Keynesian claptrap

When a policy is tried again and again and doesn’t work, if you keep trying it, you’re madVerifiably insane.

Our politicians in the UK, the US and Australia are all verifiably insane.

Example 142,426,273 in the long, sorry tale of governments trying to “do something” to fix problems they themselves created, is fiscal deficit spending to “cure” a slump caused by too much credit creation (itself caused by the govt’s support of central banking).

The solution to most government-generated economic “problems” is for the government to shrink, to get out of the damn way, to stop interfering, to stop meddling, to stop creating uncertainty in the business plans of real businessmen and women.  In other words for bureaucrats to shoot themselves in the head.  Of course, that’s the last thing a bureaucrat (or banker) wants to hear, so the madness continues until they really stuff up an economy beyond the point of no return.  Like Japan.  Or the UK.  Ha Ha Ha!

I know it’s old-fashioned to remind the anti-trust regulators, or the cops picking up someone for possessing a few grams of coke or pot, or the central bankers that the real purpose of monopoly government was very limited.  It was to provide (1) defence and (2) security services to allow citizens to protect their property rights and (3) very little else (perhaps provide public goods where they genuinely existed).

Now the government appears to try to do everything BUT these things.

They are allowing our soldiers to be killed in Afghanistan, but laughing at me when I say my wallet was stolen in my own suburb at home.  They tax me so they can give the money to another homeowner for home improvements (since when was it government’s job to decide who should get home insulation?) or they bailout bankers instead of saving bankrupted small businesses and farmers (since when was the government’s role to pick winners in the economy?  Where’s my bailout?).  They steal my guns, my gold (gold coin sales are often suspended for no reason), my income, my livelihood, my right to smoke what I want where I want – and yet they don’t provide regular running water (water restrictions are a regular occurrence around here), they don’t defend me against embezzling bankers and they don’t stop robberies in my local area.  But they think they’re geniuses when it comes to curing an economic slump!

Are these guys delusional?

Sterling T. Terrell writes:

Fiscal policy, the attempt to use government outlays and revenue to better the economy, simply does not work either a priori or in practice.

But just ask any undergraduate student in Macroeconomics 101 about fiscal policy. They know the “correct” answer: If the economy is “too slow,” the government should lower interest rates and increase government spending. If the economy is “overheated,” the government should raise interest rates and decrease government spending.

The horrors of monetary policy aside, fiscal policy cannot stimulate the economy. As we know, the government has no money of its own. It has only the power to tax and spend the money of others. There can only be a transfer that takes place, not a creation of wealth: jobs in X are gained, but jobs in Y are lost.

However, this transfer is actually a loss. Taxing away a person’s ability to fulfill his own wants and then providing him with things he may not care about makes him worse off. This process condescendingly supposes that individuals cannot decide for themselves what they need.

Furthermore, taxing is not done in a uniform manner. Progressive income taxes, double corporate taxes, and estate taxes all disproportionally take from the people that make, create, invest, and speculate to the betterment of all. Henry Hazlitt famously explained this in his well-known work Economics in One Lesson (see chapter five).

The common objection to such a theoretical analysis is: “Well. No. You have to look at the fiscal multiplier. One dollar in government spending, once it filters through the economy, will make GDP increase by more than one dollar.”

Let us agree to play the empirical game, momentarily.

New work done by Ethan Ilzetzki, Enrique Mendoza, and Carlos Vegh, covering data from 45 countries from 1960 to 2007, casts doubt on the validity of the multiplier in many cases.

Our findings lead to the usual “it depends” answer to the size of the fiscal multiplier question. As those familiar with macroeconomic theory likely anticipated, the size of the fiscal multipliers critically depends on key characteristics of the economy (closed versus open, predetermined versus flexible exchange rate regimes, high versus low debt) or on the type of aggregate being considered (government consumption versus government investment). Policymakers would therefore be well -served in taking into account a given country’s characteristics in evaluating the benefits of any fiscal stimulus package.

Read the details for yourself, but the differences they found seem to be the largest when comparing fixed- and flexible-exchange-rate economies,

and closed and open economies:

This all suggests that in a country such as the United States the fiscal multiplier is virtually zero. Robert Barrow agrees.

So, in addition to fiscal policy taking away the freedom to choose, robbing X to hand it to Y, and penalizing the very people that improve our lives, it also fails empirically. Even if it did not, as is seemingly the case in certain closed economies graphed above, there would still not be a valid reason to oppress people further by taxing away their money for “stimulation.” By that rationale, a fiscal policy taking up 95% of GDP would make people better off than a fiscal policy taking up 5% of GDP. Clearly, this is not the case.

Earlier this year, Frank Shostak predicted that the recent fiscal stimulus would not help the US economy. Looking at unemployment, he was right.

Fiscal policy does not work, a priori or empirically, but the Austrians already knew that.

  1. No comments yet.
  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: