Wednesday, January 8, 2014

Keynesians go baseline hunting

Keynesian Theory, Mark tells us, is valid when the baseline economy is defined well. Changes in government spending affect what the whole economy does.  My interpretation is that when the economy is headed down hill then they claim a bit of government stimulus makes for a smoother ride. That is not good enough for the secstags, we are at zero already. They need a better baseline, one that shows growth via government action. So they are reaching back to the sixties for a baseline. LBJ's War on Poverty.

I put the chart up to look at the sixties when debt to GDP (red line) was below five percent.  We pay interest on that debt, continuously, and the interest expense comes mainly from middle class taxes. The green line tells us what part of the federal budget is devoted to interest expense. Generally around 5-20 percent of the federal budget covers past borrowing costs. But the interest expenses become 20 percent of the budget when growth is above 3.5%, mainly because of the red line, total debt as a percent of gdp. 

So, if the Keynesians want to use the 60s as a baseline, then with debt to gdp now triple, they will have to fill a 15% hole in the budget.  How do the thirty little Hoover states want to do this? Either tax themselves, or give up a bunch of their goodies. And that is why the Keynesians have no baseline.

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