TGIF: Immortal Keynes?

Whatever you may think of Keynesian economics, you have to give it credit for one thing: its staying power.

 Read about it here.

Military Keynesians Are the Worst Keynesians of All

From the National Journal this week:

Two wars are not enough.

America's economic outlook is so grim, and political solutions are so utterly absent, that only another large-scale war might be enough to lift the nation out of chronic high unemployment and slow growth, two prominent economists, a conservative and a liberal, said today.

Nobelist Paul Krugman, a New York Times columnist, and Harvard's Martin Feldstein, the former chairman of President Reagan's Council of Economic Advisers, achieved an unnerving degree of consensus about the future during an economic forum in Washington. Their views were shared by a third economist, Jan Hatzius of Goldman Sachs, who said the only economic scenarios he could visualize were either "pretty bad" or "very bad." ...

Krugman and Feldstein, though often on opposite sides of the political fence on fiscal and tax policy, both appeared to share the view that political paralysis in Washington has rendered the necessary fiscal and monetary stimulus out of the question. Only a high-impact "exogenous" shock like a major war -- something similar to what Krugman called the "coordinated fiscal expansion known as World War II" -- would be enough to break the cycle. "I don't think we're about to launch a war against anybody," Feldstein said with tongue-in-cheek regret at the left-leaning forum, "America's Fiscal Choices," sponsored by four think tanks. "But Paul is right. That was the fiscal move that got us out" of the last downturn comparable to this one, the Great Depression.

Krugman is the leading Progressive Keynesian, Feldstein the leading conservative Keynesian. (That is not a contradiction in terms. See my article on the subject.) What unites them? Military Keynesianism.

Both mistakenly think World War II ended the Great Depression, a claim soundly debunked by Robert Higgs. (See Art Carden's discussion.) How could the war have ended the Depression? The economy was mostly devoted to making things that would blow up and destroy other things -- including life. Living standards certainly did not rise during the war: The purchase of consumer goods was restricted through an elaborate rationing system. Government directed production. It owned the economy.

Economists point to improved wartime aggregates, such as GNP, investment, or employment. But who cares about statistical aggregates? They only shroud what's going on at ground level. Government spending is a component of GNP; so increases bore no necessary relationship to individual well-being. Ten million men were drafted into the military, so what did the improved unemployment rate have to do with consumer welfare? Besides, Higgs shows the statistics are suspect for a variety of reasons.

Economists often give reckless advice to governments. But when they declare that only a major war will lift the economy out of recession, we really need to start worrying. Military Keynesianism kills.

(See Steve Horwitz's recent column on the subject.)

TGIF: Being for the Free Market Isn't Enough

Harold Meyerson, an op-ed columnist for the Washington Post, this week launched a devastating attack on what he calls "mainstream economists." Too bad he’s oblivious of Austrian economics.

The rest of TGIF is here.

Keynesian Cons

My latest article in The American Conservative is here. A teaser:

Indeed, you would be hard-pressed to find a conservative who admits to being an orthodox Keynesian, conservatives having joined the Church of the Supply Side many years ago. But though Keynesianism tends to be associated with big-government “liberalism”—in its original form, liberalism stood for small government in all realms—many who take Keynes’s approach to economics are nevertheless self-identified conservatives. In practice, “conservative Keynesian” is not a contradiction in terms.

The Freeman, April 2009

Free to Consume, Or Not

As someone who is rather less eager to consume than previously, I feel harassed by the government, mainstream economists, and news media. You may feel the same way. Apparently, we aren’t consuming enough to suit them. At least that’s what they want us to think. More than that, they want us to feel guilty and do something about it–such as going into debt. Hence the Fed and Treasury’s program to make it easier for us to borrow.

The rest of the latest TGIF, "Free to Consume, Or Not," is at the Foundation for Economic Education website.

Keynes Returns

Keynes is all the rage these days. Our House of Commons and Lords — sorry, House of Representatives and Senate — are brimming with Keynesians, and more than one news commentator has boldly declared (as we’ve heard before), "We’re all Keynesians now." In light of the resurrection of the at least twice-interred Keynes , I decided to revisit some of the gentleman’s writings.

The rest of this week's TGIF, "Keynes Returns," is here.

A Nobel Prize in Economics for Maddow?

I know she's way too easy a target to bother with really, but check out what passes for economic argument on cable television. It's from Rachel Maddow of MSNBC; an excerpt selected by a sympathizer who found it "especially compelling." (I won't inflict the video on you, but it's here.)

Cutting food-stamp funding to attract Republican support is proof-positive that the Republicans are not trying to come up with an effective stimulus here. If your house is on fire, and you call your fire department, and your fire department tells you to pour gasoline on the flames, they're not actually making a good-faith effort to help you put out the fire. They're not a good fire department.

