TCS Daily


Keynesian Creationism - Part 2

By Max Borders - February 10, 2009 12:00 AM

Continued from Part 1...

Keynesian Creationists have descended on Washington like the Promise Keepers on Houston. Their disciples are abuzz in the blogosphere, casting aspersions on the non-believers. Lest I be accused of empty ad hominem, allow me to put a little substance behind the nickname and at the same time explain why the current ruling party's stimulus plan is little more than a faith-based initiative masking an unprecedented accretion of state power:

1. Make-Pork Projects & Job "Creation"
One might credibly argue that "infrastructure" and other make-work projects like widened roads or new bridges will result in some efficiency gains over the long term. But it is not clear these projects will have any immediate stimulative effect. They amount more or less to a subsidy for the construction industry, a special interest group. What's more: Will individual states, suddenly flush with stimulus dollars for roads, spend these dollars responsibly? Or will they go to the usual political patronage projects and wasteful let-them-eat-cake projects like light rail?

Indeed, the inefficient nature of bureaucratic allocation of resources in the absence of market price signals makes productivity gains you might receive from, say, getting people to work faster, a wash at best. And because many infrastructure projects require matching state dollars, it's rather like someone giving you a Hummer when you can barely afford to put gas in your Honda. The state will have to divert resources from other priorities to fund these massive make-work projects. Again, while we may "need" infrastructure, aren't times of prosperity better times to invest in roads and bridges? