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Archive for the ‘Keynesian’ Category

I’ve previously written that Keynesian economics is like Freddy Kreuger. No matter how many times it is killed off by real-world evidence, it comes back to life whenever a politician wants to justify a vote-buying orgy of new spending.

And there will always be Keynesian economists who will then crank up their simplistic models that churn out results predicting that a bigger burden of government spending somehow will produce additional growth.

They never bother to explain why they think draining funds from the private sector is good for growth, of course, or why they think politicians supposedly spend money more wisely than households and businesses.

Nonetheless, there are some journalists who are willing to act as stenographers for their assertions.

In a September 25 story for the Washington Post, Tory Newmyer gives free publicity to Keynesian predictions that the economy will grow faster if Biden wins and then imposes his profligate agenda – which they underestimate to include $7.3 trillion of new spending and $4.1 trillion of new taxes over the next 10 years.

A Democratic sweep that puts Joe Biden in the White House and the party back in the Senate majority would produce 7.4 million more jobs and a faster economic recovery than if President Trump retains power. …Moody’s Analytics economists Mark Zandi and Bernard Yaros…see the higher government spending a Biden administration would approve — for emergency relief programs, infrastructure, and an expanded social safety net — giving the economy a potent injection of stimulus. …while a Biden administration would seek to offset some of his proposed $7.3 trillion in new spending over the next decade with $4.1 trillion in higher taxes on corporations and the wealthy, “the net of these crosscurrents is to boost economic activity,” the economists write.

Here’s one of the charts that was included in the story, which purports to show how bigger government leads to faster growth.

If there was a contest for the world’s most inaccurate economist, Zandi almost surely would win a gold medal.

But his laughable track record is hardly worth mentioning. What matters more is that we have decades of real-world experience with Keynesian economics. And it never works.

It’s also worth pointing out that Keynesians have been consistently wrong with predicting economic damage during periods of spending restraint.

Now let’s look at another example of how Keynesian predictions are wrong.

Professor Casey Mulligan from the University of Chicago analyzed what happened when turbo-charged unemployment benefits recently ended.

July was the final month of the historically disproportionate unemployment bonus of $600 per week. The termination or reduction of benefits will undoubtably make a difference in the lives of the people who were receiving them, but old-style Keynesians insist that the rest of us will be harmed too. …Paul Krugman explained in August that “I’ve been doing the math, and it’s terrifying. . . . Their spending will fall by a lot . . . [and there is] a substantial ‘multiplier’ effect, as spending cuts lead to falling incomes, leading to further spending cuts.” GDP could fall 4 to 5 percent, and perhaps as much as ten percent… Wednesday the Census Bureau’s advance retail-sales report provided our first extensive look at consumer spending in August, which is the first month with reduced benefits (reduced roughly $50 billion for the month). Did consumer spending drop by tens of billions, starting our economy on the promised path toward recession?

Not exactly. As shown in this accompanying chart, “…retail sales increased $3 billion above July.”

Professor Mulligan explains why Keynesian economics doesn’t work in the real world.

Two critical elements are missing from the old-style Keynesian approach. The first piece is that employment, which depends on benefits and opportunity costs to employer and employee, is a bigger driver of spending than government benefits are. For every person kept out of work by benefits, that is less aggregate spending that is not made up elsewhere in the economy. The second missing piece is that taxpayers and lenders to our government finance these benefits and therefore have less to spend and save on other things. Even a foreign lender who decides to lend that extra $1 million to our government may well be lending less to U.S. households and companies. At best, redistribution from workers to the unemployed reallocates demand rather than increasing its total.

Amen.

At best, Keynesian policy enables a transitory boost in consumption, but there’s no increase in production. At the risk of stating the obvious, a nation’s gross domestic income does not increase when the government borrows money from one group of people and redistributes it to another group of people.

P.S. Since today’s topic is Keynesian economics here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally entertaining sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

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Regular readers know that I give Trump mixed grades on economic policy.

He gets good marks on issues such as taxes and regulation, but bad marks in other areas, most notably spending and trade.

Which is why I’ve sometimes asserted that there has been only a small improvement in the economy’s performance under Trump compared to Obama.

But I may have to revisit that viewpoint. The Census Bureau released its annual report yesterday on Income and Poverty in the United States. The numbers for 2019 were spectacularly good, with the White House taking a big victory lap.

Here are the three charts that merit special attention.

First, we have the numbers on inflation-adjusted median household income. You can see big jumps for all demographic groups.

Next, here’s a look at whether Americans are getting richer or poorer over time.

As you can from this chart, an ever-larger share are earning high incomes (a point I made last month, but this new data is even better).

Last but not least, here’s the data on the poverty rate.

Once again, remarkably good numbers, with all demographic groups enjoying big improvements.

We’ll see some bad news, of course, when the 2020 data is released at this point next year. But that’s the result of coronavirus.

So let’s focus on whether Trump deserves credit for 2019, especially since I got several emails yesterday from Trump supporters asking whether I’m willing to reassess my views on his policies.

At the risk of sounding petulant, my answer is no. I don’t care how good the data looks in any particular year. Excessive government spending is never a good idea, and it’s also never a good idea to throw sand in the gears of global trade.

But perhaps we should rethink whether the positive effects of some policies are stronger and more immediate while the negative effects of other policies are weaker and more gradual.

I’ll close with two cautionary notes about “sugar high” economics.

For what it’s worth, we’re not going to resolve this debate because coronavirus has been a huge, exogenous economic shock.

Though if (or when) the United States ever gets to a tipping point of too much debt, there may be some retroactive regret that Trump (along with Obama and Bush) viewed the federal budget as a party fund.

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Last week, I shared some data showing how the economy enjoyed a strong recovery from recession in the early 1920s when President Warren Harding cut government spending.

(And these were genuine cuts, not the nonsense we get from today’s politicians, who claim they’ve cut spending simply because the budget increases by 5 percent rather than 7 percent.)

What happened nearly 100 years ago is very relevant today since we still have advocates of Keynesian economics who claim that more spending (especially debt-financed spending) is a recipe for more growth.

To show why this view is misguided, let’s now look at what happened in the 1940s after World War II came to an end.

In a column for today’s Wall Street Journal, Professor Richard Vedder explains that the Keynesians predicted economic disaster because of big reductions in government spending.

…many Americans assumed the end of the war would mean a resumption of the Depression, which was cut off by the World War II military buildup. In the middle of the fighting, America’s leading Keynesian economist, Alvin Hansen of Harvard, said: “When the war is over, the government cannot just disband the Army, close down munitions factories, stop building ships, and remove economic controls.” …When the sudden end of combat became apparent in late August 1945, economist Everett Hagen predicted that the unemployment rate in the first quarter of 1946 would be 14.8%.

So what actually happened?

Vedder points out that the Keynesian predictions of massive unemployment were wildly inaccurate.

Millions of military personnel did become jobless within months and defense spending plummeted, putting more out of work. In June 1946 federal employment was almost precisely 10 million less than a year earlier. Yet the sharp rise in overall unemployment didn’t occur. The total unemployment rate for 1946 was 3.9%… Perhaps most interesting for today, all this occurred as the U.S. moved from an extremely expansionary fiscal policy—with budget deficits equal to almost 25% of gross domestic product in 1944 (the equivalent of more than $5 trillion today)—to an extremely contractionary one. The U.S. by 1947 was running a budget surplus exceeding 5% of output—the equivalent of more than $1 trillion today. …This was the complete reverse of the expectation of the newly dominant Keynesian economists.

In the following chart, you can see the numbers from the Office of Management and Budget’s Historical Tables (Table 1.2), which show that fiscal policy between 1945 and 1948 was very contractionary, at least as defined by the Keynesians.

There definitely were huge spending cuts (the real kind, not the fake kind) during those years, and big deficits also became big surpluses.

Professor Vedder’s column explained that this anti-Keynesian policy didn’t produce mass unemployment.

But what about economic growth?

Well, you’ll see in the chart below the data from the Bureau of Economic Analysis for the 1945-48 period. There was a recession in 1946, which could be interpreted as evidence for Keynesianism.

But then look what happened in the next couple of years. There were more budget cuts, deficits became surpluses, and the economy enjoyed a strong rebound.

According to Keynesian theory, these two charts can’t exist. There can’t be an economic recovery when spending and deficits are falling.

Yet that’s exactly what happened after World War II (just as it happened under Harding, as Thomas Sowell observed).

Maybe, just maybe, Keynesianism is simply wrong. Maybe it’s nothing more than the economic version of a perpetual motion machine?

P.S. It’s also worth noting that huge increases in spending and debt under Hoover and Roosevelt didn’t produce good results in the 1930s.

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We did not get good policy during the economic crisis of the 1930s. Indeed, it’s quite likely that bad decisions by Herbert Hoover and Franklin Roosevelt deepened and lengthened the Great Depression.

Likewise, George Bush and Barack Obama had the wrong responses (the TARP bailout and the faux stimulus) to the economic downturn of 2008-09.

But people in government don’t always make mistakes. If we go back nearly 100 years ago, we find that Warren Harding oversaw a very rapid recovery from the deep recession that occurred at the end of Woodrow Wilson’s disastrous presidency.

In a column for the Foundation for Economic Education, Robert Murphy has a very helpful tutorial on what happened.

…the U.S. experience during the 1920–1921 depression—one that the reader has probably never heard of—is almost a laboratory experiment …the government and Fed did the exact opposite of what the experts now recommend. We have just about the closest thing to a controlled experiment in macroeconomics that one could desire. To repeat, it’s not that the government boosted the budget at a slower rate, or that the Fed provided a tad less liquidity. On the contrary, the government slashed its budget tremendously… If the Keynesians are right about the Great Depression, then the depression of 1920–1921 should have been far worse. …the 1920–1921 depression was painful. The unemployment rate peaked at 11.7 percent in 1921. But it had dropped to 6.7 percent by the following year and was down to 2.4 percent by 1923. …the 1920–1921 depression “purged the rottenness out of the system” and provided a solid framework for sustainable growth. …The free market works. Even in the face of massive shocks requiring large structural adjustments, the best thing the government can do is cut its own budget and return more resources to the private sector.

Writing for National Review, David Harsanyi points out that there are many reasons why Warren Harding should be celebrated over Woodrow Wilson.

Wilson was one of the most despicable characters in 20th-century American politics: a national embarrassment. The Virginian didn’t merely hold racist “views;” he re-segregated the federal civil service. He didn’t merely involve the United States in a disastrous war in Europe after promising not to do so; he threw political opponents and anti-war activists into prison. Wilson, the first president to show open contempt for the Constitution and the Founding, was a vainglorious man unworthy of honor. Fortunately, we have the perfect replacement for Wilson: Warren Harding, the most underappreciated president in American history… Harding, unlike Wilson — and most of today’s political class, for that matter — didn’t believe politics should play an outsized role in the everyday lives of citizens. …Where Wilson had expanded the federal government in historic ways, creating massive new agencies such as the War Industries Board, Harding’s shortened term did not include any big new bureaucracies… Wilson left the country in a terrible recession; Harding turned it around, becoming the last president to end a downturn by cutting taxes, and slashing spending and regulations. Harding cut spending from $6.3 billion in 1920 to $3.3 billion by 1923.

Walter Block, in an article for the Mises Institute, explains that what happened almost 100 years ago can provide a good road map if President Trump wishes to restore prosperity today (especially when compared to the disastrous policies of Hoover and Roosevelt).

…let us look back a bit at some economic history regarding recessions and depressions… The depression in 1921 was short lived—maybe not a V, but at least a very narrow U. …Happily, during the 1921 depression, the government of President Warren G. Harding did not intervene…and the entire episode was over not in a matter of weeks (the V) or years (a fattish U), but months (a narrow U). The Great Depression, which stretched from 1929–41 (a morbidly obese U) stemmed from identical causes. …But Presidents Herbert Hoover and Franklin D. Roosevelt “fixed” this by propping up heavy industries whose extent was overblown by the previous artificially lowered interest rates, in an early “too big to fail” paroxysm. The Smoot-Hawley Tariff added insult to injury, and put the kibosh on any early recovery. …I now predict the sharpest of Vs, but if and only if, all other things being equal, the Trump administration cleaves to market principles. …So, Mr. President, embrace the free enterprise system, attain a V, a very narrow and sharp one, and the prognostication for November will be significantly boosted.

Professor Block’s analysis is very sound…except for the part where he speculates that Trump will do the right thing and copy Harding.

Given Trump’s awful track record on spending, it would be more accurate to speculate that I’ll be playing in the outfield for the Yankees when they win this year’s World Series.

Suffice to say, though, that it would be great to find another Warren Harding. Here’s a chart based on OMB data showing that he actually cut spending (and we’re looking at genuine spending cuts, not the make-believe spending cuts that happen in DC when politicians boost the budget by less than previously planned).

According to fans of Keynesian economics, these spending cuts should have tanked the economy, but instead we got a boom.

P.S. By the way, something similar happened after World War II.

P.P.S. Back in 2012, I shared some insightful analysis from Thomas Sowell about Harding’s economic policy.

P.P.P.S. Harding also lowered tax rates.

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There’s much to dislike about Keynesian economics, most notably that it tells politicians that their vice – buying votes by spending other people’s money – is somehow a virtue.

Advocates of Keynesianism also can be very simplistic, sometimes falling victim to the “broken window fallacy” described in this short video.

Bastiat is perhaps most well-known for his insight on this fallacy.

He explained that a good economist was capable of recognizing the difference between the seen and unseen (if you want to be wonky, the difference between direct effects and indirect effects).

Sadly, there are many people today who don’t grasp this distinction.

You probably won’t be surprised to learn that Paul Krugman is in this group.

And now we have a new member of the club. In a piece for Axios, Felix Salmon reveals he still believes in this primitive form of Keynesian economics.

There’s one big non-political reason why luxury stores were targeted by looters: Their wares can now be sold for top dollar, thanks to the rise of what is often known as the “circular economy.” …Instead of stealing goods they need to live, looters are increasingly stealing the goods they can most easily sell online. …Economically speaking, looting can have positive effects. Rebuilding and restocking stores increases demand for goods and labor, especially during a pandemic when millions of workers are otherwise unemployed. …The circular economy helps to reduce waste and can efficiently keep luxury goods in the hands of those who value them most highly.

To be fair, Salmon would have been correct (though immoral) if he said looting had a positive effect on looters.

But it definitely doesn’t have a positive effect on merchants (who lose money in the short run and probably have higher insurance payments thereafter), on consumers (who are likely to pay more for products in the future), or on the overall economy (because of the unseen reductions in other types of economic activity).

Let’s wrap up with a cartoon on the topic.

P.S. If you like humor about Keynesian economics, here’s the place to start.  You’ll find additional material herehere, here, here, and here.

P.P.S. Here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally entertaining sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

P.P.P.S. To be fair to Keynes, he wrote that taxes should never exceed 25 percent.

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The coronavirus is a genuine threat to prosperity, at least in the short run, in large part because it is causing a contraction in global trade.

The silver lining to that dark cloud is that President Trump may learn that trade is actually good rather than bad.

But dark clouds also can have dark linings, at least when the crowd in Washington decides it’s time for another dose of Keynesian economics.

  • Fiscal Keynesianism – the government borrows money from credit markets and politicians then redistribute the funds in hopes that recipients will spend more.
  • Monetary Keynesianism – the government creates more money in hopes that lower interest rates will stimulate borrowing and recipients will spend more.

Critics warn, correctly, that Keynesian policies are misguided. More spending is a consequence of economic growth, not the trigger for economic growth.

But the “bad penny” of Keynesian economics keeps reappearing because it gives politicians an excuse to buy votes.

The Wall Street Journal opined this morning about the risks of more Keynesian monetary stimulus.

