He thought that government-generated stimulus was warranted only in cases of severe demand shocks, not the kind of fine-tuning that later economists have attempted.

This over-use on the short end combined with the petrodollar/Chinese recycling on the long end was really a remarkable confluence of events. Maybe some of the pharmacological metaphors other readers use aren’t so far off the mark.

Do we really face a severe demand shock in this sense right now, though? It really doesn’t feel like that sort of an endogenous downturn to me. This mess originated from massive, persistent indebtedness and leverage, the likes of which have never been seen before, not a demand shock. Visual representation here.

I know a deficiency in demand is arising, but it’s a secondary effect, and yet the leading economists of our time are egging on the most aggressive application of leeches possible, cautioning against prudence or thinking things through. It scares me.

And BTW, “Keynesianism” has a lot of elements that Keynes would not have approved of. He thought that government-generated stimulus was warranted only in cases of severe demand shocks, not the kind of fine-tuning that later economists have attempted.

As for Keynes, he gets a bad rap sometimes. Of course Reagan’s fiscal stimulus was “Keynesian”, in that it was counter-cyclical spending designed to stimulate the economy. Here’s some Keynsian food for thought: we’ve spent trillions (so far) trying to implement the “no banker left behind” policy, yet our infrastructure is crumbling and the future drivers of economic growth remain elusive.

I read recently that the total cost of the Apollo space program in equivalent dollars today is in the order of $100bn. That’s a third of what was just squandered on Citi. For that, we achieved major advances in earth and lunar science, materials science, aerodynamics and space dynamics, guidance and control, and computing (the basis of the IT revolution and the huge productivity growth that it has delivered).

What will we get for $300bn spent bailing out Citi?

I’m going to start using “fiscal deficit” or “deficit spending” instead of Keynesianism, because it’s not attached to a particular individual or subject to variable interpretation. Sorry about that, and thanks a lot for chasing down the terminology.

Deficit spending is not Keynesianism. Governments had long used deficits to finance wars. Keynesianism recommends counter-cyclical policies to smooth out fluctuations in the business cycle.

However, this article seems to dispute your categorical “Any fiscal deficit is Keynesian stimulus.” In fact, the article plainly states: “Deficit spending is not Keynesianism.”

Any fiscal deficit is Keynesian stimulus. You can do anything with it: saving Citi, reducing taxes, lending money, dig ditches in South Dakota, whatever. His key insight was that the government could create a propensity to investment when none existed. Ideally, the investment would be one that led to further beneficial multipliers. But the private sector is extremely hungry to invest right now, and it probably has higher multipliers than the public sector’s spending does. If it doesn’t, we should just convert to central planning now.

As for “fiscal stimulus”… Fiscal stimulus is what Reagan applied in 1982 — was he a K——-n? Was it the right policy? I would love to hear your views.

Yes, it was the right policy, in my opinion, and in a sense it was Keynesian. It was a different world, with major inflation and high unemployment. His policies, combined with Volcker’s monetary stranglehold, raised real interest rates significantly. That was needed then. We need lower real interest rates today.

Essentially, I think everyone is way too ignorant of real interest rates. The conventional wisdom is that higher deficits are always inflationary and lower deficits are deflationary. I disagree; that depends on a lot of things. I do believe that higher deficits raise real interest rates, and depending on the environment, that can be good or bad.

zak822, fiscal stimulus is public sector spending. It’s spent by definition.

Do not talk about Keynes or Keynesian economics unless you have read Keynes’ writings and understand his political views.

Tortoise, I read his General Theory from cover to cover. I thought it was a magnum opus of economics and I gleaned a lot of novel insights from it. That deferral of consumption is not always possible and not usually beneficial was my favorite. I don’t believe it’s the bible, nor do I believe fiscal stimulus is the right policy at this point.

Why do you think quashing debate is the right policy?

1. PLEASE, stop predicting deflation or saying that the Fed is powerless. You just encourage them to waste more money. We have not had deflation for a very long time and it is seriously doubtful that we will see deflation in our lifetimes. Make an effort to refrain from even saying the word “deflation” until consumer prices really drop over, say, at least a whole year.
2. Do not talk about Keynes or Keynesian economics unless you have read Keynes’ writings and understand his political views. You make it sound as if Reagan or GWB were Keynesian (Keynes must be turning in his grave). Let us agree that we debate without using the combination of letters “Keynes”.

The GDP Price Deflator tells us the rise in nominal GDP that is attributable to a rise in prices.