Killing Keynes & Krugman: Part 2 Flaws of Government Action in a Recession By Rick Kelo

Killing Keynes & Krugman: Part 2 Flaws of Government Action in a Recession
By Rick Kelo

This is the second article in a six part series.  I am writing these articles in layman's terms so any non-economist can easily follow along. They will break out as follows: 

1. Examples of Keynesian failures (this article)
2. Keynes' Flaws of Government Action in a Recession
3. Flaws of Stimulus
4. Government vs. Unemployment
5. Keynesian Bubble Creation
6. Keynes' Flaws of Government Action in an Expanding Economy (AKA Clintonomics)

Keynes' Flaws of Government Action in a Recession = Pandora's Box

You may never have heard the name John Maynard Keynes, but he was the architect of Too Big To Fail and all the other government bail outs that have flooded the news for the last 5 years.  He died 67 years ago, but Keynes effects your life today.  Keynes is routinely called the most influential economist of the 20th century, but not because his ideas are good or because they work.  They are very bad ideas and they have never worked anywhere.  No, Keynes is influential for entirely another reason.  A much darker reason. 

Keynes was the only economist willing to open Pandora's Box.  To tell every politician in the world what they have always wanted to hear regardless of how bad the consequences would be: that ridiculous government spending wasn't harmful, it was helpful.  Politicians are not difficult to seduce when it comes to the topic of spending money, and with just a whisper of this notion in their ear John Maynard Keynes became the most influential economist in the 20th century.  "You can spend your way into prosperity", Keynes whispered, "Of course you won't spend your way into poverty."

You will not believe the things you will see by the time this ride is over, if you can stomach the roller coaster that was Keynes' mind.  And for all those fans of Paul Krugman's loose, popular writings you need to come along for the ride and see what he (as Keynes last notable disciple) really believes.  

No you will not believe the story of a man who told Presidents & Prime Ministers they could cure their recessions by hiring people to dig holes & fill them in.  You will not believe the words of Paul Krugman, a puppy dog at Keynes heels, saying in 2002 that the economy needs to create a housing bubble to recover from the dot com bubble.  Keynesians are long on soliloquy and short on logic.  In this article I will remove the inane, academic language and show you exactly what these men called for in plain English.

Then you may decide for yourself if you want to live in a Keynesian world forced to ride a roller coaster from one economic bubble to the next on a ride that gave America a decade long Great Depression, Japan a Lost Decade, and robbed you of the recovered, rapidly growing 2013 economy you would otherwise have today instead of the stuttering, weak, jobless economy you got thanks to Keynes & Krugman's policies.

This article is the second in a 3 part series.  The first article may be accessed here: Killing Keynes & Krugman Part 1 by Rick Kelo.  For sake of convenience to the NewsVine membership I am dividing this article into 4 primers released 1 per day this week.  

Part 2 of Killing Keynes & Krugman looks at:

1. Philosophical Flaws
2. The Flaw of Stimulus Spending
3. The Flaw of Government Hiring
4. Technical Flaws 

1. Philosophical Flaws

Keynes wanted to control & direct all investment.  If anyone took his ideas to their conclusion they would find themselves living in a totalitarian state.  In publishing his book in Nazi Germany in 1936 Keynes boasted in the Foreward:

The theory of aggregated production... can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution... put forth under conditions of free competition and a large degree of laissez-faire.
~ John Maynard Keynes,  The General Theory of Employment, Interest, and Money, 7 September 1936

Keynes believed that government should spend to increase "aggregate demand" during a recession.  This suggestion is usually greeted with thunderous applause by politicians who, in the super majority of cases, already prefer to spend money like a drunken sailor on shore leave then print more to make up for it.  

Enter the problem: Deficit spending & easy money cause recessions, but to Keynes they were the cure as well.  They certainly caused the "Great Recession".  Alan Greenspan's easy money policies sent a false signal to the housing industry to produce.  A signal that caused malinvestments in housing far above what the market actually needed.  With that in mind how logical does the Keynesian suggestion that deficit spending & easy money are the cure for the recession sound?

The first problem with this theory is that recessions are not caused by a drop in aggregate demand.  Decreasing aggregate demand is the symptom.  The cause of recessions is the necessary cleansing of malinvestments that were created by the preceding boom period.  But instead stimulus acts like an anchor around the economy's neck and prevents it from naturally adjusting the damaged industries (like auto manufacturing) downward to levels that are sustainable.  Bolstering it back up artificially for a short time slows the recovery process because that industry is trying to figure out its new equilibrium and can't.  

And for the people becoming unemployed?  Without the false signals bail-outs send they'd instead have been guided by the economy's pricing system into jobs & roles that were sustainable for the long term.  Does it sound impossible?  Yet what happened to all the mortgage brokers at the height of the boom period?  They were nothing but simple order takers, but were earning six figure incomes.  And there were alot of them, all highly paid and very low skilled.  They adjusted into sustainable long-term industries.  What would they be doing instead if we'd bailed out the mortgage industry and artificially created conditions so they kept writing mortgages?  Sound much like a dead end job yet... a prolonging of the inevitable?  

When we combine the bad effect of stimulus on industries trying to find their footing with the delay it causes on individuals who will have to adjust to a sustainable, long-term job you get a recovery just like the one we have now: confused, stagnant, tepid, jobless.   

The basic flaw of this suggestion (which is why it has never worked anywhere it has been tried) is that there is not a government on this Earth with its own money.  There is no government with a surplus saved in the bank to spend in a down economy.  There are only governments in debt.  So the only money a government can spend is money it first takes from its citizens either in the form of a direct tax or by printing money.

The next basic flaw is that Keynes' theories look at demand and supply in huge aggregates only, much like most of what's deemed "classical economic" theories from the 1800s.  His ideas suggest that injecting government stimulus into the economy either in the form of spending or printing money raises these aggregates, implying that all levels of economic activity are raised across the board.  The real world paints a different picture: issues of unemployed people or idle equipment are not across the board.  Instead, they are specific to certain industries caused by unique factors that effect that industry differently than others.  That's why in 2008 we had to bail-outs banks and car makers but not other industries.  

Artificially pumping in stimulus money in will artificially "help" these distressed industries, but not in a wise, long-term way.  Stimulus in 2008 was promised to cause those companies to add jobs or, phrased differently, lower the loss of jobs in those industries.  But if that happened at all it was only because those bail-outs sent a false signal that it was temporarily profitable again to employ people (or machines in the case of car makers) that otherwise would have been idle.  I said this isn't a wise, long-term solution because when costs catch back up & pass the temporary boost from stimulus unemployment will reappear.

It is basic flaws like this that are why Keynesian economics has universally failed everywhere it has been tried.