The Federal Reserve has become the default doctor for whatever ails the U.S. economy, and on Tuesday the financial physician applied what it hopes will be monetary balm for the economic damage from the coronavirus. …The theory behind the rate cut appears to be that aggressive action is the best way to send a strong message of economic insurance. …Count us skeptical. …Nobody is going to take that flight to Tokyo because the Fed is suddenly paying less on excess reserves. …The Fed’s great mistake after 9/11 was that it kept rates at or near 1% for far too long even after the 2003 tax cut had the economy humming. The seeds of the housing boom and bust were sown.

And the editorial also warned about more Keynesian fiscal stimulus.

Even if a temporary tax cuts is the vehicle used to dump money into the economy.

This being an election year, the political class is also starting to demand more fiscal “stimulus.” …If Mr. Trump falls for that, he’d be embracing Joe Bidenomics. We tried the temporary payroll-tax cut idea in the slow growth Obama era, reducing the worker portion of the levy to 4.2% from 6.2% of salary. It took effect in January 2011, but the unemployment rate stayed above 9% for most of the rest of that year. Temporary tax cuts put more money in peoples’ pockets and can give a short-term lift to the GDP statistics. But the growth effect quickly vanishes because it doesn’t permanently change the incentive to save and invest.

Excellent points.

Permanent supply-side tax cuts encourage more prosperity, not temporary Keynesian-style tax cuts.

Given the political division in Washington, it’s unclear whether politicians will agree on how to pursue fiscal Keynesianism.

But that doesn’t mean we can rest easy. Trump is a fan of Keynesian monetary policy and the Federal Reserve is susceptible to political pressure.

Just don’t expect good results from monetary tinkering. George Melloan wrote about the ineffectiveness of monetary stimulus last year, well before coronavirus became an issue.

The most recent promoters of monetary “stimulus” were Barack Obama and the Fed chairmen who served during his presidency, Ben Bernanke and Janet Yellen. …the Obama-era chairmen tried to stimulate growth “by keeping its policy rate at zero for six-and-a-half years into the economic recovery and more than quadrupled the size of the Fed’s balance sheet.” And what do we have to show for it? After the 2009 slump, economic growth from 2010-17 averaged 2.2%, well below the 3% historical average, despite the Fed’s drastic measures. Low interest rates certainly stimulate borrowing, but that isn’t the same as economic growth. Indeed it can often restrain growth. …Congress got the idea that credit somehow comes free of charge. So now the likes of Elizabeth Warren and Bernie Sanders think there is no limit to how much Uncle Sam can borrow. Easy money not only expands debt-service costs but also encourages malinvestment. …when Donald Trump hammers on the Fed for lower rates, …he is embarked on a fool’s errand.

Since the Federal Reserve has already slashed interest rates, that Keynesian horse already has left the barn.

That being said, don’t expect positive results. Keynesian economics has a very poor track record (if fiscal Keynesianism and monetary Keynesianism were a recipe for success, Japan would be booming).

So let’s hope politicians don’t put a saddle on the Keynesian fiscal horse as well.

If Trump really feels he has to do something, I ranked his options last summer.

The bottom line is that good short-run policy is also good long-run policy.

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Back in 2010, I wrote about the absurd contention, promoted by some advocates of Keynesian economics, that wars are good for prosperity.

According to this crackpot theory, destroying wealth is a net positive because people then have to spend money to rebuild.

Now this “conceptual bad penny” is showing up again.

The New York Times, in an article about Iran’s economy, includes some analysis suggesting that war would stimulate growth.

…some experts suggest that the regime’s hard-liners may eventually come to embrace hostilities with the United States as a means of stimulating the anemic economy. …Iran has in recent years focused on forging a so-called resistance economy in which the state has invested aggressively, subsidizing strategic industries, while seeking to substitute domestic production for imported goods. …it appears to have raised employment. Hard-liners might come to see a fight with Iran’s archenemy, the United States, as an opportunity to expand the resistance economy.

Needless to say, Iran is marching in the wrong direction. Not only would a war be devastating for the country’s prosperity, but Iran also is making a big mistake by pursuing a policy of “import substitution.”

That’s basically the Peronist approach that helped trigger Argentina’s big economic decline. Though, to be fair, Iran presumably is doing the wrong thing for geopolitical reasons (avoiding sanctions) rather than protectionist reasons.

There are some Keynesians in other parts of the world who think war is good for growth, in part based on a misreading of America’s economic history.

In a piece for the Foundation for Economic Education, Professor Burton Folsom exposes a great weakness in their argument, pointing out that advocates of Keynesian wrongly expected a return to depression when government spending dropped after World War II.

On the surface, World War II seems to mark the end of the Great Depression. During the war more than 12 million Americans were sent into the military, and a similar number toiled in defense-related jobs. Those war jobs seemingly took care of the 17 million unemployed in 1939. Most historians have therefore cited the massive spending during wartime as the event that ended the Great Depression. …In truth, building tanks and feeding soldiers—necessary as it was to winning the war—became a crushing financial burden. …In other words, the war had only postponed the issue of recovery. …President Roosevelt and his New Dealers sensed that war spending was not the ultimate solution; they feared that the Great Depression—with more unemployment than ever—would resume after Hitler and Hirohito surrendered. Yet FDR’s team was blindly wedded to the federal spending that…had perpetuated the Great Depression during the 1930s. …Roosevelt’s death in the last year of the war prevented him from unveiling his New Deal revival. But President Harry Truman was on board for most of the new reforms. …Republicans and southern Democrats refused to give Truman his New Deal revival. …Instead they cut tax rates to encourage entrepreneurs to create jobs for the returning veterans. …In 1945 and 1946 Congress repealed the excess-profits tax, cut the corporate tax to a maximum 38 percent, and cut the top income tax rate to 86 percent. In 1948 Congress sliced the top marginal rate further, to 82 percent.

Let’s be thankful that FDR (and then Truman) didn’t succeed in the plan for an “economic bill of rights” that would have radically expanded the power of government.

For those interested, there are other possible economic consequences of war.

In a scholarly study for the Journal of Monetary Economics, Professors Dan Ben-David and David H. Papell find that moments of significant economic disruption – such as wars – often are followed by periods of above-average and better-than-expected growth.

In this paper, we use up to 130 years of annual aggregate and per capita GDP data for 16 countries to investigate whether output exhibits a trend break and whether economic growth is constant or changing over time. …This study provides empirical evidence that, for nearly every one of the countries, the years that provide the strongest evidence for a trend break are associated with a sharp decline in GDP. These breaks are associated with World War II for most of the countries and either World War I or the Great Depression for the remainder. While countries do tend to exhibit relatively constant growth rates for extended periods of time, the occurrence of a major shock to the economy and the resultant drop in levels are usually followed by sustained growth that exceeds the earlier steady state growth. …On average, aggregate postbreak steady state growth rates are 79 percent higher than the average prebreak rates. The results are even stronger for the per capita case, where all fifteen countries exhibit postbreak growth rates that exceed prebreak rates. In the per capita case, the steady state postbreak rates are 163 percent higher than the steady state prebreak rates.

Their study doesn’t explain why the economy expands beyond the pre-disruption trend, but one obvious explanation is that wars erode the power of privileged interest groups and thus reduce the deadweight cost of cronyism. Especially for nations that lose wars and have to start from scratch.

That’s not an excuse to have a war, of course, but it does suggest that dark clouds can have silver linings.

But sometimes dark clouds have dark linings.

In a column for Vox, Dylan Matthews examines research about the link between war and harsh tax rates.

…for the first century of American history, the federal government was funded mainly through tariffs, not income taxes. It was only in the early 20th century that the 16th Amendment authorizing income taxes passed… A recent paper by UC – Berkeley grad student Juliana Londoño Vélez provides an intriguing explanation for this evolution. Progressive taxation wasn’t an inevitable effect of democracy… It was an accidental effect of the 20th century’s massive wars. …The first federal income tax proposal came during the War of 1812, and one was implemented briefly during the Civil War. While the Progressive Era brought a renewed push, and the 16th Amendment and an accompanying income tax law were passed four years before US entry into World War I, it wasn’t until the US joined the conflict that the tax’s scale expanded to modern levels. …World War I also greatly expanded the French income tax; in 1920, to help pay for reconstruction, the top rate grew from 2 percent to 50 percent. …Londoño Vélez’s argument is quantitative. She compiled data on top income tax rates for sixteen rich, developed countries, and pairs it with data on mass mobilizations for war. …Londoño Vélez found that “no country had high taxes on the rich before the advent of war, with [the] top rate rarely exceeding 10 percent … the Wars created substantial income tax progressivity, with periods of mass war mobilization coinciding with significant rises in the top income tax rate.” …Londoño Vélez also finds that war mobilization has a significant effect on income tax rates five years on, suggesting that the effect on taxes persisted.

Here’s Figure 1 from the article, showing how tax burdens jumped because of World War I and then jumped again because of World War II.

My two cents is that wars may have been the initial excuse for income taxes and high rates, but politicians eventually would have concocted other reasons (based on their self interest) to extract lots of money.

Indeed, “Wagner’s Law” is an entire hypothesis based on the notion that politicians figure out how to grab ever-greater amounts of money as nations get richer.

That being said, it’s good to have another reason to oppose war.

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Arthur Okun was a well-known left-of-center economist last century. He taught at Yale, was Chairman of the Council of Economic Advisors for President Lyndon Johnson, and also did a stint at Brookings.

In today’s column, I’m not going to blame him for any of LBJ’s mistakes (being a big spender, creating Medicare and Medicaid).

Instead, I’m going to praise Okun for his honesty. Is his book, Equality and Efficiency: The Big Trade Off, he openly acknowledged that higher taxes and bigger government – policies he often favored – hindered economic performance.

Sadly, some folks on the left today are not similarly honest.

A column in the New York Times by Jim Tankersley looks at the odd claim, put forth by Elizabeth Warren and others, that class-warfare taxes are good for growth.

Elizabeth Warren is leading a liberal rebellion against a long-held economic view that large tax increases slow economic growth… Generations of economists, across much of the ideological spectrum, have long held that higher taxes reduce investment, slowing economic growth. …Ms. Warren and other leading Democrats say the opposite. …that her plans to tax the rich and spend the revenue to lift the poor and the middle class would accelerate economic growth, not impede it. …That argument tries to reframe a classic debate…by suggesting there is no trade-off between increasing the size of the pie and dividing the slices more equitably among all Americans.

Most people, when looking at why some nations grow faster and become more prosperous, naturally recognize that there’s a trade-off.

So what’s the basis of this counter-intuitive and anti-empirical assertion from Warren, et al?

It’s partly based on their assertion that more government spending is an “investment” that will lead to more growth. In other words, politicians ostensibly will allocate new tax revenues in a productive manner.

Ms. Warren wrote on Twitter that education, child care and student loan relief programs funded by her tax on wealthy Americans would “grow the economy.” In a separate post, she said student debt relief would “supercharge” growth. …Ms. Warren is making the case that the economy could benefit if money is redistributed from the rich and corporations to uses that she and other liberals say would be more productive. …a belief that well-targeted government spending can encourage more Americans to work, invest and build skills that would make them more productive.

To be fair, this isn’t a totally absurd argument.

The Rahn Curve, for instance, is predicated on the notion that some spending on core public goods is correlated with better economic performance.

It’s only when government gets too big that the Rahn Curve begins to show that spending has a negative impact on growth.

For what it’s worth, modern research says the growth-maximizing size of government is about 20 percent of economic output, though I think historical evidence indicates that number should be much lower.

But even if the correct figure is 20 percent of GDP, there’s no support for Senator Warren’s position since overall government spending currently consumes close to 40 percent of U.S. economic output.

Warren and others also make the discredited Keynesian argument about government spending somehow kick-starting growth, ostensibly because a tax-and-spend agenda will give money to poor people who are more likely to consume (in the Keynesian model, saving and investing can be a bad thing).

Democrats cite evidence that transferring money to poor and middle-class individuals would increase consumer spending…liberal economists say taxes on high-earners could spur growth even if the government did nothing with the revenue because the concentration of income and wealth is dampening consumer spending.

This argument is dependent on the notion that consumer spending drives the economy.

But that’s not the case. As I explained two years ago, consumer spending is a reflection of a strong economy, not the driver of a strong economy.

Which helps to explain why the data show that Keynesian stimulus schemes routinely fail.

Moreover, the Keynesian model only says it is good to artificially stimulate consumer spending when trying to deal with a weak economy. There’s nothing in the theory (at least as Keynes described it) that suggests it’s good to endlessly expand the public sector.

The bottom line is that there’s no meaningful theoretical or empirical support for a tax-and-spend agenda.

Which is why I think this visual very succinctly captures what Warren, Sanders, and the rest (including international bureaucracies) are proposing.

P.S. By the way, I think Tankersley’s article was quite fair. It cited arguments from both sides and had a neutral tone.

But there’s one part that rubbed me the wrong way. He implies in this section that America’s relatively modest aggregate tax burden somehow helps the left’s argument.

Fueling their argument is the fact that the United States now has one of the lowest corporate tax burdens among developed nations — a direct result of President Trump’s 2017 tax cuts. Tax revenues at all levels of government in the United States fell to 24.3 percent of the economy last year, the Organization for Economic Cooperation and Development reported on Thursday, down from 26.8 percent in 2017. America is now has the fourth lowest tax burden in all of the O.E.C.D.

Huh? How does the fact that we have lower taxes that other nations serve as “fuel” for the left?

Since living standards in the United States are considerably higher than they are in higher-taxed Europe, it’s actually “fuel” for those of us who argue against class-warfare taxation and bigger government.

Though maybe Tankersley is suggesting that America’s comparatively modest tax burden is fueling the greed of U.S. politicians who are envious of their European counterparts?

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I was interviewed yesterday about the possibility of a recession and potential policy options. You can watch the full interview here and get my two cents about economic forecasting, as well as Keynesian monetary policy.

In this segment, you can see that I’m also worried about a return of Keynesian fiscal policy.

Let’s examine the issue, starting with an analogy.

According to the Urban Dictionary, a bad penny is a “thing which is unpleasant, disreputable, or otherwise unwanted, especially one which repeatedly appears at a bad time.”

That’s a good description of Keynesian economics, which is the strange notion that the government can provide “stimulus” by borrowing money from some people, giving it to other people, and assuming that society is then more prosperous.

Keynesianism has a long track record…of failure.

Now the bad penny is showing up again.

Donald Trump already has been pushing Keynesian monetary policy, and the Washington Post reports that he is now contemplating Keynesian fiscal policy.

Several senior White House officials have begun discussing whether to push for a temporary payroll tax cut as a way to arrest an economic slowdown… The payroll tax was last cut in 2011 and 2012, to 4.2 percent, during the Obama administration as a way to encourage more consumer spending during the most recent economic downturn. …Payroll tax cuts have remained popular with Democrats largely because they are seen as targeting working Americans and the money is often immediately spent by consumers and not saved. …In the past, Democrats have strongly supported payroll tax cuts, while Republicans have been more resistant. Republicans have complained that such cuts do not help the economy.

As I wrote back in 2011, it’s possible that a temporary reduction in the payroll tax rate could have some positive impact. After all, the marginal tax rate on work would be lower.

But it wouldn’t be a large effect, and whatever benefit wouldn’t accrue for Keynesian reasons. Consumer spending is a symptom of a strong economy, not the cause of a strong economy.

Now let’s look at another nation.

Germany was actually semi-sensible during the last recession, resisting the siren song of Keynesianism.

But now politicians in Berlin are contemplating a so-called stimulus.

The Wall Street Journal opines against this type of fiscal backsliding.

