Tuesday, February 2, 2010

Busted: Keynesian Economics

Stick this in your pipe and smoke it, Mr. Keynes.

Why Government Spending Does Not Stimulate Economic Growth: Answering the Critics by Heritage Foundation.

Key Excerpts:

Why Government Spending Does Not End Recessions

Moving forward, the important question is why government spending fails to end recessions. Spending-stimulus advocates claim that Congress can "inject" new money into the economy, increasing demand and therefore production. This raises the obvious question: From where does the government acquire the money it pumps into the economy? Congress does not have a vault of money waiting to be distributed. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It is merely redistributed from one group of people to another.[7]

Congress cannot create new purchasing power out of thin air. If it funds new spending with taxes, it is simply redistributing existing purchasing power (while decreasing incentives to produce income and output). If Congress instead borrows the money from domestic investors, those investors will have that much less to invest or to spend in the private economy. If they borrow the money from foreigners, the balance of payments will adjust by equally raising net imports, leaving total demand and output unchanged. Every dollar Congress spends must first come from somewhere else.

For example, many lawmakers claim that every $1 billion in highway stimulus can create 47,576 new construction jobs. But Congress must first borrow that $1 billion from the private economy, which will then lose at least as many jobs.[8] Highway spending simply transfers jobs and income from one part of the economy to another. As Heritage Foundation economist Ronald Utt has explained, "The only way that $1 billion of new highway spending can create 47,576 new jobs is if the $1 billion appears out of nowhere as if it were manna from heaven."[9] This statement has been confirmed by the Department of Transportation[10] and the General Accounting Office (since renamed the Government Accountability Office),[11] yet lawmakers continue to base policy on this economic fallacy. [...]

Answering the Critics

Despite the foregoing evidence, some analysts maintain that governments can spend their way out of recession. Their common objections are addressed below:

Critics' Objection No. 1: People Are Saving Instead of Spending, and Banks Are Not Lending.By Borrowing and Spending these "Idle Savings," Government Can Circulate More Money Through the Economy. This is the most common defense of government stimulus cited by policymakers. Indeed, among proponents of government spending there is a strong focus on whether people are spending or saving, with the implication that spending circulates through the economy while savings effectively drop out.

But savings do not drop out of the economy. Nearly all people put their savings in: (1) banks, which quickly lend the money to others to spend; (2) investments in stocks and bonds; or (3) personal debt reduction. In each of these situations, the financial system transfers one person's savings to someone else who can spend it. So all money is quickly spent regardless of whether it was initially consumed or saved. The only savings that drop out of the economy are those hoarded in mattresses and safes. [Continued]


Anonymous said...

If you examine the history of Taxol, which became a very profitable drug for BMS, it is a textbook example of how government spending can result in an increase in corporate profits and therefore jobs, which in turn comes back to the government in the form of tax revenue. BMS would have never invested the money to find the active ingredient in Taxol on its own and it took the initiative of the NCI to do that.

Reaganx said...

Anonymous, are you literate? Where did government spending come from? If it didn't come from a magic land where money grows on trees, it came either from taxation or from inflation, a hidden form of taxation - these, in turn, prevented those from whom money was expropriated from earning profits and creating jobs.

Anonymous said...

I am actually fairly literate although I do not read as much the last 20 years since having kids and jobs, but investment is investment and whether it comes purely from private capital or from taxation, sometimes the investments pay off; I cited an example of how government money actually helped develop a very important cancer drug; it did not come out of the private sector, and you can easily verify my claims; another example is what we generally refer to as the "internet." Again it was government money; other examples are the space program; it is absolute nonsense to make the claims you make without at least examining counter examples such as the ones I have referenced.

Reaganx said...

Read Frederic Bastiat's immortal work What Is Seen and What Is Not Seen. Yes, you see the results of government investments. But you do not see what would have happened to the money expropriated by the government if it had not been expropriated and if it had been invested by private individuals. So, by definition, you cannot even compare. What you can compare it with, however, is millions of efficient private-sector projects in general.
Anyway, the problem with government investments is that they are completely arbitrary. You may find it useful to learn about the economic calculation debate between Marxists and the Austrian School. In a nutshell, the purpose of an economy is to satisfy the most urgent needs in the most efficient way. When investments are determined by the market, there is a clear way to find out which needs are the most urgent and which way is the most efficient - it is the pricing mechanism. When investments are determined by the government, where is no way at all to find that out - so government investments are by definition irrational from the economic standpoint. There is no way to determine whether a government investment was logical from the economic standpoint, since the pricing principle is replaced by the expropriation (taxation) principle. It cannot "pay off" by definition. A return on investment roughly equals income minus spending. In the case of a government investment, income is determined by market prices but expenditures are incurred by the government. When expenditures are made by private individuals, they are determined by their market demand, and therefore their amount makes perfect economic sense. But government expenditures do not reflect anyone's real market demand, these figures make no sense from the viewpoint of economics and therefore cannot be used for calculating investment returns. We no longer have the market pricing mechanism, according to which investments are channelled to the satisfaction of the most urgent needs.
As to the Internet, consider the fact that the Internet would have never become what is has become if it had not been developed by private businesses. It would have remained a useless gadget used by the military. Consider the fate of computing in the Soviet Union.

Reaganx said...

As to the space program, gigantic funds invested in it could have been invested in a more useful way - e.g. in breakthroughs in medicine that would make us healthier and our lives longer. Or, to use a more illustrative example, a poor bugger for whom these money was expropriated could have bought flowers for his girlfriend, and FOR HIM it would have been a much more efficient investment.
I love space but I don't believe it should be explored by gangtsers expropriating other people's money. In a free society, space should be explored by those voluntarily willing to make such investments - first by passionate wealthy space-lovers who don't care if their investments will pay off, because the process itself is a value for them and then by commercial ventures, if possible.

Reaganx said...

"from whom his money was expropriated"