Conservative Political Commentary

...usually with an attempt at historical and economic context

Friday, September 23, 2011

Keynesians Keep Trying to Control the Economy

Henry Hazlitt

President Obama’s economic policies have been based largely on his administration’s interpretation of John Maynard Keynes’ General Theory of Employment, Interest, and Money (Harcourt, Brace & Co., 1936). Federal Reserve Chairman Ben Bernanke likes Keynesianism also. Keynes became popular largely by proposing massive deficit spending as a key element for getting out of the Great Depression. Politicians loved the idea, because they like to spend money, and Keynesianism gave them cover to do so without raising taxes, should they so choose.

America has been accumulating the results of Keynesianism for decades, and is now dangerously close to a real day of reckoning concerning our huge national debt. Europe is already considering seeking a bailout from China. What Americans often fail to think about is: Who’s going to bail the U.S. when we get to that point? And we surely will unless some serious changes in direction are made fairly soon. The answer: No one. There is no one to bail us out. Would we end up repudiating our debt? Would we write it off in bankruptcy, allowing treasury bills to become worthless? Who knows?

Henry Hazlitt’s 1959 book, The Failure of the New Economics: An Analysis of the Keynesian Fallacies (D. Van Nostrand Co., Inc.) refutes Keynes at numerous points, quoting extensively from his book. (Ebook version of the Hazlitt work is available for free download at Hazlitt was closely associated with Austrian school economics of Ludwig von Mises, Fredrich A. Hayek and others, and was a prolific writer and champion of individual liberty. [1]

Since the days of Franklin D. Roosevelt, Keynesians have dominated government economic policy and academic instruction, countered somewhat by classical theorists and monetarists, vastly growing the government, with some relief along the way, but leading to the distress we have experienced since the 2008 financial crisis and the concurrent recession. Keynes held “full employment” as the goal, but the Keynesians have delivered now-chronic high unemployment.

When Michelle Bachmann says that it “wouldn’t take that long” to turn the economy around, and when she says that her policies would lead us back to $2.00-a-gallon gasoline, she should be taken seriously, because she has a much better grasp of our economic situation than the current powers that be. She has some understanding of market forces, and does not have the contempt for the free market that the socialist regime has.

It is an axiom of economics that for economic growth, there must be saving and investment, and profits. Saving leads to availability of credit and it leads to investment. Keynesianism has led the Federal Reserve to set interest rates at near zero, and they have announced plans to keep them there for a long time. This stifles saving and investment. The Fed has encouraged easy availability of credit by pumping money, created out of thin air, into the system. Keynes discouraged individual saving and wanted low interest rates. He also wanted government to control investment. Small excepts from Hazlitt:

“The outstanding faults of the economic society in which we live,” Keynes begins, “are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes” ([Keynes] p. 372).

There are four chief things wrong with this statement:
(1) The vagueness of Keynes's "full employment" concept …
(2) Prolonged mass unemployment is not the fault of our economic “society,” but of governmental interventions in labor-management relations, wage-rates, and money and
banking policy—the very kind of intervention that Keynes wished to increase.
(3) The distribution of wealth and incomes is in the main neither “arbitrary" nor “inequitable” in a competitive free market system. As John Bates Clark showed so brilliantly in “The Distribution of Wealth” (1899) “free competition tends to give to labor what labor creates, to capitalists what capital creates, and to entrepreneurs what the coordinating function creates.” Individual inequities are bound to occur, but they are not systematic. Capitalism itself tends constantly to reduce them by its rewards to production. If we are looking for really “arbitrary” and “inequitable” distribution, we can find it in the East, or in backward and “underdeveloped” countries, or in Communist Russia and China—in short, in either pre-capitalistic or socialist societies.
(4) It is even a misnomer in capitalist countries to call this process “distribution.” Income and wealth are not “distributed” but produced, and in general go to those who produce them. [Hazlitt, Pp. 374-375]

Keynes's arguments against “liquidity” and against “speculation” are untenable. Speculative anticipations and risks are necessarily involved in all economic activity.
Somebody must bear them. What Keynes is saying is that people cannot be trusted to invest the money they have themselves earned, and that this money should be seized from them by government officials and spent or “invested” in the directions in which those officials (seeking to hold on to political power) deem best. [Hazlitt, Page 430]
(Emphasis added)

President Obama has been accused of a “class warfare” attitude because of his insistence upon raising taxes on millionaires. His liberal base likes any policy aimed at going after the “rich,” or, redistribution of income. The president in his September 20 speech accused House Majority Leader John Boehner of having a “my way or the highway” position for not being willing to accept any tax increases, but Obama himself adopts a “my way or the highway” stance with the opposite position.

