Edmund Phelps Raises Doubts About Keynesian Remedies

Edmund Phelps, a Nobel Prize winner, casts doubts on Keynesian remedies because Keynes himself came to question them.

This Financial Times piece provides no answers but raises some interesting questions. But sadly, there may be no answer for the first question he asks:

What theory can we use to get us out of the impending slump quickly and reliably? … The thoughts of some have turned to John Maynard Keynes. His insights into uncertainty and speculation were deep. Yet his employment theory was problematic and the “Keynesian” policy solutions are questionable at best.

Banks spoke of the downturn in house prices as an effect of some sort of shock….The prime cause was forecasting with badly mistaken models. Speculators and home buyers, thinking that rentals or building costs would go up, bet on higher house prices in future, which also raised the price of existing houses. But over the years neither rentals nor costs (in real terms) budged. If they did not rise, (real) prices would sooner or later have to go back down.

This was Keynes’s world. At Cambridge, he showed how an investor might allow for unknown contingencies in his Treatise on Probability. In London, he ran a hedge fund with O. T. “Foxy” Falk and grew rich, only to get caught in a collapse of commodity prices in early 1929. He concluded that investors’ beliefs were “flimsy”. As one investor, then others, desert, the asset price, previously rising, may merely falter at first but finally collapses sharply along with the conventional belief.

Keynes put asset prices at the centre of employment determination in his 1936 General Theory. If a change in sentiment causes steep declines in valuations of business assets (along with share prices and house prices), business investing is cut back and employment contracts – unemployment rises – mostly in capital goods industries.

Unfortunately nothing went well after that. Keynes made a huge mistake in not distinguishing between a drop in asset prices springing from monetary causes – an exogenous, or autonomous, increase in the demand for money – and one springing from causes having nothing to do with supply and demand for money – say, diminished expectations about future returns on business assets or houses. The former phenomenon could be solved by monetary means: the central bank could boost the money supply (by purchasing public debt, say), which would drive asset prices back up without driving up other prices and wages equally in a pointless spiral.

The recent collapse of speculation on houses, however, is a non-monetary phenomenon: there has to be a drop of the money price of (a basket of) houses relative to the money price of (a basket of) consumer goods. Keynes argued that a boost of the money supply would work here too: workers would be unaware that wages in competing jobs elsewhere had jumped as much as their own, so they would be afraid to require as high a real wage as before; thus hiring would be stimulated and employment would go back up. But sustaining that recovery would surely require endless wage inflation at a rate always a step ahead of expectations – an unappealing policy. Increasingly, Keynes focused on non-monetary measures to change the new non-monetary equilibrium following a loss of investor confidence.

Keynes always felt that consumer demand too drives employment. An increase in demand encourages companies to raise production and hire more workers – at first. But in an open economy with its own currency, the stimulus would mostly go abroad. In the global economy, increased consumer demand would ultimately do little more than raise interest rates, thus setting off declines in real asset prices, investment and real wages.

Keynes emphasised investment demand as a lever to increase employment. By that theory, one might stimulate private investment through an investment tax credit or subsidies for new companies or new hires. Keynes favoured investment by the state or state enterprises.

Americans – their airports nightmarish and their bridges falling down – would welcome “infrastructure”. Yet it must be asked whether a massive shift from private to state investment would not damp the conception, development and adoption of new commercial ideas for innovation. Capitalism theory stresses diversity in sources of new commercial ideas, in the pool of entrepreneurs available for their development, in sources of finance – angel investors, venture capitalists and the rest – and in the array of end users. It also stresses how important it is that owners of financial and business enterprises be accountable to no one (except their own consciences) – thus free to use their intuition – in contrast to the strict accountability rightly required of state employees. Thus a greatly increased presence of the central government in a country’s investment sector could constrict innovation and lower the quality of the innovations that are made. We would be left still in a slump.

At the end of his life Keynes wrote of “modernist stuff, gone wrong and turned sour and silly”. He told his friend Friedrich Hayek he intended to re-examine his theory in his next book. He would have moved on. The admiration we all have for Keynes’s fabulous contributions should not sway us from moving on.

