> there is huge political opposition to counter-cyclical fiscal policy.

There is huge political opposition to raising taxes and cutting spending during expansions, yes. However there is huge political support for cutting taxes and increasing spending during contractions.

This is the real problem with fractional reserve systems. In theory they could be used to damp out the business cycle. In real democracies voters always want low taxes and high spending irrespective of the state of the economy.

> In real democracies voters always want low taxes

Would they have to always want that though? I mean, I believe a lot of things can be made more efficient by economies of scale, and in some cases avoiding perverse incentives of for-profit motives (the stories I keep reading about the worst of the American prisons come to mind). In other words: that some systems work best when handled by the government. So I have no trouble believing there are situations where paying more taxes gives me the best value for money in terms of increasing personal happiness, because they would be spent on improving those systems.

I'm not sure if there is any government out there currently that I trust that much, but it's sounds hypothetically possible to me.

>the stories I keep reading about the worst of the American prisons come to mind

That's a misconception. State run prisons are no better.

Regardless, it's not that people don't want government to provide services. They want government services and they want low taxes.

Not totally during the 2008 recession, there was support for cutting taxes, but not increasing spending. "Austerity"

Cutting taxes more or less automatically results in increased spending.

Not if the tax cut is used to pay down debt, or is "saved" by buying government issued securities. Neither of these result in more economic activity.

Sounds an awful lot like the post 2008 environment, no?

That's not really true. If you maintain the same level of spending but cut taxes, you're going to get money going into the economy. When those government issued securities are bought, for instance, there's someone on the other end of that transaction that now has money.

The real problem with the 2008 recession is monetary stimulus doesn't really work.

As long as you don't cut services along with those taxes.

The thing about Keynesian economics is that it isn't sustainable in the long term, because there is never a plan to pay off the debt accumulated during each recovery. In practice, keynesians talk about increasing spending during recessions but never speak of running equivalent surpluses during 'the good times.'

By itself this doesn't prove that it's unsustainable. In fact, there's plenty of evidence around us that it is sustainable, since it's quite rare for states to collapse due to debt (that wasn't caused by exceptional catastrophic circumstances like war/revolution/highly-corrupt mismanagement/etc). State debt doesn't EVER need to be repayed in full, interest on it just needs to stay sustainable. (Which isn't to say debt is without its costs, just that the fact that it doesn't get aggressively paid down during good times doesn't imply inevitable disaster.)

This doesn't prove that it's sustainable in principle, only that the time to inevitable collapse is greater than the ~80 years since it's been widely implemented.

In practice, ever-increasing debt absolutely requires ever-increasing growth in order to service it. We've so far been lucky, in that the period during which we've used this policy has coincided with the enormous productivity gains that came with the computer revolution. But rearranging our economy so that it's dependent on continual windfalls from external sources merely to stay afloat seems reckless at best.

If there was ever a point where our current run of innovation starting with the Industrial Revolution were to slow down or stop, then you are correct. However arguing that it's not proven to be sustainable because the fact that it hasn't collapsed in ~80 years only proves that its sustainable for 80 years is makes proving it sustainable impossible. Absent a better theory with better predictions Keynesianism is still the most successful economic theory. Moreover the scenario where innovation stops or slows down is a fairly unlikely scenario and if we're going to have a public policy debate I don't think it's wise to count on it.

Innovation in specific areas slows or stops all the time. The general run of technical progress in a specific area shows an S-curve, in which initial discoveries are made slowly, later progress accelerates as synergies are exploited and greater investment is made, and finally innovation decreases as low-hanging fruit is exhausted and the shape of available technology matches that of the problem domain. For an example of this, see aerospace; it took around sixty years to go from the field's inception to the moon landing and the Concorde, and in the fifty years since we've made mostly incremental progress over the technologies involved in both.

It seems that we're currently approaching the top of the S-curve for computation via integrated circuits; further increases going forward are likely to be incremental and margin-focused, as opposed to paradigm-shattering. Maintaining the 1950-2010 rate of productivity improvement will require new paradigm-shattering advances in some other field (machine learning? Internet of Things stuff?). It's possible that these are indeed forthcoming, and we can continue our absurd growth levels for another fifty years. It's also possible that we're nearing the edge of the problem space and we won't have any more easy order-of-magnitude productivity boosts. If the latter is true, then our economy will inevitably collapse with enormous collateral damage. As an economic system, this seems unstable at best.

