As the door turns
from David Ruccio
We can now add former Treasury Secretary Tim Geithner to the long list of those who have walked through the revolving door between Wall Street and the White House, which makes Noam Scheiber just a bit worried.
Let’s be clear what’s going on here: Geithner’s choice of post-government career isn’t shameful—there are plenty of upstanding, well-intentioned people who work in finance. And it’s obviously perfectly legal. What it is, to be blunt, is corrosive. There are any number of organizations that could benefit from Geithner’s managerial talents and A-list Rolodex. If you didn’t know how the world worked, you’d have no reason to assume that a large, profitable financial firm had a special claim on these assets.
But, of course, we all do know how the world works. It’s hard to come up with a senior economic official who didn’t cash out in the financial sector shortly after leaving government. Every time another one does, it every-so-slightly reinforces our conviction that the game really is rigged. Geithner, with his unusually prominent role and his pretensions to lifelong service, has reinforced that conviction a bit more than most.
To which the best response is in the comments:
Oh, grow up. Of course the game is rigged. You just figuring that out now?
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Real-World Economics Review Blog 
What does all this structural fraud say about government management of the economy? Keynesian economic theory is simply not robust against government fraud. That is, fraud matters when academics ignore it as though it is transient or “washes out”.
Keynesian assumption that government deficits stimulate investment/consumption leading to savings is emphatically wrong according to more than 40 years of US economic data. Table 5.1 on “Saving and Investment by Sector” of the Bureau of Economic Analysis contains US data since 1969.
The US government has had negative net savings for most periods due to budget deficits (regardless of Republican or Democrat governments, which are all Keynesians in fact), accumulating to $17 billion government debt at last count. This more or less continuous fiscal stimulus has not led to greater private sector investment or enough private net savings to compensate for government “dis-savings”. The result is a continuous decline in total US net saving from about 10 percent to about zero currently, since 1969.
The secular decline of US net saving is also the decline in net domestic investment, which is now near zero because gross domestic investment now hardly exceeds consumption of fixed capital (aka capital depreciation). If this is not an emphatic empirical repudiation of Keynesian economics, I don’t know what is. I challenge any Keynesian here to examine the data and comment on my observation.
Sorry, a typo. I meant $17 trillion of government debt, not $17 billion, if only.
Do we have a cuckoo in the nest? Keynes of course did not assume that government deficits stimulate investment/consumption leading to savings. That’s what his neoclassical and monetarist enemies say he said and crooked/idiot politicians have used to justify giving their doubtless grateful sponsors that $17 trillion.
Keynes actually argued in real terms. He concluded that government investment in infrastructure at times when the market economy was depressed by unemployment was the logical way to create useful jobs for the unemployed so they could consume and thus use available capacity in the market economy. That wouldn’t have created a government deficit if the government had printed its own money, but in any case any such deficit could be balanced by higher taxation when the market economy was overheating.
My words, of course, just in case Lyonwiss wants to start nit-picking.
Save your words for waffle. I’m only discussing economics and evidence from data.
Dave,
Both Keynes and the Austerians are incorrect IMO. The economy not only DOES NOT tend toward equilibrium, left to itself it is continually in a radical state of individual monetary disequilibrium. The empirical data in the cost accounting statistics of any and all businesses that are still “going concerns” scream this fact. Economists have either missed, ignored or settled for theories compensating for this data (theories are abstractions as we all know and as such are at least once removed from reality) and the rest is economic history.
The Austerions in the last analysis are market worshipers. Unfortunately their god is actually “Demon est deus inversus”. that demands continuous money injection that the Keynesians are all too happy to provide so as to palliate the beast, (economy) but never slay it or even domesticate it. Back and forth these two intellectual forces duel over this ultimate mischaracterization/misunderstanding about the market/economy not realizing that one has it backward and the other is just ineffectual reform instead of the transformation economics and finance has needed for at least a century.
Because business entities throughout the entire productive process CANNOT create enough individual income to liquidate all costs, and if money is injected into the economy and thereby re-initiates this same condition, then it is monetary and economic disequilibrium forever and ever, amen.
