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.
Which 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 shutdown 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. This video explains why Keynesian theory is misguided.
And if you want to dig further into the issue, you can click here for a video that explains why we might get better decisions if policy makers focused on how we earn income rather than how we allocate income.
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.
P.S. Here’s a funny video on Keynesian Christmas carols. And everyone should watch the famous Hayek v Keynes rap video, as well as its equally clever sequel.
P.P.S. Switching to another topic, we have an encouraging update to the post I wrote last year about an Australian bureaucrat who won a court decision for employment compensation after injuring herself during sex while on an out-of-town trip. Showing some common sense, the Australian High Court just ruled 4-1 to strike down that award.
[…] the perpetual motion machine of Keynesian economics is still part of the Congressional Budget Office’s methodology. Here are some excerpts from […]
[…] the current shutdown battle, but I still feel compelled to add my two cents when people make silly arguments about the economy suffering because government is temporarily spending less […]
[…] care about the current shutdown battle, but I still feel compelled to add my two cents when people make silly arguments about the economy suffering because government is temporarily spending less […]
[…] people who made up numbers about the alleged harm of the 2013 shutdown are basically the same people who said the sequester would hurt growth. They were wrong then and […]
[…] bad news is that she also is a genuine and sincere supporter of the perpetual motion machine of Keynesian economics (i.e., the theory that more government spending is a form of “stimulus” notwithstanding […]
[…] what do expect from the “perpetual motion machine” of Keynesian economics, a theory that is only successful if you assume it is […]
[…] only way this analysis possibly could be true is if governments finance the additional spending by borrowing from foreigners. But even that’s not really right because all that’s increasing is domestic consumption, not […]
[…] only way this analysis possibly could be true is if governments finance the additional spending by borrowing from foreigners. But even that’s not really right because all that’s increasing is domestic consumption, not […]
[…] only way this analysis possibly could be true is if governments finance the additional spending by borrowing from foreigners. But even that’s not really right because all that’s increasing is domestic […]
[…] only way this analysis possibly could be true is if governments finance the additional spending by borrowing from foreigners. But even that’s not really right because all that’s increasing is domestic consumption, not […]
[…] only way this analysis possibly could be true is if governments finance the additional spending by borrowing from foreigners. But even that’s not really right because all that’s increasing is domestic […]
[…] And he made the same claim about the 2013 shutdown and how it supposedly would hurt the economy. And was wrong then as well. […]
[…] explained (over and over again) why the Keynesian theory is misguided, and even narrated a video on the […]
[…] tried to answer that […]
[…] I touch on several points in the article, but this excerpt highlights his ongoing fixation on Keynesian economics, which I’ve previously referred to as the perpetual motion machine of the left. […]
[…] there’s lots of additional material here, here, and here. My favorite cartoon on Keynesian economics also is worth […]
[…] You can understand why I’ve written that Keynesian economics is the left’s perpetual motion machine. […]
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I knew Keynesian theory was impossibly silly when I first studied it in college. The first thought is, how can a government suck money from the private sector and indebt the taxpayer, spend it on private sector goods or mainly government services that results in artificially moved employment stimulus and expect a net gain? That is entirely funny math. Only Marxism is more ridiculous.
The common thread in all such Ponzi Schemes is bigger and more oppressive government, more debt enslavement of the masses. we Americans have all become indentured servants to government and worse yet, allowed government to enslave offspring to this generation’s debt. It began with Social Security which is neither social (theft from one group to pay another is pretty anti-social) nor security (Robing Peter to Bribe Paul just pisses off Peter).
The government has been working to compete with private insurers ever since the 1930’s and I wonder if in 25 years insurance companies will exist at all. Government thinks it is so much smarter, so much brighter, so much better at managing business. Funny how the vast majority of bureaucrats are so unbelievably stupid they cannot and never could get a real job in a private sector company.
Keynes was wrong. Roosevelt, Mao, Marx and Engels were wrong. Their weak-ass argument is that the capitalist system of free enterprise would never build the roads or improve their services without government regulation. These are the same idiots that artificially suppress football scores at the HS level in California to protect the children. Protect them from what, a real benchmark recognition of where success lies and how far one group of kids might be from it.
Capitalism is about competition and competition is far better and much faster at solving problems, inventing solutions and improving public health and safety. The most important principle of capitalism was “Caveat Emptor” or Buyer Beware! Companies in the modern age would product the best possible products for a given price niche because they know failure in a free market means the end. You compete to improve while lowering prices because that is how companies survive. When governments artificially manipulate markets and regulate them supposedly for the public good, they unnecessarily destroy the trials and errors that would lead to greater achievement. America did not need a million pages of law (regulations). It didn’t need politicians to pretend they are public servants while they do nothing but line their pockets with cash and enslave the next generation further.
If I break into my neighbor’s house, I am a thief.
If I hire two bent nose fellas to break into my neighbors house and steal from him for me, I am an ORGANIZED thief.
But if I convince a lawyer to lie to the people about his virtues, get him elected to public office and then get him to steal from every neighbor’s house, from the neighbors children, even from the neighbor’s prosperity as yet unborn; well then I’m a political campaign manager…..and still a thief.