The German Finance Minister said Sunday he might possibly…cobble together a Keynesian stimulus package for his recession-menaced country. …Berlin invites this stimulus pressure as the only large eurozone government responsible enough to live within its means. A balanced budget and government debt below 60% of GDP encourage the International Monetary Fund…to call for Berlin to “use” its fiscal headroom to avert a recession. …Germany’s record on delivering projects quickly is lousy, as with Berlin’s perennially delayed new airport. Too few projects would arrive in time to stimulate the new business investment proponents say would save Germany from an imminent downturn, if they stimulate business investment at all. …The worst idea, though one of the more likely, is some form of cash-for-clunkers tax handout to support the auto industry.

The right answer, as I said in the above interview, is to adopt sensible pro-market reforms.

The main goal is faster long-run growth, but such policies also help in the short run.

And the WSJ identifies some of those reforms for Germany.

Cutting taxes in Germany’s overtaxed economy would be a faster and more effective stimulus… The main stimulus Germany needs is deregulatory. In the World Bank’s latest Doing Business survey, Germany ranked behind France on time and cost of starting a business, gaining construction permits and trading across borders. Germany also lags on investor protections and ease of filing tax returns. A dishonorable mention goes to Mrs. Merkel’s Energiewende (energy transformation), which is driving up costs for businesses already struggling with trade war, taxes and regulation. …these problems don’t require €50 billion to fix, and scrapping the Energiewende would save Berlin and beleaguered businesses and households money. The bad news for everyone is that Berlin is more likely to fall for a quick-fix chimera and waste the €50 billion.

The bottom line is that Keynesian economics won’t work. Not in the United States, and not in Germany.

But politicians can’t resist this failed approach because they can pretend that their vice – buying votes by spending other people’s money – is actually a virtue.

In other words, “public choice” in action.

Let’s close by augmenting our collection of Keynesian humor. Here’s a “your mama” cartoon, based on the Keynesian notion that you can boost an economy by destroying wealth.

P.S. Here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally enjoyable sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

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Earlier this month, I commented on a Wall Street Journal report that expressed puzzlement about some sub-par economic numbers in America even though politicians were spending a lot more money.

I used the opportunity to explain that this shouldn’t be a mystery. Keynesian economics never worked in the past, so it shouldn’t be a surprise that it’s not working today.

This is true in the United States, and it’s true in other nations.

Speaking of which, here are some excerpts from a story in the Wall Street Journal about China’s sagging economy.

A strategy by Chinese policy makers to stimulate the economy…hasn’t stopped growth from slowing, stoking expectations that Beijing will roll out more incentives such as easier credit conditions to get businesses and consumers spending. …The breakdown of second-quarter figures shows how roughly 2 trillion yuan ($291 billion) of stimulus, introduced by Premier Li Keqiang in March, is failing to make business owners less risk-averse. …While Beijing has repeatedly said it wouldn’t resort to flooding the economy with credit, economists say it is growing more likely that policy makers will use broad-based measures to ensure economic stability. That would include fiscal and monetary stimulus that risks inflating debt levels. Policy makers could lower interest rates, relax borrowing restrictions on local governments and ease limits on home purchases in big cities, economists say. Measures they could use to stimulate consumption include subsidies to boost purchases of cars, home appliances and other big-ticket items.

This is very worrisome.

China doesn’t need more so-called stimulus policies. Whether it’s Keynesian fiscal policy or Keynesian monetary policy, trying to artificially goose consumption is a dead-end approach.

At best, temporary over-consumption produces a very transitory blip in the economic data.

But it leaves a permanent pile of debt.

This is why, as I wrote just a couple of days ago, China instead needs free-market reforms to liberalize the economy.

A period of reform beginning in the late 1970s produced great results. Another burst of liberalization today would be similarly beneficial.

P.S. Free-market reforms in China also would help cool trade tensions. That’s because a richer China would buy more from America, thus appeasing folks like Trump who mistakenly fixate on the trade deficit. More important, economic liberalization presumably would mean less central planning and cronyism, thus mitigating the concern that Chinese companies are using subsidies to gain an unfair advantage.

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Given the repeated failures of Keynesian economic policy, both in America and around the world, you would think the theory would be discredited.

Or at least be treated with considerable skepticism by anyone with rudimentary knowledge of economic affairs.

Apparently financial journalists aren’t very familiar with real-world evidence.

Here are some excerpts from a news report in the Wall Street Journal.

The economy was supposed to get a lift this year from higher government spending enacted in 2018, but so far much of that stimulus hasn’t shown up, puzzling economists. Federal dollars contributed significantly less to gross domestic product in early 2019 than what economic forecasters had predicted after Congress reached a two-year budget deal to boost government spending. …Spending by consumers and businesses are the most important drivers of economic growth, but in recent years, government outlays have played a bigger role in supporting the economy.

The lack of “stimulus” wasn’t puzzling to all economists, just the ones who still believe in the perpetual motion machine of Keynesian economics.

Maybe the reporter, Kate Davidson, should have made a few more phone calls.

Especially, for instance, to the people who correctly analyzed the failure of Obama’s so-called stimulus.

With any luck, she would have learned not to put the cart before the horse. Spending by consumers and businesses is a consequence of a strong economy, not a “driver.”

Another problem with the article is that she also falls for the fallacy of GDP statistics.

Economists are now wondering whether government spending will catch up to boost the economy later in the year… If government spending were to catch up in the second quarter, it would add 1.6 percentage points to GDP growth that quarter. …The 2018 bipartisan budget deal provided nearly $300 billion more for federal spending in fiscal years 2018 and 2019 above spending limits set in 2011.

The government’s numbers for gross domestic product are a measure of how national income is allocated.

If more of our income is diverted to Washington, that doesn’t mean there’s more of it. It simply means that less of our income is available for private uses.

That’s why gross domestic income is a preferable number. It shows the ways – wages and salaries, small business income, corporate profits, etc – that we earn our national income.

Last but not least, I can’t resist commenting on these two additional sentences, both of which cry out for correction.

Most economists expect separate stimulus provided by the 2017 tax cuts to continue fading this year. …And they must raise the federal borrowing limit this fall to avoid defaulting on the government’s debt.

Sigh.

Ms. Davidson applied misguided Keynesian analysis to the 2017 tax cut.

The accurate way to analyze changes in tax policy is to measure changes in marginal tax rates on productive behavior. Using that correct approach, the pro-growth impact grows over time rather than dissipating.

And she also applied misguided analysis to the upcoming vote over the debt limit.

If the limit isn’t increased, the government is forced to immediately operate on a money-in/money-out basis (i.e. a balanced budget requirement). But since revenues are far greater than interest payments on the debt, there would be plenty of revenue available to fulfill obligations to bondholders. A default would only occur if the Treasury Department deliberately made that choice.

Needless to say, that ain’t gonna happen.

The bottom line is that – at best – Keynesian spending can temporarily boost a nation’s level of consumption, but economic policy should instead focus on increasing production and income.

P.S. If you want to enjoy some Keynesian-themed humor, click here.

P.P.S. If you’re a glutton for punishment, you can watch my 11-year old video on Keynesian economics.

P.P.P.S. Sadly, the article was completely correct about the huge spending increases that Trump and Congress approved when the spending caps were busted (again) in 2018.

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Being a policy wonk in a political town isn’t easy. I care about economic liberty while many other people simply care about political maneuvering. And the gap between policy advocacy and personality politics has become even larger in the Age of Trump.

One result is that people who should be allies periodically are upset with my columns. Never Trumpers scold me one day and Trump fanboys scold me the next day. Fortunately, I have a very simple set of responses.

  • If you would have loudly cheered for a policy under Reagan but oppose a similar policy under Trump, you’re the problem.
  • If you would have loudly condemned a policy under Obama but support a similar policy under Trump, you’re the problem.

Today, we’re going to look at an example of the latter.

The New York Times reported today on Trump’s advocacy of easy-money Keynesianism.

President Trump on Friday called on the Federal Reserve to cut interest rates and take additional steps to stimulate economic growth… On Friday, he escalated his previous critiques of the Fed by pressing for it to resume the type of stimulus campaign it undertook after the recession to jump-start economic growth. That program, known as quantitative easing, resulted in the Fed buying more than $4 trillion worth of Treasury bonds and mortgage-backed securities as a way to increase the supply of money in the financial system.

I criticized these policies under Obama, over and over and over again.

If I suddenly supported this approach under Trump, that would make me a hypocrite or a partisan.

I’m sure I have my share of flaws, but that’s not one of them.

Regardless of whether a politician is a Republican or a Democrat, I don’t like Keynesian fiscal policy and I don’t like Keynesian monetary policy.

Simply stated, the Keynesians are all about artificially boosting consumption, but sustainable growth is only possible with policies that boost production.

There are two additional passages from the article that deserve some commentary.

First, you don’t measure inflation by simply looking at consumer prices. It’s quite possible that easy money will result in asset bubbles instead.

That’s why Trump is flat-out wrong in this excerpt.

“…I personally think the Fed should drop rates,” Mr. Trump said. “I think they really slowed us down. There’s no inflation. I would say in terms of quantitative tightening, it should actually now be quantitative easing. Very little if any inflation. And I think they should drop rates, and they should get rid of quantitative tightening. You would see a rocket ship. Despite that, we’re doing very well.”

To be sure, many senior Democrats were similarly wrong when Obama was in the White House and they wanted to goose the economy.

Which brings me to the second point about some Democrats magically becoming born-again advocates of hard money now that Trump is on the other side.

Democrats denounced Mr. Trump’s comments, saying they showed his disregard for the traditional independence of the Fed and his desire to use its powers to help him win re-election. “There’s no question that President Trump is seeking to undermine the…independence of the Federal Reserve to boost his own re-election prospects,” said Senator Ron Wyden of Oregon, the top Democrat on the Finance Committee.

Notwithstanding what I wrote a few days ago, I agree with Sen. Wyden on this point.

Though I definitely don’t recall him expressing similar concerns when Obama was appointing easy-money supporters to the Federal Reserve.

To close, here’s what I said back in October about Trump’s Keynesian approach to monetary policy.

I also commented on this issue earlier this year. And I definitely recommend these insights from a British central banker.

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Back in January, I wrote about the $42 trillion price tag of Alexandria Ocasio-Cortez’s Green New Deal.

To pay for this massive expansion in the burden of government spending, some advocates have embraced “Modern Monetary Theory,” which basically assumes the Federal Reserve can finance new boondoggles by printing money.

I debated this issue yesterday on CNBC. Here’s a clip from that interview.

Wow, this Modern Monetary Theory (MMT) reminds me of the old joke about “I can’t be out of money. I still have checks in my checkbook.”

I don’t know how far Ms. Kelton would go with this approach. I know from previous encounters that she’s a genuine Keynesian and thus willing to borrow lots of money to finance a larger public sector. But her answer at 2:45 of the interview also suggests she’s okay with using the Federal Reserve to finance bigger government.

In either case, our debate is really about the size of government.

And anybody who wants a bigger burden of government is at least semi-obliged to say how it would be financed. The MMT crowd stands out because they basically say the Federal Reserve can print money.

To help understand the various options, I’ve created a helpful flowchart.

It’s possible, of course, for my statist friends to say “all of the above,” so these are not mutually exclusive categories.

Though the MMT people who select “Print money!” are probably the craziest.

And I hope that they are not successful. After all, nations that have used the printing press to finance big government (most recently, Venezuela and Zimbabwe) are not exactly good role models.

I noted in the interview that MMT is so radical that it is opposed by conventional economists on the right and left.

For instance, Michael Strain of the right-leaning American Enterprise Institute opines that the theory is preposterous and nonsensical.

…modern monetary theory…freshman Democratic Representative Alexandria Ocasio-Cortez spoke favorably about it earlier this month. …MMT is…sometimes a theory of money. MMT is also being discussed in the context of a political program to justify huge increases in social spending. Finally, there is its role as a prescription for macroeconomic policy. …The bedrock observation of MMT is correct: Any government that issues its own currency can always pay its bills. …this is about all that can be said favorably regarding modern monetary theory. …it is in its ideas about macroeconomic policy that MMT fully earns its place on the fringe. …what does MMT have to say about inflation when it does materialize? …it falls to the institution with authority over tax and budget policy — the U.S. Congress — to make sure prices are stable by raising taxes… MMT seems to call for tax increases in order to restrain inflation. …Modern monetary theory…if enacted it could cause great harm to the U.S. economy.

From the left side of the spectrum, here’s some of what Joseph Minarik wrote on the topic.

MMT rests on simplistic observations that have just enough truth to take in those who need to believe. Believers in MMT see crying societal needs… By common reckoning, government lacks the resources to address all of those needs immediately. MMT solves that problem with a simple and (literally) true observation: The federal government can just print the money. …And that is what willing policymakers choose to hear: Anything. Without limit. It is so convenient —  “too good to check.” …to MMT adherents, the Federal Reserve and all other inflation “Chicken Littles” are and forever have been totally wrong. There has not been rapid inflation for 20 years or so. Therefore, there never will be inflation again. …Yes, inflation is low. But it always is before it rises. And once inflation begins, slowing it is hard and painful. MMT is the perfect theory for the video game generation, which never saw the 1960s economic miscalculations so much like what MMT advocates today, and apparently believes that such mistakes can be reversed painlessly by just hitting the reset button. …the consequences could be catastrophic.

Catastrophic indeed.

Letting the inflation genie out of the bottle is not a good idea. And the policies of the MMT crowd presumably would lead to something far worse than what America experienced in the 1970s.

Rescuing the economy from that inflation was painful, so it’s not pleasant to imagine what would be needed to salvage the country if the MMT people ever got their hands on the levers of power.

Let’s wrap this up. Earlier this week, I presented a guide to fiscal policy based on six core principles.

If Modern Monetary Theory gains more traction, I may have to add a postscript.

P.S. If ever imposed, I suspect MMT would be very good news for people with a lot of gold and/or a lot of Bitcoin.

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I don’t 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 money.

This is actually a two-part debate.

From a microeconomic perspective, there is some genuine disruption for affected federal bureaucrats, even if they eventually will get full – and lavish – compensation for their involuntary vacations. And some federal contractors are being hit as well.

There’s also a debate about the macroeconomic impact, with some making the Keynesian argument that government spending is somehow a stimulant for the economy.

I’ve endlessly explained why Keynesian argument is bad in theory and a joke in reality.

In this interview, I tried to make a more nuanced point, explaining that we should focus more on gross domestic income (GDI), which measures how we earn our national income, rather than gross domestic product (GDP), which measures how we allocate national income.

I’m not sure I got my point across effectively in a 30-second sound bite, but it’s a point worth making since people who understand GDI are much less susceptible to the Keynesian perpetual-motion-machine argument.

But enough from me.

Harold Furchtgott-Roth, in a column for the Wall Street Journal, analyzes the potential macroeconomic consequences of the shutdown.

Does the U.S. government shutdown endanger economic growth? It has led to missed paychecks… Yet these employees represent approximately 0.5% of all American workers… The effect of the furloughs on gross domestic product is likely small. …U.S. GDP is more than $20 trillion annually, or approximately $55 billion daily. The daily compensation of furloughed federal workers is about $52.5 million, or less than 0.1% of GDP. This figure does not include affected government contractors, but even doubling or tripling this figure yields only a small share of GDP. …The net effect of the partial shutdown on direct salaries and wages will primarily be to delay, but not reduce, income for the affected families. …Maybe that’s one reason the stock market, a barometer of expectations of future economic growth, has been unperturbed by the budget impasse. The Dow and the S&P 500 are up nearly 9% since the shutdown began Dec. 22. Experience also gives reason for optimism. The last major government shutdown occurred in 1995-96. It affected the entire federal government, not only part of it. Yet U.S. GDP growth increased from 2.7% in 1995 to 3.8% in 1996.

That final sentence is key.

The Keynesians are always predicting bad consequences when there’s some sort of policy that limits government spending.

But the real-world outcome is always different, as we saw with the sequester.

Steve Malanga, writing for the City Journal, takes a microeconomic perspective on the shutdown.

