``The Marxians, Keynesians, Veblenians, and other "progressives" know very well that their doctrines cannot stand any critical analysis. They are fully aware of the fact that one representative of sound economics in their department would nullify all their teachings. This is why they are so anxious to bar every "orthodox" from access to the strongholds of their "un-orthodoxy."- Ludwig von Mises, Economic Teaching at the Universities
Here are 10 reasons why Keynesian stimulus won’t help pull the US out of its economic miseries.
1. Money will have to be paid by someone.
From Wall Street Journal Street, ``Whether or not you think new spending will stimulate the economy, the one undeniable truth is that this money has to come from somewhere, which means that it is borrowed or taxed from the private economy. This spending blowout is all but guaranteeing huge future tax increases, and anyone who thinks only the rich will pay is living an illusion.”
There is NO free lunch. Stimulus will have to be paid by higher taxes, increased borrowing or inflation.
2. Incoherent plan addled by too many objectives.
From the New York Times, ``Some caution that President Obama’s proposals try to achieve too many objectives — for example, broader health care coverage and energy efficiency — at the expense of focusing tax dollars on the core issue of job creation. By this argument, more should be spent on things like infrastructure repair, either directly or by channeling money to the states for projects now delayed for lack of adequate tax revenue.
``Others argue that the best bang for the buck would come from a stimulus package devoted mainly to tax cuts rather than public investment. The breakdown in the $819 billion bill that the House approved on Wednesday and the Senate will take up next week is two-thirds spending, one-third tax cuts.
From the Washington Post, ``All of those ideas may have merit, but why do they belong in an emergency measure aimed to kick-start the economy?”
Acts of desperation to come up with messianic one off solutions will only lead to more extravagance, leakages and ineffective policies all at the expense of the taxpayers.
3. Ambiguous “targeting” and chronic “deficits”.
From Henry Hazlitt in Man vs. The Welfare State (all bold highlights mine),
``The reason the Keynesian medicine can work — under special conditions and for short periods — is that by increasing monetary demand and prices it may increase both sales and profit margins, and so restore production and employment. Yet this could be done even more effectively — and without the poisonous side effects and aftereffects — by restoring freedom of competition and individual coordination of prices and wages.
``The Keynesians think in terms of aggregates. Their remedy is to increase the total money supply, and thereby to bring the price "level" sufficiently above the wage "level" to restore or maintain profit margins and so keep the wheels of industry spinning at full speed.
``This remedy is defective in two respects. It tacitly assumes that there is a uniform discrepancy between prices and wages and a uniform percentage of "idle capacity" throughout industry. Neither is true. If "industry" is estimated to be operating at 80% of capacity, we must remember that this figure is at best an average. It may cover a situation in which, say, industry A is operating at only 60%, industry B at 63%, and so on up to industry M at 97% and industry N at 100%. If we try to expand the money supply enough to return industries A and B to full capacity, we may completely "overheat" industries M and N and produce serious productive distortions and bottlenecks.
``What is more, an increase in the stock of money, contrary to Keynesian theory, will begin to force an irregular increase in prices long before "full capacity" has been reached and the "slack" taken up — if only for the reason that the "slack" is never uniform throughout industry. In a very short time, also, with the increase in prices and the increase in the demand for labor, wages will start climbing too. Then, if the previous trouble was that most wages were already too high in relation to most prices, there will again be discoordination between wages and prices; and the Keynesian prescription will call for still further doses of government spending, deficits, and new money.
``So the Keynesian medicine must lead to chronic deficits and chronic inflating of the money supply. This is precisely what we have had. It is no accident that we have just run eight annual deficits in succession, and that we have had 32 deficits in the last 38 years. It is no accident that the US money supply (currency plus demand deposits) has been increased more than fivefold — from $36 billion at the end of 1939 to $199 billion in September, 1969. And so it is no accident that, in spite of a tremendous increase in industrial production in this thirty-year period, consumer prices have increased (to June, 1969) by 164%.
Good or bad economics can always be distinguished from the perspective of time horizon, particularly the tradeoff between short versus long term. Where the policy priority seems focused on short term relief and eventually countermanded by long term pain, such represents as bad economics.
``In the long run, we are all dead” is a tenet espoused by economists with no children who will pay for future bills.
4. Mistaken assumptions lead to flawed economic models.
From the Heritage Foundation, ``Policymakers are basing the “stimulus” bill on economic models that wrongly assume every $1 of government spending increases the economy by approximately $1.60. Is it really that simple? By that logic, debt-ridden, big-government countries like Italy, France and Germany should be wealthier than America. And why stop at $800 billion? Such logic suggests unlimited prosperity could be guaranteed by the government borrowing and spending $800 trillion. Should America be basing such costly decisions on these types of economic models?