This doesn't seem like a reasonable worry really. We will continue to innovate at a more rapid pace until we have real AI or there is a massive disaster(runaway global warming of 8-10 degrees or nuclear war are the most probable), I personally think it will be AI though because I suspect we might be looking at 20-30 years until that happens.

Once real AI comes I'm not really sure what will happen because it is unpredictable how the AI will be made, but if the past is any indication it will be made recklessly in a race between a bunch of companies. Idk how long our current world order will continue to exist and how much the AI works with us after that event. Hopefully the zoo it keeps us in will be nicer than the way we have treated animals, and hopefully that takes 20 years after the birth of real AI.

I wouldn't worry about innovation slowing down, I would worry about the end of meaningful human innovation that we are clearly headed towards.

"Innovation in a specific area slows or stops all the time" Yes, but the general pace of innovation in the entire economy including areas that are slowing down or starting up is pretty consistent. One thing I'd like to make clear is I'm not just talking about 1950-2010 growth rate, I'm talking Industrial Revolution (around 1800 depending on where you are) to now. Ever since society realized we could build machines fueled by energy to increase productivity we've been growing at roughly a 2% pace. Even if it isn't immediately clear where the new productivity gains will come from (although I'd argue there are plenty of promising areas) I think it's more likely than not going to continue.

some possible areas - AI, 3d printing, falling renewable energy prices, continued marginal gains from computers, quantum network communication, longer term - quantum computers, expansion of VR, driverless cars, etc. Point being there are a lot of promising areas on the horizon.

> In practice, ever-increasing debt absolutely requires ever-increasing growth in order to service it.

No, it only needs increasing growth of the rate of debt growth is accelerating; if it is merely constant debt growth (over the long term), constant (not “ever-increasing”) economic growth allows debt service costs to grow constantly and still have the otput not devoted todeny service grow constantly at the same rate.

> We've so far been lucky, in that the period during which we've used this policy has coincided with the enormous productivity gains that came with the computer revolution.

It's been practice (“policy” is a bit too strong) since Eisenhower. And economic growth was stronger earlier in that period than later. Too the extent that it's been sustainable, it's not due to some unusual economic magic of the “computer revolution”.

> But rearranging our economy so that it's dependent on continual windfalls from external sources merely to stay afloat seems reckless at best.

Even to the extent the computer revolution might be relevant, that's not an external source when discussion the economy. That is a thing that was produced within the economy, and government (deficit-financed) spending played an important role in it.

More so, having safe government debt is incredibly useful. Retirement and pension funds and other low-risk investment vehicles depend on them.

Technically, you don't need to pay off the debt in expansions; you increase spending by deficit spending during recessions, increasing the debt to GDP ratio, and then curtail surplus spending (even without paying down debt, you can even do this with some net deficit spending) in expansions, decreasing debt to GDP ratio mainly by GDP increase. (This still oversimplifies a bit; you really care about the debt service cost to GDP ratio, not the debt to GDP ratio, but the two tend to move in the same direction.)

People dependent on income from wage labor need to pay off debt for sustainability because the ability to do labor eventually declines or is lost.

Governments aren't individuals.

And in practice, Keynesian economies don't do the 'curtail surplus spending' part, so we end up where we are now with debt interest taking up a significant part of US spending, with signs of increasing significantly.

The US basically has (measured by direction of change of debt-to-GDP ratio) in periods of economic expansion even as debt grew in the post-WWII period, except under Nixon and later Republican Presidents and Obama (and even in Obama’s case after the first term debt expansion overlapping the Great Recession and immediate aftermath, the second term was basically flat.)

I'm not sure there is a good case that “Keynesianism” is the problem; the late anti-tax orthodoxy of the Republican Party, which has nothing to do with Keynesian fiscal policy, seems more to blame.

> running equivalent surpluses during 'the good times.'

This is because government debt isn't a zero-sum game.

Especially since our currency is no longer gold standard/backed (partly because of the Great Depression).

The end of the US dollar international convertibility to gold did not happen until August 15, 1971.

It is also exactly the year inflation took off like a rocket - see the "Cumulative Inflation" graph. And the standard of living for the middle class (at least in the US) began to stagnate (up to this day).

https://inflationdata.com/Inflation/Inflation/Cumulative_Inf...

