Keynesianism in 2009

"We're all Keynesians now," stated Milton Friedman in a 1965 article in Time magazine. Friedman, famous for a conservative brand of economic policy, was actually quoted out of context and clarified the record several weeks later. Forty-four years later, Keynesian economic policies have been the subject of much mainstream debate and widely accepted in Washington and on Wall Street.

As the U.S. economy continued to slide at the beginning of 2009 and Barack Obama was set to take office, Nancy Pelosi and Harry Reid set out to craft an economic stimulus package designed to provide a jolt to the economy. The economic orthodoxy was out in full force suggesting that the only way we could stem rising unemployment was to close the output gap by increasing aggregate demand. Paul Krugman, for example, suggested that we could stem unemployment by one percentage point for each $300B of GDP impact.

The debate over the size of the stimulus, the type of "multipliers" that different forms of stimulus would have, and the timing of the stimulus raged on the Sunday shows and in the blogosphere. Meanwhile, the politics of the debate heated up as the GOP solidified their position to vote against the stimulus despite agreeing that stimulus was needed. Meanwhile, post-Keyensians such as Steve Keen and economists of the Austrian school continued to debunk the claims of the mainstream.

The failed pseudo-science of neo-classical economics continues to maintain its mythical status of a robust theory. Multipliers, Okun's Law, and other such theory extend weak statistical correlations to prescribe public policy. What makes this worse is the stronghold that the neo-classical views have in academia and in the government (see here for a detailed account). All of this enables politicians to use the musings of Ph.D. economists as fodder for pork and political gain.

Alas, the forecasts of the economic policy makers were wrong, and the economic policies of the Federal Reserve and the U.S. Treasury enabled the financial crisis. But, as long as heterodox voices are ignored, those with power will continue to spin data and reality to claim success and maintain their positions of influence. We should all remain as Keynesians at our own peril.

Another Kashkari Update

A mere one day after the Washington Post article which I posted here on the new, rugged lifestyle that the former Interim Assistant Secretary of the Treasury for Financial Stability (that's a mouthful) and "TARP czar", Neel Kashkari, had found, we have new news.

Kashkari has taken a job at PIMCO as a managing director and head of new investment initiatives. PIMCO is a big player in the bond market and is, like other big investment corporations, tightly linked in with the corporatists in Washington. I'm sure he'll fit right in.

The Torture Loophole Preserved

Two hundred, thirty-three years ago:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights...

We all know that the injustice of slavery clouded the reality of these brilliant words. However, years of progress, and certainly the election of Barack Obama, was to set aside such errors and enshrine equality amongst all people of earth. I believe that these "unalienable Rights" are such that no government nor individual can infringe upon these rights as they are natural to all people. These rights, in my mind, involve life, liberty and property. It is arguable whether rights such as that to a writ of habeas corpus or those granted under the Bill of Rights fall under such classification. That question has been one of significant debate in our federal courts over the last several years.

In the aftermath of September 11 and the invasions of Afghanistan and Iraq, the Bush administration notably expanded the interpretation of provisions which excluded such rights. In the Military Commissions Act of 2006, Congress passed legislation which prevented unlawful enemy combatants from submitting a writ of habeas corpus to the federal courts thus restricting such prisoners to legal recourse via a military tribunal. This was challenged in Boumediene v. Bush with the Supreme Court ultimately overturning the provision allowing for Guantanamo detainees to to challenge their detentions in federal court.

Fast forward to Rasul, et al., v. Myers, et al., where four Guantanamo detainees further challenged their lack of rights. Specifically, they asserted that they were subject to torture and religious abuse while in custody. In response to Boumediene v. Bush, the petitioned the court for a second review (here is the Court of Appeals decision) of the case seeking to extend Constitutional and international law protections against such treatment.

On Monday, December 14, the Supreme Court refused to hear the case thereby affirming the decision from the Court of Appeals. As such, unlawful enemy combatants, and, in particular, these former detainees are denied protection against torture and declared as "not persons" under the Religious Freedom Restoration Act. Further, the Military Commissions Act may extend to U.S. citizens who are determined to be unlawful enemy combatants.

The Obama administration could have swayed the Supreme Court to hear the case. Instead, they fought to uphold the previous decision which effectively allows torture in cases where the is a loophole in legal jurisdiction. Read more on the decision here and here.

Where is Neel Kashkari?

Find out here. I feel for him.

Senator Bayh's Response

I received a canned response from the office of Sen. Bayh (D-IN) this week in reply to my email to him asking that he oppose Bernanke's reappointment. While I specifically focused on the reappointment, his response appeared to be his generic response to queries regarding the Audit the Fed legislation (H.R. 1207 and S. 604).

The key point at the end of the response stated that Bayh is "committed to ensuring that the Fed's activities remain consistent with its mission of promoting financial stability, maximum employment and low inflation." If Sen. Bayh is committed to such principles, then perhaps he needs to examine Bernanke's record. The Fed has absolutely failed in promoting financial stability, fostering maximum employment, and maintaining low inflation.

I just happen to be finishing this up just as Bayh began his questioning of Bernanke in the confirmation hearing (watch here - Bayh starts at 1:29:05). He immediately pledges his support despite reservations.