
**Author:** ![Tabby\_Cat](https://avatars.discourse-cdn.com/v4/letter/t/6a8cbe/32.png) [@Tabby\_Cat](https://boards.straightdope.com/u/Tabby_Cat)\ **Post date:** [January 10, 2013, 2:51am UTC](https://boards.straightdope.com/t/imf-study-says-it-was-wrong-about-keynesianism/646457/44 "2013-01-10T02:51:02Z")
> [@Richard\_Parker](#): > > Another thought: why can’t the borrowing precede the tax change? So we borrow an extra $50 billion a month until the bond rates start to rise. Once they rise to positive rates, we stop. (And at that point the Fed could buy back some portion of the bonds, if there were some adverse consequences, of course.) Based on whatever “free” debt we were able to accumulate in that period, we reduce next year’s income taxes by that amount, and announce that the next four years after that will have some very slight marginal increase. Rather than give a tax cut, why not use the borrowed money to stimulate the economy? The reason why interest rates would fall below inflation (negative nominal interest rates) is because nobody wants to invest in the real economy, as bonds are “safer” than investing in the real economy (and perhaps give better returns after accounting for risk). If the real economy perks up, if demand returns, then interest rates would rise again, as investing in the real economy offers better returns than bonds. A tax cut might stimulate demand in the sense that consumers have more disposable income, but why not stimulate demand in a manner that invests in the future and creates employment (e.g. build roads)? After all, even if a given person has more disposable income, that person may save it instead, thus not increasing demand for more goods and doing nothing for the economy. ---
**Author:** ![WillFarnaby](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/willfarnaby/32/514_2.png) [@WillFarnaby](https://boards.straightdope.com/u/WillFarnaby)\ **Post date:** [January 10, 2013, 2:52am UTC](https://boards.straightdope.com/t/imf-study-says-it-was-wrong-about-keynesianism/646457/45 "2013-01-10T02:52:40Z")
> [@IClaudius](#): > > There’s an element of truth to that but you’re ignoring the fact that the Administration’s official policy includes expansionary policies like the proposed Jobs Act, and through their negotiations to extend benefits and renew the Bush tax cuts they never advocated the expiry of all the cuts - only the upper incomes which are least stimulative in terms of consumption demand. > > It’s a pretty simple dichotomy: the Democrats favour expansionary fiscal and monetary policy with the unemployment rate above 6% and an output gap from below trend growth. Support for consolidating fiscal policies (including cuts & tax increases) are either directed at medium or long term balance, or they are part of the horse-trading with Republicans in Congress. In contrast, the Republicans tend to support hard money and more immediate fiscal consolidation through spending cuts only. > > That’s very different to austerity now, now, now - so we can have confidence and growth. Ok I admit to mischaracterizing the Dems position a bit, but you must admit they’ve toned down the stimulus talk a bit (and Obama did give token support of defense cuts, which wouldn’t jibe with Keynes, right?). Neither side is serious about cuts as evidenced by the harakiri Boehner committed in order to take defense cuts off the table. What I should have said is as a result of compromise between the two factions, what comes out in the wash is similar to what is happening in Europe. That is increased taxes and decreases in the rate of growth in spending. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [January 10, 2013, 7:46am UTC](https://boards.straightdope.com/t/imf-study-says-it-was-wrong-about-keynesianism/646457/46 "2013-01-10T07:46:38Z")
> [@WillFarnaby](#): > > Call it what you want but what is not working in Europe is precisely what Obama and the Democrats are promoting as the “balanced approach”. I’m not sure if you mean more spending and lower taxes by that, or more spending and higher taxes on everyone. Clearly Obama hasn’t been advocating higher taxes on the middle class - which is what [they are doing in Spain.](http://www.advoco.es/advice/8-personal-tax/99-massive-tax-rises-for-spain-in-2012.html) And which, as you said, is not working. ---
**Author:** ![blindboyard](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/blindboyard/32/2833_2.png) [@blindboyard](https://boards.straightdope.com/u/blindboyard)\ **Post date:** [January 10, 2013, 1:18pm UTC](https://boards.straightdope.com/t/imf-study-says-it-was-wrong-about-keynesianism/646457/47 "2013-01-10T13:18:03Z")
> [@puddleglum](#): > > As has already been pointed out most of what is called austerity are actually tax increases coupled with a leveling off in government spending, not actual cuts in spending. And Obama’s stimulus was mostly tax cuts. That’s why it didn’t work. ---
