The Instigator
walle_ras
Pro (for)
Losing
0 Points
The Contender
ResponsiblyIrresponsible
Con (against)
Winning
24 Points

Austrian VS Keynesian.

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Post Voting Period
The voting period for this debate has ended.
after 4 votes the winner is...
ResponsiblyIrresponsible
Voting Style: Open Point System: 7 Point
Started: 3/5/2015 Category: Economics
Updated: 1 year ago Status: Post Voting Period
Viewed: 851 times Debate No: 71165
Debate Rounds (5)
Comments (2)
Votes (4)

 

walle_ras

Pro

First round is acceptance.
ResponsiblyIrresponsible

Con

I accept, and will be defending the Keynesian School.
Debate Round No. 1
walle_ras

Pro

Thanks for debating with me. First of all the Austrian school of economic thought believes that the less government intervention the better. Inflation, welfare programs, and the subsidies all do more harm than good. For example while a boom follows inflation a bust follows the boom. This can be seen in the 1920s and 30s. A boom and the roaring twenties were quickly followed by the great depression, which was made worse by the New Deal.
The New Deal closely follows the Keynesian school of economic thought. The Keynesians believe that government intervention and spending are necessary for a strong economy. Yet the New Deal failed and in fact worsened the depression. In 1931 unemployment was 16.3%. While in 1939 after two New Deals unemployment was 19.0%. What finally ended the Great Depression was WWII, and the accompanying inflation. This lead to a boom that ended in 1945, as soon as the government stopped counterfeiting.
The Austrians also say that Inflation leads to an unfair advantage. Innocent, hard working, Americans are hurt by the pits and cones that results from inflation. For example the gold rush of the 1850s lead to an immense amount of gold on the west coast, while the east coast was in a depression. The clipper ships became a sort of a pipeline and purchased goods in the cheap east and sold them in the inflated west. Unfortunately, prices began to rise in the east before the economy fully recovered. All who benefited were the clipper captains, not hard working Americans.
In conclusion, the Austrian school of economics is backed up by history. Therefore, vote for me please.
ResponsiblyIrresponsible

Con

Thanks to PRO.


I'm going to rebut PRO's arguments and offer my own contentions within them, as many of them fit within that context.


PRO states, "Inflation, welfare programs, and the subsidies all do more harm than good."


He makes this claim, but then goes on to only address inflation--he doesn't tell us how welfare and subsidies do more harm than good, so we can discredit this class outright. As for his example which follows regarding the roaring Twenties, it completely misses the mark. First, the link between inflation and asset bubbles is not nearly as profound as PRO would have us believe. Dr. Frankel of Harvard University remarks, "[W]hen the global financial crisis hit..it was neither preceded nor followed by an upsurge in inflation" (1). Asset bubbles which lead to busts are a function not of inflationary pressures as much as they underpricing of risk and financial excesses. There are several causes of that: one could be overly loose monetary policy, which is an indictment not on the institution of the Fed itself (for, without it, we would've have a mechanism by which to readily tighten policy should the need arise), but on bad policy, much of which, as Alesina and Summers point out, is a function of political pressure (2).


Another point worth mentioning, as Larry Summers from Harvard has noted, the economy in 2002-2007 did not overheat in spite of the fact that a housing bubble was in the works (3), and there weren't any signs of an inflationary buildup at the time. It's critical, then, to separate out inflation from bubbles, as this association doesn't exist. Underpricing of risk is a real issue, but it can be solved not by laying waste to the institution which has the power to stop it--but rather through more extensive financial oversight and regulation, as measures like Dodd-Frank seek to do. For instance, the Glassed-Steagall Act, enacted in 1933, prevented financial crises for 50 years, but was repealed in 1999, allowing for banks to take on far too much leverage and become "too big to fail" (4). A return to sensible, "boring" banking, therefore, is the solution.


As for the 1920s, the fast majority of the 1920s was actually *deflationary*--which is to say that prices were falling. The average inflation rate was actually zero, and the only year in which there was high inflation was 1920 (5)--and, had the Fed done its job and kept inflation low and stable at around 2 percent, this wouldn't have been an issue. The reason investors tend to underprice risk and take on too much leverage is low interest rates, but low interest rates are spawned not solely by expansionary Fed policy, but by deflationary expectations and low levels of consumption and income--so the fact that the Fed was not expansionary enough in fact contributed to these financial excesses. Further, this propels debt deflation, eroding the value of collateral and exacerbating the deleveraging process.