From Harvard Professor Robert Barro at the Wall Street Journal, ``What's the flaw? The theory (a simple Keynesian macroeconomic model) implicitly assumes that the government is better than the private market at marshaling idle resources to produce useful stuff. Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system.
``John Maynard Keynes thought that the problem lay with wages and prices that were stuck at excessive levels. But this problem could be readily fixed by expansionary monetary policy, enough of which will mean that wages and prices do not have to fall. So, something deeper must be involved -- but economists have not come up with explanations, such as incomplete information, for multipliers above one.
Selectivity bias- experts blinded with economic ideology selectively use data which supports their argument even if the assumptions are defective.
5. Inefficient or wasteful government spending because it is NOT demanded for by the markets.
From Professor Gary Becker, ``Putting new infrastructure spending in depressed areas like Detroit might have a big stimulating effect since infrastructure building projects in these areas can utilize some of the considerable unemployed resources there. However, many of these areas are also declining because they have been producing goods and services that are not in great demand, and will not be in demand in the future. Therefore, the overall value added by improving their roads and other infrastructure is likely to be a lot less than if the new infrastructure were located in growing areas that might have relatively little unemployment, but do have great demand for more roads, schools, and other types of long-term infrastructure.”
Not all infrastructure spending works. Ask Japan.
6. Theory and reality don’t match.
In theory, deficit spending should be switched on during bad times and switched off during good times.
But in reality, deficit spending has been a permanent affair.
Figure 7: Heritage: Real annual federal spending has more than tripled since 1965 and has nearly doubled since 1980.From the Heritage Foundry, ``According to the suddenly back in style Keynesian theory, government can stimulate economic growth by temporarily increasing government spending. Problem is, there was nothing temporary about increases in government spending under Nixon and there is nothing temporary about the trillion dollars in new spending currently being debated in Congress.”
7. Stimulus meant to impose political IDEOLOGY than sound economics.
From Wall Street Journal, ``The spending portion of the stimulus, in short, isn't really about the economy. It's about promoting long-time Democratic policy goals, such as subsidizing health care for the middle class and promoting alternative energy. The "stimulus" is merely the mother of all political excuses to pack as much of this spending agenda as possible into a single bill when Mr. Obama is at his political zenith.
Some have used the “stimulus” as a vehicle to impose on the society their personal ideological convictions. Ultimately it is the people that pay for flawed ideologies. Think Marx, Lenin, Stalin, Mao, Pol Pot, Hitler, etc…
8. Time Lag for Government Spending.
Where spending is supposedly needed NOW, public works spending will come later.
Again, from Professor Gary Becker, ``Efficiency is not likely to be high partly because of the fundamental conflict between the goal of stimulating employment and output in order to reduce the severity of the recession, and the goal of concentrating infrastructure spending on projects that add a lot of value to the economy. Stimulating the economy when employment is falling requires rapid spending of this huge stimulus package, but it is impossible for either the private or public sectors to spend effectively a large amount in a short time period since good spending takes a lot of planning time.
The net effect is that the stimulus will either be late or unneeded.
9. Inefficiencies due to political dispensation.
From Mr. George Melloan at the Wall Street Journal, ``The central defect of government bailouts and stimulus packages is that the money is allocated through a political process. It goes to recipients who have the most political influence. Private entrepreneurs and even big business, by contrast, employ investment to earn a profit. The record shows that the latter yields greater economic efficiency, and hence creates real jobs.”
Political doleouts are almost always based on political affiliations and not on economic needs. The net effects are, wastage, corruption and inefficiencies.
Fellow Filipinos, learn that it isn’t personality based leadership that drives corruption but big bureaucracy, escalating government spending and the subsequent political process driven distribution of government endowments and the dependency and rent seeking culture.
10. Chronic Deficits Equals Inflation.
From John Hussman, ``It's tempting to think that somehow printing money means an increase in spending power, while issuing bonds means that the government is taking something in return for what it spends, but it's important to focus on the general equilibrium. In both cases, regardless of whether government finances its spending by printing money or issuing bonds, the end result is that the government has appropriated some amount of goods and services, and has issued a piece of paper – a government liability – in return, which has to be held by somebody. Moreover, both of those pieces of paper – currency and Treasury securities – compete in the portfolios of individuals as stores of value and means of payment. The values of currency and government securities are not set independently of each other, but in tight competition. That is particularly true today, when bank balances are regularly swept into interest earning vehicles as often as every night. To the extent that real goods and services are being appropriated by government in return for an increasing supply of paper receipts, whatever the form, aggressive government spending results in a relative scarcity of goods and services outside of government control, and an increasing supply of government liabilities. The marginal utility of goods and services tends to rise, the marginal utility of government liabilities of all types tends to fall, and you get inflation.”
The end result of stimulus programs: a greatly debased currency (lower standard of living).
How can these be of any good?
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