Well, 'slippery slope' is a logical fallacy. The issue here, more precisely, is that without something to push against the US is inculcating ideas into the next generation of leaders that make ex-Soviets think "wait a second, this looks like home!".
It isn't a slope, this is literally rebuilding the dangerous parts of authoritarian bureaucracy - people who can't think and are then given unearned and easily abusable power over others by an objectively dumb system. The US is already there (as I like to point out, about half the US economy is government spending these days - that isn't a free market, it is some sort of mixed open-command economy); it is only a question of how far the ripples reach.
I support your railing against bureaucracy, but question your assertion that a specific quantity of public spending is bad.
Firstly, government spending does not imply greater bureaucracy; compare and contrast healthcare in America with pretty much anywhere else.
Secondly, fiscal policy should be dynamic and reactive to economic conditions. I don't pretend to understand Keynes, but I believe he established that principle beyond question. The Austrian school may have challenged it, but their axioms did not survive the light of day.
Keynes has been discredited in recent years, it's odd that you think he's established anything. The Austrians were proven right and recent monetary policy reflects their view - you don't see much discussion of Keynes anymore. If you don't understand Keynes maybe that's why you don't realise that?
To recap Keynes: his core idea was countercyclical monetary policy, i.e. to issue debt (print money) when times are bad and pay down debt (recall money) when times are good.
It sounds good but the Austrians pointed out that there would be two problems in practice:
1. Give governments a nice sounding justification for money printing and they will do it to excess, creating inflation. The Austrians were right: governments cited Keynes when printing money in a recession, and then the "emergency measures" would conveniently never end. The part where you pay down the debt in good times by running a primary surplus would never be respected.
2. Keynes misunderstood the nature and cause of recessions.
Recessions occur when there has been widespread misallocation of resources, usually due to some collective delusion or state mismanagement. The groupthink breaks and people realize that their investments are duds. Credit is withdrawn, investments cease and there's a giant sucking sound as people lose their jobs whilst those who still have money try to figure out what to do next.
Keynes posited that recessions are quasi-natural disasters that just inexplicably happen, and that the fix is for the government to spend money to balance them out. But this isn't the case and so his fix just makes things worse. It may appear to end the recession if all you look at is a handful statistics, but the underlying misallocation still occurred and when governments step in desperate to create employment - any employment - they misallocate resources still further. Like someone taking stimulants to try and delay the end of the party, it works for a while but they get more and more messed up. There's lots of activity but not much is actually useful. Governments don't care though, because all they're trying to do is keep people digging proverbial holes and filling them back up again.
You can drown the signals of a recession by misallocating resources still further, but it's not a good idea.
Keynesianism has worked out in the past 15 years exactly as the Austrians always said it would, and now Austrian economics is back in vogue. The 2008 recession led to the ZIRP years of easy money that never ended, even when the economy was booming. Government debt climbed endlessly. Inflation span out of control and now interest rates have been hiked repeatedly even though the economy was trashed by lockdowns - exactly the moment Keynes said to do the opposite.
A warning to others: This is far more contested, and more nuanced, than this post makes it out to be. I believe this narrative as stated would not fly without lots of debate and pushback in any mainstream economics department today.
Among many other things, the recent history (of inflation, recession, and economic growth over the past 4 years) is completely wrong: stimulus was used during the COVID recession (early 2020), and the recession was very brief as a result. In the US we have had steady and strong growth continuously outside a short drop around March 2020. Inflation set in around a year later (due to many factors, not monetary or fiscal policy alone -- but again, this is complex and highly contested). Interest rates started being raised seriously two years later (spring 2022). Economic growth has continued throughout this process aside from the early-mid 2020 lockdown shock. There was never a time when "interest rates [were] hiked even though the economy was trashed by lockdowns."
University economics departments are probably still bastions of Keynesianism, but they aren't the ones whose opinions really matter :)
COVID certainly saw stimulus be used, but I didn't say that's when Keynesianism was discredited. It's really happened during the post-pandemic recovery period.