Further, this data provides evidence of the Fed combatting high inflation in 1920 that followed WWI. The Fed quickly and aggressively tightened policy, induced a recession, and then loosened policy, in order to bring inflation down. This rivalled the 1980s when Paul Volcker aggressively brought down inflation from the 1970s after overly loose policy , structural changes, such as a decline in trend productivity growth and rise in the natural rate of unemployment, and a negative oil price shock brought it to inconceivable levels (7).


But the key point worth emphasizing is that monetary policy has been far more tame since the 1980s, as the Fed has built credibility as an inflation fighter and has anchored inflation expectations at around its 2 percent target. This is important, because inflation expectations are embedded in nominal wage contracts as well as spending and investment decisions, and tend to be self-reinforcing--meaning that, provided that expectations are well-anchored, inflation shouldn't rise above the Fed's target. Research by J. Scott Davis finds evidence for this point, as he manages to show not only that expectations have become more anchored over time, but that they're less susceptible to shocks--meaning that, should an exogenous shock occur, the public trusts the Fed to bring down any inflationary pressures, and thus don't adjust their behavior as though said inflationary pressures will persist indefinitely (8).


PRO goes on to address the New Deal, but he begins with a misconception. First, there isn't a school of thought I'm aware of that actually holds that the government ought not spend a penny, even on public goods like roads, bridges, and police forces. The difference between PRO and I--or at least between these two schools--is stabilization policy: how do we react to recessions, and how do we seek to prevent them? The Keynesian school, based on the historic success of the Glassed-Steagall Act and regulations like it, as well as the malaise that took place upon lifting those regulations, think we should not only have barriers in place to prevent these recessions from happening, but that after they take place, we ought to do something about it.


The reasons the Austrian perspective of "do nothing and allow markets to clear and wages and prices to fall" in response to demand shocks--and both the Depression and the Great Depression were negative demand shocks--is because wages and pric are sticky in the short run. When demand falls, in order for markets to clear and for us to return to full employment, wages and prices must be able to fall. Because they're not able to, much of which is due to contractual obligations quoted in fixed nominal terms, people get laid out. In that phase of a prolonged downturn such as the Depression and the Great Recession which poses a significant impact on household net worth, incomes and livelihoods tend to fall, which drives interest rates close to zero--note that this is a function of market forces, not solely of Fed policy. When this takes place, because real interest rates are equal to nominal rates minus the rate of inflation, any fall in inflation induces a rise in real interest rates, which chokes off investment and consumption, reduces inflation again, and the cycle continues. Even if wages were to fall at zero nominal interest rates, the economy would in fact be worse off--a phenomenon Krugman notes is called the "Paradox of Flexibility" (9). Because markets are unable to solve these deep recessions on their own, and prolonged downturns deal permanent damage to potential output and future growth, as Martin et al., 2014, note (10), it's necessary for the government to intervene in order to mollify those downturns, lest we find ourselves in a debilitating, self-reinforcing deflationary spiral iike Japan in the 1990s, which makes further stabilization policy even harder, meaning that because wages are sticky, people get laid off, inflation falls again, and the cycle continues.


With respect to the unemployment numbers PRO cites, there are several problems. First, he provides no sources for his numbers and he's cherrypicking numbers at whim. Second, estimates of the unemployment rates from those dates by Darby show unemployment at 15.3% in 1931 and 11.3% in 1939 (11), so his numbers are wrong. Third, the New Deal was not nearly as expansionary as we would have wanted, which is why Keynes himself wrote a letter to FDR condemning much of it (12). Fourth, even IF PRO's numbers were true, they lack context--you cannot say that X event followed Y event, and therefore Y caused X. In fact, there was a lot of contractionary policy--the opposite of Keynesian stimulus--during that period. From 1936-1937, the Fed doubled reserve requirements, shrinking the money multiplier (13). Further, in 1936 FDR both raised taxes and cut spending--more anti-Keynesian contractionary policy that, as I explained, will significantly depress output (14). And, of note is that PRO actually *concedes* that WWII ended the Great Depression, lending credence to Krugman's thesis that the New Deal was simple inadequate, and further spending was needed. He concedes that stimulus is effective at demand shocks--akin to conceding this debate.