Inflation also took off like a rocket in Switzerland in the early 1970's: https://tradingeconomics.com/switzerland/inflation-cpi

Switzerland was on the gold standard until 1999. Since abandoning the gold standard, inflation in Switzerland has been minimal.

Clearly abandoning the gold standard does not necessarily lead to inflation. You haven't even shown a correlation here, much less causation.

Lack of gold standard is not sufficient for inflation - you also need reckless monetary/fiscal government policies (abundant in the US, taking full advantage of the dollar being the reserve currency)

I was not trying to prove causation. There appears to be correlation, but obviously other factors (like government spending) are at play

The end of convertibility didn't occur in a vaccum though: it was a response to a whole bunch of exogenous causes, including oil price shocks.

Simply not true. A good contemporary example is the governor of California, Jerry Brown, who has been vigorously defending the accumulation of surplus in the name of fiscal rectitude for the last several years.

Not all Keynesian fantasies go on forever. If we are not careful (which we aren't), then at a certain point, those interest payments become a runaway expense. See Puerto Rico. California is not exactly a model of fiscal excellence -- they're in big trouble with pension obligations, amongst other things.

Steve Keen suggests that automatic government spending increases in the form of unemployment benefits (and similar) have been a major economic buffer in many countries.

I heard about Keen's proposal of a debt jubilee (reducing private debt by random payments into bank accounts) and would be interested to hear criticism of it:

http://moneyweek.com/steve-keen-interview-debt-jubilee/

Naively, it would benefit those able to carry debt and maintain many bank accounts moving into the jubilee period.

Hmm, it definitely wouldn't be a deposit per bank account, that would be deeply unfair and biased to the extent it would be politically infeasible. The intention, realistic or otherwise, is for the cash sum to be awarded per citizen. Yes that may be via bank accounts for those that have them, but I imagine there would need to be other mechanisms in place for those that don't have an account.

Also the payments are fixed amount, not erasing of whatever debt you may have. A key aspect is that for those with debt the bank must use the cash towards paying off the debt first, whereas those with no debt will just get cash appear in their current account (or a cheque in the post, or whatever). Not saying it's practical, easy, or without ways of gaming the system, but those are the baseline intentions.

Ah, my reading of your summary doesn't seem to match the actual proposal much at all.

I read "random payments into bank accounts" as "payments into random bank accounts", which I think is one reasonable interpretation but clearly not the only one. I also took "reducing private debt by..." as being a requirement on the individual payments rather than simply a goal of the program.

With neither of those attributes, my analysis doesn't apply.

That's not quite how he proposes it though: in order to avoid unfairly disadvantaging creditors, he'd have them given a cash payment of their share of the net difference of their total debt from the per-capita infusion. E.g., if the person has $2000 in bonds to be called, $1000 in credit card debt, and the total jubilee per capita is $4500, they'd receive $5500 ($4500 - $1000 + $2000). (If I understand his position correctly.)

Yeah, the summary mislead me.

And it would penalize those without debt!

That's not correct. The proposal is a fixed amount per citizen, with the caveat that for those with debts the money must go towards paying off debts with priority.

The main problem appears to be how it would be implemented in practice. We already did the money 'printing' part, but QE as a means of getting that money into the economy has been pretty awful (IMO and by an number of accounts), but it was relatively straightforward and cheap to do because all of the necessary mechanisms where already in place. To allocate a fixed amount of cash to every citizen, and require that debt is paid off with priority, well that's not simple at all, it requires a central database of who owns what and that doesn't exist.

To add to pjc50's comment and to demystify the phenomenon a little...Figure 7 is just a plot of the deviations from a trend line of the GNP. I can't say for sure, but I would bet that this trend line is refit to the data at a regular frequency (probably yearly). Imho, it is useless by itself as a predictive tool....it needs to be combined with other signals to have any real value in signalling a change. It is one of those things that looks like magic in hindsight. To be fair, the article does cite other signals that indicate a downturn and I don't have any insights or desire to call bullshit on the prediction.

Shouldn't Figure 7 represent a first derivative of the GDP? In which case, no refit is necessary, but trends are still only clearly apparent in hindsight.

When I look at a two hundred year US inflation/deflation graph, it looks like taking us off the gold standard provided some form of damping.

Being on the gold standard means occasional depressions caused purely by the inability of the supply of gold to keep up with the expansion in the economy IIRC.

