Nov 12, 2010

Krackerjack Keynesianism or Economics in One Column

by Hogeye Bill

Most Americans admit that they don't know much about economics. It is not only the dismal science, but also really, really boring. Krackerjack Keynesianism seems the most popular theory among those few who think they know something about economics. Krackerjack Keynesianism is the theory that the best way to get out of a recession or depression is for the government to spend money. For Keynesians, the solution to just about any economic malady is "Just spend, baby!" This is of course exactly what the political caste wants to hear. It's not hard to see why virtually all government economists are Krackerjack Keynesians.

To be fair, John Maynard Keynes recommended that government stop spending during the good times. Whether he really believed that governments would do that is an interesting question, but in Keynes "long run" when he is dead and we aren't, a person has to be supremely naive or a statist true believer to ignore the history of the matter. In fact, governments tend to keep up the spending even in good times. It's the incentives, stupid! Why would the political caste not want to maximize its cut in the action? The political rent of privilege and monopoly depends on government redistribution. The more wealth and power government distributes to special interests, the more rent the political caste can collect.

Krackerjack Keynesians provide big government types with a pseudo-scientific justification for spending. In their academic positions at government universities and government jobs, these court intellectuals say, "Yes, spend more! It's good for the economy." It's ironic that the word "economy" derives from the ancient Greek word for household management or thrift. Obviously, if a household did it the Keynesian way, it would be rightly judged as foolish and improvident. It would go broke very quickly. So Keynesianism perhaps should be considered anti-economics. Other schools of economic thought, the Austrian or Monetarist schools for example, hold that much the same principles apply for both households and nations. They would have governments frugal, and refrain from intervening in voluntary economic processes.

Let's compare the Keynesian and the Austrian positions. Keynesians focus on one single input into a complex economy - the amount of money. They figure that if you give out money (to "the people" in speeches but to special interests in practice) it will help improve the overall economy. Non-Keynesian economists point out that money is not wealth. Wealth is food, farms, factories, homes, roads, schools, capital goods, etc. From an individual's point of view, money seems like wealth because money can buy wealth. But for a whole economy, adding more money simply bids up prices (with wages generally lagging.) Double the money supply and, roughly speaking, prices will double. If you get hold of the new money early, you make out like a bandit. If you get it later, you're screwed. Needless to say, the early getters tend to be government contractors and employees, munitions firms, and certain favored corporations and industries. Low and middle class Americans tend to get it later, and also tend to save in dollars more than their wealthier compatriots. So they get it good and hard. But probably the lowest and most exploited in the dollar inflation scheme are the third world poor whose governments use the dollar as "backing" and inflate their currencies on top of that. This includes much of Latin America.

The Keynesian theory is that somehow (like bad weather - that's not our department) the unemployment rate goes up. No problem, just spend, government, spend. This spending gives money to people you can see and register and list and document. So we can measure how many jobs are created. The Keynesians fall for the oldest economic fallacy in the book at this point: The Broken Window Fallacy. Good economists not only look at what one sees on the surface, but also the unseen effects. In this case, the lucky stiffs that got the money benefitted by bidding away wealth from those who didn't. The only thing economically the government gift did was to divert money from the most expedient use as determined by voluntary society ("the market") to the most politically expedient use as determined by temporary sellers of privilege (elected and unelected government officials.) Most non-krackerjack economists suspect that free individual entrepreneurs risking their own money create wealth better than government agents do with other people's money.

One of the worst Krackerjack Keynesians is New York Times columnist Paul Krugman. He's either the stupidest Nobel prize winner ever, or has sold his soul to the US Department of Propaganda. When he's not trying to justify giving away money to special interests through government debt spending, he's a spokesman for the US export combine, calling for higher prices for American consumers (He calls it "weakening the dollar ... to reduce those deficits." See how "scientific" bunkum can hide shafting consumers?) In another column, Krugman cherry-picks a tiny period when FDR slowed spending, and ludicrously claims that his policies failed only because he didn't spend more. This despite that from Hoover onward (FDR simply ramped up Hoover's program) the US government spent like a drunken sailor, and the US remained mired in the Depression. Recent scholarly studies indicate that the New Deal lengthened the Great Depression by years.

