Where Keynes Went Wrong: What if government spending depresses instead of stimulates?

Weekly Standard ^ | 11/02/2011 | Charles Wolf Jr.

[SeekAndFind]

It is generally recognized that the conceptual underpinnings for so-called stimulus programs lie in the theory developed by John Maynard Keynes in the 1930s. That the practical results of these programs in recent years have been negligible, if not negative, while their costs have been high, may be sufficient grounds for avoiding them in the future.

But what if the theory itself is flawed? For many economists, flawed theory would be a greater concern​—​surely more hurtful to professional pride​—​than ineffectual results from programs based on a valid theory. Moreover, it would mean no amount of effort to improve the design of stimulus programs is likely to help.

Before addressing questions about the theory, let’s briefly recap the costs and results of the stimulus so far.

Total stimulus costs have been high, but reckoning them accurately isn’t easy. They include $787 billion in federal spending that was legislated and appropriated in 2009 with the “stimulus” label attached to it. In addition, a proper accounting of the cost should include several other programs and outlays that, while not carrying the “stimulus” label, were designed to boost domestic spending or preclude reductions in spending that were otherwise expected to occur. These other programs include the following: TARP funding to relieve the impaired asset values and weakened balance sheets of financial institutions ($700 billion); bailout funds provided to support the auto industry ($17 billion); extension of unemployment benefits to support income and spending by unemployed workers ($34 billion); and temporary subsidies for the “cash for clunkers” program ($3 billion).

These other measures should be included in a full reckoning of stimulus costs because of their shared common purpose: to boost aggregate demand, or avoid its further decline as a consequence of the Great Recession.

[Tublecane]

“I’m not disagreeing with you, totally, but I think the pyramids as an example of the Broken Window fallacy is a bit of a stretch. The builders didn’t get paid, they were slaves, so they couldn’t contribute their salaries to the general economy, as the Broken Window fallacy depends on.”

It does not follow that slaves are not the most efficient means of running an economy that there aren’t more and less efficient uses of slaves. You can have them digging and refilling holes all day, for instance, or harvesting a cash crop, as they did (relatively) productively in antebellum U.S. One makes money; the other doesn’t.

Moreover, I’m not sure historians consider the pyramid builders slaves anymore, or at least not part of a permanent class of hereditary slaves. We now think they were forced, or “corvée” laborers. If not working on the pyramids they could have been running their own lives, at least insofar as anyone did back then. Perhaps not in Egypt, but somewhere.

[Tublecane]

“Of course, the ‘wealthy corpses’ could have spent that wealth on other things, but since they owned/controlled every bit of capital anyway, what’s to ‘buy’?”

Whatever other rich people buy. Your criticism sounds superficially plausible, but, again, there is a difference between an economic system being inefficient and there being no gradation of efficiency within a system. If Egypt was feudal, still it could have spent as much on gravesites as medieval England, for instance, instead of the beautiful monstrosities it bought.

Even within totalitarian societies there is a hierarchy of economy. Hitlerite Germany was wealthier than Stalinist Russia, granting it had a head start. This was precisely because it strangled the private sector less, though it strangled it nonetheless.

[Tublecane]

“There is a quote by Keynes stating that the best way to implement socialism was to inflate the currency to steal the wealth of the individual in such a way that not one man in a million would know what was happening.”

Why did he want to implement socialism? Because he’s power mad? Or perhaps because he actually thought it was better, economically? Maybe both, but I do believe he actually believed what he wrote.

[Tublecane]

“It does not follow that slaves are not the most efficient means of running an economy that there aren’t more and less efficient uses of slaves.”

That should read: “It does not follow from the fact that slaves are not the most efficient means of running an economy that there aren’t more and less efficient uses of slaves.”

[MortMan]

What government spends, they first must take. That is the crucial flaw in Keynes’ argument.

[expatpat]

You don't even have to worry about the stimulus lowering the money multiplier. The fact is that when the stimulus was passed, the multiplier was already less than 1, far below Keynes' need for a value of around 2.5 or better for govt. stimulus to work. (The multiplier did continue to go down after the stimulus, but it was already too low).

The Dems also screwed things up by using the money to keep non-productive govt. workers in their jobs, whereas Keynes was trying to stimulate the private, productive sector.

[PGalt]

Great thread! Thanks to every poster.

“The setback to Lenin’s project would not have surprised Lenin; the setback to Keynes’ would have surprised Keynes. Lenin’s project will be revived, but not Keynes’, except as a staging post in the march towards Lenin’s goal.”

http://www.networkideas.org/featart/apr2011/fa15_Lenin_Keynes.htm