Capturing the Success of Non-traditional Monetary Policy: Are BAA Interest Rates a Good Metric?

While President Obama is about to sign a bill that provides significant fiscal stimulus for the ailing U.S. economy, most economists would likely argue that this is a necessary but not sufficient condition for restoring full employment. Ben Bernanke made the following observations on January 13, 2009:

The abrupt end of the credit boom has had widespread financial and economic ramifications. Financial institutions have seen their capital depleted by losses and writedowns and their balance sheets clogged by complex credit products and other illiquid assets of uncertain value. Rising credit risks and intense risk aversion have pushed credit spreads to unprecedented levels, and markets for securitized assets, except for mortgage securities with government guarantees, have shut down. Heightened systemic risks, falling asset values, and tightening credit have in turn taken a heavy toll on business and consumer confidence and precipitated a sharp slowing in global economic activity. The damage, in terms of lost output, lost jobs, and lost wealth, is already substantial.

We noted that the credit crunch is consistent with being in a liquidity trap as Paul Krugman also noted:

conventional monetary policy has lost effectiveness. Yes, there are other things the Fed could do — and it’s doing them, on an awesome scale. But they’re controversial, precisely because, unlike conventional monetary policy, they involve picking and choosing among potentially risky investments.

Bernanke also noted:

The Federal Reserve has responded aggressively to the crisis since its emergence in the summer of 2007 ... As indications of economic weakness proliferated, the Committee continued to respond, bringing down its target for the federal funds rate by a cumulative 325 basis points by the spring of 2008. In historical comparison, this policy response stands out as exceptionally rapid and proactive … Although the federal funds rate is now close to zero, the Federal Reserve retains a number of policy tools that can be deployed against the crisis ... Other than policies tied to current and expected future values of the overnight interest rate, the Federal Reserve has--and indeed, has been actively using--a range of policy tools to provide direct support to credit markets and thus to the broader economy. As I will elaborate, I find it useful to divide these tools into three groups. Although these sets of tools differ in important respects, they have one aspect in common: They all make use of the asset side of the Federal Reserve's balance sheet. That is, each involves the Fed's authorities to extend credit or purchase securities.

The chairman of the Federal Reserve went on to describing in some detail these non-traditional monetary policy tools. The fact that interest rates on short-term government debt fell from around 5 percent in early 2007 to near zero now – with longer-term rates falling from around 5 percent to around 3 percent at the end of 2008 is testimony that the Federal Reserve did all it could do using conventional monetary policy and yet interest rates on BAA rated corporate debt rose from just over 6 percent as of late 2006 to around 9.5 percent towards the end of October 2008. While the beginning of the recession preceded the enormous spike in interest rates on BAA rated corporate debt, the panic signals over the credit crunch were the result of the unprecedented surge in credit spreads towards the end of 2008.

The title of this post suggests that watching the BAA interest rate may be a decent proxy for the success of non-traditional monetary policy. It is a metric that can be followed on a daily basis and is readily understood. If the proximate problem is high credit spreads and if investment demand is sensitive to the BAA interest rate, then this metric should be closely related to the policy problem and how it gets transmitted to the real economy.

So if one accepts my premises that the BAA interest rate is a good metric for the success of non-traditional monetary policy – how are we doing? I would submit that we have seen some – but not nearly enough – success. After all, an interest rate of 7.9 percent is not as burdensome as an interest rate of 9.5 percent. However, these interest rates are still quite high.

An Important Question (that is never asked)

by the Sandwichman

Brad DeLong wrote: "The question of should Americans be working less, and why aren't we working less already, is an important one. It has nothing to do with whether the Obama stimulus is doomed to fail:"

I disagree. Harvey's argument is not that there is a technical imposibility to a stimulus that worked (the Treasury view) but that there are political obstacles to implementing a stimulus that is large enough and appropriately targeted. My claim is that one of the political obstacles to the appropriate targeting of a stimulus is the systematic exclusion of one of the three "ingredients of a cure" prescribed by Keynes.