Let me give you an alternative theory about economics and what causes prosperity. This is basically the narrative of many if not most non-Keynesian economists. Wealth is created by a combination of labor, time, land, buildings/facilities, and tools. The last three together are called "capital." (Again: Money is not capital, but money can buy capital.) Accumulating capital is called "saving." Now that we have the terminology down, we can describe how wealth is created.

Productive people save - either directly or indirectly. They may not buy capital themselves, but those who don't generally give it to others to buy capital for them, for example by putting earnings into a savings account or a stock trading account.

Production of wealth requires saving, since capital is necessary for most production. (Most work needs tools, and space at least to stand on.) Unfortunately, there is no guarantee that enough people will want any given product. Fortunately, to the extent that a market is free and uncoerced, there is an automatic remedy. The firm without enough customers to sustain itself goes out of business. This frees up the capital used by the defunct business, and frees up the raw materials that firm would have used. The unproductive capital is called "malinvestment."

A recession or depression is the result of malinvestment. A recession means that capital is allocated in inefficient ways, i.e. ways that produce things people are not willing to buy. But as noted, the unhampered market is an emergent order, like an ecosystem or the development of natural language. The inefficient firms go bust and the capital moves to more productive uses; the market corrects itself.

But the Keynesians want to put a penny in the fuse box and short circuit the corrective mechanism. They want government to spend, spend, spend, to prop up the inefficient firms, keeping capital malinvested and inefficient and preventing the natural correction. Keynesians want, perversely, to reward the most inefficient holders of capital!

Why? Remember, they are court intellectuals - hirelings of ruling politicians. If their bosses want to keep spending (to collect the political rent of office), well, they know where their bread is buttered. And to be fair, some Keynesians may really believe their ruler-kissing voodoo economics.

What is the effect of Keynesian policy? By facilitating malinvestment, their policy prolongs the recession, and makes its eventual resolution (capital going to better uses) even harder. Krackerjack Keynesians, in effect, advise the wino to cure his alcoholism by having another drink. Reasonable economists recommend he stop drinking, suffer through the hangover, and get back to work.

Will Rogers once said, "It isn't what we don't know that gives us trouble, it's what we know that ain't so." Here are some common lies, myths, and half-truths repeated so often in the lamestream media that some people might believe them.

1) Without the massive government giveaway the economy would have collapsed. Total hogwash; there is no evidence for this whatsoever. The evidence shows that letting the malinvestments correct through the market is better than propping up bad investments for political cronies. Note that both factions of the welfare-warfare party are equally bad on this. After a back room deal, the Reps got their windfall giveaway to their financial special interests, and the Dems got their windfall giveaway to their big union automaker special interest - a pretty obvious quid pro quo.

2) There is no alternative to fiat (paper, unbacked) money - the gold standard is outdated. Again, this is total bull feces, but the hate of statist rulers and Keynesians for hard money is understandable. Without fiat money, spending would have to come out of people's hides immediately through taxation or corvee. People would rebel at current levels of government spending if it weren't for the magic of fiat money inflation.

3) The US trade deficit is a bad, bad thing. Ridiculous! Since dollars are unbacked pretty pieces of paper, it is a wonderful deal for Americans to trade these paper trinkets for real goods and services. On a related note, beware government propaganda that refers to foreigners spending these honestly earned dollars as "an attack on America." Talk about chutzpah! We get good stuff for pretty pieces of paper, then complain when they use the paper? The idea that a trade deficit is bad is a new mutant of a thoroughly discredited theory called "mercantilism." Neo-mercantilism replaces accumulation of gold with accumulation of fiat money ("a favorable balance of trade") as its objective.