The US claims to be experiencing strong growth right now, but there are reasons to be a bit skeptical of that. Opinion polls that have historically always tracked reported economic performance have now diverged significantly, with people telling pollsters that they feel the economy is poor whilst the government announces that it's actually doing great. This leads left wing economists like Noah Smith to claim that there's suddenly a sort of ignorance crisis in which people have suddenly stopped being able to assess their own economic security. I think it's more likely that US data has gone bad, ably assisted by a very pro-Biden civil service. For example one metric they use to measure economic strength is job openings, but read any thread about the job market on HN and you'll see lots of highly skilled people struggling to find work along with many reports of what appear to be fake job openings, held open just to collect CVs.
In Europe what we see is very weak or non-existent growth when controlled for inflation despite truly vast levels of immigration, i.e. real economy is probably shrinking in the UK:
For an Austrian "inflation is always and everywhere a monetary phenomenon". The post-COVID inflation is for them entirely a function of stimulus, which you'd expect to have a delayed impact in that case because when the stimulus money landed in people's bank accounts everywhere people might spend it was closed. The economy reopens, travel becomes possible again and that money starts flowing out of the bank. Inflation appears immediately, exactly as expected.
Again it's a clearer picture in Europe. The UK started rapidly raising interest rates at the start of 2022, just as COVID was ending. Two years of lockdowns had left the economy in a terribly weakened state, nobody in the UK would claim the boom times were back, yet the BoE left Keynesianism behind and ramped up interest rates to levels last seen just before the last crisis in 2008. Back then they reacted by dropping rates to zero. This time they reacted by raising them to historical norms. A pretty clear repudiation of Keynes.
Thanks. My door is always open to Cunningham. If you're in a pedagogical mood, may I submit further misconceptions?
I've always linked Keynes with the concept of national debt as a lever to pull, so I'm surprised that you mention printing money. AIUI, the Keynesian approach to the 2008 crisis would have been to issue debt in order to finance public spending, and that spending should be on social security and infrastructure projects. The former stimulates the economy at the roots, the latter generates immediate employment and long-term wealth.
I accept your counters, except that we hope to do better than digging holes and filling them in again. That may be peculiar to America.
I grant that public spending doesn't address the cause of 2008. But sandbags are still useful when the river floods, no? Is gate-shutting the only permissible response to bolted horses, or are we allowed to also engage in horse-fetching?
My weak understanding of the Austrian school is summarised as: small government, laissez-faire, and caveat emptor. I understand them to say of 2008: "you're broke, that's because you took part in an economy where Goldman Sachs pulled a fast one and shat in your pension fund. You should have selected a DESOLBA fund (Doesn't Eat Shit Out of a Lying Bastard's Arse). Now cry."
I observe that our rulers selected a stimulus program that big corp used for stock buyback, and conclude that they used the crisis to advance their own agenda. I understood that they vaunted the Austrian school as the authority for this program. You have disabused me. Please, then, what would von Mises do in 2008?
Digging and refilling holes is a metaphor, it's not meant literally. It's used in economics discussions to refer to any kind of economic activity that's taking place just for the sake of it.
Debt and money printing are intimately linked in our system, to the extent that they're nearly the same thing, which is why I used them interchangeably.
If you go back a few hundred years, money printing was pretty simple: the King wanted more money than he could raise through tax to pay for a war, so he'd debase the currency by reducing the quantity of gold in it. We don't use gold anymore so there's no theoretical limit on how much money can be created.
The creation of central banks introduced an indirection. Nowadays governments pretend to not print money. Instead they always "borrow" it. Sometimes this is actually legitimate borrowing, because the lender is someone domestic or foreign who has some surplus currency and wishes to earn interest on it. But very often the lender is the central bank. The central bank is described as independent, but in fact is just another arm of the government. It is granted special powers by law, and in many countries (e.g. the UK) the head is appointed by the government, answers to government and their salary is paid by taxes. Specifically the Central Bank is allowed to type a higher balance into its own computers, and banks are required to respect that balance. So the Treasury issues bonds, and the CB buys those bonds with newly "typed in" money, and this is just an obfuscated way for the government to print money in the end. They literally borrow from themselves.