Keynes was very explicit. He viewed investment as first aid. He viewed work time reduction as the ultimate solution. But political Keynesianism over the past 60 years has applied first aid over and over again and has systematically excluded Keynes's ultimate solution. Now if Brad thinks Keynes was wrong, that's another matter. Show why. But you can't just assert that it has "nothing to do with whether the Obama stimulus is doomed to fail". In medicine, you don't keep applying first aid over and over and never address the fundamental problem. Is it not the same in economics?

David Harvey vs. Brad DeLong Dustup!

In a post that Andrew Jackson, social and economic policy director of the Canadian Labour Congress, calls "absolutely brilliant and compelling," David Harvey argues that the stimulus package is bound to fail. On the one hand, the current package is not big enough and on the other hand, the US can't finance a big enough stimulus package because of its recent debt history. Brad DeLong calls Harvey's argument "intellectual masturbation." To which Harvey responds, lamenting the arrogance of neoclassical economists.

And now, the Sandwichman jumps into the fray with his two cents worth...

A distinction needs to be made between “Keynesianism” (even Harvey’s “strong”, “true” or “full-fledged” Keynesianism) and what Keynes actually thought about economic stimulus and full employment.

Keynes viewed government investment in infrastructure as “only one particular application of an intellectual theorem”. The other two were consumption and reduction of the hours of work. We hear about the first two applications, consumption and investment, incessantly but it was the third strategy, working less, that Keynes pronounced the “ultimate solution” to full employment. See his 1943 Treasury Department memorandum on “The Long Term Problem of Full Employment” and his 1945 letter to the poet, T.S. Eliot.

Keynes was concerned with full employment, not with economic growth. It was his successors who shifted the emphasis from the one to the other. They did so, I would argue, to suit their mathematical models more than anything. Be that as it may, in the 1970s Fred Hirsch showed how economic growth drained resources from both non-market activities and even from final consumption goods. Increased competition for scarce positional goods diverted resources into intermediate goods.

There remains a taboo against talking about work-time reduction as a possible response to the crisis. Dean Baker (he who ‘called’ the housing bubble in 2002) wrote a pair of op-ed pieces a few weeks ago in the Guardian and the New York Daily News calling for tax breaks for work time reduction. I have seen no uptake of Dean’s suggestion from the stable of liberal Keynesian economists — Krugman, et. al.

The Proposition That the GOP Cares About the Burden of the Debt is Bogus

Mark Thoma listened to John McCain so we did not have to:

I saw Senator McCain on CNN talking about how the stimulus package is, essentially, reaching into the pockets of future generations and transferring their wealth to the present generation.

Mark does a nice job of noting why this rhetoric is misplaced. Jeff Frankel has a related and interesting post noting that while the fiscal stimulus may not be enough to get us back to full employment, it may raise danger signals in international financial markets:

The 2009 fiscal-year deficit is already expected to exceed $1.2 trillion, so we are talking about deficits thereafter that could surpass 10 per cent of GDP. This is far above the levels that are considered danger signals when they come from any other country. Until now, the US has not been “any other country;” The rest of the world has been willing to finance American profligacy cheerfully. But there have already been signs in the last few weeks that the prospect of this much Treasury debt coming onto the markets is already beginning to push bond prices down and long-term interest rates up. My feeling is that if the current stimulus package were to break the $1 trillion mark, it might truly alarm international financial investors, who would in that case stop acquiring dollar assets, thus precipitating the hard landing of the dollar that so many of us have feared for so long. In those circumstances, the Fed would lose the ability to keep interest rates low, and we could be in even worse trouble than today. Everything would be different if we had spent the last 8 years preserving the budget surpluses that Bill Clinton bequeathed to George Bush. Then we would have paid down a big share of the national debt by now, instead of doubling it. We would be in a strong enough fiscal position to undertake the expansion today that we really need. In that light it is ironic, to say the least, that the politicians who are warning against the size of the stimulus bill (”generational theft”), particularly the Congressmen who are voting against it, are mostly the same Republicans who supported the original fiscal policies that gave us the doubling of the national debt: the huge long-term tax cuts of 2001 and 2003 and the greatly accelerated rate of government spending. What we need now is a fiscal policy that maximizes short-run demand stimulus relative to long-run damage to the national debt. Lots of bang for the buck. The Republicans supported fiscal policies that did the opposite. Lots of buck for the bang.