**Author:** ![Richard\_Parker](https://avatars.discourse-cdn.com/v4/letter/r/35a633/32.png) [@Richard\_Parker](https://boards.straightdope.com/u/Richard_Parker)\ **Post date:** [January 10, 2013, 2:06pm UTC](https://boards.straightdope.com/t/imf-study-says-it-was-wrong-about-keynesianism/646457/48 "2013-01-10T14:06:40Z")
> [@Tabby\_Cat](#): > > Rather than give a tax cut, why not use the borrowed money to stimulate the economy? The House of Representatives, mainly. It seems to me that they would be happy to cut pretty much any tax if Obama and the Dems sign on (except the payroll tax, apparently). So if we were agreed that at this moment borrowing was better than taxing, then it would be a win-win. > [@WillFarnaby](#): > > What I should have said is as a result of compromise between the two factions, what comes out in the wash is similar to what is happening in Europe. That is increased taxes and decreases in the rate of growth in spending. I agree with this. Neither side can really be said to have had the opportunity to try out its ideas in full. But in the real world, that will always be true. No doubt Alexander Hamilton was miffed that he didn’t get everything he wanted in the First Congress with respect to his economic plans. Our theory-making should ask which marginal half-victory is better than the other, not which pure system would be better. ---
**Author:** ![puddleglum](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/puddleglum/32/137_2.png) [@puddleglum](https://boards.straightdope.com/u/puddleglum)\ **Post date:** [January 10, 2013, 2:35pm UTC](https://boards.straightdope.com/t/imf-study-says-it-was-wrong-about-keynesianism/646457/49 "2013-01-10T14:35:48Z")
> [@blindboyard](#): > > And Obama’s stimulus was mostly tax cuts. That’s why it didn’t work. According to Wikipedia, the Obama’s stimulus was 288 billion dollars in tax cuts and a little over 600 billions dollars in spending. That is over 2-1 ratio of spending to tax cuts. Since spending usually has a lower multiplier than tax cuts that is probably why the stimulus did not work. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [January 10, 2013, 8:00pm UTC](https://boards.straightdope.com/t/imf-study-says-it-was-wrong-about-keynesianism/646457/50 "2013-01-10T20:00:54Z")
> [@blindboyard](#): > > And Obama’s stimulus was mostly tax cuts. That’s why it didn’t work. Define “didn’t work.” They did not meet the unrealistic goal, true, but they did help to get us over the hump. The level of tax cuts was higher than originally desired as a compromise. And the payroll tax cut was designed to be maximally stimulative even though it didn’t give Obama the political boost sending a check would have. And lots of people at the time noted that the stimulus was not nearly as big as required by the loss of purchasing power in the economy. And a lot of states were implementing what were partial austerity programs by cutting programs and laying off workers. That hurt also. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [January 10, 2013, 8:10pm UTC](https://boards.straightdope.com/t/imf-study-says-it-was-wrong-about-keynesianism/646457/51 "2013-01-10T20:10:31Z")
> [@puddleglum](#): > > According to Wikipedia, the Obama’s stimulus was 288 billion dollars in tax cuts and a little over 600 billions dollars in spending. That is over 2-1 ratio of spending to tax cuts. Since spending usually has a lower multiplier than tax cuts that is probably why the stimulus did not work. Not at all clear. [This link](http://economics21.org/commentary/tax-cuts-spending-multipliers-and-economic-growth), which looks pretty conservative to me, has a table showing that the right spending is probably more stimulative than the wrong tax cuts (for instance for the rich.) Note that the stimulus package mostly included relatively high multiplier items. I think the text is pretty much nonsense - they claim that tax cuts now may not work because people won’t spend in the expectation of tax increases later - but the table is good. ---
**Author:** ![jshore](https://avatars.discourse-cdn.com/v4/letter/j/b5e925/32.png) [@jshore](https://boards.straightdope.com/u/jshore)\ **Post date:** [January 10, 2013, 8:19pm UTC](https://boards.straightdope.com/t/imf-study-says-it-was-wrong-about-keynesianism/646457/52 "2013-01-10T20:19:11Z")
> [@puddleglum](#): > > Since spending usually has a lower multiplier than tax cuts that is probably why the stimulus did not work. Cite? Most of what I have seen out there says the opposite (particularly in regards to tax cuts on the wealthy). ---