Notice how Keynes expected employment to fall in capital goods industries. We have no version 2.0 for an economy so heavily dependent on financial services. I also wonder, even though the US badly needs infrastructure, if any of these newfangled theories allow for how specialized labor has become. One of the reasons that employment didn’t fall sooner is that even seemingly mundane jobs now require employer specific knowledge (computer systems, internal procedures) that make it more costly to bring a new person on board and deters firing.

Put more simply, how is creating jobs in repairing infrastructure going to help unemployed bank workers? Even if they were willing, many will prove not to be able, and will also be living at a remove from where the jobs would be. In an advanced economy, labor is not terribly fungible.

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  1. Viv

    Yves, what’s your opinion on the Austrian school of economics and Ron Paul? What if the FED was abolished and the bad debts are liquidated, that way the system gets cleaned up, moral hazard is removed.

    Yes we have a sharp downturn but the upturn would be swift as well. The US is now doing what Japan did in the early 90’s, except it has no pool of real savings. There could be possible stagnation for decades. The Nikkei hasn’t recovered till date and Japan spent billions(trillions?) on unnecessary infrastructure projects and construction.

    Society loves free markets when it’s going for us – cheap gas, cheap chinese toys and rising home prices and stocks induced by a debt binge. But when the credit spigot gets shut off as it must eventually, there is bitter complaining. The idea that the boom bust cycle had been abolished or that the world had decoupled seems like utter hogwash now, along with the mantra, “home prices always rise”.

    Let the bad debts be liquidated! Let the truth be out there that the global banking system is technically insolvent, than from there use some of the great ideas on the blogosphere to get things going again.

  2. EEgineer

    Yves said: “In an advanced economy, labor is not terribly fungible. “

    Dead on. Unfortunately few managers have figured that out. Projects at most large companies are staffed up and down as if head count was like the throttle on a car. I think that part of the problem is that most folks don’t have any idea of just how complicated technology is, and how much it’s permeated everyday life.

  3. David Habakkuk

    But repairing infrastructure would create jobs for people laid off in the construction industry, surely.

    According to the latest U.S. Census Bureau press release, privately-owned housing starts in September were at a seasonally adjusted annual rate of around 1,185,000, compared with around 817,000 a year earlier — a fall of around 31.1 per cent. Authorisations by building permits were at a seasonally adjusted annual rate 38.4% lower, which would lead one to expect that starts have further to fall.

    The workforce left unemployed by this massive slump in private sector building, could surely be usefully employed in renewing the crumbling U.S. infrastructure — and in particular in providing the kind of infrastructure which will be required to prevent a likely renewal of the uptrend in oil prices further down the line having catastrophic effects.

    Whether financial constraints make this impossible is, of course, another matter.

    As to the more general fungibility problem — what is needed, surely, are retraining schemes.

  4. a

    “What theory can we use to get us out of the impending slump quickly and reliably? … “

    Always, always ask the ontological question first: *is* there a way to get out of the impending slump quickly and reliably? Never assume existence.

  5. Alan

    This is the most absurd characterization of Keynes I have seen in a long time. Phelps ought to be ashamed. Talk about flimsy.

  6. Jojo

    @Viv said “Yves, what’s your opinion on the Austrian school of economics and Ron Paul?…”

    There’s a detailed critique of the Austrian school HERE.


    Regardless, there is an antipathy to any pain to anyone in today’s USA (even for the overall betterment of society). Any proposal/theory that requires that pain be suffered will be roundly derided. As a society, we have developed a strong aversion to pain, personal responsibility or taking our medicine.

  7. Jojo

    @David Habakkuk said – “…As to the more general fungibility problem — what is needed, surely, are retraining schemes.”

    I agree. Bill Gates and other tech “leaders” have long justified their love of the H1-B program by saying that there were not enough native American’s with the proper skills and training. Yet many unemployed technical people disagree.

    There are many, many people from the tech field unemployed who are over 45 years old. With training, I contend that a large percentage of these people could be filling the slots that currently go to H1-B importee’s. The government, Microsoft and other large corporations should commit to the USA by reducing or eliminating the importation of H1-B’s while also cobbling together a joint proposal for re/training of ALL those who have both the aptitude and desire to work in tech.