I’ve seen no evidence that the shutdown will affect me and my family. I’ve heard no friend, neighbor, or relative even mention it. Virtually everyone I know outside of my professional life seems to be going about their business. Still, I’ve taken a thorough look at press coverage over the past two weeks and found nearly 500 stories on how the closure is supposed to affect our lives. …The press seems intent on convincing the rest of us that we’re at risk… Many headlines stoking fear contradict the articles they introduce. A story in the Guardian, for instance, was pitched as a tale of the shocking impact that the shutdown would have on a small rural town. Though the paper tells us the town is “in the grip of a partial government shutdown,” readers find little evidence of it. “We really haven’t noticed anything,” City Manager Mike Deal confesses. …a story in the Bangor Daily News noted that the Small Business Administration, which hands out government-subsidized loans to firms, won’t be making them during the shutdown. Still, the story notes, that’s not going to make much of a hit on the local economy, since the SBA has made just 2,687 loans in Maine since 2010, for an average of just 27 a month. …a story in the Lafayette Daily Advertiser entitled, “How the shutdown is affecting local breweries in Louisiana.” The problem, the owner of Bayou Teche Brewing explains, is that the Alcohol and Tobacco Tax and Trade Bureau is responsible for approving labels for new beers, and the agency’s not working right now. “With every government shutdown that’s happened since we opened, we’ve had a beer needing label approval,” said Karlos Knott of Bayou. “And that results in beer we’re just having to sit on.”

Steve’s column reminds me of a piece I wrote back in 2013.

Which is why I wish one of the lessons we learned from the shutdown fight is that much of what government does is either pointless or counterproductive.

I’m not holding my breath waiting for that to happen.

Anyhow, no column on a government shutdown would be complete without some satire.

We’ll start with a sarcastic observation from Libertarian Reddit. Though it actually raises a serious point. I want to downsize Washington, but I don’t want any needless pain for bureaucrats. Yet shouldn’t we be similarly sensitive to the plight of folks in the private sector who suffer because of D.C.’s bad policies?

And it appears that government bureaucrats have figured out what to do with their hands now that they have extra time on their hands.

For what it’s worth, some bureaucrats engage in such recreation even when the government is open.

If you enjoy shutdown humor, you can find older examples here and here, and a new example here.

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I wrote in 2010 that Keynesian economics is like the Freddy Krueger movies. It refuses to die despite powerful evidence that you don’t help an economy by increasing the burden of government. In 2014, I wrote the theory was based on “fairy dust.” And in 2015, I said Keynesianism was akin to a perpetual motion machine.

What’s my proof? Well, during the period when Obama’s “stimulus” was in effect, unemployment got worse. And the best growth period under Obama was after the sequester, which Obama and others said was going to hurt the economy.

When I discuss these issues with Keynesians, they reflexively claim that Obama would have gotten good results if only he had increased spending even faster (which is also their knee-jerk response when you point out that Keynesianism didn’t work for Hoover, didn’t work for FDR, didn’t work for Japan, etc).

This is the Wizard-of-Oz part of Keynesianism. No matter how bad it works in the real world, they always claim that it theoretically could have worked if governments simply spent more.

But how do they explain away the fact that nations that adopt the right kind of austerity get better results?

Professor Edmund Phelps of Columbia University won the Nobel Prize in economics in 2006. Here’s some of what he wrote today for the Wall Street Journal, starting with a description of the debate.

Generations of Keynesian economists have claimed that when a loss of “demand” causes output to fall and unemployment to rise, the economy does not revive by itself. Instead a “stimulus” to demand is necessary and sufficient to pull the economy back to an equilibrium level of activity. …it is widely thought that fiscal stimulus—increased public spending as well as tax cuts—helped pull employment from its depths in 2010 or so back to normal in 2017. …But is there evidence that stimulus was behind America’s recovery—or, for that matter, the recoveries in Germany, Switzerland, Sweden, Britain and Ireland? And is there evidence that the absence of stimulus—a tight rein on public spending known as “fiscal austerity”—is to blame for the lack of a full recovery in Portugal, Italy, France and Spain?

So he looked at the real-world evidence and discovered that Keynesian policy is correlated with worse outcomes.

The stimulus story suggests that, in the years after they hit bottom, the countries that adopted relatively large fiscal deficits—measured by the average increase in public debt from 2011-17 as a percentage of gross domestic product—would have a relatively speedy recovery to show for it. Did they? As the accompanying chart shows, the evidence does not support the stimulus story. Big deficits did not speed up recoveries. In fact, the relationship is negative, suggesting fiscal profligacy led to contraction and fiscal responsibility would have been better. …what about monetary stimulus—increasing the supply of money or reducing the cost of money in relation to the return on capital? We can perform a similar test: Did countries where monetary stimulus in the years after they hit bottom was relatively strong—measured by the average quantity of monetary assets purchased by the central bank from 2011-17—have relatively speedy recoveries? This is a complicated question, but preliminary explorations do not give strong support to that thesis either. …the Keynesian tool kit of fiscal and monetary stimulus is more or less ineffective.

Here’s the chart showing how so-called fiscal stimulus is not associated with economic recovery.

He also reminds us that Keynesian predictions of post-World War II disaster were completely wrong.

Don’t history and theory overwhelmingly support stimulus? Well, no. First, the history: Soldiers returning from World War II expanded the civilian labor force from 53.9 million in 1945 to 60.2 million in 1947, leading many economists to fear an unemployment crisis. Keynesians—Leon Keyserling for one—said running a peacetime fiscal deficit was needed to keep unemployment from rising. Yet as the government under President Harry S. Truman ran fiscal surpluses, the unemployment rate went down (from 3.9% in 1946 to 3.1% in 1952) and the labor-force participation rate went up (from 57.2% to 58.9%).

It’s also worth remembering that something similar happened after World War I.

The economy boomed after the burden of government was reduced.

Let’s close by adding to our collection of Keynesian humor.

This is amusing, but somewhat unfair to Bernanke.

Yes, he was a Keynesian. But he wasn’t nearly as crazy as Krugman.

P.S. Here’s my video on Keynesian economics.

P.P.S. Here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally entertaining sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

P.P.P.S. I also like what Professor Phelps said about the benefits of tax competition and jurisdictional rivalry.

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When I give speeches on Keynesian economics, I usually begin with a theoretical discussion on why consumer spending is a consequence of growth rather than the cause of growth.

I then focus on two reasons to be skeptical about borrow-and-spend schemes to artificially boost growth.

  • In the short run, it makes no sense to “stimulate” an economy by borrowing from one group of people and giving the money to another group of people. It’s like trying to become richer by taking money out of your left pocket and putting it in your right pocket.
  • In the long run, so-called stimulus creates a ratchet effect for larger government since politicians rarely obey Keynes’ admonition to cut back on government spending and run surpluses when the economy is in an expansion phase.

But I oftentimes include a caveat when discussing the first point.

It is possible, I hypothesize, to increase your short-run consumption if you take money out of a foreigner’s left pocket and put it in your right pocket.

I hasten to add that this is probably not be a wise course of action since the money may be squandered and you simply wind up further in debt, but I admit that the short-run consumption data will be better.

Well, there’s a new academic study on exactly this issue from the European Stability Mechanism (sort of an IMF for eurozone countries).

Here’s what the authors decided to investigate.

In this paper, we argue that there is a natural and largely unexplored connection between fiscal multipliers and the foreign holdings of public debt. The intuition is simple….fiscal expansions can…have crowding-out effects on the domestic private sector. Probably the most important among the latter is that the resources used by the domestic private sector to acquire public debt can detract from consumption and investment. This implies that the crowding-out effect of fiscal expansions is likely to be stronger when they are financed by selling public debt to domestic (as opposed to foreign) residents.

Here’s some of the data on foreign holdings of national debt.

Our data on foreign holdings of public debt reveals interesting patterns. First of all, there is significant variation across countries: in some countries, such as Canada and Japan, the share of public debt held by foreigners is consistently low, whereas in others, such as Finland and Austria, foreigners hold more than 75% of public debt towards the end of the sample. Over time, in line with the rise of financial globalization, the general pattern is one of increasing public debt in the hands of foreigners. In the United States, for instance, the share of public debt held by foreigners has increased from less than 5% in the 1950s to close to 50% today.

And here’s a chart from the study showing how foreign holdings of U.S. government debt have increased over time.

And their conclusions, after crunching all the numbers, is that nations can boost short-run consumption if a significant share of new debt is financed by foreigners.

Our main result is that, consistent with the previous argument, the estimated size of fiscal multipliers is increasing in the share of public debt that is in the hands of foreigners. This result holds both for the United States during the postwar period, and for a panel of advanced (OECD) economies over the last few decades. …We find that the average foreign share, i.e., the share of public debt held by foreigners before a fiscal shock, …reflect capital inflows, which help finance fiscal expansions thereby minimizing their crowding-out effects on domestic investment.

Incidentally, the authors acknowledge that this creates a beggar-thy-neighbor effect.

Our findings…point to a potentially negative spillover: to the extent that fiscal expansions are financed via foreign borrowing, their crowding-out effects are exported and consumption and investment are reduced elsewhere.

In other words, any transitory benefit one country experiences will be offset by losses elsewhere.

But politicians barely care about their own voters, much less those who live in other countries, so that certainly would not be an effective argument against Keynesian spending binges.

For what it’s worth, I still think the most persuasive argument is that Keynesian economics has an awful track record, even if there’s some ability to shift part of the short-run cost onto foreigners. After all, ask Keynesians to identify an example of successful government stimulus.

And let’s not forget that the long-run costs are always negative because larger government sectors necessarily lead to smaller productive sectors.

P.S. I feel somewhat guilty for writing a column that acknowledges a potential benefit (albeit transitory and unneighborly) of Keynesian economics, so allow me to expiate my sins by sharing this comparison of Keynesian economics and Austrian economics.

For what it’s worth, I think the Austrians over-emphasize the importance of interest rates. But there’s no question they are much closer to the truth than the Keynesians.

P.P.S. If you want to enjoy some cartoons about Keynesian economics, click here, here, here, and here. Here’s some clever mockery of Keynesianism. And here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally enjoyable sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

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Keynesian economics is like Freddie Krueger, constantly reappearing after logical people assumed it was dead. The fact that various stimulus schemes inevitably fail should be the death knell for the theory, which is basically the “perpetual motion machine” of economics. Indeed, I’ve wondered whether we’ve reached the point where the “debilitating drug” of Keynesianism has “jumped the shark.”

Yet Keynesian economics has “perplexing durability,” probably because the theory tells politicians that their vice of profligacy is actually a virtue.

But there are some economists who genuinely seem to believe that government can artificially boost growth. They claim terrorist attacks and alien attacks can be good for growth if they lead to more spending. They even think natural disasters are good for the economy.

I’m not joking. As reported by CNBC, the President of the New York Federal Reserve actually thinks the economy is stimulated when wealth is destroyed.

Hurricanes Harvey and Irma actually will lead to increased economic activity over the long run, New York Fed President William Dudley said in an interview. …”The long-run effect of these disasters unfortunately is it actually lifts economic activity because you have to rebuild all the things that have been damaged by the storms.”

I’m always stunned when sentient adults make this kind of statement.

Should we invite ISIS into the country to blow up some bridges? Should we dynamite new buildings? Should we pray for an earthquake to destroy a big city? Should we have a war, featuring lots of spending and destruction?

All of those things, along with hurricanes and floods, are good for growth according to Keynesian theory.

Jeff Jacoby explains why this is poisonous economic analysis.

Could anything be more absurd? The shattering losses caused by hurricanes, earthquakes, forest fires, and other calamities are grievous misfortunes that obviously leave society poorer. Vast sums of money may be spent afterward to repair and rebuild, but society will still be poorer from the damage caused by the storm or other disaster. Every dollar spent on cleanup and reconstruction is a dollar that could have been spent to enlarge the nation’s reservoir of material assets. Instead, it has to be spent replacing what was lost. …No, hurricanes are not good for the economy. Neither are floods, earthquakes, or massacres. When windows are shattered, all of humanity is left materially worse off. There is no financial “glint of silver lining.” To claim otherwise is delusional.

By the way, I don’t think any Keynesians actually want disasters to happen.

They’re simply making a “silver lining” argument that a bad event will lead to more spending. In their world, what drives the economy is consumption, and it’s the role of government to either consume directly or to give money to people so they will spend it.

In a recent interview, I pointed out that investment and production are the real keys to growth (which is why I prefer GDI over GDP). Increased consumption, I explained, is a result of growth, not the cause of growth.

You’ll notice I also threw in a jab at the state and local tax deduction, a loophole that needs to be abolished as part of tax reform.

But let’s not get sidetracked.

For those who want to do some additional reading on Keynesian economics, I recommend this new study by a couple of professors. Here’s a blurb from the abstract.

…Keynesians assert that even wasteful government spending can be desirable because any spending is better than nothing. This simple Keynesian approach fails to account, however, for several significant sources of cost. In addition to the cost of waste inherent in government spending, financing that spending requires taxation, which entails an excess burden. Furthermore, the employment of even previously idle resources involves opportunity costs.

I’ll close by augmenting theory and academic analysis with some real-world observations. Keynesian economics didn’t work for Hoover and Roosevelt, hasn’t worked for Japan, didn’t work for Obama, and didn’t work in Australia. Indeed, Keynesians can’t point to a single success story anywhere in the world at any point in history.

Though they always have an excuse. The government should have spent more, they tell us.

P.S. Since their lavish tax-free salaries are dependent on pleasing the governments that finance their budgets, international bureaucrats try to justify Keynesian economics. Here’s some recent economic alchemy from the IMF and OECD.

P.P.S. I frequently urge people to watch my video debunking Keynesian economics. Though I admit it’s not nearly as entertaining as the famous video showing the Keynes v. Hayek rap contest, followed by the equally enjoyable sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

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To be blunt, Republicans are heading in the wrong direction on fiscal policy. They have full control of the executive and legislative branches, but instead of using their power to promote Reaganomics, it looks like we’re getting a reincarnation of the big-government Bush years.

As Yogi Berra might have said, “it’s deja vu all over again.”

Let’s look at the evidence. According to the Hill, the Keynesian virus has infected GOP thinking on tax cuts.

Republicans are debating whether parts of their tax-reform package should be retroactive in order to boost the economy by quickly putting more money in people’s wallets.

That is nonsense. Just as giving people a check and calling it “stimulus” didn’t help the economy under Obama, giving people a check and calling it a tax cut won’t help the economy under Trump.

Tax cuts boost growth when they reduce the marginal tax rate on productive behavior such as work, saving, investment, or entrepreneurship. When that happens, people have an incentive to generate more income. And that leads to more national income, a.k.a., economic growth.

Borrowing money from the economy’s left pocket and then stuffing checks (oops, I mean retroactive tax cuts) in the economy’s right pocket, by contrast, simply reallocates national income.

Indeed, this is one of the reasons why the economy didn’t get much benefit from the 2001 Bush tax cut, especially when compared to the growth-oriented 2003 tax cut. Unfortunately, Republicans haven’t learned that lesson.

Republicans have taken steps in the past to ensure that taxpayers directly felt the benefits of tax cuts. As part of the 2001 tax cuts enacted by President George W. Bush, taxpayers received rebate checks.

The article does include some analysis from people who understand that retroactive tax cuts aren’t economically beneficial.

…there are also drawbacks to making tax changes retroactive. …such changes would add to the cost of the bill, but would not be an effective way to encourage new spending and investments. “It has all of the costs of the tax cuts but none of the economic benefits,” said Committee for a Responsible Federal Budget President Maya MacGuineas, who added that “you don’t make investments in the rear-view mirror.”

I’m not always on the same side as Maya, but she’s right on this issue. You can’t encourage people to generate more income in the past. If you want more growth, you have to reduce marginal tax rates on future activity.