While Jeff is correct about the hypocrisy of the modern Republican Party, I think he could have gone further. Not only did these Republicans support the Bush43 increase in the debt to GDP ratio, they still praise the fiscal policies of the Reagan-Bush41 era, a period when the debt to GDP ratio doubled.

I would also beg to differ that a transitional period where the debt to GDP ratio rose as a result of a short-term fiscal stimulus that was necessary to avoid a major recession will lead to fiscal ruin. We have seen much larger increases in the debt to GDP ratio before without fiscal ruin but as Robert Barro noted in his On the Determination of the Public Debt (Journal of Political Economy, 1979), U.S. policymakers before the advent of the modern Republican Party was committed to retiring public debt over time.

In 1993, the Clinton Administration passed a deficit reduction package that included tax increases. Unfortunately – he got even less support from Senate and Congressional Republicans than President Obama received for the legislation he is about to sign. David Waldman reminds of the incredibly petty and stupid things said by Republican Congressional leaders in 1993. These leaders did not care about fiscal responsibility back then and their newly found devotion to fiscal austerity today sounds insincere. But as Barro’s 1979 paper suggests – we eventually need to get back to the pre-Reagan fiscal stance of using fiscal stimulus only during times of recessions or other national emergencies. We will not get there unless the Republican Party changes its ways or disappears as a force in American politics.

Nassim Nicholas Taleb and I Make Peace

I finally received an email reply from Nassim Nicholas Taleb. He wrote, "you are off the hook" I checked, and the innaccurate (and insulting) material that he had on his website about me has been removed. I thank him for reconsidering the matter and correcting the situation. While I have been critical of him on several counts, I am largely in agreement with his analysis of the current situation and the broader problem of "black swans," or to use the more conventional terminology of Keynes and Knight, fundamental uncertainty. I also repeat that his books contain much interesting information and are fun to read.

Regarding barbell investment strategies, there is no single one that necessarily will do well all the time, and Taleb has stated that. He has indeed more fundamentally made the point that we all must keep this profound degree of uncertainty in mind. I also remind that there are many different forms that barbell strategies can take, and that one might be doing well even as others might not be doing well. In any case, I welcome an end to this feud that probably should never have occurred in the first place.

Sandwichbam

by the Sandwichman


S'man's cookie fortune from Friday night: "The world will soon be ready to receive your talents."

Minute Dream

By the Sandwichman

I woke up this morning and glanced over at the clock. It was 7:08. Then I dozed off again and started to dream. I dreamed I turned on a light and the light bulb burned out. I woke up and looked at the clock. It was 7:09.

Claiming the Fiscal Stimulus Bill Failed

Let’s start with a sensible account from David Espo:

In a major victory for President Barack Obama, Democrats muscled a huge, $787 billion stimulus bill through Congress late Friday night in hopes of combating the worst economic crisis since the Great Depression. Republican opposition was nearly unanimous. The Senate approved the measure 60-38 with three GOP moderates providing crucial support. Hours earlier, the House vote was 246-183, with all Republicans opposed to the package of tax cuts and federal spending that Obama has made the centerpiece of his plan for economic recovery. The president could sign the bill as early as next week, less than a month after taking office. Supporters said the legislation would save or create 3.5 million jobs ... Vigorously disagreeing, House Republican leader John Boehner of Ohio dumped a copy of the 1,071-page bill to the floor in a gesture of contempt. "The bill that was about jobs, jobs, jobs has turned into a bill that's about spending, spending, spending," he said ... Republicans complained they had been locked out of the early decisions, and Democrats countered that Boehner had tried to rally opposition even before the president met privately with the GOP rank and file.