    One huge hurdle that will have to be dealt with is the aversion in the tech world to people over 45. This will be a difficult prejudice to to overcome though.

  8. River

    Economists have perpetually believed that they could produce models of human behavior that other economists could use for predictive purposes. Although this might be possible in more or less normal economic times I doubt if it is possible when fear has been induced by various economic upheavels. One of the prime objectives of economists should be to take steps to prevent fear from occuring. Removing the punch bowl before the party gets out of hand would be one way of preventing a collapse and the fear that sometimes follows. Once fear is induced it is not an easy task to eradicate it.

    As Taleb and Mandlebrot have pointed out, the current economic models that gave us complex debt instruments are worse than useless. These instruments fail to take into account what would happen in a true outlier event and therefore leave the economy unprepared for such an event, this means highly leveraged debt instruments will be unwound in a very short period of time or attempts to hide them ensue…a short unwind for highly leverage debt instruments was never modeled.

    I believe that Mises was on firm footing when he stated:

    ‘The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion.’


    ‘The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.’

    I wonder if Bernanke realizes how close he is to destroying the dollar currency system?

  9. vlade

    On boom and bust: these will be here as long as people will believe that money can be made out of nothing. Given that we as a humans have made optimism our survival strategy (if we were realists, we would never enter into risky business and progress would be limited, if any), these are unavoidable. It’s the price we (humankind) pay for the speed of progress.
    Booms and busts of the societies are really the same boom and bust you can see on smaller levels (with companies forming, booming, and going bust, and thus – hopefully – progressing). It’s the same thing as with evolution, where something that is suddenly found to be well adapted for the current situation will boom, until the situation changes.

    On labour:
    The corrolary to “expensive to hire” due to complexity is that a large part of the population cannot be easily re-trained. The classical economy assumes that as new industries are created and old go bust, people will retrain almost instantenuously. This was true long long ago, but is not true anymore, as the industries get more and more complex. That, of course, has a significant impact ont he economy.

  10. River

    Of course booms and busts will always occur. The point is, they can be made much worse by tinkering with the money supply and interest rates by those that have no clue what the money supply and interest rates should be set at.

    Mr Market knows what interest rates should be and Mr Market will prevail in spite of the misguided tinkerers. Allocation of assets by fools into foolish production and services is a certain recipe for disaster.

    I agree that the complexity of todays work place renders the concept of retraining difficult if not impossible. I cannot imagine a banker walking the steel of bridge construction. Construction is very difficult work, even if one takes it up at an early age. Construction also requires thought and preplanning by each worker…A process I have noticed is singularly lacking among bankers.

  11. ruetheday

    Alan – You are absolutely right. It’s clear from the excerpt that Phelps has never actually read Keynes’ General Theory. What he’s describing is the standard neoclassical synthesis mumbo jumbo (AD-AS, IS-LM, and Mundell-Fleming) with a little New Keynesianism mixed in, NOT anything based on what Keynes actually wrote.

  12. fresno dan

    Lincoln in Sandburg’s biography asks a question, “If there are 3 crows on a fence, and you shoot one, how many crows are left?”
    Economists would write a formula about the model of gun, type of ammunition, distance, wind speed, specied of crow, etc. and arrive at an answer of 2.4971.
    Despite the legerdemain of economists, goods were produced that can NOT be paid for. These malinvestiments must be accounted for, and this is a destimulatory affect. We can pay these debts quickly or slowly, but they will be paid one way or the other.

  13. DownSouth

    Edmund Phelps said:
    Yet it must be asked whether a massive shift from private to state investment would not damp the conception, development and adoption of new commercial ideas for innovation. Capitalism theory stresses diversity in sources of new commercial ideas, in the pool of entrepreneurs available for their development, in sources of finance – angel investors, venture capitalists and the rest – and in the array of end users. It also stresses how important it is that owners of financial and business enterprises be accountable to no one (except their own consciences) – thus free to use their intuition – in contrast to the strict accountability rightly required of state employees. Thus a greatly increased presence of the central government in a country’s investment sector could constrict innovation and lower the quality of the innovations that are made. We would be left still in a slump.

