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Archive for the ‘Keynesian’ Category

Back in 2010, then-House Speaker Nancy Pelosi actually claimed that paying people not to work would be good for the economy.

Wow, that’s almost as bizarre as Paul Krugman’s assertion that war is good for growth.

Professor Dorfman of the University of Georgia remembers Pelosi’s surreal moment and cites it in his column in Forbes, which debunks the Keynesian assertion that handouts create growth by giving recipients money to spend.

It is true, of course, that the people getting goodies from the government will spend that money, which also means more money for the merchants they patronize.

People who favor redistribution for other purposes often try to convince others to support them on the grounds that their favored policies will also create economic growth. …let’s review the story as told by those in favor of redistribution. When the government provides benefits to people without much income or spending power, those people will immediately go out and spend all the money they receive. This spending creates an economic multiplier effect as those who get the dollars re-spend some of them… There is nothing particularly wrong with the above story as far as it goes. Economic spending does create more spending as each person who gains income then spends some of that income somewhere else.

But there’s always been a giant hole in Keynesian logic, as Prof. Dorfman explains.

The redistribution advocates always forget to consider one part: where did the money handed out in government benefits come from? …There are three possible answers to that question: the money was raised in taxes, the money was borrowed from an American, or the money was borrowed from abroad. The fact that the money came from someplace is the key because for the government to have money to hand out it must first take it from somebody.

I would add a fourth option, which is that the government can just print the money. But we can overlook that option for the moment since only true basket cases like Venezuela go with that option. And even though we have plenty of policy problems in America, we’re fortunately a long way from having to finance the budget with a printing press.

So let’s look at Dorfman’s options. When governments tax and borrow from domestic sources, all that happens is that spending get redistributed.

If the government raised the money in taxes, then the people paying the taxes have less money to spend in the exact amount that is going to be handed out. …somebody’s spending power was reduced by the exact amount that somebody else receives. …If the money is borrowed from an American, the same thing happens. The person lending the money now either doesn’t spend the money or cannot save the money. When money is saved, banks lend it out. That borrower intends to spend the money (otherwise, why borrow?). When the money is lent to the government instead of being put in the bank, the loan and associated spending it would have created disappear.

And the same is true even when money is borrowed from foreign sources.

…the final hope for economic growth from government transfers would be if the government borrowed the money from abroad. This could work, as long as the money otherwise would not have appeared in the U.S. economy. For example, if China sells us products, they end up with dollars. The question is: if they don’t use those dollars to buy Treasury bonds, what will they do instead? The answer is that the dollars generally have to end up back in the U.S. Even if China turns those dollars into euros and buys German bonds instead, somebody else now owns those dollars and will spend them in the U.S. in some fashion (buying products, companies, or investments).

Prof. Dorfman explains that Keynesianism is merely a version of Bastiat’s broken-window fallacy.

…the claimed economic stimulus from giving money to the poor is offset by the lost spending we do not get from the original holder of the money. …this is a classic example of a famous economic principle: the broken window fallacy. In the fallacy, townspeople rejoice at the economic boost to be received when a shopkeeper must spend money to replace a broken window. What they miss is that absent the broken window, the shopkeeper would have bought something else with her money. In reality the economy is unchanged in the aggregate.

Well said, though allow me to augment that final excerpt by pointing out that the economy actually does change when income is redistributed, albeit in the wrong direction.

This is because many redistribution programs give people money, but only if they don’t work or earn only small amounts of income. And less labor in the economy means less output.

In effect, redistribution programs create very high implicit tax rates on being productive, which is why welfare programs trap people in government dependency.

Last but not least, let’s preemptively deal with a couple of Keynesian counter-arguments.

They often argue, for instance, that redistribution is good for growth because lower-income people have a higher “marginal propensity to consume.”

That’s true, but irrelevant. Even if other people are more likely to save, the money doesn’t disappear. As Prof. Dorfman explained, money that goes into the financial system is lent out to other people.

At this point, a clever Keynesian will argue that the money won’t get lent if overall economic conditions are weak. And there is some evidence this is true.

But those weak conditions generally are associated with periods when the burden of government is climbing, so the real lesson is that there’s no substitute for a policy of free markets and small government.

P.S. Here’s the video I narrated for the Center for Freedom and Prosperity about Keynesianism.

P.P.S. Advocates of Keynesian economics make some very weird arguments to justify more government spending.

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It’s very hard to be optimistic about Japan. I’ve even referred to the country as a basket case.

But my concern is not that the country has been mired in stagnation for the past 25 years. Instead, I’m much more worried about the future. The main problem is that Japan has the usual misguided entitlement programs that are found in most developed nations, but has far-worse-than-usual demographics. That’s not a good long-term combination.

As I repeatedly point out in my speeches and elsewhere, a modest-sized welfare state can be sustained in a nation with a population pyramid. But even a small welfare state is a challenge for a country with a population cylinder. And it’s a crisis for a jurisdiction such as Japan that will soon have an upside-down pyramid.

