Keynesian Strategies Alive with Obama/Geithner

Supplanted by Hayek in the 1980s, Keynesian Dogma persists with Obama/Geithner

By: John R. McClelland, GeoffTalk.com Staff Commentator

“The most difficult subjects can be explained to the most slow-
witted man if he has not formed any idea of them already; but the
simplest thing cannot be made clear to the most intelligent man if
he is firmly persuaded that he knows already, without a shadow of
doubt, what is laid before him.”

- Leo Tolstoy

Rather than borrowed wisdom from Tolstoy, this quote is something that most of us understand but neglect to reflect upon. Similarly, many highly educated individuals, academics and the politicians continue to extol the virtues of Keynesian stimulus despite reams of contradictory evidence, and more importantly, the lack of intuitive appeal. While “intellectuals,” often of the self-proclaimed variety, continue to promote Keynesian stimulus as the only prescription for an ailing economy, many advocates of a government “hands off” policy are mocked as mouth breathing knuckle draggers.

A fifty year tug of war between the ideas of John Maynard Keynes and Friedrich von Hayek would dominate much of the twentieth century, dominated at first by Keynesian forces, then though the teamwork of Margaret Thatcher and Ronald Reagan, resulting in the triumph of Hayek. Recently, politicians have again clung to the ideas of Keynes, or at least something that resembles his ideas. The 2009 stimulus package, stated to be chock full of “shovel ready” projects, was our most recent massive example.

Keynes put forth a theory that proposed that government could step in and smooth a business cycle through monetary or fiscal actions such as increased government spending. To some extent, this is to make up for weaknesses in aggregate demand. This prevents unemployment from causing further weakness, leading to a cascade of economic destruction. This, of course, is a theory. There is a distinction between theory and knowledge, yet, few people are actual truth seekers. Like the concept that Tolstoy relates to us, students of economics have had much Keynesian stimulus beat into them for so long, that they are convinced of its utility despite contrary evidence, or, even, lack of evidence.

Much of the academic and think tank work centered on Keynesian stimulus, concerns multipliers. That is, government spending of $1 should yield an output in excess of $1. Idle resources are kicked into gear, resulting in gains. Does this work? Perhaps, but the evidence has not compelled me to go beyond a certain agnosticism.

Harvard Professor Robert Barro has discovered contrary evidence.1 Noting the difficulties in measurement; Barro estimates government multipliers by using World War II as a test case. He finds that the multiplier was 0.8 so the effect was a dampener and not a multiplier. One could see how some of this was offset by scarcity in other recourses. Recall that there was rationing at the time. Barro examines other wartimes including the Korean War and Vietnam War, still finding a multiplier of 0.8. Obtaining any real precision in macroeconomics is a pipe dream, but a multiplier less than 1 indicates that the multipliers used to justify the 2009 stimulus is likely to be very overstated. Selling dollars for 80 cents doesn’t result in big profits.

Barro’s work is very insightful, yet most common people instinctively believe something is wrong with the, borrow now, pay later concept. The recent debt ceiling debate has reinvigorated this subject. People are asking what the country received for the borrowed money. One can argue about the “jobs saved or created” all day long, employing sophisticated econometric techniques or reams of documents to pluck out the jobs saved by the stimulus. Yet even the President joked that “Shovel-Ready was not as Shovel-Ready as we expected.”2 During the Great Depression, similar outcomes were expirenced by government officials.

While some on the left dispute the authenticity of this quote, Historian Burton Folsom, Jr. attributes it to Treasury Secretary Henry Morgenthau, Jr. who served under President Franklin D Roosevelt.

“We are spending more money than we have ever spent before and it does not work. I want to see this country prosperous. I want to see people get a job. We have never made good on our promises. I say after eight years of this administration we have just as much unemployment as when we started and an enormous debt to boot.”3

To many modern Americans, there sentiments likely mirror those of Morgenthau. One gets the feeling that, yes, we’ve tried this before. And how do we know that government is more efficient at marshalling resources better than private means?

A modern program that has mimicked Keynesian concepts is is the Cash for Clunkers program of 2009. This was probably the dumbest of all modern programs. While we may have helped quench China’s demand for steel in the form of scrap, billions of dollars of still valuable vehicles were destroyed simply to further revive the corpse of the American auto industry. Even if one judges that helping the domestic auto industry is a reasonable goal, this program wasn’t the way to do it

A stated goal of the program was to remove gas-guzzlers from the marketplace. Yet, many of these vehicles were still serviceable and likely, many were paid for. Now many consumers have additional debt burdens. A politician does not care about the unintended consequences of their actions, nor whether or not their policies are efficient, like the make-work program such as cash for clunkers.

The attractiveness of Keynesian belief appears to be driven by use as a means to obtain political power rather than as something shown by the data to be effective. Politicians can always cite an academic, many of whom have religious beliefs about Keynesian concepts, as the basis for their policy.

My own belief is that Keynesian Construct is a form of mental masturbation. Precisely, I don’t mean to attack Keynes as I find he had significant insights into many aspects of the economy. Instead, I see many Keynesians, as I do people blowing on the dice at the craps table, as if that gave them an element of control that persisted until the dice settled on the felt. I think this stems from a humankind deep-seated will to engineer things and to control nature. That includes the nature of humankind itself.

The world as I see it, is closer to that which Hayek described. Not with humans as chess pieces to be moved around by philosopher kings but as individuals, each with their own particular motivations. No politician can conceive of all the wants and needs of so many individual actors and guide society fluidly. So, as we look at the squabble over the debt ceiling, it might be useful to reflect on whether or not we are dogmatically attached to a yet unproven prescription to an ill we don’t fully understand, and amplify our debts even further.

John R. McClelland, GeoffTalk.com Staff Commentator

Note: We do entertain dialogue on this issue by supporters of Keynesian policies or challengers of such policies.

1) http://online.wsj.com/article/SB123258618204604599.html

2) http://nation.foxnews.com/president-obama/2011/06/13/obama-jokes-jobs-council-shovel-ready-was-not-shovel-ready-we-expected

3) http://blog.heritage.org/2009/01/14/were-spending-more-than-ever-and-it-doesnt-work/

This entry was posted in Debt, Economics, Government, John McClelland, Monetary, Philosophy, Politics and tagged , , , . Bookmark the permalink.

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