Didn’t Rush Limbaugh say early on in the next Administration that he wanted our new President to fail? Boehner marshaled the House Republicans to follow Limbaugh’s lead even if it meant endorsing Herbert Hoover economics. And of course Jonah Goldberg had to follow suit:

The stimulus bill has failed. Barack Obama has failed. The Trojan Horse of Hope and Change crashed into the guardrail of reality, revealing an army of ideologues and activists inside. Now, before I continue, let me say that Barack Obama will still be popular, he will still get things done, and he will declare victory after signing a stimulus bill. But Obama’s moment is gone, and politics is about nothing if not moments. The stimulus bill was a bridge too far, an overplayed hand, ten pounds of manure in a five-pound bag. The legislation’s primary duty was never to stimulate the economy, but to stimulate the growth of government, the scope of the state. By spending hundreds of billions on things that have absolutely nothing to do with providing an immediate stimulus for the economy, Democrats hoped to make a down payment on their dream government.

The only manure I smell is the nonsense emanating from rightwing hacks such as Boehner and Goldberg. The main problem with the U.S. economy is a lack of aggregate demand - but these economic know nothings cannot understand that increasing aggregate demand via more government spending is indeed stimulus that will create more jobs. Brad DeLong makes this point:

Had John McCain won the presidential election last November, a similarly-sized fiscal boost bill--more tax cuts, fewer spending increases, tilted toward the rich rather than toward the poor and middle class--would now be moving through the congress with genuine bipartisan support. But Barack Obama won the presidency. And so the Republicans decide to try to make America a poorer nation with higher unemployment: 246-183-1 in the House, with not a single Republican representative voting yes

When Bill Clinton first became President, certain Republicans such as Bob Barr were hoping to impeach him on just about anything, which eventually became known as the Monica Lewinsky scandal – all gift wrapped by Jonah Goldberg’s mother. It seems that these hacks are still putting partisan politics ahead of the nation’s interest even as we desperately something to reverse this recession.

Update: Rush Limbaugh wants the stimulus bill to fail – so do certain GP Congressman. It follows that these rightwing hacks actually want this recession to continue. Those of you who are suffering from being unemployed – guess this in mind.

Looting Social Security with the Old Bait & Switch Fraud

William Greider is a saint:

These players are promoting a tricky way to whack Social Security benefits, but to do it behind closed doors so the public cannot see what's happening or figure out which politicians to blame. The essential transaction would amount to misappropriating the trillions in Social Security taxes that workers have paid to finance their retirement benefits. This swindle is portrayed as "fiscal reform." In fact, it's the political equivalent of bait-and-switch fraud ... Will Obama take the bait? Surely not. The new president has been clear and consistent about Social Security, as a candidate and since his election. The program's financing is basically sound, he has explained, and can be assured far into the future by making only modest adjustments. But Obama is also playing footsie with the conservative advocates of "entitlement reform" (their euphemism for cutting benefits). The president wants the corporate establishment's support on many other important matters, and he recently promised to hold a "fiscal responsibility summit" to examine the long-term costs of entitlements. That forum could set the trap for a "bipartisan compromise" that may become difficult for Obama to resist, given the burgeoning deficit ... The Social Security fight could become a defining test for "new politics" in the Obama era. Will Americans at large step up and make themselves heard, not to attack Obama but to protect his presidency from the political forces aligned with Wall Street interests? This fight can be won if people everywhere raise a mighty din--hands off our Social Security money!--and do it now, before the deal gains momentum.