To make matters worse, Japanese politicians don’t seem overly interested in genuine entitlement reform. Instead, most of the discussion (egged on by the tax-free bureaucrats at the OECD) seems focused on how to extract more money from the private sector to finance an ever-growing public sector.

But the icing on the cake of bad policy is that Japanese politicians are addicted to Keynesian economics. For two-plus decades, they’ve enacted one “stimulus package” after another. None of these schemes have succeeded. Indeed, the only real effect has been a quadrupling of the debt burden.

The Wall Street Journal shares my pessimism. Here’s some of what was stated in an editorial late last year.

Japan is in recession for the fifth time in seven years, and the…Prime Minister who promised to end his country’s stagnation is failing at the task. …Mr. Abe’s economic plan consisted of three “arrows,” starting with fiscal spending and monetary easing. The result is a national debt set to hit 250% of GDP by the end of the year. The Bank of Japan is buying bonds at a $652 billion annual rate, a more radical quantitative easing than the Federal Reserve’s. …The third arrow, structural economic reform, offered Japan the only hope of sustained economic growth. …But for every step Mr. Abe takes toward reform, one foot remains planted in the political economy of Japan Inc. In April 2014, Mr. Abe acquiesced to a disastrous three percentage-point increase in the value-added tax, to 8%, pushing Japan into its first recession on his watch. More recently, he has pushed politically popular but economically ineffectual spending measures on child care and help for the elderly. …only 25% of the population now believes Abenomics will improve the economy. Reality has a way of catching up with political promises.

You might think that even politicians might learn after repeated failure that big government is not a recipe for prosperity.

But you would be wrong.

Notwithstanding the fact that Keynesian economics hasn’t worked, Japanese politicians are doubling down on the wrong approach.

According to a report from Bloomberg, American Keynesians (when they’re not busing giving bad advice to Greece) are telling Japan to dig a deeper hole.

Paul Krugman urged Japanese Prime Minister Shinzo Abe to…expand fiscal stimulus to revive the economy.

Reuters filed a similar report.

U.S. economist Paul Krugman said on Tuesday he advised Japan’s Prime Minister Shinzo Abe to…boost fiscal spending… Krugman’s advice was the same as that which fellow U.S. economist Joseph Stiglitz gave Abe last week.

Indeed, there apparently was a consensus for bigger government.

Every one of the economists that Prime Minister Shinzo Abe has invited here for a series of meetings with policymakers has recommended that Japan let loose government spending… When Abe asked why consumer spending has remained feeble since the 2014 consumption tax increase, the U.S. academic suggested the answer lies in expectations that fiscal stimulus will end. …Abe’s government…appears to be seeking to rally the G-7 for aggressive fiscal policy.

So why did the Japanese government create an echo chamber of Keynesianism?

Perhaps because politicians want an excuse to buy votes with other people’s money.

With an upper house election looming in July, ruling coalition lawmakers also are eager to dole out massive public spending.

And it appears that Japanese politicians are happy to take advice when it’s based on their spending vice ostensibly being a fiscal virtue.

That’s not too shocking, but the Keynesian scheme that’s being prepared is a parody even by Krugmanesque standards.

Japan’s government is considering handing out gift certificates to low-income young people in a supplementary budget for fiscal 2016 as consumer spending remains sluggish on a slow wage recovery, the Sankei Shimbun newspaper reported Thursday. Government officials believe certificates for purchasing daily necessities would lead to spending, unlike cash handouts which could be saved… The additional fiscal program would follow a similar measure for seniors and the ruling coalition would use it to gain voter support before the Upper House election expected in July, the daily said.

Maybe the politicians will succeed in buying votes, but they shouldn’t expect better economic performance. Giving people gift certificates won’t alter incentives to work, save, and invest (the behaviors that actually result in more economic output).

Indeed, on the margin these handouts may lure a few additional people out of the labor force.

The plan is foolish even from a Keynesian perspective. Since money is fungible, do these people really think gift certificates will encourage more spending that cash handouts?

By the way, another reason to be pessimistic about Japan is that there apparently aren’t any politicians who understand economics. Or at least there aren’t any that want good policy. The opposition party isn’t opposed to Keynesian foolishness. Instead, it’s leader is only concerned about who gets the goodies.

Katsuya Okada, the leader of the main opposition Democratic Party of Japan, said in parliamentary debate in January. “Elderly people are not the only ones who are suffering. Among the working generation, only a limited number of people are feeling the fruit of Abenomics.”

The bottom line is that Japan will become another Greece at some point. I’m not smart enough to know whether that will happen in five years or twenty-five years, but barring a radical reversal in government policy, the nation is in deep long-run trouble.

P.S. Though I have to give the Japanese government credit for being so incompetent that it introduced a giveaway program that was so poorly designed that nobody signed up for the handout.

P.P.S. And Japan also wins the prize for what must be the world’s oddest regulation.

