KEYNESIANISM VERSUS themostsearched

Keynesian Economics, Government Shutdowns, and Economic Growth

 

 

 

 

By Daniel J. Mitchell

 

 

Keynesian economics is the perpetual motion machine of the left. You build a model that assumes government spending is good for the economy and you assume that there are zero costs when the government diverts money from the private sector.

 

With that type of model, you then automatically generate predictions that bigger government will “stimulate’ growth and create jobs. Heck, sometimes you even admit that you don’t look at real world numbers.

 

This perhaps explains why Keynesian economics has a long track record of failure. It didn’t work for Hoover and Roosevelt in the 1930s. It didn’t work for Nixon, Ford, and Carter in the 1970s. It didn’t work for Japan in the 1990s. And it hasn’t worked this century for either Bush or Obama.

 

But politicians love Keynesian theory because it tells them that their vice is a virtue. They’re not buying votes with other people’s money, they’re “stimulating” the economy!

 

Given this background, you won’t be surprised to learn that Keynesians are now arguing that the recent partial government shudown hurt growth.

 

 

 

 

Here’s some of what Standard and Poor’s wrote about that fight and why the shutdown supposedly reduced economic output, along with their warning of economic cataclysm if politicians had been forced to balance the budget in the absence of an increase in the debt ceiling:

…the shutdown has shaved at least 0.6% off of annualized fourth-quarter 2013 GDP growth, or taken $24 billion out of the economy. …the resulting sudden, unplanned contraction of current spending could see government spending cut by about 4% of annualized GDP. That would put the economy in a recession and wipeout much of the economic progress made by the recovery from the Great Recession. …The bottom line is the government shutdown has hurt the U.S. economy.

Part of me wonders whether the bottom line is that S&P was simply looking for an excuse for having made a flawed economic prediction earlier in the year. They basically admit they goofed (though, to be fair, all economists are lousy forecasters), as you can see from this excerpt, but we’re supposed to blame the lower GDP number on insufficient government spending.

In September, we expected 3% annualized growth in the fourth quarter… Since our forecast didn’t hold, we now have to lower our fourth-quarter growth estimate to closer to 2%.

Unsurprisingly, the Obama Administration has been highlighting S&P’s analysis:

A number of private sector analyses have estimated that the shutdown reduced the annualized growth rate of GDP in the fourth quarter by anywhere from 0.2 percentage point (as estimated by JP Morgan) to 0.6 percentage point (as estimated by Standard and Poor’s)… Most of the private sector analyses are based on models that predict the impact of the shutdown based on the reduction in government services over that period.

And the establishment press predictably carried water for the White House, echoing the S&P number. Here’s an example from Time magazine:

The financial services company said the shutdown, which ended with a deal late Wednesday night after 16 days, took $24 billion out of the U.S. economy, and reduced projected fourth-quarter GDP growth from 3 percent to 2.4 percent.

If nothing else, this is a good example of how a number gets concocted and becomes part of the public policy discussion. Let’s take a step back,however, and analyze whether that $24 billion number has any merit.

 

The Keynesian interpretation is that the shutdown took money “out of the economy.” According to the theory, money apparently disappears if government doesn’t spend it.

 

In reality, though, less government spending means that more funds are available in credit markets for private spending.

 

Now that I’ve shared the basic arguments against Keynesian economics, let me give two caveats.
 

First, resources don’t get instantaneously reallocated when the burden of government spending is reduced. So I’ve always been willing to admit there could be a few speed bumps as some additional labor and capital get absorbed into the productive sector of the economy.

 

Second, a nation can artificially enjoy more consumption for a period of time by borrowing from overseas. So if deficit spending is financed to a degree by foreigners, overall spending in the economy will be higher and people will feel more prosperous.

 

But these caveats aren’t arguments for more spending. The ongoing damage of counterproductive government outlays is much larger and more serious than the transitory costs of redeploying resources when spending is reduced. And overseas borrowing at best creates illusory growth that will be more than offset when the bills come due.

 

Ultimately, the real-world evidence is probably the clincher for most people. As noted above, it’s hard to find a successful example of Keynesian spending.

 

Yet we have good evidence of nations growing faster when government outlays are being controlled, including Canada in the 1990s and the United States during both the Reagan years and Clinton years.
 

