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Keynesian Archive

Monday

3

September 2012

2

COMMENTS

In Need of Capital Day

Written by , Posted in Economics & the Economy, Free Markets, Taxes

The Department of Labor cites Labor Day as “dedicated to the social and economic achievements of American workers,” adding that “it constitutes a yearly national tribute to the contributions workers have made to the strength, prosperity, and well-being of our country.” Celebrating the hard work of Americans with a yearly day off is fine with me, but there are additional forces contributing to the “strength, prosperity, and well-being of our country” also worthy of recognition. Perhaps the time as come, for instance, for a Capital Day.

Hard work is important. Americans have long considered a strong work ethic a virtuous quality, and this has been to our advantage. But hard workers are all over the world, and the US hardly leads the world in average hours worked. Yet America is consistently at or near the top in worker productivity. What accounts for this discrepancy? Simply put, capital.

Another way to look at American prosperity is this: hard work is a necessary, but insufficient, condition for achieving prosperity. Give even the hardest worker a spoon, and it will take a long time to build a ditch. Give that same worker a shovel, and it will take less time. Now give that worker an expensive digging machine and that ditch will be completed exponentially faster. That is where growth in worker productivity comes from.

The mixing of capital and labor is where the true magic happens, and American prosperity is due to our once unique devotion to an economic system – the free market – that most efficiently matches these two ingredients.  Unfortunately, America today is no longer the most devoted to economic freedom, and the trend is heading in the wrong direction. A less free economy, generally speaking, will mean more inefficient distributions of capital and labor, resulting in a less productive workforce and thus a less prosperous economy.

In order to invest capital in our workers, we first need capital to invest, and that means savings. Unfortunately, neo-Keynesian economic thought can be reasonably accurately summed up as “savings = bad; spending = good.” Just consider the examples of politicians asserting that unemployment checks or food stamps boost economic growth because the recipients are more likely to spend it.  And then there’s the many government policies which reduce or inhibit capital formations, like direct taxes on capital such as the capital gains tax or death taxes, financial regulations and laws which discourage US investment, and other costly burdens on business – such as Obamacare.

So while we celebrate the contributions of hard working Americans of all stripes, we should keep in mind the importance of capital in achieving prosperity, a fact all too often forgotten by policymakers. Perhaps a yearly reminder in the form of a Capital Day is needed to do the trick.

Tuesday

30

August 2011

0

COMMENTS

Disaster Keynesianism Follows in Irene’s Wake

Written by , Posted in Economics & the Economy

Disaster Keynesianism is the moniker I’ve given to the belief that destruction from natural disaster promotes prosperity. It is the logical extension of standard Keynesianism, which holds that any government spending is a boost to growth, and the various voodoo “multipliers” they use to justify their faith. With Hurricane Irene now behind us, it’s no surprise to see the disaster Keynesians popping up in its wake to inform us of all the economy wonders the storm has provided.

One such example comes from Peter Morici, professor of Keynesian Voodoo at the Smith School of Business, University of Maryland. Prof. Morici claims that, “when government authorities facilitate rebuilding quickly and effectively, the process of economic renewal can leave communities better off than before.” In fairness, this may be true if taken as narrowly as possible. Morici points to the replacement of old and dated capital stock with newer facilities. This could very well happen. And because the communities do not typically bear the cost of rebuilding on their own, the individual community may well come out ahead in the end. But there’s no such thing as a free reconstruction. The rest of us who are forced to pay for this rebuilding will be made decidedly poorer by it.

The end result is a net negative on the economy as a whole. Useful resources have been destroyed, and yet more resources, which otherwise could have been used elsewhere, have been spent to replace them. The truth of this statement can be verified with a simple thought experiment. If disasters are indeed good for net economic growth, why wait for them to happen naturally? Perhaps Professor Morici will show that he’s willing to practice what he preaches and volunteer his own property for a bit of destructive economic renewal.