Yes, let’s insist that the President echo the call to keep those grubby hands off of our Social Security Trust Fund reserves. Greider reminds us of the 1983 payroll tax increases and the double role they have played in American politics ever since:

To understand the mechanics of this attempted swindle, you have to roll back twenty-five years, to the time the game of bait and switch began, under Ronald Reagan. The Gipper's great legislative victory in 1981--enacting massive tax cuts for corporations and upper-income ranks--launched the era of swollen federal budget deficits. But their economic impact was offset by the huge tax increase that Congress imposed on working people in 1983: the payroll tax rate supporting Social Security--the weekly FICA deduction--was raised substantially, supposedly to create a nest egg for when the baby boom generation reached retirement age. A blue-ribbon commission chaired by Alan Greenspan worked out the terms, then both parties signed on. Since there was no partisan fight, the press portrayed the massive tax increase as a noncontroversial "good government" reform. Ever since, working Americans have paid higher taxes on their labor wages--12.4 percent, split between employees and employers. As a result, the Social Security system has accumulated a vast surplus--now around $2.5 trillion and growing. This is the money pot the establishment wants to grab, claiming the government can no longer afford to keep the promise it made to workers twenty-five years ago. Actually, the government has already spent their money. Every year the Treasury has borrowed the surplus revenue collected by Social Security and spent the money on other purposes--whatever presidents and Congress decide, including more tax cuts for monied interests. The Social Security surplus thus makes the federal deficits seem smaller than they are--around $200 billion a year smaller. Each time the government dipped into the Social Security trust fund this way, it issued a legal obligation to pay back the money with interest whenever Social Security needed it to pay benefits.

Ah – the old fight about whether to talk about the “unified” deficit versus the “general fund” deficit. Just call me a general fund deficit type who thinks that this run-up in the total Federal debt to GDP ratio should later be reduced on tax increases on very high income groups and not backdoor employment tax increases disguised as reductions in Social Security benefits that exceed any promised reductions in payroll taxes in present value terms. Didn’t we already go through this nonsense four years ago?

Australia’s catastrophic Summer - Update

See previous story describing the background to the massive fire outbreaks in Southern Australia.

World media have focused a lot of attention on the enormity of the tragedy but have failed to mention that all levels of government in Australia have imposed the widescale spread of industrial tree plantations in the very areas most affected by these fires. The fires in Victoria actually began in a pine and eucalyptus monocultures near the township of Churchill.

Tasmania, however, is the state with the highest concentration of these massive fire liabilities. The issue of fire risk has been highlighted in Federal Senate inquiries and many other forums for well over a decade. Without success.

I am personally affected by this neoliberal industry and the related culpability of our so-called regulatory authorities. See 'Twelve years of pain'

There will be no resolution to, nor prevention of these tragedies until Australian governance is fixed at all levels.

Karl Rove Misrepresents CBO Estimate of the Fiscal Stimulus

Can’t the WSJ find someone other than Karl Rove to write op-eds on economics?

They also asked the Congressional Budget Office if the Democratic Senate bill was actually stimulative. The nonpartisan CBO found it would have a "negligible" impact on jobs by 2011 and hurt economic growth and prosperity over the next decade.

My most estimates, the bill that will finally be hammered out will be less stimulative than the original Senate bill. Brad DeLong has a nice summary of the short-term impacts as estimated by the CBO. Without the stimulus, CBO estimates that the GDP gap in 2011 will be 4.1% and the unemployment rate will be 7.5%. With this somewhat less stimulative bill, the estimated gap will be between 2.9% and 3.7% and the unemployment rate will be between 6.5% and 7.2% - all depending on whether one uses the low estimate of the effect of the plan versus the high estimate. That is not a negligible short-term impact.

Steve Benen has more on the political nonsense being peddled by Mr. Rove. As far as the long-run impact of the current fiscal stimulus - Tim Fernholz is on the right track especially as he notes that the rightwing pundits have been misrepresenting what the CBO is saying but didn’t we cover this one already?