If you're working up policy to fix an economic crisis, which is characterized by there being no spending in the economy, and someone in that debate says, 'OK, but cut the spending out of the rescue plan,' they're bad at making policy.

And you know what? It matters when you're wrong. A whopping proportion of the Republican rhetoric about stimulus is wrong.... It's just wrong. The time is now to take the radical step, as Americans -- as civic-minded Americans concerned about our future -- it's time to take the radical step of privileging correct information over incorrect information....

If you are wrong, from here on out, you should lose the argument and you should lose your political potency. Form a flat-earthers club or something, where you talk enthusiastically to each other about your made-up economic ideas that aren't based in reality. But get out of the way of the people who are actually trying to save the country.

Let's play Find the Fallacies. (A better game might be "Find the Argument.") Here's one to begin with: Just because Republicans are hypocrites about deficit spending doesn't mean they are wrong. It may only mean they should have practiced what they now preach when they were in power.

Cross-posted at Anything Peaceful.

Remember the Broken Window!

The debate over what kind of government spending will "stimulate" or not "stimulate" the economy is beside the point. As Bastiat taught us, and Henry Hazlitt reminded us, you have to consider what is "not seen"--what will not happen if the government borrows and spends scarce resources. That is all that really matters in this discussion. If some Keynesian replies that those resources will remain idle otherwise, ask why he or she is not inquiring into the government policies that make and keep productive resources idle. That would be a better use of time than lobbying for a bogus stimulus bill.

Cross-posted at Anything Peaceful.

Silver Lining on the "Stimulus" Bill

Update: The Senate bill is now $827 billion, so the following item has been overtake by events. Hopefully the outcome alluded to below will still take place.

Breaking news from CNN:

Democratic and Republican Senate negotiators reached a tentative agreement for a $780 billion economic stimulus package, according to two Democratic sources and a GOP negotiator. Senate Majority Leader Harry Reid took the list of cuts to the nearly $900 billion Senate bill to fellow Democrats, and the Senate continued the debate into the evening.

Below $800 billion! Well, look at the bright side. Maybe it will drive Paul Krugman crazy.

Republican Albatross II

Why does every Republican in Congress (with the obvious exception) begin his or her statement about the pending "stimulus" bill by saying, "Of course we need a stimulus bill..."?

Bottom Line

[T]here is no way for government macroeconomic policy to correct an incorrect perception of how [savings/consumption] plans have changed. There is no way for government to acquire the knowledge necessary to be able to coordinate individual plans. Such information simply does not exist. If it is going to ever exist it will be generated by the market process as the results of plan changes and the individual responses they provoke unfold. Any attempt by government to manipulate things will almost certainly make them worse because it is based on woefully incomplete information. It is not that the market prevents any disappointment or even crises. The market is not Utopia. The market works through feedbacks from mistakes as well as feedback from successes. it is just that the market is the best mechanism we have for resolving conflicting or miscommunicated plans. Keynes asked the right questions, but he gave the wrong answers and in the process sent economics off on a very costly detour.

–Peter Lewin, “Commentary,” Austrian Economics: Perspectives on the Past and Prospects for the Future (1991, Richard M. Ebeling, ed.)

Cross-posted at Anything Peaceful.

Boon or Doggle?

Even if government spending in theory could “stimulate the economy” in a genuine, sustainable way, it would not follow that politicians and bureaucrats would know how to spend the money intelligently. The pressures to do something now and the perverse incentives facing those in charge of the money guarantee there would be more doggle than boon.

The rest of this week's TGIF, "Boon or Doggle," is at the Foundation for Economic Education website.

Krugman Flunks Capital Theory

Paul Krugman is said to have beat up on George Will during this joint appearance on ABC's "This Week" back in November. But all Krugman really did was show that he, like Keynes, holds an unrealistic Play-Doh model of capital, as opposed to the heterogeneous, multistage, intertemporal structure-of-production model of the Austrian school. When Will notes that there was negative net investment during the 1930s, Krugman responds that, of course, there was negative net investment: "Because when . . . all the factories are standing idle, who wants to build a new one?"

Point for Krugman? Wrong.

If Krugman took the Mises-Hayek trade cycle theory seriously he'd realize that the idle factories in the 1930s represented malinvestment induced by Federal Reserve credit expansion in the 1920s. This policy, by lowering the interest rate and falsely signaling an increase in real saving (i.e., a preference for future over present goods), shifted resources from later stages of production (closer to the consumer) to earlier stages of production. Unfortunately, those who think of capital as a heap of homogeneous, monochrome Play-Doh aren't sensitive to this point. Capital is capital is capital. That's why Krugman can't understand why someone would want to invest when factories stand idle.