Tuesday

19

July 2011

0

COMMENTS

EPA Plots New Economic Sabotage Strategy

Written by , Posted in Economics & the Economy

Facing resistance over cap-and-trade and other initiatives, the EPA is opening up a new front in its war on economic prosperity:

The EPA wants to cut the national ambient air-quality standard to between 60 and 70 parts per billion, which would push thousands of communities over the current limit of 75 ppb. That, in turn, would make it more difficult to attract new business.

“Is this really another uncertainty you want to throw at the business community right now?” asked Ross Eisenberg, the U.S. Chamber of Commerce’s environment and energy counsel. “It just doesn’t make much sense.”

…Now, Mr. Eisenberg said, he is hearing the standard will be set around 65 ppb. “Anything in that range would be too low,” he said. It would even force respected national parks like Yellowstone and the Grand Canyon out of compliance.

Communities that fail to drop within the limit will be hit with fines and forced to place restrictions on businesses. One of the biggest restrictions will be a rule that they have to tear down one or more buildings before they can build a new one.

“So you wind up scaling down,” Mr. Eisenberg said. “You’re having less business at that point. You’re taking more away than you’re adding.”

This is just Keynesian make-work by another name. Destroying buildings before you can make new ones, digging ditches for no purpose, it’s all the same: a waste of resources. But at least we’ll have plenty of “green jobs” destroying the prosperity of yesteryear and ushering in our future of sustainable, eco-friendly poverty.

Saturday

25

June 2011

0

COMMENTS

We Don’t Need an Investor-in-Chief

Written by , Posted in Economics & the Economy, Taxes

How was anything ever invented before government started “investing” in new technologies? One wonders these things, given the seriousness with which Keynesians seem to believe that if they don’t choose the economic winners and then throw large sums of money at them – other people’s money, of course – then there will be no innovation or growth. The latest example of this faulty attitude involves a plan by the President to spend $500 million “investing” in manufacturing, or something:

President Obama on Friday will announce the launch of the Advanced Manufacturing Partnership (AMP), an initiative that would provide more than $500 million to encourage investments in promising technologies.

It is the administration’s second initiative in less than a month intended to boost U.S. manufacturing.

…“Today, I’m calling for all of us to come together — private-sector industry, universities and the government — to spark a renaissance in American manufacturing and help our manufacturers develop the cutting-edge tools they need to compete with anyone in the world,” Obama will say, according to prepared remarks.

What do Obama and his bureaucrats know about manufacturing or what “cutting-edge tools they need to compete with anyone in the world”? He doesn’t seem to know, for instance, that we’re already in a manufacturing “renaissance”, in so far as manufacturing output continues to grow to new heights, breaking its own record, year after year.

Perhaps an even better question is: what makes Obama qualified to spend other people’s money better than they would themselves? Government “investments” are necessarily made according to political criteria, as the first priority of a politician is to get reelected, not turn a profit. And in order for these vote-seeking politicians to spend money on their schemes, it must first be removed from the productive sector of the economy, where individuals with actual skin in the game are much better suited to find investment opportunities that will pay off.

If President Obama really wants to promote investment, he should remove the existing disincentives to savings and investment, such as the capital gains, dividends and death taxes, among other destructive taxes on capital formation. Simply put, we don’t need an Investor-in-Chief to direct investment capital to promising sectors and businesses, we simply need government to get out of the way and to stop making it so difficult for private investors to do so in the first place.

Sunday

5

June 2011

0

COMMENTS

Stuck on Stimulating Stupid

Written by , Posted in Big Government, Economics & the Economy

For modern day Keynesians, there’s really only one possible solution to fit every set of economic facts – spend more of other people’s money on politically favored projects. It hasn’t worked too well so far.

Image courtesy of Dan Mitchell

Despite the obvious failures of government spending to boost the economy, Keynesian politicians are banging the drums for yet more of the same:

House Democrats this week have amplified their calls for new spending on infrastructure and other federal projects in the face of May’s discouraging job-creation figures.

…”The American people, while concerned about the deficit, place much more emphasis on job creation, and they see a role for the government,” Rep. Raul Grijalva (D-Ariz.) told The Hill. “A fast injection of job stimulus on the public side would help tremendously. … It [the job report] helps our argument about investment.”