Even the most ardent Keynesian would concede that long-term fiscal stimulus leads to long-term crowding-out. Only those pseudo-economists who were apologists for the Bush43 fiscal stimulus would try to deny this. In my view, the ideal fiscal stance would be short-term stimulus followed by long-term fiscal restraint once the economy approached full employment. This was the policy of the Clinton Administration as I understand it – it is what is being recommended to President Obama by his economic advisors.

Update: Ed Rollins joins in the criticism of this fiscal stimulus by suggesting that the President has not been exactly truthful. Why? Because Rollins thinks that the Federal government is too much in debt to be going for fiscal stimulus. Somehow – the stupidity of certain rightwingers have given them license to call the President a liar?

What Congress forgot to ask the bankers

Yesterday when the bankers were telling Congress how much they have been lending, I don't know of anyone who asked them how much of these loans in response to pre-existing lines of credit. One of the ways banks try to get fees is to collect interest on lines of credit -- money that they have not yet lent, but stand willing to lend in the future. Banks are contractually obligated to fulfill these loans.

With credit tightening, many borrowers have taken advantage of these lines of credit. Doing so, they give the impression that banks are increasing their loans, but the arrangements for these loans, in effect, may have been made quite some time ago.

CNN Pundits Claim Poor Have a Zero Marginal Propensity to Consume

Full disclosure – every time I have to endure listening to Ali Velshi opine on economic matters – I want to scream. So before we discuss his latest, let’s let Brad DeLong have the microphone:

With the exception of the wingnuts in the neo-Hooverite caucus, both Republican and Democratic economic advisors were telling their legislative principles by late fall that a fiscal boost would be a good thing--Republican economists saying that they would prefer tax cuts targetted toward people with a high propensity to spend out of income, Democratic economists saying that they would prefer direct spending on shovel-ready projects. Barack Obama proposes a bipartisan compromise: do some tax cuts and some spending, with a 35-65 split because, after all, the Democrats won the election.

That is a very nice summary of the political debate so which people have a high propensity to spend. Well – don’t listen to a CNN pundit:

On No Bias, No Bull, Brown asserted: "Food stamps, unemployment benefits not likely to stimulate the economy because these are the people who are in the most dire straits spending the bare minimum." After Velshi replied, "That's right," Brown stated, "So the stimulus part comes from the big spending package that we're going to talk about." Velshi responded: "Right. And, you know, maybe the $500 or $1,000 you get per family. But you're absolutely right. There are some of these things that are more about recovery than stimulus. The administration likes to call it a recovery bill. If you're giving food stamps and you're giving unemployment benefits, that's not stimulus; that's simply helping people out who are in a lot of trouble."

I’ll grant that a household with low income will not be consuming as much as say Bill Gates and his family. But the issue is not the absolute level of consumption per person but rather the marginal propensity to consume, that is, how much of each extra dollar of disposable income will be spent. Ricardian Equivalence types – that is those permanent income types who also impose the long-run government budget constraint in their consumption model – might tell you that tax cuts for those who are not borrowing constrained will not increase consumption. But when Campbell Brown talks about “people who are in the most dire straits”, I would suggest she is talking about people who are borrowing constrained.

If Ali Velshi understood economics, he would have told Ms. Brown that the issue is the marginal propensity to consume, which would imply she had this exactly backwards. Then again – Ali is not an economist getting his degree in religious studies. So why does CNN put this economic know nothing on as some sort of expert in business and economics?

The Role Economists Play in the Obama White House as Compared to the Last 8 Years

The Economist makes an interesting observation:

Mr Obama continues to seek sensible economic advice. It was emblematic of George Bush’s low regard for economists that in 2003 he moved the Council of Economic Advisers (CEA), the administration’s in-house think-tank, from the White House complex to a drab office building a block away. Mr Obama has moved it back. Each morning he gets a memo prepared the previous night by the CEA and the Treasury, then spends about 30 minutes with his economic team. In regular attendance are Mr Summers, Mr Geithner, Peter Orszag (the budget director) and Christina Romer, who chairs the CEA.

