And, Why Are Keynesians Clueless?

Wednesday, 26 Jun 2013 07:42 AM

By Gary Jakacky

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Last week's article highlighted the historical evidence that proves beyond doubt how pathetic the record of Keynesian "stimulus" has been. Thank you, President Obama, for removing that word forever from our political and economic discourse.

But fiscal policy is part of a larger issue. WHY does fiscal policy not work? Simple: fiscal policy is just federal government purchases on steroids.

The most pernicious of all misunderstandings about economic theory — and there are many — is the belief that there is no theoretical basis for the idea that government spending is overwhelmingly harmful to our economy. Among writers of textbooks, the belief that targeted government purchases — that is what fiscal policy is, after all — can smooth out the business cycle and spur recovery? Unquestioned! Impervious to three decades of failure in Japan, and ongoing years of euro-style stagnation here in the United States.

And yet the proof is so simple it can be explained without a single chart, graph or formula — all the trappings academicians use to intimidate laymen, win plush tenured posts and suggest only they possess the wisdom to guide government policy.

The key is to look closely at the process of spending money. That is what makes the wheel go round, or as economists say, what makes the circular flow. As it turns out, all purchases can be broken into four categories.

1. You spend your own money, and buy something for yourself. Two microeconomic incentives dominate this case. You have the incentive to search for a low price — it is your money after all — and you have the incentive to buy what you want. Maximize your satisfaction, economists say. This is the most prevalent form of spending in capitalist economies, which is why they produce outstanding goods and services at minimal cost.

2. Suppose you spend your own money, but buy something for someone else. While you still have incentive to economize, it is far harder to determine exactly what that "someone else" really wants. So pervasive is this failure to satisfy the recipient that gift cards are now the second most wanted holiday present in America. The first is cash.

The very success of gift cards is proof of how difficult it is to make purchases for strangers, yet Keynesians ignore this evidence right before their eyes. This is exactly what government employees do the tune of trillions of dollars a year.

3. Ever spend someone else's money, on yourself? Not very common, though criminals do this all the time when they steal credit cards or bank accounts. Not much incentive to search for the lowest price, but every incentive to quickly buy what you really like or might need.

Liberal journalists constantly point out the irony of plush executive offices and limousines by corporate executives who have expense accounts, even as their company falters. Little is said about government agencies with fat cat administrators and padded budgets. Seen the unemployment rate among government employees lately?

4. Finally, the worst of all. Imagine spending someone else's money to purchase items for a complete stranger. You have no incentive to economize or satisfy. A virtual guarantee that high-priced items will be foisted on those who neither want nor need them.

Sound familiar? This is the category of spending done by millions of federal, state and local government employees. While I mentioned them briefly in No. 2, their real home is here. And yet academic economists and mainstream media members stand, jaws agape, when they tell us about $500 toilet seats at the Pentagon or $3.00 aspirin tablets at county hospitals.

The logic is unassailable. Yet if you advocate cutting government purchases (No. 4) and returning the revenue to individual citizens (No. 1), so hung up are analysts on the discredited concepts of Keynesian economics (and National Income Accounts based
upon them) that unemployment is the only result they foresee.

In fact, it would be the exact opposite. Throughout the 1980s and early 1990s, government purchases as a percentage of gross domestic product declined. So did unemployment.

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