By the way, I’m not arguing that there is no political benefit to retroactive tax cuts. If Republicans simply stated that they were going to send rebate checks to curry favor with voters, I’d roll my eyes and shrug my shoulders.

But when they make Keynesian arguments to justify such a policy, I can’t help but get upset about the economic illiteracy.

Speaking of bad economic policy, GOPers also are pursuing bad spending policy.

Politico has a report on a potential budget deal where everyone wins…except taxpayers.

The White House is pushing a deal on Capitol Hill to head off a government shutdown that would lift strict spending caps long opposed by Democrats in exchange for money for President Donald Trump’s border wall with Mexico, multiple sources said.

So much for Trump’s promise to get tough on the budget, even if it meant a shutdown.

Instead, the back-room negotiations are leading to more spending for all interest groups.

Marc Short, the White House’s director of legislative affairs, …also lobbied for a big budget increase for the Pentagon, another priority for Trump. …The White House is offering Democrats more funding for their own pet projects.

The only good news is that Democrats are so upset about the symbolism of the fence that they may not go for the deal.

Democrats show no sign of yielding on the issue. They have already blocked the project once.

Unfortunately, I expect this is just posturing. When the dust settles, I expect the desire for more spending (from both parties) will produce a deal that is bad news. At least for those of us who don’t want America to become Greece (any faster than already scheduled).

Republican and Democratic congressional aides have predicted for months that both sides will come together on a spending agreement to raise spending caps for the Pentagon as well as for nondefense domestic programs.

So let’s check our scorecard. On the tax side of the equation, we’ll hopefully still get some good policy, such as a lower corporate tax rate, but it probably will be accompanied by some gimmicky Keynesian policy.

On the spending side of the equation, it appears my fears about Trump may have been correct and he’s going to be a typical big-government Republican.

It’s possible, of course, that I’m being needlessly pessimistic and we’ll get the kinds of policies I fantasized about in early 2016. But I wouldn’t bet money on a positive outcome.

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While it’s quite clear that the establishment media leans to the left, I don’t get too agitated about bias. Though every so often I can’t resist the temptation to comment when I come across egregious examples on issues such as poverty, guns, Greece, jobs, taxes, and education.

The bias extends to politics, of course, though the only time I felt compelled to comment was when ABC News rushed to imply that the Tea Party somehow was connected to a mass shooting in Colorado.

Well, I now feel compelled to comment again. But this example goes beyond bias and should be characterized as blatant and disgusting dishonesty. The hacks at Time took a quote from Charles Koch and then used selective editing to completely misrepresent what he actually said.

In a just world, the person who engaged in this bit of mendacity would lose his or her job and never again work in journalism. But I would hold my breath waiting for that to happen.

But let’s set aside the issue of media bias and dishonesty.

I want to highlight what Mr. Koch said about GDP. He expressed skepticism of that measure because it doesn’t distinguish between good expenditures and bad expenditures.

That’s one of the reasons why I prefer gross domestic income instead of gross domestic product. In simple terms, GDI measures how our national income is generated and GDP measures how it is allocated.

As the Bureau of Economic Analysis explains, the two numbers are basically different sides of the same coin.

In national economic accounting, GDP and GDI are conceptually equal. GDP measures overall economic activity by final expenditures, and GDI measures it by the incomes generated from producing GDP. In practice, GDP and GDI differ because they are constructed using different sources of information. …when one looks at annual data – where the timing differences are less important, the correlation between GDP and GDI is 0.97.

That correlation shouldn’t be a surprise. Indeed, over a longer period of time, the two numbers should be identical.

Both go up when the economy is doing well, and both go down when there is a recession.

But I want to make a more subtle point.

The reason I like GDI over GDP is because one the former is more likely to lead people to support good policy while the latter is more likely to lead people in the direction of bad policy.

Here’s some of what I wrote on the topic back in 2013.

GDP numbers only measure how we spend or allocate our national income. It’s a very indirect way of measuring economic health. Sort of like assessing the status of your household finances by adding together how much you spend on everything from mortgage and groceries to your cable bill and your tab at the local pub. Wouldn’t it make much more sense to directly measure income? Isn’t the amount of money going into our bank accounts the key variable? The same principle is true – or should be true – for a country. That’s why the better variable is gross domestic income (GDI). It measures things such as employee compensation, corporate profits, and small business income. …We should be focusing on how to increase national income, not what share of it is being redistributed by politicians.

And, on a related note, you can back to 2009 for a column I wrote explaining that consumer spending is a reflection of a strong economy, not the cause of a  strong economy.

And this video ties everything together by debunking the Keynesian argument that politicians should focus on goosing consumer spending.

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Keynesian economics is fundamentally misguided because it focuses on how to encourage more spending when the real goal should be to figure out policies that result in more income.

This is one of the reasons I wish people focused more on “gross domestic income,” which is a measure of how we earn our national income (i.e., wages, small business income, corporate profits, etc) rather than on “gross domestic product,” which is a measure of how our national income gets allocated (consumption, investment, government, etc).

Simply stated, Keynesians put the cart before the horse. Consumption doesn’t drive growth, it’s a consequence of growth.

But let’s set all that aside because we have new evidence that Keynesian stimulus schemes aren’t even very good at artificially goosing consumption.

Three economists (from MIT and Tex A&M) have crunched the numbers and discovered that Obama’s Cash-for-Clunkers scheme back in 2009 was a failure even by Keynesian standards.

The abstract of the study tells you everything you need to know.

The 2009 Cash for Clunkers program aimed to stimulate consumer spending in the new automobile industry, which was experiencing disproportionate reductions in demand and employment during the Great Recession. Exploiting program eligibility criteria in a regression discontinuity design, we show nearly 60 percent of the subsidies went to households who would have purchased during the two-month program anyway; the rest accelerated sales by no more than eight months. Moreover, the program’s fuel efficiency restrictions shifted purchases toward vehicles that cost on average $5,000 less. On net, Cash for Clunkers significantly reduced total new vehicle spending over the ten month period.

This is remarkable. At the time, the most obvious criticism of the scheme was that it would simply alter the timing of purchases.

And scholars the following year confirmed that the program didn’t have any long-run impact.

But now we find out that there was impact, but it was negative. Here’s the most relevant graph from the study.

It shows actual vehicle spending and estimated spending in the absence of the program.

For readers who like wonky details, here’s the explanatory text for Figure 7 from the study.

The effect of the program on cumulative new vehicle spending by CfC-eligible households is shown in Figure 7. The figure shows actual spending and estimates of counterfactual spending if there had been no CfC program. Cumulative spending under the CfC program was larger than counterfactual spending for the months immediately after the program. However, by February 1 the counterfactual expenditures becomes larger and by April has grown to be $4.0 billion more than actual expenditures under the program. It is difficult to make the case that the brief acceleration in spending justifies the loss of $4.0 billion in revenues to the auto industry, for two reasons. First, we calculate that in order to justify the estimated longer-term reduction in cumulative spending to boost spending for a few months, one would need a discount rate of 208 percent. Given the expected (and realized) duration of the recession, it seems difficult to argue in favor of such a discount rate. Second, we note that Cash for Clunkers seems especially unattractive compared to a counterfactual stimulus policy that left out the environmental component, which also would have accelerated purchases for some households without reducing longer-term spending.

By the way, the authors point out that Cash-for-Clunkers wasn’t even good environmental policy.

One could also argue that this decline in industry revenue over less than a year could be justified to the extent the program offered a cost-effective environmental benefit. Unfortunately, the existing evidence overwhelmingly indicates that this program was a costly way of reducing environmental damage. For example, Knittel [2009] estimates that the most optimistic implied cost of carbon reduced by the program is $237 per ton, while Li et al. [2013] estimate the cost per ton as between $92 and $288. These implied cost of carbon figures are much larger than the social costs of carbon of $33 per ton (in 2007 dollars) estimated by the IWG on the Social Cost of Carbon [Interagency Working Group, 2013].

So let’s see where we stand. The program was bad fiscal policy, bad economic policy, and bad environmental policy.

The trifecta of Obamanomics. No wonder the United States suffered the weakest recovery of the post-WWII era.

P.S. David Letterman had a rather amusing cash-for-clunkers joke back in 2010.

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Time for an update on the perpetual motion machine of Keynesian economics.

We’ll start with the good news. The Treasury Department commissioned a study on the efficacy of the so-called stimulus spending that took place at the end of last decade. As discussed in this news report, the results were negative.

…a scathing new Treasury-commissioned report…argues the cash splash actually weakened the economy and damaged local industry… The report, …says the…fiscal stimulus was “unnecessarily large” and “misconceived because it emphasised transfers, unproductive expenditure…rather than tax relief and/or supply side reform”.

The bad news, at least from an American perspective, is that it was this story isn’t about the United States. It’s a story from an Australian newspaper about a study by an Australian professor about the Keynesian spending binge in Australia that was enacted back in 2008 and 2009.

I actually gave my assessment of the plan back in 2010, and I even provided my highly sophisticated analysis at no charge.

The Treasury-commissioned report, by contrast, presumably wasn’t free. The taxpayers of Australia probably coughed up tens of thousands of dollars for the study.

But this is a rare case where they may benefit, at least if policy makers read the findings and draw the appropriate conclusions.

Here are some of the highlights that caught my eye, starting with a description of what the Australian government actually did.

The GFC fiscal stimulus involved a mix of new public expenditure on school buildings, social housing, home insulation, limited tax breaks for business, and income transfers to select groups. Stimulus packages were announced and implemented in the December 2008, March 2009 quarters and ran into subsequent quarters.

For what it’s worth, there are strong parallels between what happened in the U.S. and Australia.v

Both nations had modest-sized Keynesian packages in 2008, followed by larger plans in 2009. The total American “stimulus” was larger because of a larger population and larger economy, of course, and the political situation was also different since it was one government that did the two plans in Australia compared to two governments (Bush in 2008 and Obama in 2009) imposing Keynesianism in the United States.

Here’s a table from the report, showing how the money was (mis)spent in Australia.

Now let’s look at the economic impact. We know Keynesianism didn’t work very well in the United States.

And the report suggests it didn’t work any better in Australia.

…fiscal stimulus induced foreign investors to take up newly issued relatively high yielding government bonds whose AAA credit rating further enhanced their appeal. This contributed to exchange rate appreciation and a subsequent competitiveness… Worsened competitiveness in turn reduced the viability of substantial parts of manufacturing, including the motor vehicle sector. …Government spending continued to rise as a proportion of GDP… This put upward pressure on interest rates… this worsened industry competitiveness contributed to major job losses, not gains, in manufacturing and tourism. …In sum, fiscal stimulus was not primarily responsible for saving the Australian economy… Fiscal stimulus later weakened the economy.

Though there was one area where the Keynesian policies had a significant impact.

Australia’s public debt growth post GFC ranks amongst the highest in the G20. Ongoing budget deficits and rising public debt have contributed to economic weakness in numerous ways. …Interest paid by the federal government on its outstanding debt was under $4 billion before the GFC yet could reach $20 billion, or one per cent of GDP, by the end of the decade.

We got a similar result in America. Lots more red ink.

Except our debt started higher and grew by more, so we face a more difficult future (especially since Australia is much less threatened by demographics thanks to a system of private retirement savings).

The study also makes a very good point about the different types of austerity.

…a distinction can be made between “good” and “bad” fiscal consolidation in terms of its macroeconomic impact. Good fiscal repair involves cutting unproductive government spending, including program overlap between different tiers of government. On the contrary, bad fiscal repair involves cutting productive infrastructure spending, or raising taxes that distort incentives to save and invest.

Incidentally, the report noted that the Kiwis implemented a “good” set of policies.

…in New Zealand…marginal income tax rates were reduced, infrastructure was improved and the regulatory burden on business was lowered.

Yet another reason to like New Zealand.

Let’s close by comparing the burden of government spending in the United States and Australia. Using the OECD’s dataset, you see that the Aussies are actually slightly better than the United States.

By the way, it looks like America had a bigger relative spending increase at the end of last decade, but keep in mind that these numbers are relative to economic output. And since Australia only had a minor downturn while the US suffered a somewhat serious recession, that makes the American numbers appear more volatile even if spending is rising at the same nominal rate.

P.S. The U.S. numbers improved significantly between 2009 and 2014 because of a de facto spending freeze. If we did the same thing again today, the budget would be balanced in 2021.

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I’m glad that Donald Trump wants faster growth. The American people shouldn’t have to settle for the kind of anemic economic performance that the nation endured during the Obama years.

But does he understand the right recipe for prosperity?

That’s an open question. At times, Trump makes Obama-style arguments about the Keynesian elixir of government infrastructure spending. But at other times, he talks about lowering taxes and reducing the burden of red tape.

I don’t know what’s he’s ultimately going to decide, but, as the late Yogi Berra might say, the debate over “stimulus” is deja vu all over again. Supporters of Keynesianism (a.k.a., the economic version of a perpetual motion machine) want us to believe that government can make the country more prosperous with a borrow-and-spend agenda.

At the risk of understatement, I disagree with that free-lunch ideology. And I discussed this issue in a recent France24 appearance. I was on via satellite, so there was an awkward delay in my responses, but I hopefully made clear that real stimulus is generated by policies that make government smaller and unleash the private sector.

If you want background data on labor-force participation and younger workers, click here. And if you want more information about unions and public policy, click here.

For today, though, I want to focus on Keynesian economics and the best way to “stimulate” growth.

The question I always ask my Keynesian friends is to provide a success story. I don’t even ask for a bunch of good examples (like I provide when explaining how spending restraint yields good results). All I ask is that they show one nation, anywhere in the world, at any point in history, where the borrow-and-spend approach produced a good economy.

Simply stated, there are success stories. And the reason they don’t exist is because Keynesian economics doesn’t work.

Though the Keynesians invariably respond with the rather lame argument that their spending schemes mitigated bad outcomes. And they even assert that good outcomes would have been achieved if only there was even more spending.

All this is based, by the way, on Keynesian models that are designed to show that more spending generates growth. I’m not joking. That’s literally their idea of evidence.

Since you’re probably laughing after reading that, let’s close with a bit of explicit Keynesian-themed humor.

I’ve always thought this Scott Stantis cartoon best captures why Keynesian economics is misguided. Simply stated, it’s silly to think that the private sector is going to perform better if politicians are increasing the burden of government spending.

But I’m also amused by cartoons that expose the fact that Keynesian economics is based on the notion that you can become richer by redistributing money within an economy. Sort of like taking money out of your right pocket and putting it in your left pocket and thinking that you now have more money.

Expanding on this theme, here’s a new addition for our collection of Keynesian humor. It’s courtesy of Don Boudreaux at Cafe Hayek, and it shows the Keynesian plan to charge the economy (pun intended). You don’t need to know a lot about electricity to realize this isn’t a very practical approach.

Is this an unfair jab? Maybe, but don’t forget that Keynesians are the folks who think it’s good for growth to pay people to dig holes and then pay them to fill the holes. Or, in Krugman’s case, to hope for alien attacks. No wonder it’s so easy to mock them.

P.S. If you want to learn more about Keynesian economics, the video I narrated for the Center for Freedom and Prosperity is a good place to start.

P.P.S. And if you like Keynesian videos, here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally entertaining sequel, which features a boxing match between Keynes and Hayek. And even though it’s no longer the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

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In the world of fiscal policy, there are actually two big debates.

  1. One debate revolves around the appropriate size of government in the long run. Folks on the left argue that government spending generates a lot of value and that bigger government is a recipe for more prosperity. Libertarians and their allies, by contrast, point out that most forms of government spending are counterproductive and that large public sectors (and the accompanying taxes) undermine economic performance.
  2. The other debate is focused on short-run economic effects, and revolves around the “Keynesian” argument that more government spending is a “stimulus” to a weak economy and that budget-cutting “austerity” hurts growth. Libertarians and other critics are generally skeptical that government spending boosts short-run growth and instead argue that the right kind of austerity (i.e., a lower burden of government spending) is the appropriate approach.

