Wednesday, May 11, 2011

Another Great Post at Catallaxy

This is becoming one of my favorite blogs. I don’t even remember how I found it. I was probably looking up something on Keynesian economics.

Anyway, Steve Kates reviews the recent paper (PDF) by the Republican Party Joint Economic Committee. His summary is fairly blunt (emphasis mine), which is why I like this blog.

This is a measured very sober empirically-based study that reverses the entire direction of Keynesian-based policy. Whether this is the future of economic theory, it is the present of economic policy. We are looking at a world in which policy has run well ahead of the textbook theories economists now teach. If you have grown up on the C+I+G version of macroeconomics, then what you have learned has with near certainly passed its use-by date.

It’s important to hear (or read) someone saying this so emphatically. CIG is stated as an absolute fact by Keynesian and is their ultimate fallback defense.

For those that don’t know, the formula in question is:

GDP = C + I + G

where:

GDP = Gross Domestic Product

C = Private consumption

I = Gross Investment

G = Government Spending

The problem is that this formula, while the basis of post-1936 macroeconomics, is fundamentally flawed. From it you can assume that all you ever need to do to grow the GDP, and thus the economy, is have the government spend more. And that’s the fundamental belief behind Keynesian economics. However, it ignores the fundamental truth behind government spending, and that’s government cost.

When I go to work and do my job, my employer pays me for my work, and I spend that money, giving some other company income so that they can pay their employees who can go out and spend money on still more companies who can pay still more employees.

The reason you can include my consumption and ignore my cost in the GDP is that my income is earned. I provided a service, which allows the company I work for to sell their product and have their buyers increase the public consumption part of the formula.

In other words, I am not only a consumer, but also a producer.

The government is not a producer. The money it acquires is un-earned (yes, I know civil defense, education, etc., but those are a small part of the federal budget these days, and there are other problems with including these anyway). So, the government must take the money it acquires. This means there are fewer dollars available for public consumption, so fewer dollars left to pay producers to produce consumable products and services. In other words, G starves C (and I, but that’s more than I want to get into right now).

But C is the most important part of the equation. Without C, eventually there is no I, and no G, since those two variables depend on C.

And there is the fatal flaw in Keynesian economics.

Keynesians will tell you that I’ve missed something important. They aren’t planning on starving C, because they’re using short term deficit spending. Except history shows us that it’s never short term. And even if it were, it still must be paid for eventually. Even if you let this debt go on forever, you have to at least pay the interest. And in the end, the only way to pay for it is by starving C.

Also, G spending picks winners and losers generally in a way that is the antithesis of the free market, therefore rewarding producers that might not (and probably would not) have ben rewarded otherwise, at the expense of producers who would have. High G spending destroys the free market, which destroys a country’s future ability to produce products and services worthy of consumption. In other words, not only does G spending today starve C now, but it starves C in the future as well.

I’ve been saying this for a while, but it’s worth repeating. Given the Global Financial Crisis of 2008, and the near worldwide Keynesian response, we have empirical evidence and an enormous number of data points that all show one thing. Keynesian economics fails. And it fails spectacularly.

At this point, anyone who still believes in Keynesian economics should be locked up, as they are clearly a threat to their own safety as well as the safety of those around them.

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