Obama and the Keynesians Total Fail

Posted by Jeff Carter
on December 17th, 2011

Caught this article in BI today. The lack of analysis and depth of thought is frightening. In March of 2009, we embarked on our latest Keynesian experiment. Previous to this one, we had tried Keynesian schemes before. They almost never work. The author also fails to look past the comparison of the Austrian School and Keynesian school of economics. There is another more rigid school, the Chicago School.

Without delving into the petty differences of each, the Austrian and Chicago school are similar, but the Chicago school has a lot more math to it. It’s more data and scientific method driven. The Keynesian school relies on the fundamental principles of the IS-LM curve. It’s more of an art form with than the Chicago school, which relies on a classical mathematical model for prediction.

The first time we tinkered with Keynes was the Great Depression. Instead of rescuing the American people, Keynesian economics made us poorer and prolonged the downturn. Keynesian advocates like to say that it was World War Two that brought us out of the Depression. Even today, Krugman was advocating for space invaders to get us to ramp up spending and bring us out of this prolonged recession.

Nobel Laureate Robert Lucas and Leonard Rapping calculated on the basis of just expansionary Federal Reserve policy that the economy should have been back to normal by 1935. So what stopped a blockbuster recovery from ever starting? The New Deal.

Please try and disabuse yourself of some horrible logic and psychological constructs. World War Two did not bring the US out of the Great Depression. Saying that ignores the opportunity costs of war, and turns a blind eye to the decimation of human capital that took place from 1939-1945. The New Deal was a raw deal for the American people since it ignored all precepts of classical economic thought. Demand curves always slope down and many of the New Deal programs threw that precept to the wind. Believing the pablum that war or government spending gets you out of economic downturns is simplistic, and flimsy logic at best. At it’s worst it becomes psychologically damaging and turns government into a over arching and domineering beast. Thinking this way also shows that you haven’t thought through all the issues. Intellectually bankrupt.

The whole crux of the advocacy of the Keynesian system is the multiplier. They always hypothesize a multiplier effect of more than 1.0, but below 2.0. This means that for every government dollar spent, it will multiply through the economy in a factor greater than 1.

That’s where the Keynesian argument falls on its face. The multiplier effect of government spending a dollar is always less than 1. It is actually much closer to zero, and in some cases negative. Where do those government dollars come from? They don’t majestically come out of thin air. There is no money tree planted in the nation’s capital that we simply can pick dollars from and send out to people to spend.

The dollars that fund our government come from the American taxpayer. Period. The End. The government creates debt that must be paid by the productivity of the American taxpayer.

There is an opportunity cost to taking that dollar away from the American taxpayer. Individuals can be more productive using their own dollars for their own means than the government can using centrally planned systems and spending it for us.

In March of 2009, we spent more than any government spent before. Yet, today, we are still in the doldrums. Instead of spending, suppose we had cut taxes and cut spending by the same amount. Because it’s a mathematical fact that cutting taxes does stimulate in a multiple greater than 1, we would have been out of the deep economic ditch we are in, and would have had less debt to show for it.

Critics will point to exceptions. Defense, big infrastructure projects etc. And because of transaction costs, it is better to aggregate together, pay taxes and off load that sort of thing to the government. However, when it comes to private investing, insurance, individual care, education, and retirement the government is a horrible manager of funds. There is always waste, what economics professors would categorize as dead weight loss when the government does things that are better left to the efforts of private individuals.

That is really the crux of the election debate in 2012. Do you want a nanny state that takes care of everything, decides for you, and directs you-and will cause the country to continue going down the path of a death spiral of debt? Or do you want to dismantle the albatross and return sovereignty to private individuals that are all trying to maximize their gains. The act of millions of us trying to make life better for ourselves individually will translate into more production and raise the standard of living for us all.

Monolith versus The Millions. The millions are always more efficient and work faster.

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