Back in 2009 and 2010, I wrote a lot about the Keynesian stimulus fight. In more recent years, however, I have focused more on the debate over the growth-maximizing size of government.

But it’s time to revisit the stimulus/austerity debate. The National Bureau of Economic Research last month released a new study by five economists (two from Harvard, one from NYU, and two from Italian universities) reviewing the real-world evidence on fiscal consolidation (i.e., reducing red ink) over the past several decades.

This paper studies whether what matters most is the “when” (whether an adjustment is carried out during an expansion, or a recession) or the “how” (i.e. the composition of the adjustment, whether it is mostly based on tax increases, or on spending cuts). …We estimate a model which allows for both sources of non-linearity: “when” and “how”.

Here’s a bit more about the methodology.

The fiscal consolidations we study are those implemented by 16 OECD countries (Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Portugal, Spain, Sweden, United Kingdom, United States) between 1981 and 2014. …We also decompose each adjustment in its two components: changes in taxes and in spending. …we use a specification in which the economy, following the shift in fiscal policy, can move from one state to another. We also allow multipliers to vary depending on the type of consolidation, tax-based vs expenditure-based. …Our government expenditure variable is total government spending net of interest payments on the debt: that is we do not distinguish between government consumption, government investment, transfers (social security benefits etc) and other government outlays. …In total we have 170 plans and 216 episodes, of which about two-thirds are EB and one-third are TB.

By the way, “EB” refers to “expenditure based” fiscal consolidations and “TB” refers to “tax based” consolidations.

And you can see from Table 5 that some countries focused more on tax increases and others were more focused on trying to restrain spending.

Congratulations to Canada and Sweden for mostly or totally eschewing tax hikes.

Though I wonder how many of the 113 “EB” plans involved genuine spending reforms (probably very few based on this data) and how many were based on the fake-spending-cuts approach that is common in the United States.

But I’m digressing.

Let’s now look at some findings from the NBER study, starting with the fact that most consolidations took place during downturns, which certainly wouldn’t please Keynesians, but shouldn’t be too surprising since red ink tend to rise during such periods.

…there is a relation between the timing and the type of fiscal adjustment and the state of the economy. Overall, adjustment plans are much more likely to be introduced during a recession. There was a consolidation in 62 out of 99 years of recession…, while we record a consolidation in only 13 over 94 years of expansion. …it is somewhat surprising that a majority of the shifts in fiscal policy devoted to reducing deficits are implemented during recessions.

And here are the results that really matter. The economists crunched the numbers and found that tax increases impose considerable damage, whereas spending cuts cause very little harm to short-run performance.

We find that the composition of fiscal adjustments is more important than the state of the cycle in determining their effect on output. Fiscal adjustments based upon spending cuts are much less costly in terms of short run output losses – such losses are in fact on average close to zero – than those based upon tax increases which are associated with large and prolonged recessions regardless of whether the adjustment starts in a recession or not. …what matters for the short run output cost of fiscal consolidations is the composition of the adjustment. Tax-based adjustments are costly in terms of output losses. Expenditure-based ones have on average very low costs.

These findings are remarkable. Even I’m willing to accept that spending cuts may be painful in the short run (not because of Keynesian reasons, but simply because resources don’t instantaneously get reallocated to more productive uses).

So if the economists who wrote this comprehensive study find that there is very little short-run dislocation associated with spending cuts, that’s powerful evidence.

And when you then consider all the data and research showing the positive long-run effects of smaller government, this certainly suggests that the top fiscal priority should be shrinking the size and scope of government.

P.S. I mentioned above that Keynesians doubtlessly get agitated that governments engage in fiscal consolidation during downturns. This is why I’m trying to get them to support spending caps. The good news, from their perspective, is that the government’s budget would be allowed to grow when there’s a recession, albeit not very rapidly. The tradeoff that they must accept, however, is that spending would be limited to that modest growth rate even during years when there’s strong growth and the private sector is generating lots of tax revenue.

Honest Keynesians presumably should yes to this deal since Keynes wanted restraint during growth years to offset “stimulus” during recession years. And economists at left-leaning international bureaucracies seem sympathetic to this tradeoff. I don’t think there are many honest Keynesians in the political world, however, so I’m not expecting to get a lot of support from my leftist friends in Washington.

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Earlier this year, I criticized the Organization for Economic Cooperation and Development for endorsing an orgy of Keynesian spending.

Did my criticism have an effect? Well, the bureaucrats in Paris just issued a new report that bluntly suggests a reorientation of fiscal policy to achieve more growth.

…the global economy remains in a low-growth trap with weak investment, trade, productivity and wage growth and rising inequality in some countries. …a stronger fiscal policy response is needed to boost near-term growth and strengthen long-term prospects for inclusive growth.

Sounds good to me. I welcome sinners who want to repent. Is the OECD now recommending corporate tax rate reductions? A flat tax? Entitlement reform? Elimination of wasteful departments, agencies, and programs? A spending cap?

Don’t be silly. This is the OECD. Some of the professional economists are sensible and competent, but major policy initiatives almost always are determined by the high-level hacks who crank out proposals designed to give cover to politicians that want ever-more taxes and spending.

So when the bureaucrats in Paris suggest “a stronger fiscal policy response,” they’re actually advocating for more government. Which is exactly what they did back in February. And what they’ve been repetitively doing all during the Obama Administration. I’m not joking. Here are some further excerpts.

…this chapter emphasises the need for a fiscal initiative…to foster productivity in the medium to long term. Measures should be chosen depending on each country’s most pressing needs and could include not only raising soft and hard infrastructure or education spending… In many countries, such a package could be deficit-financed for a few years, before turning budget-neutral.

The OECD says that “stimulus” would be a good idea because nations now have more “fiscal space,” which is bureaucrat-speak for an estimate of how much additional red ink is supposedly feasible feasible given interest rates, existing debt levels, and other variables.

I’m more worried, for what it’s worth, about the level of spending. And on that basis, there’s less fiscal space. Here’s a comparison (based on the OECD’s own dataset) of the burden of spending before the great recession/global financial crisis and today. As you can see, government outlays are consuming almost 2-percentage points more of economic output.

Needless to say, there’s hasn’t been much “austerity” over the past decade (other than higher income taxes and higher VAT taxes, which means taxpayers have taken a hit but not bureaucrats and interest groups).

In any event, the OECD ignores all this evidence and thinks today is the perfect time for another spending binge. Here are additional details from the report.

OECD governments could finance a ½ percentage point of GDP productivity-enhancing fiscal initiative, for three to four years on average in OECD countries without raising the debt-to-GDP ratio in the medium term, provided the selected activities and projects are sound. Such an initiative could encompass high-quality spending on education, health and research and development as well as green infrastructure that all bring significant output gains in the long run. …the average output gains for the large advanced economies of such a fiscal initiative amount to 0.4-0.6% in the first year.

It’s laughable that the bureaucrats project more growth as a result of Keynesian “stimulus” even though we just suffered through the failure of Obama’s 2009 program (not to mention the repeated failure of Keynesian economics in Japan and elsewhere).

The only good news, if we grade on a curve, is that the bureaucrats apparently don’t think Keynesian “stimulus” would be that helpful for the American economy.

Though I’m worried this Table, buried four pages from the end of the report, won’t get much attention (just as other decent portions of the report, such as commentary about the damage caused by bad tax policy, also will get ignored).

If you think I’m being paranoid, check out these passages from a news report in the Wall Street Journal. The main takeaway from the OECD’s new publication, according to the reporter, is that politicians around the world have a green light for more wasteful spending.

Adding detail to earlier calls for a switch to budget stimulus from exhausted monetary policies, the Paris-based think tank said most governments have room to boost spending by half a percentage point of economic output over a period of three to four years without risking an increase in their already high debts. …The think tank calculates that an increase in spending on the scale it recommends would lift economic growth in the countries involved by between 0.4 and 0.6 of a percentage point, with an additional 0.2 percentage point boost if the effort were to be coordinated internationally. …If governments were to follow the OECD’s advice, it would mark a further turn away from the policies of austerity that were an immediate response to surging government debts in the aftermath of the 2008 financial crisis. …A slow shift toward a greater reliance on fiscal policy has been under way since last year, when Canada embarked on a fiscal stimulus, while the OECD noted that increases in spending are also under way in Germany, Italy and China. …“There is quite a bit more receptivity to the notion of using fiscal policy more actively,” said Ms. Mann.

And I’m worried that this kind of bad advice may influence President-Elect Trump, who already has made worrisome comments about spending for infrastructure and entitlements.

P.S. But I’m semi-hopeful that Trump won’t be a fan of the OECD in general, if for no other reason than the head bureaucrat in Paris called him a racist and was remarkably open about favoring Hillary Clinton’s election.

Gurria tells UpFront’s Mehdi Hasan: “I would tend to agree with those who say that this is not only misinformed, but yes, I think the word racist can be applied. “I think that because the American public is wise, it will then act in consequence,” Gurria adds.

I’ve previously argued that ending American subsidies for the OECD (and its leftist agenda) is an IQ test for Republicans. In prior years, GOPers on Capitol Hill have failed this test. Maybe Trump, if for no other reason than Secretary General Gurria’s harsh attack, will finally end the gravy train for this parasitical bureaucracy.

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Since it’s very likely that Hillary Clinton will be our next President, I’m mentally preparing myself for upcoming fights over her agenda of bigger government and class warfare. But the silver lining to this dark cloud is that I don’t think I’ll be distracted by also having to fight against protectionist policies.

My tiny bit of optimism is based on the fact that hackers at Wikileaks got access to the secret speeches she gave to Wall Street and other corporate bigwigs and we learned that, when she can speak freely with no cameras and outside observers, she believes in “open trade.”

In other words, I was right when I said on TV that she was lying about being in favor of protectionism.

Since I don’t think bureaucrats and politicians should have the power to interfere with our buying decisions, I’m glad Hillary is a secret supporter of free trade.

That’s the good news.

The 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 all the evidence of failure from the spending binges of Obama, Hoover and Roosevelt, and Japan).

Here’s what the Daily Caller is reporting about one of her secret speeches to a corporate audience.

Hillary Clinton argued that expanding food stamps and other safety net programs is essential to fuel economic growth at a speech to General Electric executives, according to an excerpt of the transcript made public by WikiLeaks Friday. “Economic growth will take off when people in the middle feel more secure again and start spending again,” Clinton said in her speech at General Electric’s Global Leadership Meeting in January, 2014. …Giving people income assistance, like the food stamps program, would help the economy because families on food stamps will have more money to spend, Clinton argued.

Wow, this is depressing. If this was an off-the-record speech to the Democratic National Committee, a George Soros group, or some other left-leaning outfit, I’d be tempted to dismiss her remarks as rhetoric.

But GE executives presumably aren’t big fans of income redistribution (other than to themselves, of course). So Hillary’s comments were not a form of pandering. She presumably really believes that Keynesian economics is some sort of elixir, that you actually can boost economic performance by taking money out of the economy’s right pocket and putting it in the economy’s left pocket.

Not only is this wrong, it’s backwards.

  • When the crowd in Washington spends money, much of it is lost to bureaucracy and waste. This may not matter to Keynesians since they just want there to be spending (no joke, Keynes actually did write that  it would be good policy to bury money in the ground so that people would get paid to dig it out). Sensible people, by contrast, understand that it matters for the economy whether money is spent wisely.
  • Moreover, redistribution spending tends to be especially harmful since it subsidizes people for not working or for having low levels of income, which is why research has shown that policies such as Obamacare, jobless benefits, and food stamps are associated with lower levels of employment. In other words, redistribution is bad for economic performance.

The bottom line is that we shouldn’t expect any sort of economic renaissance if Hillary is our next president. Just another four years of the kind of anemic performance we’ve experienced under Obama.

P.S. Click here to learn more about the failure of Keynesian economics.

P.S. If you want both substance and entertainment, here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally entertaining sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

 

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When I was younger, folks in the policy community joked that BusinessWeek was the “anti-business business weekly” because its coverage of the economy was just as stale and predictably left wing as what you would find in the pages of Time or Newsweek.

Well, perhaps it’s time for The Economist to be known as the “anti-economics economic weekly.”

Writing about the stagnation that is infecting western nations, the magazine beclowns itself by regurgitating stale 1960s-style Keynesianism. The article is worthy of a fisking (i.e., a “point-by-point debunking of lies and/or idiocies”), starting with the assertion that central banks saved the world at the end of last decade.

During the financial crisis the Federal Reserve and other central banks were hailed for their actions: by slashing rates and printing money to buy bonds, they stopped a shock from becoming a depression.

I’m certainly open to the argument that the downturn would have been far worse if the banking system hadn’t been recapitalized (even if it should have happened using the “FDIC-resolution approach” rather than via corrupt bailouts), but that’s a completely separate issue from whether Keynesian monetary policy was either desirable or successful.

Regarding the latter question, just look around the world. The Fed has followed an easy-money policy. Has that resulted in a robust recovery for America? The European Central Bank (ECB) has followed the same policy. Has that worked? And the Bank of Japan (BoJ) has done the same thing. Does anyone view Japan’s economy as a success?

At least the article acknowledges that there are some skeptics of the current approach.

The central bankers say that ultra-loose monetary policy remains essential to prop up still-weak economies and hit their inflation targets. …But a growing chorus of critics frets about the effects of the low-rate world—a topsy-turvy place where savers are charged a fee, where the yields on a large fraction of rich-world government debt come with a minus sign, and where central banks matter more than markets in deciding how capital is allocated.

The Economist, as you might expect, expresses sympathy for the position of the central bankers.

In most of the rich world inflation is below the official target. Indeed, in some ways central banks have not been bold enough. Only now, for example, has the BoJ explicitly pledged to overshoot its 2% inflation target. The Fed still seems anxious to push up rates as soon as it can.

The preceding passage is predicated on the assumption that there is a mechanistic tradeoff between inflation and unemployment (the so-called Phillips Curve), one of the core concepts of Keynesian economics. According to adherents, all-wise central bankers can push inflation up if they want lower unemployment and push inflation down if they want to cool the economy.

This idea has been debunked by real world events because inflation and unemployment simultaneously rose during the 1970s (supposedly impossible according the Keynesians) and simultaneously fell during the 1980s (also a theoretical impossibility according to advocates of the Phillips Curve).

But real-world evidence apparently can be ignored if it contradicts the left’s favorite theories.

That being said, we can set aside the issue of Keynesian monetary policy because the main thrust of the article is an embrace of Keynesian fiscal policy.

…it is time to move beyond a reliance on central banks. …economies need succour now. The most urgent priority is to enlist fiscal policy. The main tool for fighting recessions has to shift from central banks to governments.

As an aside, the passage about shifting recession fighting “from central banks to governments” is rather bizarre since the Fed, the ECB, and the BoJ are all government entities. Either the reporter or the editor should have rewritten that sentence so that it concluded with “shift from central banks to fiscal policy” or something like that.

In any event, The Economist has a strange perspective on this issue. It wants Keynesian fiscal policy, yet it worries about politicians using that approach to permanently expand government. And it is not impressed by the fixation on “shovel-ready” infrastructure spending.

The task today is to find a form of fiscal policy that can revive the economy in the bad times without entrenching government in the good. …infrastructure spending is not the best way to prop up weak demand. …fiscal policy must mimic the best features of modern-day monetary policy, whereby independent central banks can act immediately to loosen or tighten as circumstances require.

So The Economist endorses what it refers to as “small-government Keynesianism,” though that’s simply its way of saying that additional spending increases (and gimmicky tax cuts) should occur automatically.

