Killing Keynes & Krugman Part 4: Government vs. Unemployment By Rick Kelo

Killing Keynes & Krugman Part 4: Government vs. Unemployment

By Rick Kelo

This article is the fourth 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
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)

3. The Flaw of Government Hiring

One of the worst damages Keynes did was to instill in people an idea that only government was capable of doing something.  When we talk about hiring vs unemployment there are 2 separate topics, and for the sake of brevity (because this article isn't exactly short) I'm going to lump them together.  But I want to mention these 2 separate areas upfront so as you read quotes & consider the topic you can separate them in your mind.  On the one hand there's the hiring of people by the government.  On the other hand there is government spending money with the idea that it will create hiring in the private sector.  At the philosophical level they are the same but for matters of discussion they're generally treated as separate topics.  

Keynes considered growing the government bureaucracy a good thing even if government only paid people to sit around, or to dig holes and fill them back in.  In his mind government employing someone was really no different than the stimulus spending described previously.  Give people money, they will spend it, demand goes up and that lowers unemployment.  PRESTO!

Of course the idea is completely irrational.  Suppose you and I live in a town of 10 people where 8 of us work and each make $100.  The other 2 don't work so its decided that they will become employees of town hall and the 8 workers will have $20 of their pay taken from them and given to the 2 people paid to sit at town hall.  Now everyone has an equal $80 each, and the 2 government employees will go out and spend their money on things the other 8 productive members of the town provide.  But the economy hasn't gotten any bigger.

Samuelson argues that when the government adds jobs, these come at the expense of jobs elsewhere. This is manifestly not true. ... Don’t try to hide your prejudices under a mystical doctrine in which important, productive jobs somehow don’t count if they come from a place with a .gov email address.
~ Paul Krugman, New York Times, October 27th, 2012 (Source)

To dig holes in the ground, paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services.
~ John Maynard Keynes, The General Theory of Employment, Interest, and Money,  Page 139

Creating jobs in a depressed economy is something government could and should be doing.
~ Paul Krugman, New York Times, July 10th, 2011 (Source) 

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again there need be no more unemployment.
~ John Maynard Keynes, The General Theory of Employment, Interest, and Money,  Page 85

'wasteful' loan expenditure may nevertheless enrich the community on balance. Pyramid-building, earthquakes, even wars may serve to increase wealth.
~ John Maynard Keynes, The General Theory of Employment, Interest, and Money, Page 85

Now one of my bigger fans on this site wrote a rambling diatribe about Milton Friedman and me yesterday so I decided to contrast Keynes ideas in the 2 quotes above with the other economist of the 20th century to occupy the same stature as Keynes: Milton Friedman.  

In the 1960s Friedman traveled to China.  In his tour the Communist Party official took him to the site of a new canal.  Friedman was shocked to see no bulldozers or modern equipment, instead all the workers were digging the canal by hand with shovels.  When he asked why the Communist Party official told him: "We have 100% full employment in this province, this is a jobs program."  Friedman replied that if you want a canal you should use bulldozers, if you want jobs the workers should have spoons, not shovels. (Source)

Krugman, the nation's largest supporter of both fiscal & monetary stimulus, has no problem with digging holes with spoons and follows closely attached to Keynes on this topic.  

"If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months," he said. "And then if we discovered, oops, we made a mistake, there aren't any aliens, we'd be better off."
~ Paul Krugman speaking on CNN, "Fareed Zakaria GPS", August 14th, 2011 

The error in Krugman's thinking is that if some portion of the 20 million people working for government were employed instead in creative, productive activity unemployment would be less because the resulting economy would be larger.   That is because the economy isn't made up of all the money in America, its made up of the total of all the goods & services produced.  According to the Bureau of Economic Analysis there are 102 million Americans working in private industry.  Those 102 million people represent 32% of the 314 million people in America.  The only goods & services that exist are what that 32% produce, which must then be divided across the 100%.

• Digging holes in the ground & filling them back up like Keynes calls for does not make the economy any larger.
• Wasting a bunch of money preparing for a fake alien invasion like Krugman calls for does not make the economy any larger.
• Burying tax dollars down a mineshaft then letting people draw a paycheck to dig them out like Keynes calls for does not make the economy any larger.
• The only thing that grows the US economy is more producing not more spending.  
• Only production of more of the goods & services that people consume will make the economy larger.  

That brings us to the other method of falsely making the economy appear enlarged that Keynes & Krugman call for: printing money.

The best way to destroy the capitalist system [is] to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.
~ John Maynard Keynes, 1919, Economic Consequences of Peace, p. 113 (Sources: 8, 9, 10)

The quote above goes a long way to explaining the underlying mentality behind all Keynes' inflationary policies.  To a great many Americans who hear the idea of inflation it sounds far less scary than the idea of unemployment.  But what if you have both?  Keynes theory states that we can lower unemployment through public works or increasing the money supply, but this raises inflation .  Then, Keynes says, do the opposite if you need to lower inflation, but the opposite policies will also raise unemployment.  Well America made inflation part of our monetary policy.  The result was 1970-1983: rising unemployment & rising inflation.  Now how do we implement one Keynesian policy to lower unemployment when we need to use the opposite policy to lower inflation?  Uh oh...

This time in history caused the death of demand side economics.  That is why to this day, even on very liberal, fringe web rags that routinely bash supply side economics you will not see a single article defending Keynesian demand side economics.  

Keynes took great issue with anyone who didn't admit inflationary doctrines are sound.  As Keynes' saw it the only problems were not enough money & credit.  Both easy problems to fix since government could just increase the overall supply of money at the printing press & create credit by lowering the interest rate.  According to Keynes cranking out money at the printing press & creating credit by lowering interest rates was like turning stones into bread:

The fact that this costs them nothing deserves emphasising.  The accumulation of a bancor credit, as compared with an accumulation of gold, does not curtail in the least their capacity or their inducement either to produce or to consume.... the same miracle already performed in the domestic field of turning a stone into bread.
 ~ John Maynard Keynes, The Keynes Plan, 1942, Vol 3, pp. 4-5 (Source)

These comments about printing money & lowering government interest rates (to create credit) are the foundations for what you know today as "stimulus."  If printing money was such a good idea though then, of course, counterfeiting wouldn't be illegal.

The problem with Keynes' theories of solving a recession at the printing press is that an economy isn't made up of money.  Its made up of the sum total of all the goods & services produced.  That is why huge amounts of stimulus & deficit based spending never pulled America out of the Great Depression and never pulled Japan out of its "Lost Decade".  Only in the backwards world of Keynes was an expanding government bureaucracy a recipe for economic growth.