Posts Tagged ‘Keynesians’
Good-Bye to All That

In good times inefficient systems can survive. Buffet’s comment that “only when the tide goes out do you discover who’s been swimming naked”  applies to “countries” as well as companies. While the debt tide may not have actually turned, it is in the process of turning.

The law of diminishing returns applies to debt as much as it does to other things that can increase GDP. Diminishing returns to debt have well and truly set in across the Western world. If it is not already, its impact on GDP will soon be negative. The instant markets recognized this the new paradigm will be born.  A new normal will then begin its reign.

Time is running out for the Western welfare state. We will soon see who is swimming naked. Our apparent fair and progressive system is about to be revealed as but one more path to perdition.  A slower less direct path than some, but the destination no less certain. Assorted schools of economics will be consigned to the dustbin of history as their vacuous ideology is revealed for what it is. Alas they will rise again in perverted form, when we have forgotten our past and times again appear to suit them.

At this unraveling of the Keynesian concept it seems apt to cite a Keynesian:

“To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in – or more precisely not in – the country’s business and banks. This inventory – it should perhaps be called the bezzle – amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly.”

John Kenneth Galbraith, The Great Crash of 1929

It is also apt that Galbraith was wrong in this as in so much else. Embezzlement is not alone among the various forms of larceny in having a time parameter. The Western welfare state also has a time parameter. It is simply the public mirror of private sector embezzlement. As with so many government failures when compared to their private sector equivalent, its effect will be worse. It is likely to be maintained for longer, be more pervasive and have far worse consequences. Our welfare state may have made us feel wealthier than we were for years or decades, but it can not change reality.

The reality is that embezzlement lies at the heart of our welfare state. Welfare recipients are paid with taxes from workers on the promise that those workers will be similarly treated in their time of need. With fewer workers and ever more welfare recipients there is only one way it can end, absent prodigious productivity increases. Alas crony capitalism is not associated with rapid rises in productivity. Neither is socialism or traditional and tribal socioeconomic structures.

We need capitalist incentives to maintain any semblance of our expected way of life. Advocate for it now. All it takes for evil to triumph is for the good to remain silent.

Keynesians are so wrong

Peter Smith demolishes the basis on which Keynesian policies are often deemed a success:

National Accounts

“If government spends a dollar; this will always be shown as contributing to GDP in the period it is spent. And, it would be shown this way even if the whole dollar were spent on imports and did not, in fact, contribute to GDP”.

“The fact that government expenditure is shown dollar for dollar as contributing to economic growth is therefore meaningless. It is a truism because of the way the accounts are constructed. It doesn’t show that stimulus spending works at all; it simply reflects the way the national accounts are put together.”

Macroeconomic models

“However complex the model, it will be based on the textbook macroeconomic identity that aggregate private consumption spending plus private investment spending plus government spending plus exports minus imports equals production. It will also have within it a positive relationship between an increase in production and an increase in employment.

If you impose on these models an increase in government spending they will inevitably show an increase in production and employment. It is important to understand that whether total employment rises or falls, the models will still show that an increase in government expenditure will have contributed to employment growth.”

Keynesian conclusions

“If the government spends taxpayers’ money to build, say, a school library, at a reasonable cost, this will be shown dollar for dollar as contributing to GDP. If the same library were built at an inflated cost, this would be shown dollar for dollar as contributing to GDP. If the same library were then immediately demolished at government expense even more would be added to GDP. And this is not the end of the matter. If government takes resources away from the private sector to build a school library, this will be recorded, and probably written up, as the economy being saved from a decline in private sector activity by government spending.”

The quotes do not do justice to the article, Time to Topple Keynesian Economics, which is commendably short. Read it and Why Keynesians and Krugman are Wrong.

Why Keynesians and Krugman are Wrong

Vox Day absolutely nails the failings of Krugman and Keynesians in The Return of the Great Depression:

“If total spending in the economy was necessarily equal to total income the United States could not be in cumulative debt equivalent to 375 percent of GDP… If someone doesn’t buy an equity or an industrial plant, that doesn’t mean he must have bought a car instead.”

Not every dollar of income must be spent today and not every dollar that is spent today is earned.

“When there is a credit-inflated boom that results in your working at a job in which you produce goods that no one wants, needs, or can obtain financing to buy, and which your employer consequently cannot sell, it naturally follows that neither you nor your co-workers are going to be employed in the near future”.

“in their myopic focus on the aggregate picture, Keynesians constantly ignore the reality that inflation, investment, and unemployment all have a disparate impact on different areas of the economy at different points in time. While these diverse impacts will eventually have a cumulative effect on the aggregate economy, the Keynesians consistently fail to comprehend that, due to the disparate nature of these effects, analyzing them in the overly simplistic Keynesian manner guarantees that their cumulative net effect will be miscalculated”.

“if an investment boom can occur in the tulip bulb market, it can obviously happen anywhere that cheap credit is made available to people who believe they can make money buying and selling in a short-term time frame”.

“Krugman is handicapped by the inability of the Keynesian model to account for time-preference, savings, or the consequence of debt”.

The book is a seriously good read. Not written in a dry academic manner, but as per a good blogger. You can read it on your computer for $1.99 on Scribid or $3.50 for Kindle. For less than two dollars, just buy it.