…there are ways to make fiscal policy less politicised and more responsive. …more automaticity is needed, binding some spending to changes in the economic cycle. The duration and generosity of unemployment benefits could be linked to the overall joblessness rate in the economy, for example.

In the language of Keynesians, such policies are known as “automatic stabilizers,” and there already are lots of so-called means-tested programs that operate this way. When people lose their jobs, government spending on unemployment benefits automatically increases. During a weak economy, there also are automatic spending increases for programs such as Food Stamps and Medicaid.

I guess The Economist simply wants more programs that work this way, or perhaps bigger handouts for existing programs. And the magazine views this approach as “small-government Keynesianism” because the spending increases theoretically evaporate as the economy starts growing and fewer people are automatically entitled to receive benefits from the various programs.

Regardless, whoever wrote the article seems convinced that such programs help boost the economy.

When the next downturn comes, this kind of fiscal ammunition will be desperately needed. Only a small share of public spending needs to be affected for fiscal policy to be an effective recession-fighting weapon.

My reaction, for what it’s worth, is to wonder why the article doesn’t include any evidence to bolster the claim that more government spending is and “effective” way of ending recessions and boosting growth. Though I suspect the author of the article didn’t include any evidence because it’s impossible to identify any success stories for Keynesian economics.

  • Did Keynesian spending boost the economy under Hoover? No.
  • Did Keynesian spending boost the economy under Roosevelt? No.
  • Has Keynesian spending worked in Japan at any point over the past twenty-five years? No.
  • Did Keynesian spending boost the economy under Obama? No.

Indeed, Keynesian spending has an unparalleled track record of failure in the real world. Though advocates of Keynesianism have a ready-built excuse. All the above failures only occurred because the spending increases were inadequate.

But what do expect from the “perpetual motion machine” of Keynesian economics, a theory that is only successful if you assume it is successful?

I’m not surprised that politicians gravitate to this idea. After all, it tells them that their vice  of wasteful overspending is actually a virtue.

But it’s quite disappointing that journalists at an allegedly economics-oriented magazine blithely accept this strange theory.

P.S. My second-favorite story about Keynesian economics involves the sequester, which big spenders claimed would cripple the economy, yet that’s when we got the only semi-decent growth of the Obama era.

P.P.S. My favorite story about Keynesianism is when Paul Krugman was caught trying to blame a 2008 recession in Estonia on spending cuts that occurred in 2009.

P.P.P.S. Here’s my video explaining Keynesian economics.

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The War against Cash continues.

  • In Part I, we looked at the argument that cash should be banned or restricted so governments could more easily collect additional tax revenue.
  • In Part II, we reviewed the argument that cash should be curtailed so that governments could more easily impose Keynesian-style monetary policy.
  • In Part III, written back in March, we examined additional arguments by people on both sides of the issue and considered the risks of expanded government power.

Now it’s time for Part IV.

Professor Larry Summers of Harvard University is President Obama’s former top economic adviser and he’s a relentless advocate of higher taxes and bigger government. If he favors an idea, it doesn’t automatically make it bad, but it’s surely a reason to be suspicious. So you won’t be surprised to learn that he wrote a column for the Washington Post applauding the move in Europe to eliminate €500 notes. Indeed, he wants to ban all large-denomination notes.

There is little if any legitimate use for 500-euro notes. Carrying out a transaction with 20 50-euro notes hardly seems burdensome, and this would represent over $1,000 in purchasing power. Twenty 200-euro notes would be almost $5,000. Who in today’s world needs cash for a legitimate $5,000 transaction? …Cash transactions of more than 3,000 euros have in fact been made illegal in Italy, while France has placed the limit at 1,000 euros. …In contrast to the absence of an important role for 500-euro notes in normal commerce, these bills have a major role facilitating illicit activity, as suggested by their nickname —“Bin Ladens.” …Estimates by the International Monetary Fund and others of total annual money laundering consistently exceed $1 trillion. High-denomination notes also have a substantial role in facilitating tax evasion and capital flight.

Who “needs cash” for transactions, he asks, but isn’t the real issue whether people should have the freedom to use cash if that’s what they prefer?

Also, in dozens of trips to Europe since the adoption of the euro, I’ve never heard anyone refer to the €500 note as a “Bin Laden,” so I suspect that’s an example of Summers trying to demonize something that he doesn’t like.

But perhaps the most important revelation from his column is that he admits there’s no evidence that crime would be stopped by his plan to restrict cash.

To be sure, it is difficult to estimate how much crime would be prevented by stopping the creation of 500-euro notes. It would surely impose some burdens on criminals and might interfere with some transactions, which is not unimportant.

Unsurprisingly, he wants to coerce other governments into restricting high-value notes.

Europe has led on a significant security issue. But its action should be seen as a beginning, not an end. As a first follow-on, the world should demand that Switzerland stop issuing 1,000-Swiss-franc notes. After Europe’s action, these will stand out as the world’s highest-denomination note by a huge margin. Switzerland has a long and unfortunate history with illicit finance. It would be tragic if it were to profit from criminal currency substitution following Europe’s bold step. …There would be a strong case for stopping the creation of notes with values greater than perhaps $50.

Summers isn’t the only academic from Harvard who is agitating to restrict cash. Prof. Kenneth Rogoff (who’s also the former Chief Economist at the IMF) recently wrote a piece for the Wall Street Journal explaining his hostility.

…paper currency lies at the heart of some of today’s most intractable public-finance and monetary problems. …There is little debate among law-enforcement agencies that paper currency, especially large notes such as the U.S. $100 bill, facilitates crime: racketeering, extortion, money laundering, drug and human trafficking, the corruption of public officials, not to mention terrorism.

At the risk of bursting his balloon, cash played almost no role in the most notorious terrorist event, the 9-11 attacks. And Rogoff admits that bad guys would use easy substitutes.

There are substitutes for cash—cryptocurrencies, uncut diamonds, gold coins, prepaid cards.

So he then dredges up the argument that cash facilitates tax evasion.

Cash is also deeply implicated in tax evasion, which costs the federal government some $500 billion a year in revenue. According to the Internal Revenue Service, a lot of the action is concentrated in small cash-intensive businesses, where it is difficult to verify sales and the self-reporting of income.

I addressed these issues in Part I of this series, but I’ll simply add that the academic evidence shows that lower tax rates are the best way of boosting tax compliance (as even the IMF has admitted).

To his credit, Rogoff acknowledges that his preferred policy would reduce the rights of individuals.

Perhaps the most challenging and fundamental objection to getting rid of cash has to do with privacy—with our ability to spend anonymously. But where does one draw the line between this individual right and the government’s need to tax and regulate.

His main argument is that our rights should be reduced to give government more power. He especially wants central bankers to have more power to impose Keynesian monetary policy.

Cutting interest rates delivers quick and effective stimulus by giving consumers and businesses an incentive to borrow more. It also drives up the price of stocks and homes, which makes people feel wealthier and induces them to spend more. Countercyclical monetary policy has a long-established record, while political constraints will always interfere with timely and effective fiscal stimulus.

Yes, he’s right. Activist monetary policy does have a long-established track record. It played a key role in causing the Great Depression, the 1970s stagflation, and the recent financial crisis.

Hooray, Federal Reserve!

And Rogoff wants the arsonists at the Fed to have more power to create boom-bust cycles.

In principle, cutting interest rates below zero ought to stimulate consumption and investment in the same way as normal monetary policy, by encouraging borrowing. Unfortunately, the existence of cash gums up the works. If you are a saver, you will simply withdraw your funds, turning them into cash, rather than watch them shrink too rapidly. Enormous sums might be withdrawn to avoid these loses, which could make it difficult for banks to make loans—thus defeating the whole purpose of the policy. Take cash away, however, or make the cost of hoarding high enough, and central banks would be free to drive rates as deep into negative territory as they needed in a severe recession. …if a strong dose of negative rates can power an economy out of a downturn, it could bring inflation and interest rates back to positive levels relatively quickly, arguably reducing vulnerability to bubbles rather than increasing it.

Needless to say, I disagree with Rogoff and agree with Thomas Sowell that an institution that repeatedly screws up shouldn’t be given more power.

Especially since I’m concerned that the option to use bad monetary policy may actually be one of the excuses that politicians use for not fixing the problems that actually are hindering growth.

So, yes, instead of expanding their power, I want to clip the wings of the Federal Reserve and other central banks.

Now let’s consider the harm that would be caused by restricting or banning cash. Two professors from NYU Law School looked at some of the logistical issues of a shift to digital money. The echoed some of the points raised by Summers and Rogoff, but they also pointed out some downsides. Such as government being able to monitor everything we buy.

…centralization of banking under this system would also create a Leviathan with the power to monitor and control the personal finances of every citizen in the country. This is one of the chief reasons why many are loath to give up on hard currency. With digital money, the government could view any financial transaction and obtain a flow of information about personal spending that could be used against an individual in a whole host of scenarios.

It also would cause a mess because so many people around the world rely on dollars, something that’s beneficial to the U.S. Treasury and foreigners from places with untrustworthy central banks.

…a transition to digital currency might come at a large cost for the U.S. in particular, because the dollar remains the world’s de facto reserve currency. The U.S. collects enormous seigniorage revenue that accrues to the economy when the Federal Reserve prints dollars that are exported abroad in exchange for foreign goods and services. These bank notes ultimately end up in countries with less reliable central banks where locals prefer to hold U.S. currency instead of their own. Forfeiting this franchise as the world’s reserve currency might be too costly, as the U.S. currency held abroad exceeds half a trillion dollars, according to reliable estimates.

Professor Larry White of George Mason University (also a Senior Fellow at Cato) writes about what he calls “currency prohibitionists.”

The rhetoric of the anti-high-denomination gang has gotten increasingly shrill.  …Charles Goodhart in September called the European Central Bank and the Swiss National Bank “shameless” for issuing “vastly high-denomination notes,” namely the €500 and SWF 1000, “which are there to finance the drug deals.” …I have an alternative suggestion for removing $100 bills from the illegal drug trades:  Legalize the trade.  …My suggestion would reduce the demand for high-denomination currency.

Nice plug for sensible libertarian policy.

But even if one favors drug prohibition, that doesn’t mean currency prohibition will be effective.

Today’s high-denomination-currency prohibitionists, like today’s drug prohibitionists and yesterday’s alcohol prohibitionists, only think about the supply side.  But does anyone think that banning the $100 bill during Prohibition (when it had a purchasing power more than 11 times today’s, as evaluated using the CPI) and even higher denominations would have put a major dent in the rum-running business, if an army of T-Men couldn’t? …eliminating high denomination, high value notes we would make life harder” for such criminal enterprises.  No doubt.  But we would also make life harder for everyone else.  The rest of us also find high-denomination notes convenient now and again for completely legal and non-controversial purposes, like buying automobiles and carrying vacation cash compactly.  …currency prohibitionists too often regard those who defend high-denomination notes not as intellectually honest but mistaken opponents, but rather as morally suspect characters.  Larry Summers goes out of his way to smear an ECB executive from Luxembourg (who has had the temerity to ask for better evidence before accepting the case for prohibiting high-denomination notes)… The case for prohibiting large-denomination currency, to summarize, is largely based on guilt by association or on wishful thinking about the benefits of allowing greater range of action to discretionary monetary policy.

On the topic of crime and cash, an article for the WSJ debunks one of the left’s main talking points. If using cash is supposed to be a sign of criminal activity, why are the world’s two most cash-friendly nations also two of the safest and crime-free countries?

Are Japan and Switzerland havens for terrorists and drug lords? High-denomination bills are in high demand in both places, a trend that some politicians claim is a sign of nefarious behavior. Yet the two countries boast some of the lowest crime rates in the world. The cash hoarders are ordinary citizens… The current hoarding in Switzerland and Japan thus underscores one of many ways in which cash is a basic tool of economic liberty: It lets people shield themselves from monetary policies that would force their savings into weak economies that can’t attract sufficient spending or investment on their own. These economies need reforms that boost incentives to work and invest, not negative interest rates and cash limits that raid the bank accounts of law-abiding citizens.

A column by Sarah Jeong in Bloomberg explores some of the additional implications of cash restrictions.

…wherever information gathers and flows, two predators follow closely behind it: censorship and surveillance. The case of digital money is no exception. Where money becomes a series of signals, it can be censored; where money becomes information, it will inform on you. …the Department of Justice began to come under fire for Operation Choke Point…the means were highly dubious. …the DOJ got creative, and asked banks and payment processors to comply with government policies, and proactively police “high-risk” activity. Banks were asked to voluntarily shut down the kinds of merchant activities that government bureaucrats described as suspicious. The price of resistance was an active investigation by the Department of Justice. …Where paternalism is bluntly enforced through a bureaucratic game of telephone, unpleasant or even inhumane unintended consequences are bound to result. …the cashless society offers the government entirely new forms of coercion, surveillance, and censorship. …As paper money evaporates from our pockets and the whole country—even world—becomes enveloped by the cashless society, financial censorship could become pervasive, unbarred by any meaningful legal rights or guarantees.

Her observation on Operation Choke Point is very important since that campaign has been a chilling example of how government abuses its power in the financial sector.

Megan McArdle’s Bloomberg column touches on some additional concerns.

What’s not to like? Very little. Except, and I’m afraid it’s a rather large exception, the amount of power that this gives the government over its citizens. Consider the online gamblers who lost their money in overseas operations when the government froze their accounts. Now, what they were doing was indisputably illegal in these here United States, and I am not claiming that they were somehow deeply wronged. But consider how immense the power that was conferred upon the government by the electronic payments system; at a word, your money could simply vanish. …Unmonitored resources like cash…create a sort of cushion between ordinary people and a government with extraordinary powers. Removing that cushion leaves people who aren’t criminals vulnerable to intrusion into every remote corner of their lives. …If we want to move toward a cashless society — and apparently we do — then we also need to think seriously about limiting the ability of the government to use the payments system as an instrument to control the behavior of its citizens.

For what it’s worth, one way of getting the benefits of a cashless world without the risks is with private digital monies such as bitcoin.

Steve Forbes nails the issue.

Gaining attention these days is the idea of abolishing high denominations of the dollar and the euro. This concept graphically displays the astonishing stupidity–and intellectual bankruptcy–of today’s liberal economic policymakers and the economics profession. …The ostensible reason is to help in the fight against terrorists, bribers, drug dealers and tax evaders by making it more inconvenient for these bad guys to move around and store their ill-gotten cash. …The notion that such evildoers as the Mexican drug cartels and ISIS will be seriously disrupted by the absence of the Benjamin–”These sacks of cash are too heavy now. Let’s surrender!”–is so comical… Monetary expert Seth Lipsky pithily points out in the New York Post, “When criminals use guns, the Democrats want to take guns from law-abiding citizens. When terrorists use hundreds, the liberals want to deny the rest of us the Benjamins.”

Excellent point. Politicians should concentrate on restricting the freedom of bad guys, not ordinary citizens.

So what are the implications of the war against cash? They aren’t pretty.

The real reason for this war on cash–start with the big bills and then work your way down–is an ugly power grab by Big Government. People will have less privacy: Electronic commerce makes it easier for Big Brother to see what we’re doing, thereby making it simpler to bar activities it doesn’t like, such as purchasing salt, sugar, big bottles of soda and Big Macs.

Steve raises a good point about tracking certain purchases. Imagine the potential mischief if politicians had a mechanism to easily impose discriminatory taxes on disapproved products.

He also notes that the war on cash is motivated by a desire to more effectively implement an ineffective policy.

Policymakers in Washington, Tokyo and the EU think the reason that their economies are stagnant is that ornery people aren’t spending and investing the way they should. How to make these benighted, recalcitrant beings do what they’re supposed to do? The latest nostrum from our overlords is negative interest rates. If people have to pay fees to store their money, as they do to put their stuff in storage facilities, then, by golly, they might be more inclined to spend it.

