Keynes Vs. Hayek

This is a discussion on Keynes Vs. Hayek within the Economic & Fundamental Analysis forums, part of the Methods category; Originally Posted by Atilla When growth gets going and books balance - one can then cut taxes assuming G is ...

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Old Aug 24, 2011, 7:37pm   #16
 
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Re: Keynes Vs. Hayek

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When growth gets going and books balance - one can then cut taxes assuming G is earning its way and raise rates to ease off inflationary pressure on excess borrowing. Ensuring one is earning ones way and not borrowing...
Just so I can make sure I understand what you're saying...

Consider that you have a high level of debt.

Taxation represents government income. So are you saying that if you worked in a job, and your salary was going up, and your income was more than your living costs, so that you didn't need to borrow more money (original debt still exists of course) that you would at that point decide to cut back on your working hours and earn less income?

That would completely ignore two important things. The first is that, you have a huge amount of outstanding debt, and second that you may go through harder times in the future, and it might be wise to at least earn the same amount or gain even more income while you can, and pay off debt or save for that rainy day.

What you're suggesting, if I have understood it correctly, is completely wrong. And obviously so. When things get going, and the books are balanced, it is at this time that you pay off as much of your debt as you can.
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Old Aug 24, 2011, 7:44pm   #17
 
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Re: Keynes Vs. Hayek

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Anybody who cares to note this is precisely the reason why;

1. Raise taxes - demand side management to curb inflation
2. Cut interest rates - supply side to stimulate investment and production

is required to get balanced growth in economy.


When growth gets going and books balance - one can then cut taxes assuming G is earning its way and raise rates to ease off inflationary pressure on excess borrowing. Ensuring one is earning ones way and not borrowing...

Pretty basic economics but such is life...
Basic economics you say? I will make this simple so that even you can understand. The UK imports twice as much as it exports. The U.K is now a net importer of oil and food. These are commodities that are produced outside of the U.K. When the Central Bank increases the money supply it devalues the currency at the same time, this is called debasement. What this means is that anything the UK imports will be more expensive due to a depreciated currency. If you don’t believe me then perhaps you will believe Andrew Sentance - External Member of the Monetary Policy Committee:

"Why has inflation turned out persistently above target, despite the widespread expectation that it would be pushed down by the financial crisis and the global recession?" The answer, he argues, is that "too much faith is being put on the impact of a large 'output gap' pushing down on inflation and not enough weight has been put on the upward pressure from the global environment and the exchange rate".

Fourth, and most importantly, Andrew Sentance says that in an open economy like the UK the 'output gap' model of inflation pays insufficient attention to the global forces shaping UK inflation. "A key driver behind the upward pressure on prices in global markets has been strong global economic growth, particularly driven by Asia and other emerging markets", he says. Moreover, "Forecasts of future global growth are now being revised up again.". Dr Sentance concludes that "...global inflationary pressures look set to continue and with them above-target UK inflation.


He concludes by saying that, while the exchange rate should clearly not become the centrepiece of UK monetary policy, the value of sterling "...needs to be one of the key areas of focus for the MPC as we seek to steer ourselves out of the current phase of high inflation". A modest appreciation of sterling, he argues, ".would mitigate the impact of global inflationary pressures in the short term and help to steer inflation back to the target over the medium term".


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Old Aug 24, 2011, 7:57pm   #18
 
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Re: Keynes Vs. Hayek

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Just so I can make sure I understand what you're saying...

Consider that you have a high level of debt.

Taxation represents government income. So are you saying that if you worked in a job, and your salary was going up, and your income was more than your living costs, so that you didn't need to borrow more money (original debt still exists of course) that you would at that point decide to cut back on your working hours and earn less income? Obviously if you have debt you wouldn't substitute leisure for work until debt is paid off. Where did this come from... "at that point you would cut back on your working hours and less income came from" You doing hocus pocus magic stuff.

The point is as people become well off and cash rich by working harder they don't do more hours. They simply work less hard. Someone earning less money works weekends and BHolidays and in some cases two jobs.

I had better expectations from your powers of deduction.