    Now come the capitalist ideologues like Phelps, forced to confront the same bleak truth that the Marxist ideologues were forced to confront only a few decades ago. Their theories join the wreckage of other passing scientisms, dashed to pieces on the rocky shores of history and human nature.

    Reinhold Niebuhr warned over half a century ago that the “powers of human self-deception are seemingly endless.” We have “dreamed of a ‘scientific’ approach to all human problems,” clinging to “the pretension that a community, governed by prudence, using covert rather than overt forms of power, and attaining a certain harmony of balanced competetive forces, has achieved an ideal social harmony. A society in which the power factors are obscured is assumed to be a ‘rational’ rather than coercive one.”

    Niebuhr goes on to explain:

    It is frequently assumed that human nature can be manipulated by methods analogous to those used in physical nature. Furthermore it is generally taken for granted that the highest ends of life can be fulfilled in man’s historic existence. This confidence makes for utopian visions of historical possibilities on the one hand and for rather materialistic conceptions of human ends on the other. All concepts of immorality are dismissed as the fruit of wishful thinking.

    Capitalism thus suffered the same fatal flaw as Marxism: it was “incapable of recognizing all the corruptions of ambition and power which would creep ineviatably into its paradise of innocency.”

    The loss of innocence is now clarion to all except the most committed of ideologues, which Phelps most certainly is. As Niebuhr tells us: “The force and danger of self-interest in human affairs are too obvious to remain long obscure to those who are not too blinded by either theory or interest to see the obvious.”

  14. David Habakkuk


    Of course bankers cannot retrain as construction workers.

    The ‘rocket scientists’ who did so much to create this mess could however retrain as schoolteachers.

    Some of them might even enjoy doing something useful for a change.

  15. Anonymous

    That’s silly. Capitalism is not a utopian system. Capitalism assumes Marxism’s “fatal flaw.” It works because people want to generate gains and the price system is the best purveyor of information ever devised. Other economic theories are largely attempts to manipulate man’s motivation (to get him to consume now instead of later, to work when he would otherwise not, to invest in X instead of Y) and to replace the price system with a system which outputs the information the government and/or ideologues desire.

    The only solution to this mess is a return to the free market, which has been dead for 80 years. Crony mixed-marketism is hardly capitalism and I have to laugh at anyone who thinks the free market is a significant cause in the insolvency of the USA and its citizens.

  16. doc holiday

    This topic is something I’m tinkering with and thus far, I see a need for competitive constraints on a local economic level.

    The wal-mart/Dr. Evil approach to global corporate fascism obviously doesn’t work, because the model to expand infinitely with EPS growth, is an unsustainable model.

    This is why we are seeing a third of global shareholder wealth destroyed, because the system grows to a point of collapse and falls in on itself, or explodes like a bubble.

    The idea of competitive constraint is to discourage global-like expansion and to manage smaller enterprise more efficiently. A bad example of constraint, would be a building moratorium in a city like Boulder, Colorado, i.e, instead of allowing a city to grow to a point of an unsustainable building bubble, constraints are placed on permit activity, which forces construction spending to go into other parts of the city, e.g, builders are somewhat forced into taking older homes and businesses and revamping them and re-design them, re-model them, and thus creating value in them, versus treating them as disposable assets.

    The point being, unplanned growth in any economic activity needs to be tied to realistic sustainable outcomes, versus some retarded plan of world domination…

    Never mind…

  17. Avl Guy

    Yves writes, “…how is creating jobs in repairing infrastructure going to help unemployed bank workers?”

    Some great responses came from @Engineer and @ David H.

    There’s little evidence of an ‘easy route’ to a promising future for redundant bankers, loan officers, securities analysts, portfolio managers, mortgage bankers, etc. Nor should there be an 'easy route'…and that perhaps is why there is no route at all.
    On one level, redundant FIRE professionals should run the same gauntlet ran by redundant farmers when Ag gave way to industry, and ran by steel workers and shipbuilders at naval bases as their industries shrank, out-sourced or suffered long cycles of peacetime.
    On another level, ex-FIRE workers could debatably be justly left to their own devices because of the unique problem their excessive numbers create for the larger society. An excess of steelworkers simply drives down wages (in nonunion areas) and allows the most-talented to secure the best employment.
    But what is the definition of the ‘most talented’ SIV analyst? 'most talented' Sub-prime mortgage broker or CDS trader? An excess of steelworkers does not lead to creation of more lower-quality steel. But excess appraisers, realtors, subprime mortgage brokers and CDS traders find ways to deform capital from productive uses to unsustainable and oft times destructive uses. Some labor forces are more harmful than others when 'creatively' employed.