And Steve correctly observes that bad monetary policy is now an excuse to not fix the problems that actually are contributing to economic stagnation.

Manipulating the value of money and controlling interest rates, i.e., the price of money, never works. Money measures value. It is a claim on services and is a tool for facilitating commerce and investing. The reason economies around the world are in the ditch–which is fueling anger, discontent and ugly politics–is structural, government-created barriers: unstable money, suffocating rules and too-high rates of taxation.

James Grant, in a column for the Wall Street Journal, is not impressed by the anti-cash agitprop and specifically debunks some of the arguments put forth by Rogoff. He starts with some very sensible observation that politicians should reform drug laws and tax laws rather than restricting our freedom to use cash.

Terrorists traffic in cash, Mr. Rogoff observes. So do drug dealers and tax cheats. Good, compliant citizens rarely touch the $100 bills that constitute a sizable portion of the suspiciously immense volume of greenbacks outstanding—$4,200 per capita. Get rid of them is the author’s message. Then, again, one could legalize certain narcotics to discommode the drug dealers and adopt Steve Forbes’s flat tax to fill up the Treasury. Mr. Rogoff considers neither policy option. Government control is not only his preferred position. It is the only position that seems to cross his mind.

Grant makes the (obvious-to-folks not-in-Washington) point that restricting cash to enable Keynesian monetary policy is akin to throwing good money after bad.

Mr. Rogoff lays the blame for America’s lamentable post-financial-crisis economic record not on the Obama administration’s suffocating tax and regulatory policies. The problem is rather the Fed’s inability to put its main interest rate, the federal funds rate, where it has never been before. In a deep recession, Mr. Rogoff proposes, the Fed ought not to stop cutting rates when it comes to zero. It should plunge right ahead, to minus 1%, minus 2%, minus 3% and so forth. At one negative rate or another, the theory goes, despoiled bank depositors will stop saving and start spending. …What would you do if your bank docked you, say, 3% a year for the privilege of holding your money? Why, you might convert your deposit into $100 bills, rent a safe deposit box and count yourself a shrewd investor. Hence the shooting war against currency. …In the topsy-turvy world of Mr. Rogoff, negative rates would be the reward to impetuousness and the cost of thrift. …Never mind that, in post-crisis America, near 0% interest rates have failed to deliver the promised macroeconomic goods. Come the next crackup, Mr. Rogoff would double down—and down.

And he echoes the insights of Austrian-school scholars about how easy-money policies are the cause of problems rather than the cure.

Interest rates are prices. They impart information. They tell a business person whether or not to undertake a certain capital investment. They measure financial risk. They translate the value of future cash flows into present-day dollars. Manipulate those prices—as central banks the world over compulsively do—and you distort information, therefore perception and judgment. The ultra-low rates of recent years have distorted judgment in a bullish fashion. True, they have not, at least in America, ignited a wave of capital investment—who needs it in a comatose economy? They have rather facilitated financial investment. They have inflated projected cash flows and anesthesized perceptions of risk (witness the rock-bottom yields attached to corporate junk bonds). In so doing, they have raised the present value of financial assets. Wall Street has enjoyed a wonderful bull market. The trouble is that the Fed has become hostage to that very bull market. The higher that asset prices fly, the greater the risk of the kind of crash that impels new rounds of intervention, new cries for government spending, bigger deficits—more “stimulus.”

Let’s close with the good news is that Switzerland doesn’t seem very interested in following Europe and the United States down the primrose path of seeking to curtail monetary freedom.

Manuel Brandenberg, a lawmaker in the Swiss canton of Zug, loves cash. …That belief in bills is shared by many of his compatriots, who have a penchant for hard currency even when electronic options are available. In a country whose wealth managers flourished thanks to banking secrecy, citizens often cherish the untraceable privacy conferred by notes and coins. “Cash is property and cash is freedom,” said Brandenberg… Unlike their neighbors, the Swiss have no plans to reconsider banknote denominations — 10, 20, 50, 100 and 200 francs. Not even the highest of 1,000 francs ($1,040). …The predilection for notes and coins is evident on the streets of Zurich, where a number of stores don’t take plastic — among them Belcafe at Bellevue, a busy transport hub in the center. …Roughly 20 percent of purchases — including large sums for jewelry — were paid in cash, then-Finance Minister Eveline Widmer-Schlumpf told parliament in 2014. …“There’s no reason to change things,” said Rickli. “I don’t want the state to know who goes to what restaurant. That’s none of the government’s business.”

Thank goodness for the “sensible Swiss.” On so many issues, Switzerland is a beacon of common sense and individual freedom.

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Remember Bill Murray’s Groundhog Day, the 1993 comedy classic about a weatherman who experiences the same day over and over again?

Well, the same thing is happening in Japan. But instead of a person waking up and reliving the same day, we get politicians pursuing the same failed Keynesian stimulus policies over and over again.

The entire country has become a parody of Keynesian economics. Yet the politicians make Obama seem like a fiscal conservative by comparison. They keep doubling down on the same approach, regardless of all previous failures.

The Wall Street Journal reports on the details of the latest Keynesian binge.

Japan’s cabinet approved a government stimulus package that includes ¥7.5 trillion ($73 billion) in new spending, in the latest effort by Prime Minister Shinzo Abe to jump-start the nation’s sluggish economy. The spending program, which has a total value of ¥28 trillion over several years, represents…an attempt to breathe new life into the Japanese economy… The government will pump money into infrastructure projects… The government will provide cash handouts of ¥15,000, or about $147, each to 22 million low-income people… Other items in the package included interest-free loans for infrastructure projects…and new hotels for foreign tourists.

As already noted, this is just the latest in a long line of failed stimulus schemes.

The WSJ story includes this chart showing what’s happened just since 2008.

And if you go back farther in time, you’ll see that the Japanese version of Groundhog Day has been playing since the early 1990s.

Here’s a list, taken from a presentation at the IMF, of so-called stimulus plans adopted by various Japanese governments between 1992-2008.

And here’s my contribution to the discussion. I went to the IMF’s World Economic Outlook database and downloaded the numbers on government borrowing, government debt, and per-capita GDP growth.

I wanted to see how much deficit spending there was and what the impact was on debt and the economy. As you can see, red ink skyrocketed while the private economy stagnated.

Though we shouldn’t be surprised. Keynesian economics didn’t work for Hoover and Roosevelt, or Bush and Obama, so why expect it to work in another country.

By the way, I can’t resist making a comment on this excerpt from a CNBC report on Japan’s new stimulus scheme.

Abe ordered his government last month to craft a stimulus plan to revive an economy dogged by weak consumption, despite three years of his “Abenomics” mix of extremely accommodative monetary policy, flexible spending and structural reform promises.

In the interest of accuracy, the reporter should have replaced “despite” with “because of.”

In addition to lots of misguided Keynesian fiscal policy, there’s been a radical form of Keynesian monetary policy from the Bank of Japan.

Here are some passages from a very sobering Bloomberg report about the central bank’s burgeoning ownership of private companies.

Already a top-five owner of 81 companies in Japan’s Nikkei 225 Stock Average, the BOJ is on course to become the No. 1 shareholder in 55 of those firms by the end of next year…. BOJ Governor Haruhiko Kuroda almost doubled his annual ETF buying target last month, adding to an unprecedented campaign to revitalize Japan’s stagnant economy. …opponents say the central bank is artificially inflating equity valuations and undercutting efforts to make public companies more efficient. …the monetary authority’s outsized presence will make some shares harder to buy and sell, a phenomenon that led to convulsions in Japan’s government bond market this year. …the BOJ doesn’t acquire individual shares directly, it’s the ultimate buyer of stakes purchased through ETFs. …investors worry that BOJ purchases could give a free ride to poorly-run firms and crowd out shareholders who would otherwise push for better corporate governance.

Wow. I don’t pretend to be an expert on monetary economics, but I can’t image that there will be a happy ending to this story.

Just in case you’re not sufficiently depressed about Japan’s economic outlook, keep in mind that the nation also is entering a demographic crisis, as reported by the L.A. Times.

All across Japan, aging villages such as Hara-izumi have been quietly hollowing out for years… Japan’s population crested around 2010 with 128 million people and has since lost about 900,000 residents, last year’s census confirmed. Now, the country has begun a white-knuckle ride in which it will shed about one-third of its population — 40 million people — by 2060, experts predict. In 30 years, 39% of Japan’s population will be 65 or older.

The effects already are being felt, and this is merely the beginning of the demographic wave.

Police and firefighters are grappling with the safety hazards of a growing number of vacant buildings. Transportation authorities are discussing which roads and bus lines are worth maintaining and cutting those they can no longer justify. …Each year, the nation is shuttering 500 schools. …In Hara-izumi, …The village’s population has become so sparse that wild bears, boars and deer are roaming the streets with increasing frequency.

Needless to say (but I’ll say it anyhow), even modest-sized welfare states eventually collapse when you wind up with too few workers trying to support an ever-growing number of recipients.

Now maybe you can understand why I’ve referred to Japan as a basket case.

P.S. You hopefully won’t be surprised to learn that Japanese politicians are getting plenty of bad advice from the fiscal pyromaniacs at the IMF and OECD.

P.P.S. Maybe I’m just stereotyping, but I’ve always assumed the Japanese were sensible people, even if they have a bloated and wasteful government. But when you look at that nation’s contribution to the stupidest-regulation contest and the country’s entry in the government-incompetence contest, I wonder whether the Japanese have some as-yet-undiscovered genetic link to Greece?

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Japan is the poster child for Keynesian economics.

Ever since a bubble popped about 25 years ago, Japanese politician have adopted one so-called stimulus scheme after another.

Lots of additional government spending. Plenty of gimmicky tax cuts. All of which were designed according to the Keynesian theory that presumes that governments should borrow money and somehow get those funds into people’s pockets so they can buy things and supposedly jump-start the economy.

Japanese politicians were extraordinarily successful, at least at borrowing money. Government debt has quadrupled, jumping to way-beyond-Greece levels of about 250 percent of economic output.

But all this Keynesian stimulus hasn’t helped growth.

The lost decade of the 1990s turned into another lost decade and now the nation is mired in another lost decade. This chart from the Heritage Foundation tells you everything you need to know about what happens when a country listens to people like Paul Krugman.

But it’s not just Paul Krugman cheering Japan’s Keynesian splurge.

The dumpster fire otherwise known as the International Monetary Fund has looked at the disaster of the past twenty-five years and decided that Japan needs more of the same.

I’m not joking.

The Financial Times reports on the latest episode of this Keynesian farce, aided and abetted by the hacks at the IMF.

Japan must redouble economic stimulus…the International Monetary Fund has warned in a tough verdict on the world’s third-largest economy. Prime minister Shinzo Abe needs to “reload” his Abenomics programme with an incomes policy to drive up wages, on top of monetary and fiscal stimulus, the IMF said after its annual mission to Tokyo. …David Lipton, the IMF’s number two official, in an interview with the Financial Times…argued that Japan should adopt an incomes policy, where employers — including the government — would raise wages by 3 per cent a year, with tax incentives and a “comply or explain” mechanism to back it up. …Mr Lipton and the IMF gave a broad endorsement to negative interest rates. The BoJ sparked a political backlash when it cut rates to minus 0.1 per cent in January.

Wow.

Some people thought I was being harsh when I referred to the IMF as the Dr. Kevorkian of the global economy.

I now feel that I should apologize to the now-departed suicide doctor.

After all, Dr. Kevorkian probably never did something as duplicitous as advising governments to boost tax burdens and then publishing a report to say that the subsequent economic damage was evidence against the free-market agenda.

P.S. The IMF is not the only international bureaucracy that is giving Japan bad advice. The OECD keeps advising the government to boost the value-added tax.

P.P.S. Japan’s government is sometimes so incompetent that it can’t even waste money successfully.

P.P.P.S. Though Japan does win the prize for the strangest government regulation.

P.P.P.P.S. By the way, here’s another example of the IMF in action. Sri Lanka’s economy is in trouble in part because of excessive government spending.

So the IMF naturally wants to do a bailout. But, as Reuters reports, the bureaucrats at the IMF want Sri Lanka to impose higher taxes.

Sri Lanka will raise its value added tax and reintroduce capital gains tax…ahead of talks on a $1.5-billion loan it is seeking from the International Monetary Fund. …The IMF has long called on Sri Lanka to…raise revenues… These are likely to be the main conditions for the grant of a loan, economists say.

P.P.P.P.P.S. On a separate topic, the British will have a chance to escape the European Union this Thursday.

I explained last week that Brexit would be economically beneficial to the United Kingdom, but independence also is a good idea simply because the European Commission and European Parliament (and other associated bureaucracies) are reprehensible rackets for the benefit of insiders.

In other words, Brussels is like Washington. Sort of a scam to transfer money from taxpayers to the elite.

Though I wonder whether the goodies for EU bureaucrats can possibly be as lavish as those provided to OECD employees. I don’t know if the bureaucrats at the OECD get free Viagra, but they pay zero income tax, which surely must be better than the special low tax rate that EU bureaucrats have arranged for themselves.

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At the risk of understatement, I’m not a fan of Keynesian economics.

The disdain is even apparent in the titles of my columns.

And these are just the ones with some derivation of “Keynes” in the title. I guess subtlety isn’t one of my strong points.

That being said, there are some elements of Keynesian economics that are reasonable.

I’ve written, for instance, that reductions in government spending can be temporarily painful because labor and capital don’t get instantaneously reallocated.

And I don’t object to the notion of shifting government outlays so they take place when the economy is weak (assuming, of course, that the spending is for a sensible and constitutional purpose).

So I was very interested to see that Tyler Cowen and Alex Tabarrok of George Mason University have a new video on fiscal policy and the economy as part of their excellent series at Marginal Revolution University.

Interestingly, “Keynes” is mentioned only once, and then just in passing, even though the discussion is about discretionary Keynesian fiscal policy.

Here are my thoughts on the video.

  1. Near the beginning, Alex discusses how an economic shock can lead to a downturn as households cut back on their normal expenditures. That’s quite reasonable, but I wish there had been some acknowledgement that negative shocks are often the result of bad government policy (i.e., the mistakes that caused and/or exacerbated the recent financial crisis or the Great Depression) .
  2. There was no discussion of how government can put money into the economy without first taking the money out of the economy via taxes or borrowing (see cartoon below, or my video on the topic). One can argue, of course, that Keynesian policy leads to more consumer spending by borrowing money from credit markets and giving it to people, but doesn’t that simply lead to less investment spending? Perhaps there’s an implicit hypothesis that banks will just sit on the money in a weak economy, or maybe the assumption is that the government can artificially boost overall spending in the short run by borrowing money from overseas. Analysis of these issues, including the tradeoffs, would be valuable.
  3. Because of my concerns about government inefficiency, I enjoyed the discussion about targeting vs timeliness, but Keynesians only care about having the government somehow dump money into the economy. And they’ll use any excuse, even a terrorist attack.
  4. Tyler point out that the textbook view of Keynesian economics is that governments should run deficits when there’s a downturn and surpluses when the economy is strong, but he is understandably concerned that politicians only pay attention to the former and ignore the latter.
  5. Raising unemployment benefits is not the win-win situation implied by the conversation since academic research shows that longer periods of joblessness when people get money for not working.
  6. I’m not convinced that adjusting the payroll tax will have significant benefits. What’s the evidence that companies will make long-run hiring decisions based on short-run manipulations of the tax?
  7. The discussion at the end about fiscal rules got me thinking about how Keynesians should support a spending cap since it means spending can still climb during a recession (even if revenues fall). Of course, the tradeoff is that they would have to accept modest spending increases when the economy is strong (and revenues are surging).

Here’s an amusing cartoon strip on Keynesian stimulus from the same artist who gave us gems on the minimum wage and guaranteed income.

P.S. Since today’s topic is Keynesian economics here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally entertaining sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

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