Obama wants to take more money out of the hands of job creators to “invest” in things his administration would like to “invest” in, i.e., spend for. Government, in their view, owns all the money, and they only let us keep whatever portion of it they choose.

Rep. Paul Ryan (R-WI) appeared on Fox News Sunday the day before the president’s speech and indicated that Republicans would not be able to accept much of what the president was expected to propose, and characterizing it as “class warfare” approach. Ryan explained why more new taxes are not the answer:

Socialist policies lead to authoritarian controls and less freedom. Obama’s jobs bill and tax proposal, though unlikely to become law, do illustrate the Keynesian tax and spend philosophy. Obama’s wish is to get higher taxes now, and make “cuts” some time in the future – cuts which are unlikely to happen if liberals have their way.

As I have said before, class envy is the very lifeblood of liberalism, and exploiting and promoting the class struggle is the process. It has this in common with communism. Obama, the great uniter, is now reduced to pandering to labor unions by threatening “the rich” with higher taxes and more regulations, for his own political purposes. Neither his “jobs” bill nor his proposal for “paying for it” is likely to gain any ground, nor would they help with the actual problems if they were to be passed. The proposals are certainly no better than the previous “stimulus” and would create at least one more new government agency, the “Infrastructure Bank.” As if we didn’t have enough slush funds already (see Fannie and Freddie).

[1] See Keynes vs. Hayek rap video here. Sequel here.

Photo: Ludwig von Mises Institute, via Wikipedia.

Tuesday, September 13, 2011

Economic Principles That Should Be Put into Practice

President Barack Obamaa, flanked by Paul Volck...Image via Wikipedia
Paul Volcker, President Obama, and GE CEO Jeffrey Immelt
The same people in government who create economic crises and problems for America are the ones who propose to solve them, by doing more of the things that created them. The futility of this approach should be obvious, but somehow isn’t. Since so many economists have been taken in by Keynesianism, they are thereby largely precluded from considering other approaches. Therefore, we have things like President Obama’s latest “jobs” bill proposal. It’s like the previous “stimulus” plan, except it would also add an “infrastructure bank,” i.e. a slush fund/piggy bank for liberal politicians to fund union-friendly projects that would create little to nothing in terms of addressing the actual problems of unemployment.

The “jobs” bill would cost nearly half a trillion dollars, which the president proposed to pay for, initially, by letting the super committee figure it out, and then, more recently, proposed raising taxes on those awful oil companies and rich people.

Government officials could get a clue about how the economy works if they would listen to Peter Schiff in the following video of Schiff’s appearance on MSNBC’s Morning Joe (video via The Daily Bail, dated March 25, 2009) [1]:

Quoth Schiff: “Keynes. It's nonsense. He's like a witch doctor in medicine. You can't follow Keynes. Keynes didn't understand economics.”

That the economy should be based on savings, investment, and production, rather than endless borrowing and spending, ought not to be such a hard concept to grasp. Also, politicians should understand that propping up, even enshrining the mistakes that led to the crisis simply compounds the errors and prevents market corrections.

The more spending the government does to try to jump-start the economy, and the more money the Fed prints to put into the system, the worse the situation will become. Unless definite measures are taken to reduce the size and scope of government and to make actual significant cuts in federal spending, and to stop all bailouts, subsidies, and other corporate welfare, the outlook is for more economic deterioration to an extent determined by how much of this is not done.