When the inflationary boom ended, as it had to because it was artificially induced and there weren't enough resources for both the early stages and the later stages (where consumers wanted them), the malinvestments had to be liquidated. But since capital consists not of Play-Doh but of discrete things -- buildings, machinery, tools materials -- with particular characteristics, those that were the products of malivestment were not necessarily suitable for other purposes. They couldn't simply, costlessly, and instantly be moved and employed in later stages of production. Hence, the idle factories. This was wasted capital brought about by the credit expansion. This was the depression.

If the economy was to recover, new investment consistent with consumers' actual preferences had to be undertaken. But that required time and saving, i.e., deferred consumption. It also required a stable political environment in which investors could be confident that their property was safe from the government. Unfortunately, thanks to tax increases, unending interventionist programs, and threatening antibusiness rhetoric, FDR's government failed to provide that environment.

Krugman's flip remark to Will is a perfect illustration of what is wrong with Keynesian economics.

Cross-posted at Anything Peaceful.

Shame on You, Paul Krugman

We are certainly used to the fallacious Keynesian "economics" that pours forth from most of Paul Krugman's New York Times columns. That's bad enough. But dishonesty too? What's the excuse for that? In a recent column called "Fifty Hebert Hoovers," Krugman expressed fear that the nation's governors would follow in the footsteps of Hoover, with devastating consequences for the economy. And what did Hoover do that has Krugman so concerned? He writes:

No modern American president would repeat the fiscal mistake of 1932, in which the federal government tried to balance its budget in the face of a severe recession....

But even as Washington tries to rescue the economy, the nation will be reeling from the actions of 50 Herbert Hoovers — state governors who are slashing spending in a time of recession.... [Emphasis added.]

Krugman here leads his readers to believe that Hoover tried to balance the budget by slashing spending. In fact, Hoover did not reduce spending. On the contrary, he increased it. If he aimed at balancing the budget, it was through tax increases not spending cuts. For example, the top marginal income-tax rate jumped from 24 to 63 percent. Anyway, he actually ran large budget deficits. In this, as in many other areas, Hoover anticipated Franklin Roosevelt. (See my article, "Bad Deal," in The American Conservative, Jan. 12.)

Does anyone believe that Krugman is unaware of that fact?

Cross-posted at Anything Peaceful.

Keynes the Jokester?

I spent much of my recent vacation reading Henry Hazlitt's chapter-by-chapter demolition of Keynes's The General Theory of Employment, Interest, and Money (1936), The Failure of the "New Economics" (1959). I didn't expect to read the book cover to cover, but after only a few pages I had to keep going. It is that well-written and interesting. I'm now a few pages from the end.

The more I read the more I thought: Keynes was surely joking. No one in his position could really be that confused, contradictory, and ignorant of economic logic. It had to be a gag on the economics profession, an emperor-with-no-clothes experiment.

Thus I smiled when I got to Hazlitt's statement in chapter XXV, "Did Keynes Recant?" (p. 398):

Keynes was a brilliant man. Much of what he wrote he wrote in tongue-in-cheek, for the pleasure of paradox, to épater le bourgois [shock the middle class], in the spirit of Wilde, Shaw, and the Bloomsbury circle. Perhaps the whole of the General Theory was intended as a huge (400-page) joke, and Keynes was appalled to find disciples who took it all literally.

If it was a joke, Keynes helped inflict much misery and oppression on innocent people just for a laugh. I guess for the elitist Keynes, the well-being of the masses can't be allowed to impede his bold and daring lifestyle. It is for people like him that secularists like me wish there was a place of fire and brimstone.

At any rate, I highly recommend Hazlitt's book. Don Boudreaux says that Richard Dawkins's The Blind Watchmaker proves that any subject, no matter how complex, can be written about clearly and accessibly. I say the same about The Failure of the "New Economics."

Cross-posted at Anything Peaceful and Liberty and Power.

Save Us from Government Spending

If you're a glutton for torment as I am, you watch cable-TV news shows most nights. These days the shows are feeding viewers a steady diet of 100-proof Keynesianism as the cure for our economic woes. Leading in this department is Chris Matthews of MSNBC's "Hardball." (I call it "Nerf Ball." Matthews's idea of a hardball question for a politician is, "Are you running for president?") Matthews declared last week, "We're all Keynesians now," and each night he pontificates on why the government must start to spend massive amounts of money, even though it doesn't have massive amounts of money. We'll worry about the consequences later. Why must it spend? Because we aren't doing it and that's putting the economy in recession. Someone has to spend, Matthews says, and the government is spender of last resort.

The rest of this week's TGIF, "Save Us from Government Spending," is at the Foundation for Economic Education website.