As the number of jobs lost since the beginning of the recession passes 7 million, obstinate liberal economists such as Paul Krugman continue to push the upside-down theory that the best way to climb out of debt is to keep digging.
“We find that a stronger short-term fiscal policy response” — by which they mean a temporary increase in government spending — “is significantly associated with smaller medium-term output losses.”
So we should be doing much more than we are to promote economic recovery, not just because it would reduce our current pain, but also because it would improve our long-run prospects.
But can we afford to do more — to provide more aid to beleaguered state governments and the unemployed, to spend more on infrastructure, to provide tax credits to employers who create jobs? Yes, we can.
It can clearly be observed that as months of real data is placed beside the Keynesian model, the trendline does not fit (h/t azred).
Despite this, Krugman continues to insist that the only way to preserve the economy is through government handouts and centralized planning. He believes that we should adopt the same approach which nearly bankrupted Britain and ended their reign as the top global power.
It was Keynes who advocated Britain’s quitting the gold standard in 1931, a measure that did bring some relief while earning the opprobrium from the advocates of “sound” money. He wasn’t joking when he said that instead of paying out dole money it would have been better for the British government to print a great number of five-pound notes, paying people first to bury them and then to dig them up.
He helped turned the British Pound into a fiat currency. Their central bank cranked up the printing press and allowed the country to inflate and consume itself.
Keynes once demonstrated an example of his doctrine by knocking towels onto the floor and claiming that the act of picking them up was equivalent to the generation of work.
Gadding from one conference to another in the 1930s, Keynes occupied a place in the public imagination normally reserved for left-handed tennis players or erratic minor royalty. He was spotted by Bloomsbury cronies telling housewives on the newsreels how they must abjure the thrifty habits of generations. In Washington he alarmed a pundit of conservative views by tipping a pile of washroom towels to the floor in an attempt to show how increased consumption generated work and therefore would aid economic recovery.
Should we really be basing our economic outlook on the theories of a man who believes that creating disorder and then cleaning it up is a proper means of stimulating recovery?
Less than 15 years after Keynes convinced it to drop the gold standard, Britain was on the brink of bankruptcy. On the advice of Keynes, Britain took out a large loan in from the United States, twice the amount of its GDP.
John Maynard Keynes, the economist and lawmaker who was then the top adviser to the British Treasury, likened his country’s financial situation to the military rout at Dunkirk. Prime Minister Clement Attlee dispatched Keynes to Washington to seek support.
Instead of a subsidy, Keynes came back with the loan, fixed at 2 percent interest to be reimbursed in annual payments that were structured like a mortgage. The payments were mostly interest in the early years and shifted toward capital later on.
When Britain took the $4.34 billion loan in 1945, it was the world’s dominant superpower. Its debt helped fuel the growth of its financier, the United States.
Richard Nixon famously declared almost four decades ago: “We are all Keynesians now”, meaning the use of tax and spending adjustments to smooth economic fluctuations was generally accepted.
The world subsequently learned — through experience and a major revision of economic thinking — that Keynesian policies could be ineffective, or even harmful. Governments around the world are now acting as if those lessons had never been learnt, but they remain valid today.
As deficit spending drives the US into its own downward spiral, we are borrowing an increasing portion of our GDP from overseas. Judging by history, we can expect those lenders, China and Japan, to leverage our own debt into a position of global power while we fall into greater dependency. Further borrowing and spending will only increase the size of the ditch in which we are becoming buried.
According to an IMF study, as little as 10% of the money borrowed for stimulus spending is recycled into economic output.
The multi-country IMF study referred to found that the bang for the stimulus buck is small: typically 10¢ in extra GDP per dollar of stimulus at the time of impact, and no more than 50¢ even after three years. Some other commentators think the effect is even weaker. The notion that the pay-off to fiscal stimulus can be enlarged and fine-tuned through careful targeting sounds like a proposition from the Soviet handbook of economic planning, and will be about as successful.
It is little wonder that an economic theory exemplified by knocking towels onto the floor or burying money and then digging it up would consume more resources than it produced. It is a recipe for demoralization and disaster.
The most penetrating criticism of Keynes came from Friedrich von Hayek, an Austrian lecturing at the London School of Economics, who famously became Mrs Thatcher’s favourite economist. Hayek had witnessed the catastrophe of state during the hyperinflation of the 1920s. He had his own, purely economic reasons for disagreeing with Keynes; but he also suggested that the Keynes style of liberalism, by increasing the scope of state power, would end by extinguishing the bourgeois freedoms it purported to save. Somewhat unconvincingly, Keynes responded that “dangerous acts” were all right so long as they were perpetrated by the right people – ie, by the progressive, socially congenial elite educated at Oxbridge or Harvard. Keynes remained a statist who believed that “moderate planning” was better than laissez-faire.
Are we all Keynesians now? Let’s hope not. The true remedy to the economy’s ills is to stop borrowing, stop spending, let prices drop, and allow failed companies to enter bankuptcy.
Keynesian-style policies have resulted in disasters such as the Great Depression, the “stagflation” in the United States from 1970 to 1982, and the aftermath of the Japanese Bubble. Each lasted more than a decade. It would be far better to allow for an unobstructed free-market correction process. With no government safety net or bailouts, there would be more hoarding, faster deflation, more bankruptcy, and a speedy return to prosperity.
While bankruptcy sounds horrible, it is actually a wonderful and orderly process. First of all, it fixes balance sheets quickly. It also provides an opportunity to remove current owners and administrators who operated businesses in a risky fashion. No need to worry about bonus questions here! Some bankrupt firms will go completely out of business and their resources will be auctioned off to other entrepreneurs at very low prices. I would imagine that the dozens of startup firms working to bring electric cars to market would love the opportunity to buy an auto plant in Michigan for pennies on the dollar. Other firms will remain in business with most workers keeping their jobs, but bankruptcy reduces debt and cost and provides an opportunity to renegotiate contracts and wage rates.
The resulting environment after bankruptcy is one of new owners and operators with far less debt who have not had their “animal spirits” crushed. Firms would have less debt and therefore lower cost structures. Some consumers would be flush with hoarded cash and have an opportunity to buy at much lower prices. The economy enters recovery mode and can quickly attain full employment and economic growth. Most importantly, by not bailing out the losers, there is no moral hazard that entrepreneurs will believe they can rely on bailouts in the future.
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