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In recent weeks, the bureaucrats at both the International Monetary Fund and the Organization for Economic Cooperation and Development have recommended that politicians should have a green light to supposedly stimulate growth by increasing the burden of government spending.

keynesian-fire1Since the lavish (and tax-free) salaries for IMF and OECD bureaucrats are made possible by those same politicians, it’s hardly a surprise that the international bureaucracies cranked out their justifications for bigger government.

Now it’s time to see which nations actually decide to roll the dice with a Keynesian spending binge, and it looks like Canada is at the top of the list.

As reported by Bloomberg, the new Prime Minister thinks more spending will “stimulate” growth.

Canadian Prime Minister Justin Trudeau is urging global leaders to rely more on government spending…to spur growth… He also defended his plan to go willingly into the red. …Trudeau’s arrival on the global scene and his endorsement of deficits marks a sharp about face from his predecessor, Stephen Harper. Along with German Chancellor Angela Merkel and U.K. Prime Minister David Cameron, Harper championed the budget austerity alliance within the Group of Seven that often clashed with the U.S. on fiscal policy.

Needless to say, the former Canadian Primer Minister was right and Obama was – and still is – wrong.

And while they certainly aren’t advocates of small government, Angela Merkel and David Cameron also were wise to impose a modest bit of spending restraint in recent years.

Now we’ll see what happens to Canada as government gets bigger.

Here are some of the specific details about Trudeau’s proposed spending binge.

Trudeau, 44, hinted he is considering expanding on pledges that have his country on pace for a deficit of nearly C$30 billion ($22.3 billion) in the fiscal year that begins April 1. Having promised C$10.5 billion in new spending during the campaign…”we need to be investing intelligently in infrastructure, in money in the pockets of the middle class, to grow the economy,” Trudeau said of the fiscal situation.

And he explicitly invokes the discredited Keynesian argument that a larger burden of government spending somehow boosts economic performance.

Statistics Canada reported that output grew just 1.2 percent in 2015, down from 2.5 percent in 2014. To Trudeau, that’s a reason to spend more instead of tightening up to eliminate the deficit, as Harper had argued in last year’s election campaign. “Cuts would have been terrible for the economy,” Trudeau said.

What makes the Canadian developments so tragic is that the country has been a comparative success story in recent decades.

Canada is now one of the world’s most economically free nations thanks to relatively sensible policies involving spending restraint, corporate tax reform, bank bailouts, the tax treatment of saving, regulatory restraint, and privatization of air traffic control. Heck, Canada even has one of the lowest levels of welfare spending among developed nations.

Most remarkable, the country’s biggest progress on spending actually took place when Trudeau’s party was in charge in the 1990s.

And now Trudeau wants to reverse course and put Canada’s progress at risk.

P.S. It’s good news (or, to be more accurate, a lesser form of bad news) that Trudeau’s Keynesian agenda involves infrastructure spending since there’s at least a possibility that such outlays may generate a positive return. If he was proposing a lot of redistribution spending, by contrast, that would represent bad policy from both a micro and macro perspective.

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Although it doesn’t get nearly as much attention as it warrants, one of the greatest threats to liberty and prosperity is the potential curtailment and elimination of cash.

As I’ve previously noted, there are two reasons why statists don’t like cash and instead would prefer all of us to use digital money (under their rules, of course, not something outside their control like bitcoin).

First, tax collectors can’t easily monitor all cash transactions, so they want a system that would allow them to track and tax every possible penny of our income and purchases.

Second, Keynesian central planners would like to force us to spend more money by imposing negative interest rates (i.e., taxes) on our savings, but that can’t be done if people can hold cash.

To provide some background, a report in the Wall Street Journal looks at both government incentives to get rid of high-value bills and to abolish currency altogether.

Some economists and bankers are demanding a ban on large denomination bills as one way to fight the organized criminals and terrorists who mainly use these notes. But the desire to ditch big bills is also being fueled from unexpected quarter: central bank’s use of negative interest rates. …if a central bank drives interest rates into negative territory, it’ll struggle to manage with physical cash. When a bank balance starts being eaten away by a sub-zero interest rate, cash starts to look inviting. That’s a particular problem for an economy that issues high-denomination banknotes like the eurozone, because it’s easier for a citizen to withdraw and hoard any money they have got in the bank.

Now let’s take a closer look at what folks on the left are saying to the public. In general, they don’t talk about taxing our savings with government-imposed negative interest rates. Instead, they make it seem like their goal is to fight crime.

Larry Summers, a former Obama Administration official, writes in the Washington Post that this is the reason governments should agree on a global pact to eliminate high-denomination notes.

…analysis is totally convincing on the linkage between high denomination notes and crime. …technology is obviating whatever need there may ever have been for high denomination notes in legal commerce. …The €500 is almost six times as valuable as the $100. Some actors in Europe, notably the European Commission, have shown sympathy for the idea and European Central Bank chief Mario Draghi has shown interest as well.  If Europe moved, pressure could likely be brought on others, notably Switzerland. …Even better than unilateral measures in Europe would be a global agreement to stop issuing notes worth more than say $50 or $100.  Such an agreement would be as significant as anything else the G7 or G20 has done in years. …a global agreement to stop issuing high denomination notes would also show that the global financial groupings can stand up against “big money” and for the interests of ordinary citizens.

