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Posts Tagged ‘Keynesian’

The White House recently began claiming that the “Recovery Act” had “created or saved” 640,000-plus jobs. This turns out to have been a political mistake, in part because even sympathetic reporters understand that the “jobs saved” measure allows for creative accounting. But the White House also erred by providing (supposed) details about the jobs that were created. This made it very easy for reporters and other curious people to do a bit of fact checking, which has generated a spate of stories showing that the White House’s numbers are wrong, even using make-believe methodology. The Washington Examiner has put together a very useful interactive map which links to many of the news reports debunking the Administration’s fraudulent numbers.

For a refresher coures in “stimulus” issues, here is the Center for Freedom and Prosperity’s three-part series on Keynesianism, stimulus, and growth.

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One of the (many) frustrations of my job is dealing with the confusion about economic growth. It should go without saying that economic growth occurs when there is an inflation-adjusted increase in national income. Many policy makers (and journalists) presumably understand this elementary observation. Yet those same people usually attach great importance to monthly data on consumer spending. There is nothing wrong with that data, to be sure, but there is something wrong with how it is analyzed. Many people assume that consumer spending drives growth because it is roughly two thirds of the economy. But this puts the cart before the horse. Higher levels of consumer spending do not cause prosperity. Instead, more consumer spending is best understood as a symptom of prosperity.

Consider an example: Would it be a positive sign if national income fell by 1 percent (and assume that this translated into a 1 percent fall in disposable income), but people increased consumer spending by 2 percent by borrowing lots of money and utilizing their credit cards? Retails stores might be happy, but clearly this pattern would not be sustainable.

This is why “Keynesian” policies are misguided. The goal of Keynesianism is to have the government borrow money and then to distribute that money to consumers. Yes, that may bolster consumer spending, but only at the expense of investment spending. After all, the government had to borrow the money out of private credit markets.

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The burden of government spending has skyrocketed during the Bush-Obama years. Many politicians claim that all this new spending represents necessary “investments” to boost economic growth. But as this new video explains, both cross-country comparisons and empirical analysis suggest government is far too big – not only in Europe, but also in America.

This is the second of a two-part series. The first installment, which focuses on eight theoretical reasons why excessive government undermines growth, can be viewed here.

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In a new mini-documentary released by the Center for Freedom and Prosperity, I explain several of the ways that government spending hinders economic growth.

Feb 23, 2021 addendum: This screenshot from the video summarizes the various ways government spending can undermine prosperity.

Costs #1 and #2 apply to every penny in the budget, as explained in the video.

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A fallacy (one of many) of Keynesian economics is that it incorrectly assumes that consumption is the cause of economic growth rather than the result of economic growth. This leads advocates of this misguided theory to adopt policies designed to get people to spend more – even though economic growth (by definition) is the result of people earning more income. This absurd logical mistake is evident in the cash-for-clunkers debacle, as I explain to Foxnews.com:

…critics have a different view. “This is not good for economic growth,” said Dan Mitchell, a senior fellow in economics at the Cato Institute. “You’re simply getting people to use existing income to spend on cars. Getting people to spend more of their money on cars mean they will have less money to spend on other things.” Economic growth, Mitchell argued, is not getting people to spend more money on products, it’s getting them to have more income. Mitchell also believes the program is counterproductive for the auto industry down the road because the acceleration in car purchases will precede a “big downturn in the future.” “Giving someone a shot of heroin is not good for their long term health,” he told FOXNews.com. The program, Mitchell added, shows that the government is “incompetent.”

The Wall Street Journal has the same perspective, noting that the policy is not a success – unless one defines success as getting people to buy things with other people’s money:

What the clunker policy really proves is that Americans aren’t stupid and will let some other taxpayer buy them a free lunch if given the chance. The buying spree is good for the car companies, if only for the short term and for certain car models. It’s good, too, for folks who’ve been sitting on an older car or truck but weren’t sure they had the cash to trade it in for something new. Now they get a taxpayer subsidy of up to $4,500, which on some models can be 25% of the purchase price. It’s hardly surprising that Peter is willing to use a donation from his neighbor Paul, midwifed by Uncle Sugar, to class up his driveway. On the other hand, this is crackpot economics. The subsidy won’t add to net national wealth, since it merely transfers money to one taxpayer’s pocket from someone else’s, and merely pays that taxpayer to destroy a perfectly serviceable asset in return for something he might have bought anyway. By this logic, everyone should burn the sofa and dining room set and refurnish the homestead every couple of years.

Last but not least, the CEO of Edmunds, the company that publishes leading car-buying guides, has a column in the Wall Street Journal explaining that even auto companies may come to regret this policy since the net effect seems to be that consumers either postponed or accelerated purchases that would have occurred anyway:

…it’s not clear that cash for clunkers actually increased sales. Edmunds.com noted recently that over 100,000 buyers put their purchases on hold waiting for the program to launch. Once consumers could start cashing in on July 24, showrooms were flooded and government servers were overwhelmed as the backlog of buyers finalized their purchases. Secondly, on July 27, Edmunds.com published an analysis showing that in any given month 60,000 to 70,000 “clunker-like” deals happen with no government program in place. The 200,000-plus deals the government was originally prepared to fund through the program’s Nov. 1 end date were about the “natural” clunker trade-in rate.

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Based on a theory known as Keynesianism, politicians are resuscitating the notion that more government spending can stimulate an economy. This mini-documentary produced by the Center for Freedom and Prosperity Foundation examines both theory and evidence and finds that allowing politicians to spend more money is not a recipe for better economic performance.


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