I wonder how this compares to how things operated when Bill Clinton was President.

Hookah-Smoking Caterpillar Keynesians II

by the Sandwichman

In the previous post, the Sandwichman concluded that Humpty-Dumpty hookah-smoking Caterpillar Keynesianism is not as daft, at least, as the alternatives offered by the likes of Niall Ferguson and Peter Schiff. It remained to wring a bit more daftness out of political Keynesianism.

Keynes, it has been pointed out, was not a Keynesian. What passes for Keynesianism these days is a hodge-podge of public-spending agendas upheld by opportunistic textual exegesis. The New Deal functions as a flexible exemplar for public spending. The New Deal was both Keynesianish and yet not Keynesian enough. Actually, it was ("hey, hey") LBJ and Tricky Dick, not the sainted Franklin Delano Roosevelt, who put full-fledged political Keynesianism to the test.

At the end of A Living Wage, Lawrence Glickman offered an interpretation of the New Deal that challenges traditional assumptions. Instead of viewing the focus on sustaining consumption as originating with the New Deal and Keynes, Glickman traced it back to the "living wage" ideology of labor that had evolved over the final three decades of the 19th century. It wasn't the ideas that were new, it was only their (relative) respectability.

Glickman's account of that evolution in labor ideas centered on the distinction between a traditional "producerist" ideology and the emerging consumerist ideology that characterized Samuel Gompers' American Federation of Labor. When asked the question, "what does labor want?" Gompers famously replied,

"We want more schoolhouses and less jails; more books and less arsenals; more learning and less vice; more leisure and less greed; more justice and less revenge; in fact, more of the opportunities to cultivate our better natures, to make manhood more noble, womanhood more beautiful, and childhood more happy and bright."

This is sometimes abbreviated as "More!" or "More, more, more..." The New Deal thus incorporated labor movement ideas about an American 'standard of living'. Organized labor, in turn, appropriated a technocratic, "Keynesian" language regarding 'purchasing power' and 'aggregate demand'. Even big business got into the act with the National Association of Manufacturer's billboard campaign trumpeting the world's highest wages and standard of living and the world's shortest working hours.

All this is saying is that the actual political constituency for fiscal stimulus is quite a different matter than adherence to an intellectual construct. As World War II drew to a close there was near unanimity among economists, politicians and the general public in favor of doing whatever needed to be done to maintain full employment (which is not to say economic growth).

If the goal of Keynesianism was to "save capitalism from the stupidity of its managers", who would spare the saviors from the hubris of their expertise? According to Fred Hirsch:

...Keynes's interpretation of managed capitalism retains a vital importance precisely because of its unquestioning reliance on obligations and instincts deriving from an earlier preindustrial culture. It is in the complete Keynesian system that we can best observe the limits of the guided market, because Keynes took for granted supportive characteristics that his own system could not preserve but that the purer system of his successors in economic liberalism ignored.

The Sandwichman's crucial amendment to Hirsh's view is to point out that the cultural ground for those non-market obligations and instincts need not be "preindustrial" but can as readily be extra- or counter- industrial, as in the 19th century labor movement's notion of a living wage. What is important, though is that these obligations and instincts operate outside any "laws of the market", even as modified by the intervention of the state. This means you, 'aggregate demand' and 'multiplier'.

The Achilles heel of Political Keynesianism resides not in the pseudo-economic objection that "the money has to come from somewhere" but in the fuzzier notion that the motivating obligations and instincts have to come from somewhere other than the market. Keynesianism cannot succeed -- as its modern day adherents delude themselves it can -- as a technocratic exercise in estimating multipliers and shortfalls in capacity utilization. The technocratic, mathematical defense of fiscal stimulus policy consents to a rhetorical deck of cards where the reactionary clowns hold all the jokers.

"To live outside the law, you must be honest." That includes living outside the metaphorical "laws" of classical political economy.