    Fortunately, those excess FIRE professionals possessing the talent to re-invent themselves will adapt and prosper; their adaptability is their personal competitive advantage while these FIRE bubbles burst.
    Those that can’t adapt deserve no more sympathy or assistance than given to excess buggy whip makers, nurse maids, textile workers, steel workers, and dot.com launch party event planners. If they’ve allowed themselves to become un-retrainable, then they are in for a future of downward mobility. I personally don’t believe people are born un-retrainable and yet also magically manage to get employment in FIRE jobs. It’s a contradiction.
    I agree with @Jojo. We need to admit that their excess numbers almost ensure they’re in for painful downward mobility. But their “I’m Un-ReTrainable” belief guarantees that will be their fate.
    I'm almost 50, well-credentialed and experienced, and have re-invented myself twice, career-wise, including RE lending and RE portfolio mgmt, as well as in other sectors technical & non-tech, and also in workforce training & development.
    What @ DownSouth said is painfully true for the utopian idealism behind Yves query about her cohorts' prospects: “… it is generally taken for granted that the highest ends of life can be fulfilled in man's historic existence. This confidence makes for utopian visions of historical possibilities on the one hand.”

  18. Anonymous

    Two thoughts:

    The first – “It also stresses how important it is that owners of financial and business enterprises be accountable to no one (except their own consciences) – thus free to use their intuition …”

    This strikes me as a more than a bit self-serving. Isn’t this the precisely the sort of “magic of the Free Market(tm)” thinking that got us into this mess? Why will it be different now?

    Second: Whenever someone says “…what is needed, surely, are retraining schemes…” one needs to ask “Retraining for what?”.

    As someone who, as an educator, has seen retraining schemes of various sorts (welfare mothers into programmers, etc.) come and go, I wonder just what jobs you think that displaced workers, financial or otherwise should seek? I don’t mean to sound wholly negative, but beyond a current, and ultimately self-limited bubble in health-care related fields, from where will the job growth for which one is retraining originate in a crashing economy? The vaunted (and largely fictional) shortage in Science and Engineering? I doubt it.

    Service economies, particularly those that are collapsing just don’t generate the jobs people need to restart the economy.

    Infrastructure rebuilding jobs, even when financed by the government, seem to me to have a better chance of helping here than YALFR (Yet Another Laissez-Faire Ripoff).

  19. Anonymous

    Anon 12:18 is right: Retraining is useless without jobs to retrain for (and that young people are not training for already). For good discussions of the futility of job-training programs in the absence of jobs, see Gordon Lafer, “The Job Training Charade” (about job training for the poor) and Louis Uchitelle, “The Disposable American” (which touches on job training for laid-off workers).

  20. john bougearel

    Here are a few essential takeaways:

    1) Thank god someone of Edmund Phelps stature has highlighted that Keynesian ‘policy solutions” are questionable at best and may not work during deflationary shocks. This is an important issue that we need to stay on top of, because the vast majority of folks only recognize one solution or policy response: that of Keynesian stimulus. The majority of folks need to become aware keynesian economics, as we practice it, has its limits, and may not be the best policy response.

    2) Edmund Phelps identifies the recent collapse of housing prices as a non-monetary phenomena, that is, it had nothing to do with constrictions on the money supply but possibly more to do about future expectations about diminishing return on investments from our homes, not only our homes, but on stocks and commodities too, because the deflationary spiral that has collapsed the economy has also shocked these asset classes as well. The deflationary shock has created a world of diminishing expectations in these asset classes as well.