Summers cites a working paper by Peter Sands of the Kennedy School, so let’s look at that argument for why governments should get rid of all large-denomination currencies.

Illegal money flows pose a massive challenge to all societies, rich and poor. Tax evasion undercuts the financing of public services and distorts the economy. Financial crime fuels and facilitates criminal activities from drug trafficking and human smuggling to theft and fraud. Corruption corrodes public institutions and warps decision-making. Terrorist finance sustains organisations that spread death and fear. The scale of such illicit money flows is staggering. …Our proposal is to eliminate high denomination, high value currency notes, such as the €500 note, the $100 bill, the CHF1,000 note and the £50 note. …Without being able to use high denomination notes, those engaged in illicit activities – the “bad guys” of our title – would face higher costs and greater risks of detection. Eliminating high denomination notes would disrupt their “business models”.

Are these compelling arguments? Should law-abiding citizens be forced to give up cash in hopes of making life harder for crooks? In other words, should we trade liberty for security?

From a moral and philosophical perspective, the answer is no. Our Founders would be rolling in their graves at the mere thought.

But let’s address this issue solely from a practical, utilitarian perspective.

The first thing to understand is that the bad guys won’t really be impacted. The head the The American Anti-Corruption Institute, L. Burke Files, explains to the Financial Times why restricting cash is pointless and misguided.

Peter Sands…has claimed that removal of high-denomination bank notes will deter crime. This is nonsense. After more than 25 years of investigating fraudsters and now corrupt persons in more than 90 countries, I can tell you that only in the extreme minority of cases was cash ever used — even in corruption cases. A vast majority of the funds moved involved bank wires, or the purchase and sale of valuable items such as art, antiquities, vessels or jewellery. …Removal of high denomination bank notes is a fruitless gesture akin to curing the common cold by forbidding use of the term “cold”.

In other words, our statist friends are being disingenuous. They’re trying to exploit the populace’s desire for crime fighting as a means of achieving a policy that actually is designed for other purposes.

The good news, is that they still have a long way to go before achieving their goals. Notwithstanding agitation to get rid of “Benjamins” in the United States, that doesn’t appear to be an immediate threat. Additionally, according to SwissInfo, is that the Swiss government has little interest in getting rid of the CHF1,000 note.

The European police agency Europol, EU finance ministers and now the European Central Bank, have recently made noises about pulling the €500 note, which has been described as the “currency of choice” for criminals. …But Switzerland has no plans to follow suit. “The CHF1,000 note remains a useful tool for payment transactions and for storing value,” Swiss National Bank spokesman Walter Meier told swissinfo.ch.

This resistance is good news, and not just because we want to control rapacious government in North America and Europe.

A column for Yahoo mentions the important value of large-denomination dollars and euros in less developed nations.

Cash also has the added benefit of providing emergency reserves for people “with unstable exchange rates, repressive governments, capital controls or a history of banking collapses,” as the Financial Times noted.

Amen. Indeed, this is one of the reasons why I like bitcoin. People need options to protect themselves from the consequences of bad government policy, regardless of where they live.

By the way, if you’ll allow me a slight diversion, Bill Poole of the University of Delaware (and also a Cato Fellow) adds a very important point in a Wall Street Journal column. He warns that a fixation on monetary policy is misguided, not only because we don’t want reckless easy-money policy, but also because we don’t want our attention diverted from the reforms that actually could boost economic performance.

Negative central-bank interest rates will not create growth any more than the Federal Reserve’s near-zero interest rates did in the U.S. And it will divert attention from the structural problems that have plagued growth here, as well as in Europe and Japan, and how these problems can be solved. …Where central banks can help is by identifying the structural impediments to growth and recommending a way forward. …It is terribly important that advocates of limited government understand what is at stake. …calls for a return to near-zero or even negative interest rates…will do little in the short run to boost growth, but it will dig the federal government into a deeper fiscal hole, further damaging long-run prospects. It needs to be repeated: Monetary policy today has little to offer to raise growth in the developed world.

Let’s close by returning to the core issue of whether it is wise to allow government the sweeping powers that would accompany the elimination of physical currency.

Here are excerpts from four superb articles on the topic.

First, writing for The American Thinker, Mike Konrad argues that eliminating cash will empower government and reduce liberty.

Governments will rise to the occasion and soon will be making cash illegal.  People will be forced to put their money in banks or the market, thus rescuing the central governments and the central banks that are incestuously intertwined with them. …cash is probably the last arena of personal autonomy left. …It has power that the government cannot control; and that is why it has to go. Of course, governments will not tell us the real reasons.  …We will be told it is for our own “good,” however one defines that. …What won’t be reported will be that hacking will shoot up.  Bank fraud will skyrocket. …Going cashless may ironically streamline drug smuggling since suitcases of money weigh too much. …The real purpose of a cashless society will be total control: Absolute Total Control. The real victims will be the public who will be forced to put all their wealth in a centralized system backed up by the good faith and credit of their respective governments.  Their life savings will be eaten away yearly with negative rates. …The end result will be the loss of all autonomy.  This will be the darkest of all tyrannies.  From cradle to grave one will not only be tracked in location, but on purchases.  Liberty will be non-existent. However, it will be sold to us as expedient simplicity itself, freeing us from crime: Fascism with a friendly face.

