Keynesian economics vs. Austrian economics

I will now proceed to rebut what I consider his most important points and will give some empirical evidence for Keynesian theory. :"Keynesian Economists believe that there should be a strong government involvement in offsetting the effects of a depression or a recession by stimulating the economy. " This is only true some of the time. While the two most important recessions in recent memory were largely demand-driven, 99% of all recessions in the past 6,000 years were supply driven. Such recessions include famine, disease, etc. Increased demand through printing money or spending by the government would not have increased economic output during such scenarios. Only recessions where there are large amounts of unemployed workers and underutilized capital can be cured through increased demand. Now, regarding the gentlemen's use of Keynes himself, I want to make two points 1: Economics is not about who came up with what. While historians can use the writings of Keynes himself to make judgments about certain topics, economics is primarily concerned with conceptual analysis and empirical evidence, not primary sources. 2: The quote the gentleman gave only talks about reform, not stimulus or recovery. Actions of government like FOMC operations and fiscal stimulus are very different from financial regulatory reform like Dodd-Frank, Glass-Steagall, and the myriad of other regulatory reforms undertaken during the Roosevelt administration. Despite being left-of-center on some macroeconomic issues, I myself am sympathetic to the case against regulation of the banking industry. There is no good reason, for instance, that American banks ought not be able to participate in the securities market. Such regulations put our banks at a competitive disadvantage to other banks and make it more difficult for businesses to obtain the banking services that they need. Now my opponent gives 5 examples that demonstrate the failure of Keynesian economics. I want to address them one at a time. :"During the 1930s, New Deal lawmakers doubled federal spending--yet unemployment remained above 20 percent until World War II. " 1: Unemployment in the United States dropped every year from 1933 to 1937, And GDP grew every year from 1933 to 1937, exactly at the same time that the government increased deficit spending. Curiously, in 1937, the US government dramatically cut deficit spending. At the same time, unemployment increased and the economy entered into recession. So on a superficial level, the case against fiscal stimulus is looking weak. 2: This is not strictly economics. From this analysis we cannot know how much of the change in output was due to government spending, due to increased real money balances, debt deflation, etc. For that we need an econometric model. Greg Mankiw's "Macroeconomics" gives a simple set of econometric models that help illustrate the more complicated aspects of Keynesian economics. By my own back-of-the-envelope calculations, the increased government deficit spending during the 1930s was responsible for an increase of 2% in GDP. By Okun's law, this would only reduce unemployment by about 1%. :"Japan responded to a 1990 recession by passing 10 stimulus spending bills over 8 years (building the largest national debt in the industrialized world)--yet its economy remained stagnant. " Again, by my own calculations, fiscal multipliers are about $1.30 for every increase in government spending, taxes held equal. The deficits of the "lost decade" period by Japan were, for the magnitude of their recession, quite modest. Japan lost almost 1.5 trillion dollars in output, from a 5.3 trillion pre-recession peak. :"In 2001, President Bush responded to a recession by "injecting" tax rebates into the economy. The economy did not respond until two years later, when tax rate reductions were implemented. " First, very basic keynesian theory predicts that tax cuts will not work as well as increases in government spending. The reason for this is that government spending increases economic output directly. However, tax cuts do not. Before any of a tax cut is spent, some of it is saved. This can be demonstrated through a simple Keynesian Cross model, or even better through an IS/LM model that also takes into account how increased interest rates will reduce investment. Second, however, pioneering research into the microeconomics of investment consumption by economists like Irving Fisher, Franco Modigliani, Milton Friedman, and others have yielded one basic, but extremely important insight: The marginal propensity of persons to consume does not depend merely on current income. Rather, consumers are forward looking and examine the trade-offs between consumption and saving. If consumers receive a temporary one-off boost in their income through a stimulus check, they are unlikely to spend that money and will instead save it. This is because consumers will optimize consumption over time, and part of that includes spreading consumption out over many years through saving or borrowing. Third, finally, Bush's own economists do not say that the recovery would not have happened without tax cuts. Bush's chairman of of his council of economic advisors said that his 2001 and 2003 tax cuts created 1.5 million jobs and increased GDP by 2 percentage points. :"In 2008, President Bush tried to head off the current recession with another round of tax rebates. The recession continued to worsen. " This might be a problem for Keynesian economics circa 1930, but we have much more nuanced models of consumer behavior that explain this. :"Now, the most recent $787 billion stimulus bill was intended to keep the unemployment rate from exceeding 8 percent. In November 2009 it topped 10 percent. " Simple ignorance on the part of Obama's economic team. :"These consumers and investors feel more secure when both spending and taxes are low. " The argument we are having is over short run economic fluctuations, not economic growth per se. There is a strong consensus among economists on what causes economic growth. Further, it is not necessarily the case that investors are more confident when spending and taxes are low. If taxes are low, but there are large budget deficits, investors will face very large borrowing costs because deficits crowd out investment in the long run. Investors will only invest when the marginal productivity of capital is more than the rental price of capital. at the margin, when interest rates increase, some investors will not invest. Therefore, low taxes can easily cause an economy to contract. :"Here is some empirical evidence for this:" Austerity can help in the long run, when interest rates are free to equilibrate supply and demand for savings. However, in the short run, this does not happen. Having responded to my opponent, I want to reiterate the simple theoretical case for Keynesian economics. MV=PY, or Money times velocity equals price times quantity of transactions. Necessarily, if prices are not free to adjust, decreases in money supply or velocity will cause decreases in output. Decreases in velocity are equivalent to decreases in aggregate demand for goods and services. Decreases in demand for goods and services can be caused by an increase in demand for liquid assets, like cash, and these increases can be caused by any number of factors. In conclusion, Keynesian economics is theoretically and empirically sound. I have to give credit to Drs Thomas Sowell, Paul Krugman, and N. Gregory Mankiw. On economic matters, These three gentlemen are easily the three most influential authors I've ever read.