And while it may have not played out historically in the US, the opposite side of that coin, that is a glut of gold, is just as devastating to an economy.

Didn't happen to the US, but did to Spain.

Additionally, glut of new world silver also greatly damaged the economies of India and China, which heavily used silver currencies at the time.

The problem in economics is that it's very hard to invalidate a theory.

What would you consider an invalidation of the theory?

The easiest way to invalidate a theory is to see what predictions it makes, and to figure out where those predictions were wrong.

One recent example: the choice between austerity and stimulus, in the US and Europe, shortly after the 2008 downturn. Keynesian economic theory claimed that if your interest rate approached 0%, that you could no longer stimulate the economy via interest rates, but that the best way to improve the situation was for the government to create and spend money. And that doing so wouldn't cause sudden inflation.

Another theory said that fiscal austerity measures and the reduction of government debt would improve the situation. This theory also suggested that the US should experience strong inflation in the years immediately following 2008.

IIRC, the US government spent something like 1/3 to 1/2 the money that some Keynesian economists recommend spending on a stimulus. Other countries tried varying degrees of austerity. So to test the theory, you'd need to compare what happened in different countries.

Note that this particular "Keynesian" theory does not necessarily recommend heavy government spending when the Fed interest rate is above 0%. Basically, it's only about emergency measures when ordinary economic theories have failed.

For an easily-accessible version of this particular "Keynesian" theory, and why it's supposed to work, see this paper on the "Capital Hill Baby Sitting Co-op": http://www.eecs.harvard.edu/cs286r/courses/fall09/papers/coo... This is really more of parable than anything else, but it explains the logic.

Tl;dr: At the government's scale, money is a weird abstraction and you can't always pretend that it works like grain or cars or other simple economic goods. Or to put it another way, if the economy gets bad enough, then everybody wants to work more hours at the restaurant, but nobody wants to go out to eat—and therefore something has to give.

I'm not qualified to comment on whether this theory is actually true. But that's how you might test it, and an explanation of why it's supposed to be useful under certain circumstances.

This is what I was going to say, but I'll put it in stronger terms; The only way to invalidate a theory is to take it's prediction, and prove it false. This is called falsification.

Economics is a challenging area to have theories because it is really really hard to run experiments. As a result you have to use existing choices and try to identify what the theory predicts, then walk forward in time to see if that prediction was accurate or inaccurate. It is really hard to do because humans tend to want things to succeed and can unconsciously add or subtract data points that move them closer to 'prove' or 'disprove' depending on what they want. Eliminating that bias is very difficult.

On a related note, we're also due for an ice age based on historical cycles. However as systems change and the balances within them shift, it can be difficult to see which variables force the cycle and which merely enhance it. Easy to see an enhancer as a major force when it isn't.

So back to business cycles; there are four outlier economic events which I think can provide some insights into what may or may not happen in the next decade. These are (in chronological order) The dissolution of the USSR in the 80's, Japan's meltdown in the 90's, the misnamed "Mortgage crisis" of 2009, and the collapse of the Venezuelan economy in 2015. Each of these events share a common thread of state controls and markets being ripped apart by events. I don't think we have yet learned all we need to learn from them.

How does the Venezuelan crisis affect the World Economy, though? AFAIK they are neither well integrated into global trade and finance (Japan and US), nor do they have so many people as to cause a serious change in the labor market (USSR).

In both the USSR and Venezuela cases we've seen a complete separation of meaningful feedback and controls in the regulation arm and the market itself. In both cases multiple markets emerged that where nominally independent (black, grey, sanctioned, and unsanctioned) which created ways for capital to flow that had previously been impossible. In both cases there appears to be tremendous looting of GDP into the market accounts of a smaller wealthy elite. To the extent that the wealth of a nation empowers its governance, the rise of oligarchs creates a nominally stable power structure that is disassociated with GDP development. To me, this appears to structurally favor wealth creation for the oligarchs over GDP creation for the economy.

What I observe is that the rapid shift of materially significant (from a GDP perspective) wealth from the general market to a much smaller number of market 'maskers' on a sovereign state basis, has an attenuating effect on systemic controls and other market damping systems.

So looking at how business cycles happen in a system where more and more interacting economies are less market driven and more exploitation driven is, again in my non-professional opinion, might shed some light on how the cycles will evolve.

