Why the State Loves Keynseian Economics
In
this time of economic turmoil it seems as though the majority of
economists have become disciples of John Maynard Keynes. Turn on
virtually any news broadcast covering the financial crisis which the
State's economic mismanagement has thrust upon us and, most of the
time, the “economic experts” the media turns to for explanations
of what is going on, and for suggestions of what needs to be done to
turn things around, turn out to do little but spout the same mistaken
Keynesian economic ideas that Franklin Delano Roosevelt relied upon
to justify his “New Deal.” According to most of the economists
that the general public will have opportunity to listen too, men such
as Robert Reich, Robert Rubin, Lawrence Summers, Henry Paulson, Chris
Farrell, and others, there are two things which will pull America out
of the financial disaster that we are supposedly heading for: an
increase in consumer spending, and a large Federal government
financial stimulus package. The fact that both history and economics
tells us these steps are counter-productive, indeed will act to
extend the length and depth of the economic troubles, does not appear
to matter to these people.
In spite of
the evidence, compiled by Murray Rothbard and others, that Keynes'
preferred policy, called “pump priming” acts to prolong economic
downturns and make them worse than they need to be, these policies
continue to be number one on the State's list of tools to be used
when faced with an economic downturn. There are a several reasons
for this state of affairs. Passing so-called “economic stimulus”
packages appeals to short-sighted legislators because they are seen
to be “doing something” about the worsening economy. This action
also allows the power-hungry Congresscritters, and members of the
executive branch of the government, to extend the power of the State
by attaching various rules and regulations to the money they thus
make available: rules that must be obeyed by anyone wishing to avail
themselves of this Federal largess.
However, the
truth of the matter is that State intervention in the economy is
always counter-productive, and rarely moreso than during an economic
downturn. The reasons are fairly simple, though many people fail to
understand them. The effects of the Federal government's
interventions begin with one simple thing: any money spent by the
Federal government, which adds to the government's deficit, is money
that is no longer available to the private sector. The Federal
government must cover its deficits by borrowing money from some
source and, of necessity, the loans to the State compete against
demand for the same funds from the private sector. However, most
people do not recognize the truth of this situation, and its affect
on their lives, and so they simply accept the loudly and oft-repeated
claims that only the Federal government is capable of “making a
large enough impact on the economy” to be useful. It's as if the
economy is some large machine that will automatically respond
positively to the government's attempts at percussive maintainence.
It is amazing
that otherwise intelligent people do not seem to understand why the
government's “economic stimulus” packages do not work as
advertised. They seem to think that, because it is the Federal
government which is borrowing money so as to be able to increase its
deficit spending, the law of supply and demand is somehow bypassed.
They do not, or choose not, to understand that every dollar borrowed
by the State is a dollar that is no longer available to entrepreneurs
in the private sector. Also not comprehended is that the increased
demand for dollars in the loan market drives up the price of those
dollars, I.e., interest rates increase, which increases the economic
burden that must be borne by private sector borrowers. The higher
interest rates also ensure that some potential borrowers, business
people who might have created private sector jobs, are unable to
afford to take out loans, reducing the amount of economic growth.
Some people
will say that when the Federal Reserve acts to increase the money
supply, as it has done recently to the tune of several trillions of
dollars, that it offsets the increased demand for dollars by the
Federal government and the overall effect on the private sector is
neutral. This is simply not the case as the Federal Reserve's
actions simply increase the rate of inflation within the economy. By
flooding the economy with dollars the Fed simply makes each of those
dollars is worth less than its predecessor. The increased inflation
offsets any possible affect the increased supply of dollars may have
had on overall demand. There is also the increased danger of the
government's artificial expansion of the money supply triggering a
hyper-inflationary spiral such as is now occurring in Zimbabwe. The
simply truth is that government action cannot repeal the basic laws
of economics.
The Federal
government, of course, is all in favor of government-based economic
stimulation. After all, from its point of view, it's all good. It
is able to expand and extend the reach of its power. It lessens the
economic power of the private sector, further enhancing the State's
power. And, perhaps most important, the majority of the jobs which
are created by the economic stimulus are directly connected to State
spending and, therefore, the citizens holding those jobs are made yet
more dependent on the State for their livelihoods. From the State's
point of view this is all good and, if the economic crisis is
lengthened, its power is only increased. In short, no matter how it
is sugar-coated, the policies of John Maynard Keynes are essentially
ways of increasing the power of the central government at the expense
of individual freedom.