    As long as future expectations are diminishing returns from our assets, monetary responses have and will prove wanting. While Keynes contributions have been valuable tools for setting economic policies in the past, they have a limited role for today’s crisis. And Edmund Phelps is right to suggest that Keynes’ contributions in the past “should not sway us from moving on.” Non-monetary measures should be explored such as investment in infrastructure, not just of bridges and airports, but the energy grid as well.

    One problem we have is that our policy makers have relied too heavily on only one economic tool to solve all economic ills in the past 75 years. This exclusivity is akin to horse running around the track with blinkers on. It is advisable that our policymakers (the horse running with the blinkers on) remove their blinkers so that they can see the whole field to gain a broader perspective of what tactics will be required to win the race.

    3)anon at 3:30 am also raises a very pointed observation: there may be no economic model that will get us out of this deflation spiral quickly and reliably. It may not even be advisable to do so. A reversion to the mean (or below the mean) may be best in the long run. That is another way of saying it might be best to cleanse the system entirely.

    And so @ Jojo: a strong aversion to pain does not infer that pain can be avoided. It is just wishful mumbo-jumbo. As Mises points out “There is no means of avoiding the final collapse of a boom brought about by credit expansion.” (hat tip ~ River) And so, the best course of action is to pull out the playbook for “Storm Tactics” and get ready to ride out a very rough Force 10 storm knowing full well not everyone will survive. A very important lesson of this crisis is that collateral damage becomes inevitable and unavoidable.

    @Downsouth: pulling a Reinhold Niebuhr quote out of the hat: very nicely done.

  21. Anonymous

    Phelps contends that increasing public spending on infrastructure will somehow constrain private innovation. Huh? So DARPA spending on semiconductor research and communications somehow constrained innovation in computers and the internet? Public spending on gene research etc. etc. There is a dearth of privately-funded basic research right now. Public funding of basic research (along with rebuilding bridges, retrofitting buildings to conserve energy, etc.) would go a long way to shore up employment and keep us plodding along while we sort through the financial wreckage.

    Maybe all of those “financial innovators” can go back for an MBA in manufacturing and contribute to the real economy in the future…

    A central issue for the U.S. and global economy that needs to be addressed is the role of the dollar as a global currency. The U.S. economy simply cannot adjust properly as long as the dollar is serving two roles.

  22. SlimCarlos

    @ john b:

    From Monday’s FT:

    “If ordinary policies fail to avert slump and deflation, the monetary printing press is the final tool at the disposal of policymakers. The government could borrow directly from the central bank and distribute the newly created money to households and firms. This worst-case scenario is a long way off. Yet events in recent months have validated the most pessimistic predictions. Authorities must now make full use of all traditional policies, while having contingency plans to hand.”



  23. River

    Yes, ‘The government could borrow directly from the Fed Reserve and distribute the money directly to households and firms.’

    SlimCarlos, what would the outcome of such a fiscal policy be?

    Dilution of the money supply and hyper inflation at some point.

    The dollar would lose it’s status as world reserve currency.

    Sale of treasuries would be limited to the Fed and a few fools that did not realize the monetization in process.

    The government would be unable to service the current account deficit when foreign money stopped pouring into US debt instruments.

    Of course, the government could service the current account deficit with worthless dollars…That begs the question: What would we use to purchase 11.5 million bbls of oil each day on world markets?

    What would we use to purchase plastic salad shooters from China?

    Hyper inflation by monetizing the debt and printing money would lead to a collapse of our political system and financial system, imo.

    I believe it is wiser to save the dollar than to collapse it in a fruitless attempt to save Wall St.

  24. fledermaus

    if any of these newfangled theories allow for how specialized labor has become.

    I think it is less that than companies are no longer willing to have someone learn the job while working. They seem to expect fully trained and/or experienced people. With less time to evaluate canidate they want shortcuts to finding the right person.

  25. Anonymous

    Anon, maybe this is our work. We spend multitudes of hours trying to figure out how to keep you employed, and happy. Yet the slightest little discomfort and your yelling – hey asshole you lost my job.

    Start learning how to dig ditches my friend.