Second, the invaluable Allister Heath of the U.K.-based Telegraph warns that the desire for Keynesian monetary policy is creating a slippery slope that eventually will give governments an excuse to try to completely banish cash.

…the fact that interest rates of -0.5pc or so are manageable doesn’t mean that interest rates of -4pc would be. At some point, the cost of holding cash in a bank account would become prohibitive: savers would eventually rediscover the virtues of stuffed mattresses (or buying equities, or housing, or anything with less of a negative rate). The problem is that this will embolden those officials who wish to abolish cash altogether, and switch entirely to electronic and digital money. If savers were forced to keep their money in the bank, the argument goes, then they would be forced to put up with even huge negative rates. …But abolishing cash wouldn’t actually work, and would come with terrible side-effects. For a start, people would begin to treat highly negative interest rates as a form of confiscatory taxation: they would be very angry indeed, especially if rates were significantly more negative than inflation. …Criminals who wished to evade tax or engage in illegal activities would still be able to bypass the system: they would start using foreign currencies, precious metals or other commodities as a means of exchange and store of value… The last thing we now need is harebrained schemes to abolish cash. It wouldn’t work, and the public rightly wouldn’t tolerate it.

The Wall Street Journal has opined on the issue as well.

…we shouldn’t be surprised that politicians and central bankers are now waging a war on cash. That’s right, policy makers in Europe and the U.S. want to make it harder for the hoi polloi to hold actual currency. …the European Central Bank would like to ban €500 notes. …Limits on cash transactions have been spreading in Europe… Italy has made it illegal to pay cash for anything worth more than €1,000 ($1,116), while France cut its limit to €1,000 from €3,000 last year. British merchants accepting more than €15,000 in cash per transaction must first register with the tax authorities. …Germany’s Deputy Finance Minister Michael Meister recently proposed a €5,000 cap on cash transactions. …The enemies of cash claim that only crooks and cranks need large-denomination bills. They want large transactions to be made electronically so government can follow them. Yet…Criminals will find a way, large bills or not. The real reason the war on cash is gearing up now is political: Politicians and central bankers fear that holders of currency could undermine their brave new monetary world of negative interest rates. …Negative rates are a tax on deposits with banks, with the goal of prodding depositors to remove their cash and spend it… But that goal will be undermined if citizens hoard cash. …So, presto, ban cash. …If the benighted peasants won’t spend on their own, well, make it that much harder for them to save money even in their own mattresses. All of which ignores the virtues of cash for law-abiding citizens. Cash allows legitimate transactions to be executed quickly, without either party paying fees to a bank or credit-card processor. Cash also lets millions of low-income people participate in the economy without maintaining a bank account, the costs of which are mounting as post-2008 regulations drop the ax on fee-free retail banking. While there’s always a risk of being mugged on the way to the store, digital transactions are subject to hacking and computer theft. …the reason gray markets exist is because high taxes and regulatory costs drive otherwise honest businesses off the books. Politicians may want to think twice about cracking down on the cash economy in a way that might destroy businesses and add millions to the jobless rolls. …it’s hard to avoid the conclusion that the politicians want to bar cash as one more infringement on economic liberty. They may go after the big bills now, but does anyone think they’d stop there? …Beware politicians trying to limit the ways you can conduct private economic business. It never turns out well.

Last, but not least, Glenn Reynolds, a law professor at the University of Tennessee, explores the downsides of banning cash in a column for USA Today.

…we need to restore the $500 and $1000 bills. And the reason is that people like Larry Summers have done a horrible job. …What is a $100 bill worth now, compared to 1969? According to the U.S. Inflation Calculator online, a $100 bill today has the equivalent purchasing power of $15.49 in 1969 dollars. …And although inflation isn’t running very high at the moment, this trend will only continue. If the next few decades are like the last few, paper money in current denominations will become basically useless. …to our ruling class this isn’t a bug, but a feature. Governments want to get rid of cash… But at a time when, almost no matter where you look in the world, the parts of it controlled by the experts and technocrats (like Larry Summers) seem to be doing badly, it seems reasonable to ask: Why give them still more control over the economy? What reason is there to think that they’ll use that control fairly, or even competently? Their track record isn’t very impressive. Cash has a lot of virtues. One of them is that it allows people to engage in voluntary transactions without the knowledge or permission of anyone else. Governments call this suspicious, but the rest of us call it something else: Freedom.

Amen. Glenn nails it.

Banning cash is a scheme concocted by politicians and bureaucrats who already have demonstrated that they are incapable of competently administering the bloated public sector that already exists.

