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.





Speak your mind

4 Comments so far

  1. Andre Wallin on January 31, 2012 6:38 pm

    if you are young and you are trying to become a speculator, you must hide your good looks because people will boost your ego for the wrong reasons. looks are temporary and they guide you toward procreation and temporary relationships which all stand in the way of a successful speculator. wear sunglasses or a hat at all times as well as dark colors.

  2. Craig on January 31, 2012 9:35 pm

    Don’t forget that whatever govt data you use will be totally revised after a few years and sometimes drastically. 2007 and 2008 GDP was revised down to something similar to the Conference Board’s coincident index. Earnings in the late 1990s and early 2000s revised the peak away and made 1996 or something the peak which was more in line with industrial commodity prices. Geoffrey Moore made a stock market indicator with long leading economic indicators but the revisions kept changing the signals and messed up the whole process. A fellow with the Dallas Fed suggested that data should never be revised back more than a year or two. Too bad more people don’t think that way.

  3. Greg Rehmke on February 1, 2012 3:13 am

    Lists of “spin-offs” from private firms funded by NASA and other government research and development agencies are misleading for a number of reasons.

    First, few private firms maintain departments to catalog spin-off claims, but NASA and other federal agencies do. They collect stories from contractors and these suffer from various “Al Gore invented the Internet” problems. That is, success has many fathers and all sorts of folks tangentially involved can claim credit for various innovations.

    Second, what were the many thousands of scientists and engineers not doing while the spent their careers working in the NASA bureaucracy, or in the big military contractors working through federal cost-plus contract for politicized space programs? Bastiat emphasizes “the seen and the unseen.” What government funds it can later point to. But unseen are the projects that never were as tax-dollars and engineers are absorbed by government projects.

    Third, private rocket and space station firms tried for decades to raise funds and get federal permits for various space projects. They struggled against gravity at technology frontiers and also against NASA’s efforts to maintain it’s monopoly control of space programs (seen as jobs programs by local Congressmen). The seen are the claimed spin-offs from taxpayer dollars flowing through NASA to private space contractors. The unseen are the spin-offs we could expect from private space firms had they had less grief from federal regulatory agencies helping NASA block private space projects.

    It was only the booming tech industry that created enough billionaire space enthusiasts to fund rocket projects to do an end run around NASA competing for the Ansari X-Prize. (See Jeff Greason’s great TED talk for more on private space vs. govt.: http://www.youtube.com/watch?v=m8PlzDgFQMM (And I have more at www.EconomicThinking.org/Space )

    Elon Musk of SpaceX has a Mars exploration business plan to offer tickets to Mars for $500,000. As I recall, their (preliminary) market analysis suggests 8,000 people a year are willing to pay that for a trip to Mars. SpaceX is developing the needed rockets and infrastructure as they work through some $3 billion in current launch orders. If enough people turn out not to be willing to pay enough to fund travel to Mars, then SpaceX won’t fly them to Mars, at least not at a profit for investors.

    Who but governments could build a tunnel under the English Channel? Well, governments never did, but private firms and private investors did. They lost a lot of money, but this dream project was privately funded and built.

  4. Craig on February 2, 2012 1:38 pm

    One thing to think about in regard to the Fed’s ability. Back in the late 1980s or early 1990s, Geoffrey Moore wrote a paper on the change to a service based economy from manufacturing. He suggested that the less capital intensive nature of services will reduce the Fed’s ability to stimulate. Also, he said that services trend more, so it’s great on the upside but is very hard to reverse on the downside. Ever since I found that old paper stashed in a file cabinet, it’s stuck with me. (Also in the old files were inflation cycle comparisons which nobody does anymore.)


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