Monty Pelerin's World

Economics, Finance and Politics Through The Prism of Classical Liberalism

Keynes’ Myths Support Wizard-of-Oz Government

Keynes’ Myths Support Wizard-of-Oz Government

Franklin Delano Roosevelt, 1933.

Keynesian economics is mostly a fraud and always has been. It has little theoretical basis and no empirical support. I have posted on this topic before, most recently here.

Unfortunately, our school system has convinced the public that government is the source of most good and can solve all problems. Generations of children have been taught that Franklin Delano Roosevelt “saved” us from the Great Depression. All of the history textbooks proclaim this. Yet, his Treasury Secretary clearly contradicted this myth:

We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong … somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises … I say after eight years of this Administration we have just as much unemployment as when we started … And an enormous debt to boot! — Henry Morganthau, Treasury Secretary May 1939

Morganthau’s statement is the equivalent of Ben Bernanke and Tim Geithner stating that “everything we have done has done no good.”  If only current political appointees could be so honest, but the Keynesian myth must continue at all costs. It is the source of government power and spending. It is the source of economist income and prestige.  It is the foundation supporting the myth of government.

In Keynesian Economics and the Wizard of Oz Dan Mitchell does an excellent job of exposing what more and more observers believe to be a fraud. Mitchell states:

In the ultimate triumph of theory over reality, the Keynesians say all that matters is the macroeconomic model behind the curtain showing that more government spending leads to more jobs and growth. Consider the recent report from the Congressional Budget Office (CBO), which claimed that Obama’s stimulus created at least one million jobs. As Brian Riedl of the Heritage Foundation noted:

CBO’s calculations are not based on actually observing the economy’s recent performance. Rather, they used an economic model that was programmed to assume that stimulus spending automatically creates jobs — thus guaranteeing their result. …The problem here is obvious. Once CBO decided to assume that every dollar of government spending increased GDP…, its conclusion that the stimulus saved jobs was pre-ordained.

But surely this can’t be true, you may be thinking. Our public servants in Washington would not make important policy decisions based on a model that automatically produces a certain result, would they? Peter Suderman of Reason pulls aside the curtain:

…those reports rely on assumption-packed models that effectively predetermine their outcomes; what they say, in essence, is that the stimulus worked because we assume it did. …

Economics is a complex behavioral science. Like all behavioral sciences, it is difficult to provide data that supports or refutes hypotheses. Hypotheses in the physical sciences can be definitively tested because experiments are repeatable. Yet even here, political views can corrupt. The global warming scam is evidence of that.

The behavioral sciences are not nearly as precise and are open to “fudging” conclusions. Anyone can rent an economist that will provide the desired conclusions.  President Dwight D. Eisenhower issued a general warning in his Farewell Address:

The prospect of domination of the nation’s scholars by Federal employment, project allocations, and the power of money is ever present – and is gravely to be regarded.

Any economist who works for the government must compromise his integrity. He becomes part of a political team with political goals. Either he or his scientific integrity must go when it conflicts with these goals.

This post appeared on American Thinker