I haven't much space left, but I'll address the remainder of PRO's arguments as best I can.His argument on inflation is counter-factual. Inflation is a rise in the general price level, but not a rise in the cost of living. Most wages are indexe to various measures of inflation, so if prices rises by 2 percent, wages tend to rise by the same amount, meaning that real wages and the cost of living remain unchanged. Again, sticky prices and wages prevent rapid movements in inflation. Further, in the short run there's a negative relationship between inflation and unemployment, so the notion that people are "hurt" by inflation, on net, is ludicrous (15), as higher inflation is consistent with faster economic activity. Second, his argument on gold is unsourced, so you should disregard it anyway, but it actually demonstrates the volatility of the gold sandard: it's dependant on how much gold you manage to mine, whereas the Fed is actually able to control the supply of money and thus inflation so these types of shocks do not occur. Further, prices would be significantly more volatile under a gold standard, and deflatioanary episodes which dampen growth would be much more frequent. In fact, there was 23 percent less variances in the price level after the Fed launched QE than there was under a gold standard (16).



SOURCES


(1) http://tinyurl.com...


(2) http://tinyurl.com...


(3) http://tinyurl.com...


(4) http://tinyurl.com...


(5) http://tinyurl.com...;


(6) http://tinyurl.com...


(7) http://tinyurl.com...


(8) http://tinyurl.com...


(9) http://tinyurl.com...


(10) http://tinyurl.com...


(11) http://tinyurl.com...


(12) http://tinyurl.com...


(13) http://tinyurl.com...


(14) http://tinyurl.com...


(15) http://tinyurl.com...


Debate Round No. 2
walle_ras

Pro

walle_ras forfeited this round.
ResponsiblyIrresponsible

Con

To summarize my arguments:

(1) PRO's account of the 1920s and the subsequent New Deal are inaccurate and ahistorical--his numbers are false, and he ignores the contractionary policy enacted in the late 1930s which was deleterious to growth, and would be advocated by the Austrian, but not the Keynesian, school.

(2) PRO concedes that WWII spending ended the Great Depression.

(3) The Austrian school disregards the importance of demand shocks, which are critically important because prices and wages are sticky, meaning that a negate demand shock results in self-reinforcing unemployment.

(4) Effective monetary policy post-1980 has produced prices that are 23 times more stable than under a gold standard -- which destroys discretionary monetary policy, enslaves us to the speed at which we can mine gold (based largely on chance), and precludes stabilization policy.

(5) Deflation, as we would have under a gold standard, is highly detrimental because it raises real interest rates, erodes collateral, threatens financial stability, reduces consumption, and leads to mass layoffs.

(6) Regulatory policy, like Glassed-Steagall, is necessary to preventing crises like that of 2007-09.

(7) His account of people being "hurt" by inflation is patently false. Higher inflation is associated with higher economic activity via the short-run Phillips Curve. It only becomes a problem if it becomes out of control, but a myriad of evidence finds that three decades of disciplined central bank has reduced inflation volatility and improved economic decision making.


Vote CON.
Debate Round No. 3
walle_ras

Pro

Venezuelan. I don't have much time.
ResponsiblyIrresponsible

Con

PRO provides no attempt to engage my case at all or to defend his own, and this is after he completely forfeited a round. Since the last round is intended for crystallization, with neither of us making new arguments or new rebuttals, I highly urge you to vote CON.
Debate Round No. 4
walle_ras

Pro

I did in fact engage his arguments. I gave an example of inflation literally killing people. Also, subsidies and welfare merely increases debt. The economy is not a machine, the economy cannot be learned in just one semester. I say that the government cannot play with the hopes and dreams of many just to line the pockets of the wall street executives and bureaucrats. Keynesianism has lead us to where we are now. With tons of spending comes high taxes and tons of debt. The national debt eats 7 jobs each day. The national rescission will only be solved if we listen to the Austrians. When we listen to Keynes we get the housing bubble, and high unemployment. As for world war two that didn't end the depression. What ended the depression was free market capitalism. Sure unemployment fell but we rationed meat, eggs, butter. Is that his idea of a good economy? If everyone was in the military we would have full employment and nothing to eat. So vote PRO. And read Whatever Happened To Penny Candy, by Uncle Eric.
ResponsiblyIrresponsible

Con

PRO is trying to engage in a rebuttal in the last round. Judges, please do not allow him. Further, he has dropped my entire case. Nevertheless, I'm going to take this opportunity to respond to wha he is sayng.