The idea that they should be given added power to extract more of our money and manipulate our spending is absurd. Laughably absurd if you read Mark Steyn.

P.S. I actually wouldn’t mind getting rid of the government’s physical currency, but only if the result was a system that actually enhanced liberty and prosperity. Unfortunately, I don’t expect that to happen in the near future.

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I thought the Organization for Economic Cooperation and Development had cemented its status as the world’s worst international bureaucracy when it called for a Keynesian spending binge even though the global economy is still suffering from previous schemes for government “stimulus.”

But the International Monetary Fund is causing me to reconsider my views.

First, some background about the IMF. Almost all of the problems occur when the political appointees at the top of the organization make policy choices. That’s when you get the IMF’s version of junk science, with laughable claims about inequality and growth, bizarrely inconsistent arguments about infrastructure spending, calls for massive energy taxes,

By contrast, you do get some worthwhile research from the career economists (on issues such as spending caps, fiscal decentralization, and the Laffer Curve).

But that kind of professional analysis gets almost no attention. The IMF’s grossly overpaid (and untaxed!) Managing Director seemingly devotes all her energy to pushing and publicizing bad policies.

The Wall Street Journal reports, for instance, that the IMF is following the OECD down the primrose path of fiscal recklessness and is also urging nations to throw good money after bad with another Keynesian spending spree.

The world’s largest economies should agree to a coordinated increase in government spending to counter the growing risk of a deeper global economic slowdown, the International Monetary Fund said Wednesday. …the IMF is pushing G-20 finance ministers and central bankers meeting in Shanghai later this week to agree on bold new commitments for public spending.

Fortunately, at least one major economy seems uninterested in the IMF’s snake-oil medicine.

The IMF’s calls will face some resistance in Shanghai. Fiscal hawk Germany has been reluctant to heed long-issued calls by the U.S., the IMF and others to help boost the eurozone’s weak recovery with public spending.

Hooray for the Germans. I don’t particularly like fiscal policy in that nation, but I at least give the Germans credit for understanding at the end of the day that 2 + 2 = 4.

I’m also hoping the British government, which is being pressured by the IMF, also resists pressure to adopt Dr. Kevorkian economic policy.

The International Monetary Fund has urged the UK to ease back on austerity… IMF officials said the Treasury had done enough to stabilise the government’s finances for it to embark on extra investment spending… The Treasury declined to comment on the IMF report. The report said: “Flexibility in the fiscal framework should be used to modify the pace of adjustment in the event of weaker demand growth.” …Osborne has resisted attempts to coordinate spending by G20 countries to boost growth, preferring to focus on reducing the deficit in public spending to achieve a balanced budget by 2020.

But you’ll be happy to know the IMF doesn’t discriminate.

It balances out calls for bad policy in the developed world with calls for bad policy in other places as well. And the one constant theme is that taxes always should be increased.

I wrote last year about how the IMF wants to sabotage China’s economy with tax hikes.

Well, here are some excerpts from a Dow Jones report on the IMF proposing higher tax burdens, tax harmonization, and bigger government in the Middle East.

The head of the International Monetary Fund on Monday urged energy exporters of the Middle East to raise more taxes… “These economies need to strengthen their fiscal frameworks…by boosting non-hydrocarbon sources of revenues,” Christine Lagarde said at a finance forum in the United Arab Emirates capital. …Ms. Lagarde called on the Persian Gulf states to introduce a valued added tax, which, even at a relatively low rate, could lift gross domestic product by 2%, she said. …Ms. Lagarde, who on Friday clinched a second five-year term as the IMF’s managing director, also urged governments in the region to consider raising corporate income taxes and even prepare for personal income taxes. Income taxes in particular could prove a sensitive move in the Gulf, which in recent decades has attracted millions of workers from abroad by offering, among other things, light-touch tax regimes. Ms. Lagarde also wants to discourage “overly aggressive tax competition” among countries that allow international companies and wealthy individuals to shift their wealth to lower tax destinations.

Wow, Ms. Lagarde may be the world’s most government-centric person, putting even Bernie Sanders in her dust.

She managed, in a single speech, to argue that higher taxes “strengthen…fiscal frameworks” even though that approach eventually leads to massive fiscal instability. She also apparently claimed that a value-added tax could boost economic output, an idea so utterly absurd that I hope the reporter simply mischaracterized her comments and that instead she merely asserted that a VAT could transfer an additional 2 percent of the economy’s output into government coffers. And she even urged the imposition of income taxes, which almost certainly would be a recipe for turning thriving economies such as Dubai back into backward jurisdictions where prosperity is limited to the oil-dependent ruling class.

And it goes without saying that the IMF wants to export bad policy to every corner of the world.

The IMF chief said taxation allows governments to mobilize their revenues. She noted, however, that the process can be undermined by “overly aggressive tax competition” among countries, and companies abusing the system of international taxation. …She argued that the automatic exchange of taxpayer information among governments could make it harder for businesses to follow the scheme.

And don’t forget that the IMF oftentimes will offer countries money to implement bad policy, like when the bureaucrats bribed Albania to get rid of its flat tax.