I’m an optimist at heart, but sometimes even I wonder if fighting this kind of stupidity is a pointless battle. It really doesn’t matter what the reality is or what the facts show, these people will always call for more government as the solution. “We have a massive spending problem? Who cares, just spend more!”

Cue Joe Biden explaining that we have to spend money to stop from going bankrupt.

Friday

29

April 2011

0

COMMENTS

From Where Do These Magical Regulators Come?

Written by , Posted in Economics & the Economy

George Soros recently penned an interesting Op-ed in Politico, coinciding with an appearance at the Cato Institute (is there a libertarian equivalent to Holy Water, and was it burning?) for an event reflecting on the impact of F.A. Hayek (I think).

I actually found the Soros article rather interesting. In it he recounts his view of an ideological battle of sorts between Hayek and his colleague Karl Popper, under whom Soros studied. There were many things I found wrong with the piece, both in terms of facts and opinions, but I want to address only one here. Soros ultimately claims to find value in both views, but what I really keyed on was the presence of a bit of magical thinking common on the left. First, here’s a snippet of the conclusion to the Soros piece:

Because perfection is unattainable, it makes all the difference how close we come to understanding reality. Recognizing that the efficient market hypothesis and the theory of rational expectations are both a dead end would be a major step forward.

As I see it, the two sides in the current dispute have each got hold of one half of the truth. which they proclaim to be the whole truth.

…I recognize that the other side is half right in claiming that the government is wasteful and inefficient and ought to function better.

But I also continue to cling to the other half of the truth — namely that financial markets are inherently unstable and need to be regulated.

Earlier in the piece, he makes the case that perfect knowledge is not attainable, which inevitably leads to the “inherently unstable” nature of markets. This argument is internally inconsistent and fails on its own premise.

If financial markets are inherently unstable because perfection is unattainable, why would government regulators not be subject  to the same constraints? Are they not bound by the same inability to achieve perfect knowledge? It is a common fallacy of the statists to believe that regulators can magically rise above all the problems faced in the market, but this is not the case. In fact, they face even greater challenges because politics has been thrown into the mix.

As regulators have no greater ability to achieve perfect knowledge than market participants, how does placing more power in fewer hands improve the situation? It seems to me the more stable system is the one that sees less power in each individual hand, while spread out among many more decision-makers.

On a related note, EconStories.tv dropped round 2 of the Hayek vs. Keynes rap. I highly recommend checking it out:

Sunday

13

March 2011

1

COMMENTS

The Fallacy of Disaster Keynesianism

Written by , Posted in Economics & the Economy

Whenever a massive disaster strikes, it’s inevitable that misguided, big government economists will pop up to assure that the coming reconstruction boom will provide a silver lining. Paul Krugman, the modern intellectual leader of this type of disaster Keynesianism, opined three days after the 9/11 attacks that the tragedy “could even do some economic good.” In the wake of Japan’s tragedy, many are following in his fallacious footsteps.

Larry Summers, former White House director of the National Economic Council, stated:

“If you look, this is clearly going to add complexity to Japan’s challenge of economic recovery,” Summers said. “It may lead to some temporary increments, ironically, to GDP, as a process of rebuilding takes place.”

After the Kobe earthquake in 1995 Japan actually gained some economic strength due to the process of reconstruction, he added.

Walter Brandimarte at Reuters trumpets a future “boost from reconstruction.” An International Business Times article similarly looks to “government spending on reconstruction” to lift growth. According to the disaster Keynesians, all the economic activity to rebuild in the aftermath of natural disasters or war strengthen the economy.

It is easy to demonstrate how nonsensical is this proposition by taking it to its logical conclusion. If 9/11 was an economic boon, than why not recreate the effect all across the country? Why not simply blow up the biggest buildings in every city? Why should only New Yorkers share in such destructive wealth?