You could probably throw Zimbabwe, Yugoslavia, and Greece into that mix too. To a lesser extent Iceland, but in that case the "bad actors" were thrown into jail afterwards (which of course doesn't have effects reaching back into time)

Yugoslavia? You mean before the war and the break-up?

During the 80s, Yugoslavia was a us-allied communist nation that experienced hyperinflation due to economic mismanagement.

So 'yes'. Thanks for the clarification.

It depends what time scale you're looking at. If you consider the US government's reaction to the events of 2008 a success because the stock market is high right now and unemployment is low, that would be misleading if the effects take an even longer timeframe to show themselves.

The Austrian economists would argue that what happened in 2008 was a breakdown of the fiat monetary system and that the responses were just bandaids. In the longer-term view, when you look at shifts in power and rising and falling of empires, 2008 could be the first of many massive shocks to the economy.

>everybody wants to work more hours at the restaurant, but nobody wants to go out to eat—and therefore something has to give

Ideally the restaurant would lower wages until fewer people want to work there, and lower prices until people want to eat there. Decreasing the value of money feels like a dirty hack that benefits the richest at the expense of everyone else. Remember before we adopted these policies recessions used to be really short.

And as we saw, despite claims from worry warts like Ron Paul, and from gold advertisers playing pump 'n dump, there was no inflation in the US to speak of. Throughout The Great Recession government bond prices remained high - which allowed the US to continue borrowing & spending without being reigned in by financial markets.

There is an enormous amount of asset inflation, and future inflation is just "stored" there.

Exactly. The following phenomenon are all related:

- the record-breaking auction prices of art pieces (Picasso, etc) at Christie's & Sothebys

- the vast pools of money chasing late-stage tech startups driving up late-round valuations,

- the increase in student loans for college students driving up tuition prices outpacing "official" inflation metric

There's also "shrinkflation"[1] which is a form of inflation but does not count in CPI calculations. Also, many homeowners complained that their house insurance went up 20+ percent even though they don't live in a hurricane or flood zone.

The pundits saying there's no inflation seem to only look at the flawed CPI statistic. If the Fed's quantitative easing creates $4 trillion in new money, that has to show up somewhere in the economy. (Unless _everybody_ coordinates to hide all $4 trillion in a mattress to negate its effect.) If citizens are seeing a reduction in purchasing power in real terms, you have inflation happening.

[1] https://en.wikipedia.org/wiki/Shrinkflation

See also, the related phenomenon of a company introducing a new, notionally superior product line at a higher price than the original, then somewhat later discontinuing the original, while never reducing the price of the new one. This results in the cheapest available product becoming more expensive, without this appearing in inflation statistics.

I have the most exposure to this in the realm of medical products. A family member has Type I diabetes, and so must continually buy insulin and blood testing supplies as an everyday expense; several times, he has been forced to switch products (between varieties of insulin, from purely chemical test strips to ones with an electronic reader, &c.) by the discontinuance of the older product. The new one is always much more expensive, and never reduces in price to match the old; this has resulted in a significant increase in his expenses for these supplies, despite nothing ever occurring that would appear in inflation statistics.

>, the related phenomenon of a company introducing a new, notionally superior product line at a higher price than the original,

Yes, and airlines charging a new extra fees for baggage when they used to be included in the base airfare is another form of inflation. This "shrouded pricing" is used to hide price increases in various industries.

This is strongly related to 'unbundling'.

Another example: products get slightly smaller but remain he same price. Often packaging can hide the change.

Correct, but the pundits are also correct, because there are really two different economies in the US:

- the "Walmart" economy - no inflation there, regular Joe Schmoes have not had a real raise in years

- the "Hamptons" economy - lots of money sloshing around (thanks to the Fed), bankers, etc spending big on luxury real-estate, etc.

Inflation is measured more by price than income. The salaries being stagnant at Walmart and co don't really have much say in the CPI.

Don't discount real estate's potential to be a sink of excess capital virtually without limit.

I'm not so sure about that. Of course they're not making land any more, but as the price of real estate increases so do rents and economic dislocation, so every rise in the cost of real estate comes with a reduction in disposable income.

False. Shrinkflation is counted in CPI calculations.

Do you mean inflation in financial instruments and other investment vehicles?

Not the original commenter, but, a negative correlation between government investment and economic growth?

"...there is huge political opposition to counter-cyclical fiscal policy."

Congress doesn't want to spend money on infrastructure.