**Author:** ![jshore](https://avatars.discourse-cdn.com/v4/letter/j/b5e925/32.png) [@jshore](https://boards.straightdope.com/u/jshore)\ **Post date:** [January 10, 2013, 8:54pm UTC](https://boards.straightdope.com/t/imf-study-says-it-was-wrong-about-keynesianism/646457/53 "2013-01-10T20:54:17Z")
> [@Voyager](#): > > [This link](http://economics21.org/commentary/tax-cuts-spending-multipliers-and-economic-growth), which looks pretty conservative to me, has a table showing that the right spending is probably more stimulative than the wrong tax cuts (for instance for the rich.) It should be noted that the table itself is from the Congressional Budget Office, so it is a non-partisan summary. (Not surprisingly, the conservative group the is linked to has some criticisms of the table.) ---
**Author:** ![IClaudius](https://avatars.discourse-cdn.com/v4/letter/i/c37758/32.png) [@IClaudius](https://boards.straightdope.com/u/IClaudius)\ **Post date:** [January 10, 2013, 10:56pm UTC](https://boards.straightdope.com/t/imf-study-says-it-was-wrong-about-keynesianism/646457/54 "2013-01-10T22:56:12Z")
> [@Voyager](#): > > Not at all clear. [This link](http://economics21.org/commentary/tax-cuts-spending-multipliers-and-economic-growth), which looks pretty conservative to me, has a table showing that the right spending is probably more stimulative than the wrong tax cuts (for instance for the rich.) Note that the stimulus package mostly included relatively high multiplier items. I think the text is pretty much nonsense - they claim that tax cuts now may not work because people won’t spend in the expectation of tax increases later - but the table is good. It is one of the great fallacies of the RBC / Chicago school approach that Ricardian Equivalence is real thing and that the public is so hyper-sensitive to deficit spending that their consumption patterns will be negated because they anticipate identical corresponding future tax rises. It’s certainly true that people respond to the policy environment over time, with intertemporal consumption smoothing and incentives, but its nothing like a crude 1:1 which tries to define public expenditure as a zero sum game. It’s bunk as both theory and behaviourally. Ricardian Equivalence in this sense is quite simply and plainly false. In the reality, the details matter. For example, a growing economy in structural surplus will erode any fundamental concern with fiscal solvency and thus the anticipation of major tax increases. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [January 11, 2013, 12:13am UTC](https://boards.straightdope.com/t/imf-study-says-it-was-wrong-about-keynesianism/646457/55 "2013-01-11T00:13:46Z")
> [@jshore](#): > > It should be noted that the table itself is from the Congressional Budget Office, so it is a non-partisan summary. (Not surprisingly, the conservative group the is linked to has some criticisms of the table.) They seem to say that the variance is so wide across studies that you can’t really say much of anything. That might be a fair argument (or might not) but the data certainly does not show that tax cuts have higher multipliers - and even the conservatives who wrote the article don’t claim it. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [January 11, 2013, 12:17am UTC](https://boards.straightdope.com/t/imf-study-says-it-was-wrong-about-keynesianism/646457/56 "2013-01-11T00:17:46Z")
> [@IClaudius](#): > > It is one of the great fallacies of the RBC / Chicago school approach that Ricardian Equivalence is real thing and that the public is so hyper-sensitive to deficit spending that their consumption patterns will be negated because they anticipate identical corresponding future tax rises. > > It’s certainly true that people respond to the policy environment over time, with intertemporal consumption smoothing and incentives, but its nothing like a crude 1:1 which tries to define public expenditure as a zero sum game. It’s bunk as both theory and behaviourally. Ricardian Equivalence in this sense is quite simply and plainly false. Too true. (My daughter and I teach behavioral economics as applied to engineering - she is the economist/psychologist.) Specifically the discount rate for future penalties is much higher than would be predicted by classical economics. I don’t know if there are any studies on future tax increases, (especially given that the studies that were done were on sure penalties, not ones with an uncertain date and probability,) but I bet few people indeed would put off current consumption because of a potential future tax hike. [Previous page](https://boards.straightdope.com/t/imf-study-says-it-was-wrong-about-keynesianism/646457.md?page=2)