How to actually fix that most elemental and underlying problem is where the debate needs to start. Economists must look deeper for their theoretical formulations, and the policy answers of that new thinking is undoubtedly more than the financial system is able to understand or countenance because it would require that it transcend itself and step down from the overweening position of power it now holds, and take its legitimate and still profitable but smaller place in the economy. However, we cannot shrink from this task or continue to delude ourselves that reform can still be relevant.
BFWR
Let me put it to you that one can go wrong in two ways: one can have (or knowingly sell) the wrong idea, or have the right idea but not the means of making it work properly. Banker’s derivatives like the Austrians are of the first type. Pioneers like Keynes are of the second type; the practical version – and in particular the monetary aspect – of his theory was sabotaged by bankers at Bretton Woods, and after his death the logic of his theory was sabotaged by banker’s stooges who stole his name.
The right idea Keynes had amounted to an anticipation of dynamic error correction logic or cybernetics (i.e. continuous error correction by information feedbacks, as in steering a ship or car. Thus instead of the theory of Adam Smith’s “invisible hand” being random price errors automatically cancelling each other out, it becomes the actors in a “market” continually correcting inefficiencies by adjusting the direction of investment in light of price changes. Economists STILL don’t seem to be aware of this (or don’t want to admit its weakness: that crooks can and do doctor the error correction feedback to direct money into their own pockets).
But in 1935 Keynes’s theory an was an advance even on this. It was about 1964 before the theory of cybernetics had been absorbed and compared to the practice of navigation. It was realised that even if a ship was steered in the right direction, over a period of time it would blow off course, i.e. the course would be correct but in the wrong position. It is thus necessary to correct the course from time to time, to compensate for the ship being out of position. But that is exactly what Keynesian investment in infrastructure amounted to in practice.
Consideration of the Titanic disaster added a further element: the steersman looking ahead in time and initiating changes not to correct the course but to change it. Which is exactly what we are seeing the need for now.
Reblogged this on Arijit Banik and commented:
plus ça change, plus c’est la même chose
http://www.bloomberg.com/news/2011-05-12/goldman-sachs-viewed-unfavorably-by-54-in-poll-showing-no-damage-to-firm.html
The fact of the matter is, in the past several decades, all US governments, regardless of professed ideology, Republican or Democrat, all behave virtually the same economically, regardless of what they say in terms of economic policy. This is what the data reveal, regardless of economic theory.
They all say they want balanced budgets over the economic cycle. Republicans want to do this with a smaller government balance sheet, by reducing tax (popular) and by implication reducing spending (unpopular). Democrats want to do this with a larger government balance sheet, by increasing spending (popular) and by implication increasing tax (unpopular).
The truth of the matter is, as the economic data demonstrates, US governments only do what’s popular, resulting normally in budget deficits and rarely surpluses. The accumulated budget deficits have resulted in a $17 trillion government debt, which is growing exponentially with the help of other unfunded liabilities.
The fact that the government is always a substantial part of the economy as a fraction of the GDP, with Republicans failing to shrink the size of government, means the US economy is de facto Keynesian. Through substantial spending and tax policies, governments direct the US economy, as many expect them to do. Obamacare is the latest example of US
government directing the health sector.
The US Federal Reserve is charged with monetary policy, where interest rates are supposed to be lowered (popular) in recessions and raised (unpopular) in expansions. Again the data show governments (through the ‘independent’ Fed) only do what’s popular, resulting in a secular decline in the official interest rate which is now zero-bound.
Of course it is denied that US governments are Keynesian, because they rarely or sufficiently take unpopular Keynesian actions running government budget surpluses and raising interest rates when times are good. But this only proves that Keynes’s faith in a government’s ability to exercise sound economic policy is sadly misplaced.
The internal contradiction of Keynesian economics consists of the assumptions that individuals are irrational and governments are rational, forgetting that governments are run by individuals. The revolving door proves that rational individuals, looking after their self-interests, create irrational governments for the national interest, exactly the opposite to the Keynesian assumptions.