And the Baltic nations imposed genuine spending cuts and are now doing much better than other European countries that relied on either Keynesian spending or the tax-hike version of austerity.

 

themostsearched

themostsearched is a new libertarian paradigm which integrates politics, economics, ethics, and spirituality:

Black Hole: Taxation is armed robbery that feeds the black hole of political corruption; it's the perfect index of corruption and tyranny. Only evil governments tax citizens and companies.

Constitution: The only purpose of a constitution is to protect citizens from government abuse. Reform treaties of a confederation, such as the Lisbon Treaty of EU, not voted by the citizens are null and void.

Corruption: Political corruption is proportional to the square of the size of the government.

Democracy: Every democracy is eventually hijacked by rabblerousers, pullpeddlers, clans of kleptocrats, bumptious bugaboos, busybodies, butterbabies, nabobs of nepotism, cranks of cronyism, pusillanimous pussyfooters, riffraffs of rascals, socialist sophists, and Machiavellian mafiosi. Democracy tends to kleptocracy. Anarchy should replace democracy.

Depression: Only governments can cause economic depressions and funny money. Lower tax rates, a reduction in the burden of government, and elimination of kleptocracy and VAT are the only way to boost growth.

Education: There is no direct relationship between education and schooling. You might be schooled but uneducated, and you might be educated but unschooled. Schools are concentration camps for the drones of society.  Unschooling is much better than schooling. Internet is the best source of knowledge and information, replacing schools, libraries, media, parliaments, and postoffice.

Environment: The best way to save the environment is vasectomy.  Deadly viruses are Gaia's antibiotics against the cancer of overpopulation.

Equality: Death is the only equalizer. Egalitarianism brings death to society, transforming citizens to zombies.

Evolution: The ultimate phase of human evolution is the complete domination of soul.

Faith: Faith is retarded thinking that keeps you away from God.  You have to become faithless, in order to start your journey to God!  You have to discover God your own way without intermediaries. God's truth should replace faith.  You might discover that God is the universe!

Government: The only purpose of government is to protect citizens from criminals. Public services, central banks, and fiat money should be abolished.

Heroism: Entrepreneurs, innovators, anarchists, and heretics are the real heroes.

Insurance: Citizens with proper individual retirement accounts and health savings accounts should be allowed to opt out of State Insurance.

Intervention: Any government intervention deteriorates an existing trend. Laissez-faire is the only progressive policy.

Laws:  All laws that citizens are required to know should not exceed 300 pages of type size 12.  When a new law is born, another law must die.

Legislature: Parliaments should be abolished, because they continuously create laws that enslave citizens, constrain economic activity, loot producers, reward drones, and encourage political corruption.

Misery: Throwing money to misery brings more misery.

Money: A deluge of fiat money brings financial plague and haemorrhage of economy. Real money is tied up to precious metals and strategic metals.

Patriotism: Patriotism is addiction to local hysteria.

Privacy:  Nobody, including your government, has the right to break into your home, your land, your accounts, your computer, your files, and your secrets.  You have the natural right to protect your privacy from intruders.  Molon Labe!

Property: Governments should not own or regulate any property, including electromagnetic waves. The first individual who improves or cultivates any unclaimed property is entitled to that property.  Governments cannot own, allocate, regulate, or manipulate frequency fields and media. Eminent domain is null and void.

Religion: Religion is spiritual slavery. Church is the business of religion. Religious monopoly turns bishops to ayatollahs, and churches to Sodom and Gomorrah.  Spirituality, pantheism, and metaphysics should replace religion. Most scientists are pantheists!

Selfownership: You own your body and your soul, and nobody should dictate what you take in and what you take out. Speech, education, heresy, habeas corpus, military service, mating, healthcare, food, abortion, cloning, drugs, guns, and euthanasia should be personal choices.

Style: Your soul needs to resonate with mighty words and unique acts that express your style and destiny. Your government cannot dictate your language, your words, and your culture. Resonate now and sing your song!

System: The most efficient political system is anarchy, where everything is private, there are no taxes at all, there is no government, and there is no parliament.

Taxes: Taxes destroy the economy. Raising tax rates is masochism. Smart stimulus is to cut tax rates. Stupidus stimulus is to increase spending, which stimulates the cancer of statism!

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