Let's think about someone who earns considerably more than they spend and has no debt. Do you think unlike a poor sod they will work BH long hours doing OT and weekends or do two jobs? THINK it through.

And before some bright spark says many chief execs are on the board of executives working for 2/3 companies - get in touch with reality...


That would completely ignore two important things. The first is that, you have a huge amount of outstanding debt You make it up as you go along. If you have debt you are not well off are you? It's alright my friend plastic has my rear covered I won't work today... You joker or what? , and second that you may go through harder times in the future, and it might be wise to at least earn the same amount or gain even more income while you can, and pay off debt or save for that rainy day.

What you're suggesting, if I have understood it correctly, is completely wrong. And obviously so. When things get going, and the books are balanced, it is at this time that you pay off as much of your debt as you can.
No you understood totally wrong. Your mind is like smash potatoes with a mixture of peas. Keep taking the medicine...
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Old Aug 24, 2011, 7:57pm   #19
 
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Re: Keynes Vs. Hayek

I think that the conservatives critique over the period was better to cut taxes and let the private sector allocate resources as opposed to wasteful public spending ..... where the country won't see any future returns

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You can't say something has failed unless you've applied it properly, and I doubt that has been done. As pointed out in the radio presentation. Keynes requires government stimulus when things are bad, but also requires government to run a surplus when things are good. Unfortunately, when things are good, you get idiot opposition politicians suggesting that rather than run a surplus or get rid of overall debt, we should cut taxes. It seems reasonable to some folk, and will gain some popular vote, but in my opinion is the exact opposite of what you should do. And raising taxes now is the exact opposite of what should be happening, and the results are clear to see. It's not working.
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Old Aug 24, 2011, 8:04pm   #20
 
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There is nothing to restrain Government spending anymore
Not exactly true .... I believe that the Greek government is kinda constrained at the moment

This is the danger of over spending. There comes a time where the stock of debt becomes so unsustainable that interest payments exceed that of GDP growth, in effect leading to insolvency
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Old Aug 24, 2011, 8:05pm   #21
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Re: Keynes Vs. Hayek



For atilla's benefit
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Old Aug 24, 2011, 8:14pm   #22
 
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Basic economics you say? I will make this simple so that even you can understand. The UK imports twice as much as it exports. The U.K is now a net importer of oil and food. These are commodities that are produced outside of the U.K. When the Central Bank increases the money supply it devalues the currency at the same time, this is called debasement. What this means is that anything the UK imports will be more expensive due to a depreciated currency. If you don’t believe me then perhaps you will believe Andrew Sentance - External Member of the Monetary Policy Committee:
Yes agreed. Do you also agree that what we export is cheaper?
"Why has inflation turned out persistently above target, despite the widespread expectation that it would be pushed down by the financial crisis and the global recession?" The answer, he argues, is that "too much faith is being put on the impact of a large 'output gap' pushing down on inflation and not enough weight has been put on the upward pressure from the global environment and the exchange rate".
This isn't news mate. Been arguing that we will have inflation and that in high probability this is government policy to lighten the debt burden on borrowers. I agree. But do you understand the objective of this policy instead of beating us to death with your debasement and gold standard. I accept I agree and long term we should revert back. Simply not now...
Fourth, and most importantly, Andrew Sentance says that in an open economy like the UK the 'output gap' model of inflation pays insufficient attention to the global forces shaping UK inflation No ****. What do you think the other side of making exports cheaper is. Importing inflation. Well done. Top marks.. "A key driver behind the upward pressure on prices in global markets has been strong global economic growth Tempted to say sod off here... More like rise in oil and commodity prices due to economic growth in the far east. (unless ofcourse this is what you mean by global growth and not contraction in the West)., particularly driven by Asia and other emerging markets", he says. Moreover, "Forecasts of future global growth are now being revised up again.". Dr Sentance concludes that "...global inflationary pressures look set to continue and with them above-target UK inflation.

Agree and we may well get hyper-inflation too. Never said anything againts...

He concludes by saying that, while the exchange rate should clearly not become the centrepiece of UK monetary policy, the value of sterling "...needs to be one of the key areas of focus for the MPC as we seek to steer ourselves out of the current phase of high inflation". A modest appreciation of sterling, he argues, ".would mitigate the impact of global inflationary pressures in the short term and help to steer inflation back to the target over the medium term".