4) Our children or grandchildren will have to pay for US overspending. This is false because it overlooks the likely possibility that the dollar will hyperinflate and become worthless. The people that will pay the costs of US rulers' profligacy will be holders of dollars and dollar-denominated securities. Some of the main holders are the central banks of China, Japan, and Russia. I suspect most of your grandchildren will see the way the wind blows, and hold silver, moonshine, pot, wheat, gold, or some other commodity of real value. Historically, the fiat money standard is an anomaly. Until the late 20th century, people were generally too wise to accept paper except during wartime emergencies. I think our children and grandchildren, using gold or silver backed currency, will wonder how their ancestors could have been so stupid. I can hear them now: "Did Grandpa really believe in fairies and that politicians wouldn't abuse their money printing presses?"

4) The Chinese government is manipulating their currency. This one's true, but evades the fact that the US government is the undisputed reigning world champion of monetary manipulation. They've manipulated the dollar, which they can print at will, to be the world's standard money, and convinced/coerced other States' rulers to back their currency by the dollar. Now that China has taken rudimentary steps in manipulation, US propagandists cry "foul." Talk about the pot calling the kettle black! Notice that, just as Americans are screwed by their government's pillage through fiat currency, the Chinese people are screwed the same way by their government. The Chinese government arranges for their people to send goods to foreign countries for pretty pieces of paper, and keeps their currency "cheap" so that they can export more. Why? Just as in the US, there is a combine of rulers and favored exporters. Chinese rulers covet political rent, too.

5) The Federal Reserve Bank is privately owned. This is true by legal fiction but false objectively. The US government owns the Fed. It appoints its governors and gives the Fed its marching orders. If we were talking about Enron, then we would be calling the Fed a "shell corporation." The Fed has no real operations other than as the monopoly distributor of US dollars. It has no real assets other that the financial assets used for this fiat money distribution. The Fed is essentially a shell entity of the US Treasury. Having an overtly owned central bank would make no difference whatsoever, except make it a little more obvious that the government creates money out of thin air. Ah, the magic of central banking - being able to rob all current dollar holders without even reaching into their pockets!

6) Treasury notes (bills, securities) are a solid asset. False. They are IOUs from the US government - promises to print even more fiat money in the future. They are certificates of guaranteed future inflation.

7) The CPI shows that there is little or no inflation. True, but misleading since the CPI was rigged way back in the Nixon era to hide inflation from the public. Did you know that the two most important items to most people have been excluded from the CPI? Food and energy were both eliminated to deceive the public. If you want a decent gauge of inflation, look at the price of gold or silver, or use the CCI, an independent commodities index. Or create your own market basket of goods and look up historical prices. But whatever you do, don't believe government statistics.

8) The US has a free market economy. False. There is a long history of massive intervention in the economy by government. Abraham Lincoln gave corporate subsidies to the railroad corporations that got him elected. The FTC cartelized transportation later in the 19th century. The money combine with its central bank started in 1913. Medicine was cartelized in the 1910s. The railroads and national economy were commandeered by government during WWI. They called it "war socialism," but really it was war fascism - government and favored businesses in cahoots. Then came the New Deal, making the war fascism permanent. Today we have managed trade agreements (fraudulently called "free trade agreements"), massive giveaways ("bailouts") of politically connected corporations and whole industries that were too inept to survive an honest economy, and so on. What the US has now is dirigisme, using a combination of statist socialist tools (e.g. nationalization) and fascist tools (e.g. regulation and State-industry "partnerships.")

There are three things I'd like the reader to remember. First: Money is not wealth. (It can buy wealth, but is not itself wealth.) Second: Jobs are not wealth. (They can produce wealth, but they are not wealth.) Finally: Try to look at the whole picture when analyzing costs and benefits; don't just look at the obvious or short term phenomena. When a pundit writes that weakening the dollar helps exporters, you should automatically think, "... and harms consumers who buy imports, like Wal-Mart shoppers and most people." When someone says that a tariff will create American jobs by excluding imports, it should be reflexive to think "... and screw a multitude of consumers who have to pay more." Governments, through their Krackerjack Keynesian "experts," tend to mention only the benefits favorable to their interests. They are masters of the Broken Window Fallacy.

To learn more, check out these web sites:
Ludwig von Mises Institute -
Foundation for Economic Education -