You may wonder what happens to the interest payments, if the government is borrowing from itself. The answer is that the Treasury pays the central bank which keeps the interest payments for a while ... and then the Treasury takes them back!
Repayments meanwhile simply disappear, the money is wired to the central bank and then deleted. This really puts into perspective how meaningless the whole charade really is.
> The former stimulates the economy at the roots, the latter generates immediate employment and long-term wealth.
Well, spending on welfare is an economic depressant, you're paying people to not work. The second part is on firmer ground: Keynesians argue that the government should spend abstractly on "infrastructure" during recessions to stimulate employment (in the construction sectors primarily), and this will create wealth.
But this argument also has great problems. It's not yet as discredited as counter-cyclical monetary policy. You'll see governments refer to this concept routinely. However it doesn't work, conceptually:
1. With only a few exceptions if an infrastructure project was actually worth it the private sector would want to be building it already (because it'd have clearly positive ROI). The exceptions are ones where you need eminent domain to seize large quantities of contiguous land, which pretty much means railways, airports and roads (but usually not roads these days). So either the government can simply take over private sector activity, which doesn't actually improve the economy (same stuff gets built), or it can invest in things with expected negative ROI.
2. Governments have a long track record of being very bad at calculating infrastructure ROI.
The problem is that there are very limited opportunities to build heavy transport projects these days. Look at the difficulties the UK has faced with HS2, Heathrow third runway etc. You have to demolish a lot of homes and people don't like it, and environmental law offers many opportunities for delay, so in practice by the time an infrastructure project gets off the ground the recession was already years in the rear view mirror.
Combine these things and infrastructure spending by governments, counter-cyclical or not, often ends up just being a waste of resources, or very ambiguous at best. The poster child for this problem right now is Belt & Road, although in the past EU spending was also famous (Spain's airports to nowhere, etc). An airport in a place with no demand i.e. not a city, is not literally digging a hole and filling it again, but it's somewhat similar from an economic perspective. You move a lot of earth and in the end it's not useful for much.
> I understand them to say of 2008:
That's not quite what they say about 2008 no lol :)
von Mises would have done nothing in 2008. Just let the recession proceed without interference until it reaches its natural end. Fundamentally those houses just weren't worth much and the debt was bad, no way to go back in time and fix that, so you just have to take the economic hit and let things shake out. It sucks but you can't unspill milk, better to focus on what went wrong and how to avoid a repeat.
The Austrian analysis of 2008 is that it was caused by government interference in the market, specifically, governments became very keen on the idea of everyone being able to own their own home. US law and regulation was changed to strongly incentivize banks to issue mortgages, in particular, Fannie Mae/Freddie Mac started buying up pretty much any mortgage going even if it wasn't a good investment, but that didn't matter because the government was always willing to take them. Eventually it all came tumbling down. The fix would therefore be (a) stop government interference in the housing market, (b) forbid fractional reserve banking, which is why banks have to be bailed out when they fail.
There's more to unpack about welfare being "paying not to work" - 82 year olds, absence of employment in mining towns - but you've put the argument for small government well. You made me imagine a monkey driving a bulldozer.
Keynes' error was to pretend that the monkey is a qualified operator who follows the drawings. But the more democratic a nation becomes, the more its leadership resembles a cork bobbing on the tide. Furthermore, economics does not have perfect insight, so even a benevolent dictator will certainly fuck it up if she meddles.
Then, in a recession, you can take action to alleviate the pain somewhat, but you will inevitably just store up future pain for yourself. You could mitigate that future pain once the crisis has passed, but you won't, because the mitigation will alienate the voters. The pretence that you'll accept even a tiny amount of pain in the good times is the self-deception of an addict.
How am I doing?
This then reduces to the trolley problem. Where the one person on the side track is only presumed to be there, but might actually be further down the main track, and might get rescued anyway.