"I did in fact engage his arguments"

No, you did not. You forfeited the round after I posted, and then didn't post an argument in the next round.

"I gave an example of inflation literally killing people."

No, not even close. You gave an example--unsourced--of inflation volatility under a gold standard were prices were contingent on how much gold you could mine. As my source says, there was 23 times more inflation volatility under a gold standard than undr QE. Further, you *never* showed inflation killing people, nor that those harms exist under the current system. Further, you dropped my arguments on the differences between inflation and the cost of living, more stable inflation since the 1980s, and the harms of deflation, which are inevitable under your system. In fact, you dropped my entire case, so the judges can immediately vote CON simply for that.

PRO says, "Also, subsidies and welfare merely increases debt."

This is a new argument. He never engaged either of these in his opening remarks. These obviously need not increase debt, because it's possible to run a balanced budget and fund these things. Further, all Keynesians argue is that at zero nominal interest rates welfare expenditures can boost demand--and these are no different, because they're putting money (generally, though the term "subsidy" is a bit more ambiguous, and could apply either to poor people through the EITC or oil companies, the latter of whom ought not have a subsidy and whom Keynesians would not endorse giving lavish amounts of money to) into the hands of people who will spend it, and stimulating demand is fundamentally important amid a demand shortfall. PRO dropped my argument that the Depression and Great Recession were demand shortfalls, so you can vote CON just on this.

PRO says, "The economy is not a machine, the economy cannot be learned in just one semester."

This is non-topical and irrelevant. The economy is a machine, albeit a volatile one, and it is complex. I never asserted you could learn it in one semester, so this is a complete strawman. I want to apply what we have learned rather than whitewashing it, as Austrians do, by concluding that any efficiency is ipso facto a result of government. That is what PRO's school does, and they've been wrong on everything--whether they were predicting hyperinflation, or higher long-term interest rates, or another bubble, they were wrong. History does not support the Austrian school, and it never will.

PRO says, "I say that the government cannot play with the hopes and dreams of many just to line the pockets of the wall street executives and bureaucrats"

This is sophistry. It's not doing that. We're trying to regulate Wall Street banks so that they don't play with people's hopes and dreams by, say, taking down the global economy. Regulation, as I pointed out last round and as PRO dropped, prevented financial crises for 50 years. Then we lifted those regulations, and got the crash of 2008. There's a lesson to be learned here: regulatory oversight is necessary to prevent financial excesses, and breaking up the banks prevents that we don't need to actually rescue them and can allow them to fail, because they won't be able to take down the entire global economy. In 2008, we had to: if they failed, we all failed.

PRO says, "Keynesianism has lead us to where we are now. With tons of spending comes high taxes and tons of debt."

So much wrong here.

First, lack of regulation and tight monetary upolicy, not "Keynesians," brought us here. Both of us are as far removed from Keynes as you can get.

Second, the federal deficit is declining as the economy is improving and spending cuts have been made.

Third, taxes are lower than at any time in the post-war era--though you'll note that Keynes supported tax cuts to boost aggregate demand.

Fourth, the "debt" was a result primarily of spending during good times under Bush on wars, tax cuts, Medicare Part D, and defense spending--none of which Keynes, who wanted us to pay down debt during good times would have supported. Then the remaining debt was brought on because of falling tax revenue and a deteriorating economy, and the government needed to spend money at a time when no one was in order to stimulate the economy so there wouldn't be even MORE debt, because cutting back, via the paradox of thrift, only would have made the economy much worse. What PRO won't tell you is that he can't cite any negative impacts of that debt. As the economy grow, the debt to GDP ratio stabilizes and we become better able to service it. We're not going to actually "pay it back." That idea is ludicrous and misunderstands the fact that, if we so wanted, we could finance a deficit on our own, though we don't.