Obama calls for “investment,” meaning government spending, but what is needed is for government and the Fed to step aside and let private saving and investment take place. If there could be some certainty as to low taxes and less regulation (get rid of Obamacare and Dodd-Frank, and rein in the EPA), the business climate would look much more favorable, and the economy would soon improve. If interest rates could be set by the free market, investors could experience acceptable returns, and would be willing to risk capital.

Until the GOP can take control of House, Senate, and White House, there won’t likely be a lot of progress, and even if they do, it will remain to be seen how they would proceed. But it isn’t yet too late to start improving things. It’s over a year until election time, and during the interim, we’ll have to cope with high unemployment, high deficits, and whatever the “super committee” comes up with. If the economy can be interfered with less by government and the Fed, some good things can still happen over the next year or so. Let the recession play itself out, and the market will begin correcting the economy.

[1] “Look Out Krugman, Belief In Keynes Is Belief In Self-Delusion: Peter Schiff Tells The Truth About The Recession And Government Spending (MSNBC Morning Joe Video),” The Daily Bail.

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Friday, September 2, 2011

Infrastructure Bank – Another Plan That Won’t – and Can’t – Work

"View in Wall Street from Corner of Broad...                      Image via WikipediaWhen you see a “jobs creation” approach that didn’t work, doesn’t work, and can never work, why urge Congress to try it again?

Back in March of this year Eric Jaffe at wrote

Democrats John Kerry and Mark Warner joined Republican Kay Bailey Hutchison to propose the BUILD Act yesterday. The bipartisan legislation would create a national infrastructure bank the senators are calling the American Infrastructure Financing Authority — the term “bank” being anathema these days. [1]

I’ve always admired Sen. Hutchison, but this may be evidence that her decision to retire from the Senate is a good one.

This proposal didn’t get anywhere at the time, but the “Infrastructure Bank” is on President Obama’s list of ideas for job creation. According to Jaffe’s article, the Federal Government would provide billions of dollars and many billions more would come from private investors (Wall Street, etc.) and these funds would be invested and applied to infrastructure projects. Wow, what an idea.

According to Jaffe, “The upside is clearly good. Less clear is whether the plan can get off the ground.” Of course it didn’t, fortunately, at the time.

Conn Carroll at The Washington Examiner (08/14/2011), has a better evaluation of the idea: it’s just another “stimulus.”

The first thing to note about this proposal is that it's not really a bank. Banks use deposits from some customers to fund loans to other customers, and they make money by charging interest to borrowers at higher rates than they offer to depositors.

Obama would run his bank a little differently. Instead of forcing borrowers to pay money back, Obama's National Infrastructure Innovation and Finance Fund would “directly provide resources for projects through grants, loans, or a blend of both.” Another word for “grant” is “gift,” so basically Obama's infrastructure bank would be just giving money away.

But then how would Obama's bank stay in business? Simple. Congress would give it $5 billion to spend every year…. [2]

Tackling those “shovel ready” jobs, I suppose.

Carroll mentions other similar failed measures associated with “stimulus” projects. The article is well worth reading.

It’s clear that Keynesian spending will not bring about the desired recovery, but will likely put us back into recession. The August jobs figures (zero net jobs added, prior month revised downward, nominal unemployment rate still 9.1%) suggest that nothing being done now is helping much at all. And more billions added to the debt? As Victor Davis Hanson observes, the ever-present Keynesian excuse is that we haven’t spent enough.

But how much would be enough? We already have so much debt it will never be paid back except through massive inflation.

The entire approach of government intervention, and Federal Reserve intervention in the free market not only doesn’t help the situation, but promotes the false idea that somehow the free market has failed. In fact, the entire financial crisis and the current economic downturn are the fault of government and the Fed. Private sector blame consists of failing to adequately protest bad government policies, creating bad securities, and, understandably, accepting the bailouts when bankruptcy was deserved, which would have liquidated the debts rather than sticking the taxpayers with them.

But Keynesianism, as currently practiced, knows no real limit of spending to try to stimulate the economy. See how it has stimulated things so far.

[1] Eric Jaffe, “Kerry, Hutchison Propose National Infrastructure Bank,” 03/16/2011,

[2] Conn Carroll, “Infrastructure bank is just another stimulus boondoggle,” 08/14/2011, The Washington Examiner.

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