Put your money in land in another country that people are moving to. That way you bypass the Foreign Account Tax Compliance Act that has made us financial prisoners in our own country. The Dumbocrats passed that in 2009 when they had complete contol. I am afraid we have passed the financial tipping point in the US.
I read an article that gave some details of where this $24 billion supposedly comes from. Their analysis included:
(a) Government employees were not paid, and so stores where they normally shop lost income, etc. As you note above, we could discuss where the money to pay the government employees comes from, but that’s irrelevant in this case. Once the shutdown ended they were all given back pay. And Congress had declared in advance that they were going to do this. So no one lost a dime and everyone knew that they would not lose a dime. Their pay was just delayed by a couple of weeks. Given they knew the back pay was coming, it would be interesting to see if any even reduced their spending, or just put purchases on credit cards and/or ran down their bank accounts a little.
(b) Because national parks were shut down, many people cancelled their vacation plans, thus taking money away from tour operators, hotels restaurants, etc. This assumes that if you were planning a trip to Yellowstone and were forced to cancel it, that you will then take the money you would have spent on that trip and burn it in the fireplace. In reality, of course, many people simply found a different destination. The national park’s loss may have been Disneyworld’s gain. Others might decide that instead of going on a trip they will buy a bigscreen TV or a new swimming pool, or maybe they’ll spend the money on something totally unrelated to entertainment. Whatever they do, the money doesn’t disappear, it’s just spent on something else. Money may be lost from one particular business or one particular town, but it is not lost from the economy as a whole.
(c) The economy was deprived of the services of these government employees. Well for starters this assumes that they are all so busy that they can’t make up the work once they get back. Or more to the point, it assumes that the work they do adds something to the economy. How much poorer are we because the government was not able to inspect quite as many shower heads this year to make sure that they met federal water use limits, or because government grants to artists to urinate on crucifixes was delayed? I’d argue we are probably richer because government interference in the economy was slightly reduced for a few weeks.
Just as the heroin addict feels worse, both in perceived as well as real terms (withdrawals can kill you) when he temporarily suspends drugs in an unplanned way, so does an addiction to government spending (ie. addiction to diverting energy to much less productive use) cause severe disruption. But in anything other than the very short term, both drug addiction and government spending lead to irreversible decline.
Now if we could only have the growth trendline of France, where the government confiscates more than half of every person’s daily work, then…. then….we would match the average world growth rate trendline of 4-5% and we would stave of American decline.
The economic jargon is fine, and it is interesting to match wonk details to intuition and common sense, just like one learns a lot in physics 101 from debunking clever perpetual motion machines, which BTW is not always an easy task.
But the principle of conservation of energy applied to economics is that your national prosperity equals the value of your national production. Yet, what is the long term trend of production when the core aim of HopNChange is to flatten the effort reward curves, by taking from the most productive to supply unconditional services and guarantees to the mediocre? Or simply flatten the effort reward curve by reneging on delayed gratification by diluting savings?
Flattening of effort reward curves and increased — or even simply maintaining — production don’t reconcile, no matter how many Qx Mz equations one writes or how many contorted macro- economic gimmicks one plays, or even believes in. At best, you can fool a few people most of the time, or fool most people some of the time. But you cannot fool most people most of the time with economic gimmicks that few people understand. Reality will trickle through and flatter effort reward curves will decrease motivation and thus production. Will the residual motivation that is left after HopNChange be enough for Americans to keep outcompeting the rest of the world? We will find out soon enough.
Some of the feedback that the American public is and will be getting now for some time to come: “that hard work and ambition just don’t pay enough to justify the stress” are very long term and will take some time to manifest. But once they do, they will become impossible to eradicate. Again, look to Europe to see where the New American Dreams lead.
Don’t worry. Everything will be all right….
http://research.stlouisfed.org/fred2/series/BASE
Economists are great forecasters. What are you talking about? It’s reality violating assumptions that invalidate their forecasts!
The government shutdown probably did hurt the economy, but not in the way S&P describes. All the money saved was probably spent on furloughed workers and purchases. The time shift would not have been available to the private economy.
What is lost is any real productivity [~2% of what the private economy would have produced with the same resources].
crietmann
Agreed that through QE the Fed is adding to the monetary base. However, there is one more step. Rather than expand the total money supply through fractional reserves, the Fed is paying interest on excess reserves, taking that same $80B back out, with no net increase in the money supply. Hence no/little inflation.
Claims are made that QE funds are “going into the stock market”, but this also is false, since for every buyer of stock there is a seller, unless companies are issuing additional shares. Stock prices rise on the perception that all is well.
Ron Paul has suggested that the Fed just cancel the Treasury bills on hand, thereby lowering the federal debt. But the Fed is an “independent” entity that has the right to print money. What if the paper they’ve purchased needs to be discounted, or interest rates go up, or banks decide to lend their excess reserves? No one knows.
Good and needed article, though I’d challenge the idea that we are not following the path to hyperinflation by not printing money, and borrowing it instead. Our QE infinity stimulus $80B+ per month) is contributing directly to our money supply – selling the Fed government distressed assets. How do you reconcile this?