  26. Anonymous

    anon 7:11
    Obviously you are not very good at what you do now so maybe you should sharpen your shovel and see if you are any better at digging. You are a real JERK>

  27. datadave

    Yves, great questions! I while in the construction trades myself, have oft wondered how is more ‘infrastructure improvement’ going to significantly improve employment. Most contractors will just hire a few currently underemployed tradespeople while preferring to run current crews overtime and on weekends…makeing a few more prosperious….but not hireing a lot of new people except for temporary low-paid go-fers and flag-people. In fact, I am working with a recently laid-off paving contractor supervisor who just move back into his old job and while leaving non-transferable skilled people w/o any chance of getting a new job in infrastructure. Heavy-equipment operators, although hardly brain surgeons do need training, suffer temp. layoffs and long hours when working, and other unappetizing conditions so that it’s not a majority of people’s choice of employment. Specialized skills in engineering take long time to develop and like-wise not ‘transferrable’ to immediate employment.

    Specialization is the problem as you say.

    I am thinking a new CCC wouldn’t be a bad thing…building and cleaning national parks, green jobs (insulation and demolition) etc.

    Actually law enforcement and Americorps were good ideas of the Clinton years. Amazingly it doesn’t take that long to become a cop. Only months of training..but then I don’t think we can use any more incarcerated folks.

  28. Juan


    You are confusing a particular set of social relations which began coming into existance moreless 500 yrs ago with an analysis/critique of those relations. Implied notions that the end of some state capitalisms such as the old USSR represented a collapse of that critique are themselves really no more than part of the triumphalism drooled forth in the interests of a by now should be evident failed neoliberalism and its partner in crime, neoclassical economics.

  29. Anonymous

    “What theory can we use to get us out of the impending slump quickly and reliably?”

    It depends how the impending slump is defined. If the problem to be addressed is a fall off in employment, reducing the work week is a simple and reliable method to “get us out.”

    IN fact, it is the only method – and was actually endorsed by Keynes. Even Hoover suggested it.

    But, I have to say, it is fun watching politicians, economists, and bureaucrats running around looking for another solution as the world tumbles down around the.

    Government induced economic expansion worked for six decades, but now has reached an impasse. It is now failing, as it had to, since only with its failure would anyone revisit the simple method of reducing working hours during a slump.


  30. andy bossie

    It’s kind of silly to act like the only people who are going to become unemployed due to this economic crisis are bankers. The point of a second stimulus will be to help offset the effects of the financial crisis on the real economy. Also, it has been barely mentioned here that the skill set for construction are not that different than the skill set needed to build infrastructure. Furthermore, these projects are probably going to take years, plenty of time to train new workers if they need to be.

    Another thing no one has mentioned is the multiplier effect of any spending. As that money filters through the economy it pass through tons of other sectors. That’s the whole point of a Kenyesian plan. A second stimulus plan is inevitable and I think the first test of the obama administration will be if they do something dumb like hand people a check (with a lower multiplier) or if they do something productive and useful (but less politically obvious) with the money.

    Also, I can’t believe how brazenly people still tout the free market as the only legitimate mechanism for economic activity. Why must human intervention in our own affairs be executed perfectly to be justified especially in times when its obvious what the problems are with letting nature take it’s course. Keynes’ concern with his model are legitimate concerns and something to be thought about seriously but they real aren’t grounds to dismiss Keynes’ insights wholesale.

    It also rubs me the wrong way when people dismiss a less than perfect economic theory with vague and free floating pronouncements like “government investment stifles creativity.” Where is the intellectual rigor in statements like that?

  31. Peggy McGilligan

    Reinhold Niebur; I'll have to do some reading. Fortunately, economics isn't exactly a hard science. But as I mentioned, world markets will not rebound; they know the bailout does not address the fundamental reasons – rampant corruption, illegal immigration, and a dependence on foreign oil – that there is a problem. Simply put, the bailout is good money after bad. Demand accountability.

    Lets hope President Obama will be bigger on solutions, than he is on rhetoric. Although not nearly as politically correct, I believe the girl & the Navy guy would have been by far and away the better choice. But hey, either way you’re being misled: http://theseedsof9-11.com

    I was talking to a banker and he said: We want to be free! We want to be free to do what we want to do. We want to be free to ride. We want to be free to ride our machines without being hassled by The Man! And we want to get loaded. And we want to have a good time. And that's what we’re gonna do. We’re gonna have a good time. We’re gonna have a party. Seriously, that last was from the 1966 movie The Wild Angels. It's as good advice as any. Hope it helps.