Exchange rates are NOT centrepiece of UK monetary policy. It is control of inflation. Exchange rates are consequence of interest rate, inflation and BoP...
Give up Atilla
I don't see it as competition. You see there are many factors, that go to make a cake. But some factors are more significant than others. You need to use your intellect to judge. Dropping names of these people is only an opinion. Not necessarily the right one.

You don't really understand dependancies, impacts and consequences of all these points do you?
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Old Aug 24, 2011, 8:16pm   #23
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there was a great programme about the effects of taxpayer funded stimulus, big governments etc... it also used HK as an example of what can be done. If I find it I'll post.
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Old Aug 24, 2011, 8:51pm   #24
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found it, beause I am a clever person. It's called "Britains trillion pound horror story" and was made by Channel 4. It is still available to view on 4OD.

http://www.channel4.com/programmes/b...ry/4od#3153186

And, since this thread seems to have alot of people on rants, I think this one by Simon from CNBC. Most of it is crap but he's pretty good, and gets it bang on here. (not related)

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Old Aug 24, 2011, 8:51pm   #25
 
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Re: Keynes Vs. Hayek

If the bigwigs of USA, UK, France etc could stop mouthing off on this subject of which they know next to nothing and have a look at the better economic examples like Korea, Singapore. Hong Kong etc. then they might get the ball rolling in the right direction imho.

Gordon Brown, that self proclaimed guru, is now thankfully quiet. So much for his 5 golden principles etc.
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Old Aug 24, 2011, 9:13pm   #26
 
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Re: Keynes Vs. Hayek

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No you understood totally wrong. Your mind is like smash potatoes with a mixture of peas. Keep taking the medicine...
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Obviously if you have debt you wouldn't substitute leisure for work until debt is paid off. Where did this come from...
You stated that when the books are balanced, that you would cut taxes. This equates to cutting income. The debt isn't going to be paid off any time soon, so why would you even consider cutting taxes (income) when times are good? It's the opposite of what you should do, because as you point out debt needs to be paid off. In fact taxes should be raised in good economic times.

"Obviously if you have debt"... well the government does. This is a fact. Any discussion about not having the debt is irrelevant. So again, why cut taxes just because on a particular year, our government might be running a surplus? If you're suggesting that balanced books means there is no total debt either, then your point again is irrelevant, because we can't be in that position for a long time, if ever.

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The point is as people become well off and cash rich by working harder they don't do more hours. They simply work less hard. Someone earning less money works weekends and BHolidays and in some cases two jobs.
Are we having a discussion about what people do, or what people SHOULD do? Suppose times are good and I can earn £20 per hour for work, and I am aware that in a few years I may not be able to earn much or at all, AND I have debts. Then yes I work harder now while times are good and pay off my debt. I don't have any debt, eliminating any debt asap is one of my priorities, and I'll work 3 jobs to pay it off if I need to. Again, as you say some people in that position will work less hard. They may have to suffer the repercussions of that choice. We're all suffering the repercussions now of our governments 'leisure time'

It's interesting that I gave an analogy comparing your philosophy of what governments should do (cutting taxes etc), with an individual in a similar position. And on reading it you realise it's a ridiculous philosophy for the individual. But for some reason your head is clouded with economic concepts, which stop you from seeing the obvious. The policy that you espouse IS ridiculous. Whether it be for an individual working, or for a government.
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Old Aug 24, 2011, 9:20pm   #27
 
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Re: Keynes Vs. Hayek

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I think that the conservatives critique over the period was better to cut taxes and let the private sector allocate resources as opposed to wasteful public spending ..... where the country won't see any future returns
Well my taxes have gone up. PLus with the high inflation, my money has been devalued which compounds the effect. And yet wasteful spending still seems to be going strong.
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Old Aug 24, 2011, 9:27pm   #28
 
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Re: Keynes Vs. Hayek

No doubt ... but it takes time to reform public sector & change the overall culture.