Here's my problem with von Mises. The cause of 2008 was a period of deregulation, basically Jamie Dimon going "trust me, bro" and kicking his lips. It's not an economic cause, it's a political one; but if we examine economists' contribution to the issue, we see decades of free-market-fundamentalism which, I put it to you, created massive overconfidence. The neolibs got exactly what they wanted and created a peculiarly neolib crisis. So the Austrian school is just as fingers-in-ears deaf to political folly as Keynes.
Right, 82 year olds can't usually work anyway so state pensions are indeed not holding back the economy. It gets blurrier in the somewhat common case where state pensions can be awarded at, e.g. 55 (see Greece, US air traffic controllers...). I was mostly thinking of minimum wages, out-of-work credits, long term disability benefits in the case where working is actually possible, etc.
I think your description of Keynesian monetary policy in terms of addiction is interesting!
You can view 2008 as either caused by regulation or deregulation, it's a fascinating event in that way, and is why different parties were at loggerheads over it.
The view that it was caused by deregulation is as you say: banks were allowed to do risky things that leveraged up their risk until they were going to fail, and this provoked the crisis.
The view that it was caused by regulation is to observe that the only reason banks aren't allowed to collapse in the first place is the odd way in which they are regulated. A banking license is a regulatory permission to tell people they have $1000 on deposit whilst not actually being able to service such a withdrawal. In the case of a normal company like FTX, that's fraud. With the right license, it's not.
If retail banks weren't allowed to do anything with deposits except keep them safe, they could not have become endangered by bad aggregated mortgage debt, and then could have just been allowed to fail. It would have hurt investors a ton but bubbles always do - the ATMs would have kept working though and that's what politicians really respond to, the crisis of the innocent working guy. To fix this situation you don't pass a law, you repeal a law, hence, caused by regulation.
I've been lurking on HN for years, and I just created an account to thank you for this post.
I always had this gut feeling that the Keynesianism in the aftermath of 2008 was a really bad idea but economics isn't my space and I don't care to argue with politicos about economics. This explains it really well.
If so, you need to adjust your critical thinking skills. Deeply unnuanced posts about highly debated topics - like the one you replied to - should set off alarm bells. Unless you think that a random HN user (with a very dodgy comment history) can just "set the record straight" after a few decades of debate.
What now? Well, economics isn't really that complex.
Rule 1. Don't print money - it distorts the natural flow of information and incentives through the market, leading to misallocations.
Rule 2. Get rid of fractional reserve banking. It's an unnatural privilege that other companies would be forbidden from engaging in (it's considered fraud if you don't have a banking license). This forces all interest bearing investment to take place through funds that expose their actual risks and liquidity constraints to investors.
When it's possible to save money risk free because banks can't loan it out and there's no monetary inflation, the moral hazard evaporates and you can allow funds to collapse if they make persistently bad investments. There is no longer any need for bank bailouts.
Recessions can still happen in such a world, because mass hysteria and utopian thinking is a part of human nature. There's no law you can pass to stop people getting over-excited about dotComs or AI startups. You just have to let people work out the true value of these things themselves.
I like your analysis elsewhere. But you can’t avoid misallocations always. Some risk has to be taken by everyone. Even the private markets miscalculate roi.
You also can’t avoid debt (printing money). At the simplest, you can tell yourself you will postpone your own retirement to take the risk of misallocating resources yourself, for a gamble.
That's true, but market misallocations do eventually correct (recessions). Government mandated misallocations can go on for decades without anything to naturally check them.
I'm not sure what you mean in your second paragraph. Keeping the monetary base stable is eminently possible.
Hey, looking for a source for "about half the US economy is government spending these days". I've searched online for 2023 and I'm seeing a pretty okay 23% for government spending.
Slippery slope is only a fallacy if you assume a certain form of certainty or determinism. Otherwise it is just an older term referring to Bayesian updating of priors.
It isn't a slope, this is literally rebuilding the dangerous parts of authoritarian bureaucracy - people who can't think and are then given unearned and easily abusable power over others by an objectively dumb system. The US is already there (as I like to point out, about half the US economy is government spending these days - that isn't a free market, it is some sort of mixed open-command economy); it is only a question of how far the ripples reach.