P.S. Now perhaps you’ll understand why I was so disappointed that last year’s budget deal included a provision to expand the IMF’s authority to push bad policy around the world.

P.P.S. In other words, American taxpayers are being forced to subsidize the IMF so it can advocate higher taxes on American taxpayers! Sort of like having to buy a gun for the robber who wants to steal your money.

P.P.P.S. Though I’ll also be grateful that the IMF inadvertently and accidentally provided some very powerful data against the value-added tax.

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I don’t know whether Keynesian economics is best described as a perpetual motion machine or a Freddy Krueger movie (or perhaps even the man behind the curtain in the Wizard of Oz), but it’s safe to say I’ll be fighting this pernicious theory until my last breath.

keynesian-fire1That’s because evidence doesn’t seem to have any impact on the debate.

It doesn’t matter that Keynesian spending binges didn’t work for Hoover and Roosevelt in the 1930s. Or for Japan in the 1990s. Or for Bush or Obama in recent years.

What does matter, by contrast, is that politicians instinctively like Keynesianism because it tells them their vice is a virtue. Instead of being a bunch of hacks that can’t resist overspending in their quest to buy votes, Keynesian theory tells them that they are “compassionate” souls simply trying to “stimulate” the economy.

And to make matters worse, there are plenty of economists (many of whom are on the government teat) who act as enablers, telling politicians that bigger government somehow can jump-start growth.

For instance, the Paris-based Organization for Economic Cooperation and Development (OECD) has just issued recommendations for ways to boost a sluggish global economy. Given that the organization’s lavish budget comes from its member governments, you won’t be surprised that it is licking the hand that feeds it and recommending that politicians should get to spend more money.

A stronger collective fiscal policy response is needed to support growth… Governments in many countries are currently able to borrow for long periods at very low interest rates, which in effect increases fiscal space. Many countries have room for fiscal expansion to strengthen demand. …Investment spending has a high-multiplier, while quality infrastructure projects would help to support future growth.

If the OECD is right, there are supposedly a lot of “shovel-ready” infrastructure jobs that would be wise investments, so why not borrow lots of money in today’s low-interest rate environment, finance a bunch of new spending, and magically boost growth at the same time?

Needless to say, I’m very skeptical about the federal government having an infrastructure party. We would get a bunch of bridges to nowhere, lots of fat contracts to line the pockets of unions, some mass transit boondoggles, and more horror stories about cost overruns.

Oh, and don’t forget that the politicians would decide that all sorts of additional categories of spending count as “investment,” so money also would get squandered in other areas as well.

But let’s set that aside and deal with the underlying economic issue of so-called stimulus.

Politicians in America and elsewhere engaged in several years of Keynesian spending when the downturn began in 2008. That didn’t work. In more recent years, they’ve been engaging in lots of Keynesian monetary policy, and that hasn’t been working either.

Now they want to return to the option of more deficit spending.

Why should we believe that a policy that has repeatedly failed in the past somehow will work this time?

If you ask the OECD bureaucrats, they say it will work because they have a model that’s programmed to say more government spending is good for growth.

I’m not joking. Just like the Congressional Budget Office, the OECD uses a model that automatically assumes that more spending will lead to more growth. So you plug in a number for some “stimulus” outlays and the model mechanically cranks out data showing better performance.

Here’s what the OECD is claiming.

Gee, if this is accurate, why don’t we have governments confiscate all the money in the economy, spend it on so-called public investment, and then we can all be rich!

Actually, I shouldn’t joke. Some Keynesian reader might take the idea and run with it.

P.S. What makes all this especially irritating is that American taxpayers are subsidizing the OECD’s statism.

And it’s not just this recent foray into Keynesian economics. Here are other examples of the OECD pushing policies that are directly contrary to the interests of the American people.

Now you can understand why I rank the OECD as the worst international bureaucracy.

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If everyone has a cross to bear in life, mine is the perplexing durability of Keynesian economics.

I thought the idea was dead when Keynesians incorrectly said you couldn’t have simultaneously rising inflation and unemployment like we saw in the 1970s.

Then I thought the idea was buried even deeper when the Keynesians were wrong about simultaneously falling inflation and unemployment like we saw in the 1980s.

I also believed that the idea was discredited because Keynesian stimulus schemes didn’t work for Hoover and Roosevelt in the 1930s. They didn’t work for Japan in the 1990s. And they didn’t work for Bush or Obama in recent years.

Last but not least, I figured Keynesian economics no longer would pass the laugh test because of some very silly statements by Paul Krugman.

He stated a couple of years ago that it would be good for growth if everyone thought the world was going to be attacked by aliens because that would trigger massive military outlays.

He also asserted more recently that a war would be very beneficial to the economy.

Equally bizarre, he really said that the terrorist attacks on the World Trade Center would “do some economic good” because of the subsequent money spent on rebuilding.

Wow. I guess the moral of the story is that we should destroy lots of wealth because it’s good for prosperity. Just like we should eat more cheeseburgers to lose weight.