PS ... I am by no means a Tory, but neither am I a Blairite

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Well my taxes have gone up. PLus with the high inflation, my money has been devalued which compounds the effect. And yet wasteful spending still seems to be going strong.
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Old Aug 24, 2011, 9:40pm   #29
 
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Re: Keynes Vs. Hayek

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You stated that when the books are balanced, that you would cut taxes. This equates to cutting income. The debt isn't going to be paid off any time soon, so why would you even consider cutting taxes (income) when times are good? It's the opposite of what you should do, because as you point out debt needs to be paid off. In fact taxes should be raised in good economic times.




Its not as simple as that. Different tax cuts will have different stimulative effects. You may find a situation that through tax cuts you actually stimulate the economy and increase revenue. This is what is referred to as the infamous Laffer curve.

You can for instance pursue a policy similar to Ireland's and attract FDI, foreign investments increased jobs + exports by pursuing a low corporation tax strategy. Indeed the Irish vehemently defended this during their IMF bailout package

Plenty other examples abound ..... but I guess you get the drift
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Old Aug 24, 2011, 9:52pm   #30
 
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Re: Keynes Vs. Hayek

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You stated that when the books are balanced, that you would cut taxes. This equates to cutting income. The debt isn't going to be paid off any time soon, so why would you even consider cutting taxes (income) when times are good? I fail to understand. How can the books be balanced if one has debt. Applies to Gov or Individuals. It's the opposite of what you should do, because as you point out debt needs to be paid off. In fact taxes should be raised in good economic times. Why? If you run large surplus like Japan or China you are taking money out of the system. Balanced books is the objective not surplus or defecits. You may choose to raise taxation in good times and spend in recession but this leads to boom bust scenarios.

"Obviously if you have debt"... well the government does. This is a fact. Any discussion about not having the debt is irrelevant. So again, why cut taxes just because on a particular year, our government might be running a surplus? If you're suggesting that balanced books means there is no total debt either, then your point again is irrelevant, because we can't be in that position for a long time, if ever. Let's apply your arguement to what today. If you spend more than you earn you raise debt. If you then complement that by taxing less you are encouraging greater disparity between earning and expenditure -> even more debt. This is why Keynesian approach fails. Politicians will spend out of recession and continue spending on in a boom cutting taxes. You can't have it both ways.

What is your objection to;
1. Raising taxes
2. Reducing spending

to pay off debt. What part of the logic do you object to. The rest of the geezers banging their drum about lower taxes making people work harder is tosh.

Think how you would respond to the stimulus. (assuming you have no debt but savings too. Would you really work twice as hard)?


Are we having a discussion about what people do, or what people SHOULD do? Suppose times are good and I can earn £20 per hour for work, and I am aware that in a few years I may not be able to earn much or at all, AND I have debts. Then yes I work harder now while times are good and pay off my debt. Look mate - If you have debt you are not well off alright. Have can you class people in debt as well off??? If your assets > liabilities and you are in positive equity then you're ok I don't have any debt, eliminating any debt asap is one of my priorities, and I'll work 3 jobs to pay it off if I need to. Again, as you say some people in that position will work less hard. They may have to suffer the repercussions of that choice. We're all suffering the repercussions now of our governments 'leisure time'. So when will you ease off work? Ask this question will you then continue working as hard. Would more money make you work harder. Taxes go down are you going to say - oh taxes went down I can earn more money. Don't know how much you earn but let's say you earn £50-100K and this range is not unusual to many people in Banking... +bonuses on top. You going to want to work on BH and weekends doing OT?

It's interesting that I gave an analogy comparing your philosophy of what governments should do (cutting taxes etc), with an individual in a similar position. And on reading it you realise it's a ridiculous philosophy for the individual. But for some reason your head is clouded with economic concepts, which stop you from seeing the obvious. The policy that you espouse IS ridiculous. Whether it be for an individual working, or for a government. No you didn't. You conjured up some daft assumption with debt saying you are well off.
Giving up the will to live...

Look policy is simple...

1. Raise Taxes
2. Reduce Spending
3. Mild inflation > interest rates

Hey presto debt paid off in no time.

Anything else is pissing in the wind...
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