The fallacy of such thinking probably does not elude you. The Keynesians focus on increased economic activity to sustain their absurdities, but they ignore the preceding loss of wealth. It is simply the broken window fallacy as originally explain by Bastiat. Sure, a broken window will spur economic activity to replace it, but at the end of the day all that has happened is a shifting of resourcing out of other productive activities and into producing something that leaves you no better off than before the destruction. It is a net economic loss.

Look at this way. The Japanese will spend millions of labor hours, and hundreds of billions (or more) worth of resources rebuilding their nation. At the end of the process, they will have approximately what they had before. All of those hours that could have been spent doing something else, and all of those resources that could have been used for making something else, are pure waste. Destruction is destruction and loss is loss, no matter how much the Keynesians talk of aggregate demand and other fuzzy accounting gimmicks.

More on the topic:

Update: One more…

Sunday

12

December 2010

0

COMMENTS

Don’t Fall Into the Keynesian, Demand-Side Trap

Written by , Posted in Economics & the Economy, Liberty & Limited Government, Taxes

This post from Pejman Yousefzadeh on the tax deal is a few days old, but it’s worth talking about because it illustrates a trap into which conservatives too often fall. His point is that the temporary extension of the tax rates likely will not help the economy. I don’t dispute this, as whatever benefit the tax rate extension provides comes from the fact that it means taxes won’t be going up. It’s good only insofar as it prevents politicians from doing something really bad, at least for another 2 years.

What I take issue with is his reasoning. Here’s what he says:

The thing is, a temporary extension of the Bush tax cuts will not be enough to stimulate the economy. Per Milton Friedman’s permanent income hypothesis, consumption patters (sic) even in the aftermath of a temporary extension of the Bush tax cuts will be tempered by long term expectations that eventually, the tax cuts may be allowed to expire. As a consequence, consumers are more apt to save money that comes from a temporary tax cut, rather than spending it in order to offer the economy any kind of economic stimulus.

My problem is his implication that the primary benefits from cutting taxes comes from increases in consumption.  This is essentially the Keynesian view of economic growth. It is this consumption-based view of growth which has led both Bush and Obama to try “stimulating” the economy through gimmick rebates and handouts. Each attempt has failed more miserably than the last.

Just to be clear, I’m not disputing Friedman’s permanent income hypothesis (that personal decisions on spending are based not on current income, but long-term expectations),  just its relevance to this situation. It’s not germane here because even if it were not true and consumption would increase in response to a temporary extension, it wouldn’t have any significant pro-growth impact. Otherwise, the other stimulus attempts would have worked.

The benefit from lowering tax rates, particularly those on capital, comes when it reduces government disincentives to savings, investment and entrepreneurship. Increased consumption is just the consequences of growing the economy. To see it as something to try to increase in its own right is to implicitly admit the validity of the Keynesian, interventionist approach which has never worked.

Monday

6

December 2010

2

COMMENTS

The Keynesian Stimulus Fallacy Refuses to Go Away

Written by , Posted in Economics & the Economy

They say that doing the same thing over and over again while expecting different results is the definition of insanity. If that is the case, then Keynesian politicians are completely bonkers.

Given the disappointing nature of the recent employment numbers, as well the ongoing failure of government “stimulus” plans to spur economic growth, you’d expect sane leaders to consider changing course. Yet just recently we’ve seen comments from Nancy Pelosi and Sherrod Brown touting the great stimulative qualities of jobless benefits – essentially a government subsidy of unemployment. Nor is this the first time Pelosi has made such remarks.

Now the White House is reportedly demanding yet another round of unemployment subsidies, along with a conglomeration of gimmicky tax credits which do nothing to lower marginal tax rates, before it will agree not to raise taxes in the midst of a recession. They should be more focused in providing an environment where jobs are likely to be created, rather than turning what was originally intended to be a temporary cushion into a permanent entitlement.

These leaders are in desperate need of a lesson in the fallacies of Keynesian economics, and it just so happens that one is available in the form of this recent video by the Center for Freedom and Prosperity, narrated by Hiwa Alaghebandian of the American Enterprise Institute:

Originally posted at American Thinker.