Jan

31

In an effort to prove or disprove Keynesian notions I looked at two data series since 1971 for predictive relationships, federal spending and GDP annual changes adjusted to 2005 dollars from CBO data. With lags of 1 to 5 years I found nothing of significance for federal spending affecting GDP 1 to 5 years ahead. For GDP predicting spending, I did find a slight positive relationship between GDP changes now and spending changes two years from now, rsq=.04. I think it fair to say marginal federal spending increases or decreases do not affect GDP much, now or 5 years from now, but the debate will rage on.

Gary Rogan writes: 

While I of course believe that Keynesianism is pure unadulterated nonsense and any attempts to create net wealth by the government are doomed to fail, the statement that 'if there had been an opportunity for profit, some clever merchant would have been making the stuff even without a government "investment". ' isn't easily provable.

Clearly two points need to be addressed. One is scale, and it's very relevant these days as the weird topic of "colonies on the moon" has become a hot issue in the Florida primary. Could it be that things so giant in scope that no real-world merchant, even a billionaire, would voluntarily attempt to do for the fear of a devastating loss may make a profit? Much as this topic has been discussed here, I encounter it all the time in my discussions elsewhere, as just yesterday I was reacting to a list of space program spinoffs.

Second is the strangely modern behavioral economics aspect of Keynesianism. Is it possible that when "fear grips the nation" merchants, along with everyone else, start behaving irrationally and their fear of loss overcomes their normally healthy interest of making a profit even when such profit-making opportunities are otherwise self-evident?

Stefan Jovanovich comments:

Er, no, Gary. The scale of current investment in the petroleum industry alone dwarfs the capital construction programs of the every government in the world. Nimitz class aircraft carriers cost roughly $4.5B each. The Ford class carriers that the Pentagon hopes to build will cost $8B each; right now they are building 2. The projected investment in oil sands in Canada alone for 2013 will exceed the entire budget for the Navy's 2 new carriers.

If there is an opportunity for profit, people with money will find it. Of course, that includes government contracting, as Adam Smith so ably reminded all of us. Keynes' theory of "animal spirits" was useful because it suggested that entrepreneurs themselves needed Keynesian economics, that - without the assurance of a government customer - no one would take the risk. That premise seems far less easily provable than mine. The many people on this List and throughout the world and throughout history who have literally made something from nothing seem to have a superabundance of energy and determination and guts and the necessary lunacy required to "make it new".

If there is a profit to be found in sending air breathing tailless monkeys into the void of space, Mr. Branson and his competitors will find it. What Speaker Gingrich is proposing is precisely what Keynes proposed, paying people in Florida to dig holes and fill them up again. Yet, somehow, he and not Governor Romney is the "true conservative". La Di Da.
 


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