Tuesday, February 17, 2009

Caroline Baum De-Bunks Keynesian Bunk

Yet another excellent column from the frequently fine Caroline Baum.

She explains in clear, accurate, yet simple language exactly why Keynesian stimuli are all bunk, the triumph of hope over experience (and logic).
When I first learned about fiscal stimulus according to John Maynard Keynes in an introductory economics course, it made a modicum of sense. The idea was that at times when the private sector isn’t pulling its weight, the government can step in and spend instead.

It doesn’t take an inquiring mind very long to find the flaw in the argument. How exactly does the government get the money to pay for its spending? Neither borrowing (today) nor taxing (tomorrow) increases aggregate demand. All they do is transfer the ability to spend from one entity to another and the timing of that spending from the future to today.

In the short run, the economy will get some boost from hundreds of billions of dollars in government spending. What about the long run? (Please don’t say we’re all dead.) One dollar of federal borrowing means one dollar unavailable for the private sector.


“Empirically, nobody can point to a single Keynesian episode that worked,” says Dan Mitchell, senior fellow at the Cato Institute, a libertarian think tank in Washington.

Attempts to spend their way out of a slump by Herbert Hoover, Franklin Roosevelt, George W. Bush, Japan (in the 1990s) and Europe yielded little in the way of results, Mitchell says. “The only thing Keynesians have ever been able to point to that worked was World War II,” which isn’t something we want to repeat.


Just to recap:

There is no Santa Claus.

The federal government can’t give something to one person without taking it away from someone else, either today or at some point in the future.

There is a tooth fairy. It’s called the Federal Reserve.

The Fed has pixie dust. It’s called a printing press.

Unlike the fiscal authority, the Fed has the gift that keeps on giving.

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