  32. tompain

    If the only problem th eeconomy faces was to reallocate the bankers, we’d have a relatively small problem and no one would be talking about infrastructure projects to stimulate the economy. Wall Street has gone thorugh fairly significant downturns before, and those workers do manage to get reabsorbed. Partly that is probably a result of the fact that a lot of these wall street jobs are actually not as specialized as you think. Remember that many of them are filled by kids who are a couple of years out of college or b-school or law school. They made an unfortunate detour in their careers but they can backtrack if necessary. Other workers have made enough money to go unemployed for a while or even to retire. Some clowns at haedge funds should never have been investing other people’s money to begin with, and they will go back to doing whatever they were ding before the bubble brought them into the industry. IT guys will land at other companies eventually. Etc.

    The infrastructure projects become important if you suddenly find yourself with thousands of unemployed factory workers. If you don’t get them back to work, they default on mortgages, they stop consuming, etc. Ultimately that indirectly even effects those bank workers.

    Also, infrastructure projects do need things like purchasing agents, finance guys, project managers, etc.

  33. luther

    proposal to add to keynes 2.0:

    to flippantly paraphrase jim rogers: perhaps some bankers should trade in their maseratis for tractors?

    or rather to proactively quote from michael pollan in an open letter to the next 'farmer-in-chief' that outlines some ideas for a rethinking of the american agricultural industry:

    "In fact, well-designed polyculture systems, incorporating not just grains but vegetables and animals, can produce more food per acre than conventional monocultures, and food of a much higher nutritional value. But this kind of farming is complicated and needs many more hands on the land to make it work. Farming without fossil fuels — performing complex rotations of plants and animals and managing pests without petrochemicals — is labor intensive and takes more skill than merely “driving and spraying,” which is how corn-belt farmers describe what they do for a living."


    of course gov't would need to 'invest' in retraining and such, but if fiscal stimulus is inevitable, this might not be a bad place to apply it — to help funge labor back to the land?

    p.s. great word btw yves, fungible.

    1755–65; < ML fungibilis, equiv. to L fung(ī) to perform the office of + -ibilis -ible


    right around the time of adam smith…

  34. luther

    btw, speaking of fungible fungus, someone over at CR shared this 2day (hattip whoever u r):


    “A fungus that lives inside trees in the Patagonian rain forest naturally makes a mix of hydrocarbons that bears a striking resemblance to diesel, biologists announced today. And the fungus can grow on cellulose, a major component of tree trunks, blades of grass and stalks that is the most abundant carbon-based plant material on Earth. “

  35. SlimCarlos

    >> SlimCarlos, what would the outcome of such a fiscal policy be? Dilution of the money supply and hyper inflation at some point.

    FDR did just this: a managed devaluation. The result was a) arresting deflatioary tendencies and b) laying the groundwork fr 30 years of stable, non-inflationary growth. Isn't this a good thing?

    >> I believe it is wiser to save the dollar than to collapse it in a fruitless attempt to save Wall St.

    The way things are going the dollar won't be saved. And devaluation will help main st, not wall street.

  36. LauraH

    Those who approach Keynes from the basis of what he himself wrote and said, in the circumstances of his time, may be better able to see how his insights can help us today than those (of whom Professor Phelps is an admirable exemplar) who approach Keynes as simply a bundle of theoretical axioms. So, for example, no one considering Keynes’s advocacy of internationally coordinated economic policy and of what we might now call global economic governance would simply dismiss Keynes’s approach with Professor Phelp’s brief reference to stimulatory policy in an open economy being wasted. It was precisely to avoid this risk that Keynes advocated international action. To consider what Keynes did in fact advocate in this arena, see – for example – Donald Markwell, “John Maynard Keynes and International Relations: Economic Paths to War and Peace” (Oxford University Press, 2006). This seems to me to be essentially what Gordon Brown is now saying in his advocacy of international economic cooperation today.

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