The crucial point, is that we should pay down debt when times are good and run up debt when times are bad. Otherwise, you'll create a debt burden you can't carry because the economy will completely tank amid failed austerity, as in Europe.

PRO says, "The national debt eats 7 jobs each day."

This is unsourced, completely false, and positively absurd. There is no mechanism through which that is possible.

PRO says, "The national rescission will only be solved if we listen to the Austrians."

No, the Austrians were responsible for getting us INTO this crash because of their calls for the deregulation which brought it on. Further, the economy has been improving b Keynsian stimulus--not by doing nothing, as the Austrians want.

Further, doing nothing isn't possible: we're at the zero lower bound, so allowing wages and prices to fall will raise real interest rates and reduce investment, lower inflation again, ad infinitum. The economy cannot self-correct at the zero lower bound. PRO's arguments are totally false and ahistorical.

PRO says, "When we listen to Keynes we get the housing bubble, and high unemployment"

This is so totally untrue. If we listened to Keynes--and we didn't--we would've regulated the banks (or refused to deregulate them, really) and prevented this bubble from ever forming in the first place. Then we would've, if we actually had a recession, responded quickly and aggressively rather than dragging our hands as we actually did, allowing the dollar to appreciate, real interest rates to rise--both Austrian policies--which prolonged the recovery.

PRO says, "As for world war two that didn't end the depression. What ended the depression was free market capitalism."

PRO has nothing more than baseless assertions. He has no facts, no logic, nothing of the sort. The problem that led to the Depression was inadequate demand. The New Deal and WWII brought us out. That's a historical act. Market capitalism run amok CAUSED the crisis. Further, contractionary policy in the late 1930s--which PRO would have supported--prolonged the recovery, whereas if we followed a more expansionary, Keynesian policy, it would've been over much faster.

PRO states, "Sure unemployment fell but we rationed meat, eggs, butter."

This is totally untrue, unsourced, and ahistorical. Do not allow PRO's complete lies to sway you.

PRO states, "Is that his idea of a good economy? If everyone was in the military we would have full employment and nothing to eat."

This sounds like a line out of the Keynes-Hayek rap video.

No, this is a strawman. I never said I want to ration anything or that I want everyone in the military and us to have nothing to eat. This is a bogus strawman.

PRO states, "So vote PRO. And read Whatever Happened To Penny Candy, by Uncle Eric."

No, do not vote PRO, because he has not provided a single accurate, logical, or sourced argument and has dropped my entire case. His conception of the crisis of 2008 and the 1930s is incorrect and ahistorical, and he fails to even challenge the accurate account I actually portrayed in my last round of sticky wages and prices inducing recessions following demand shocks.

Therefore, vote for evidence--vote CON.
Debate Round No. 5
2 comments have been posted on this debate. Showing 1 through 2 records.
Posted by ResponsiblyIrresponsible 1 year ago
ResponsiblyIrresponsible
Well, this should be fun.....I'll dive into this when I get out of class tomorrow. Expect my argument to be up by then!
Posted by ResponsiblyIrresponsible 1 year ago
ResponsiblyIrresponsible
Is PRO Austrian? Because I'll totally take this.
4 votes have been placed for this debate. Showing 1 through 4 records.
Vote Placed by Paleophyte 1 year ago
Paleophyte
walle_rasResponsiblyIrresponsibleTied
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Total points awarded:06 
Reasons for voting decision: Pro effectively forfeited two rounds and made new arguments in the last. Pro's arguments were only loosely related to one another or the resolution and were entirely unsourced. Con effectively rebutted and made several well-constructed arguments using good sources. Pro failed to counter these effectively.
Vote Placed by Lee001 1 year ago
Lee001
walle_rasResponsiblyIrresponsibleTied
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Reasons for voting decision: FF
Vote Placed by simonstuffles 1 year ago
simonstuffles
walle_rasResponsiblyIrresponsibleTied
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Reasons for voting decision: Pro forfeits once and fails to to address any of Con's arguments.
Vote Placed by lannan13 1 year ago
lannan13
walle_rasResponsiblyIrresponsibleTied
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Reasons for voting decision: Forfeiture