So you can see why I’m frustrated. It seems that evidence and logic don’t matter in this debate.

But maybe this latest example of Keynesian malpractice will finally open some eyes. The International Monetary Fund recently published a study asserting that higher spending on refugees would be good for European economies.

I’m not joking. Here are some excerpts from that report.

In the short term, the macroeconomic effect from the refugee surge is likely to be a modest increase in GDP growth, reflecting the fiscal expansion associated with support to the asylum seekers… In the short term, additional public spending for the provision of first reception and support services to asylum seekers, such as housing, food, health and education, will increase aggregate demand. …Relative to the baseline, the level of GDP is lifted by about 0.05, 0.09, and 0.13 percent for 2015, 2016, and 2017, respectively (solid line in the chart below, representing the response of EU GDP as a whole). For the first year, the output impact is entirely due to the aggregate demand impact of the additional fiscal spending.

To understand the implications of what the IMF is claiming, let’s review some basic facts, all of which presumably are uncontroversial.

First, we know that economic output is the result of capital and labor being mixed together to produce goods and services.

Second, we know that growth occurs when the amount of output increases, which implies increases in the quantity and/or quality of labor and capital.

Third, we know that the influx of migrants to Europe will lead governments to divert additional resources from the private sector to finance various programs.

Now let’s think about the IMF’s assertion. The bureaucrats are basically arguing that letting governments take a bigger slice of the pie somehow is going to increase the size of the pie.

If you’re wondering how this makes sense, welcome to the club.

The 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 domestic output.

In other words, it’s like running up your credit card to live beyond your means when the real goal should be increasing your income.

But maybe you don’t want to believe me, so let’s look at some other voices.

The top economist of Germany’s Finance Ministry, Ludger Schuknecht, writes in the Financial Times about the perils of never-ending Keynesianism.

…after decades of attempts to fine-tune the economic cycle by running fiscal deficits and cutting interest rates at times of weak demand, many economies are fragile. …Government deficits and private-sector debt are at high levels in emerging markets, and many western ones too. Ageing populations are weighing on public finances. …Traders gamble on continued bailouts. …Yet this lesson goes largely unheeded; policymakers are urged to pile more debt on the existing mountain. …The work of repairing public sector balance sheets has ground to a halt almost everywhere. …Public debt in many countries is now well above 100 per cent of gross domestic product. …nations lacking resilience increasingly rely on support from others… This creates a new form of moral hazard: since countries that behave recklessly will be bailed out, they have little incentive to reform. …talk of global safety nets is futile, and focusing…on stimulus is outright frivolous.

I’m not a huge fan of German fiscal policy. Tax rates are too high and the burden of government spending is excessive. Heck, they’ve even figured out how to use parking meters to tax prostitutes!

But at least the Germans aren’t big believers in Keynesian pixie dust (and you won’t be surprised to learn Krugman goofed when trying to claim Germany was a Keynesian success story).

In any event, Schuknecht realizes that there’s a point beyond which more spending and more so-called stimulus is simply impractical.

Which is basically the main point in a column by Daniel Finkelstein in the U.K.-based Times. He’s writing about the attacks on “austerity” and is unimpressed by the financial literacy (or lack thereof) on the part of critics.

If I went to…buy a new sweater and decided not to get one because it was too expensive, would I be making an ideological statement about shopping? …Or would I just be, like, putting up with my old sweater for the time being while I saved up a bit of money? …Apparently my innocent view that it is a good idea to be able to pay for the goods you purchase makes me a small-state neo-liberal Tory free market fundamentalist. Which seems quite a complicated description for just wanting things to add up. …Between 2000 and 2006, Gordon Brown and Tony Blair engaged in a structural increase in public spending without a matching increase in taxation. You cannot do this for ever. …one thing is clear. Two plus two has to equal four. However unpopular that is.

By the way, if you read the entire piece, it’s rather obvious that Mr. Finkelstein is not a “small-state…free market fundamentalist.”

He simply understands that an ever-expanding public sector simply doesn’t work.

Which reminds me of a very wise observation by Tyler Cowen.

…at the popular level, there is a confusion between “austerity is bad” and “the consequences of running out of money are bad.”

In other words, this issue is partly about the putative value of Keynesian economics and partly about whether nations get to the point where Keynesian policy simply isn’t practical.

To cite an example, Switzerland or Hong Kong have what’s called “fiscal space” to engage in Keynesianism, while Greece and Italy don’t.

Of course, one of the reasons that Greece and Italy don’t have any flexibility is that politicians in those nations have rationalized ever-larger public sectors. And now, they’ve finally reach the point Margaret Thatcher warned about: They’ve run out of other people’s money (both in terms of what they can tax and what they can borrow).

Meanwhile, Hong Kong and Switzerland are in good shape because they generally have avoided Keynesian stimulus schemes and definitely have policies to constrain the overall size of the public sector.

For further information, here’s my video on Keynesian economics.

P.S. But if you want more cartoons about Keynesian economics, click here, here, here, and here.

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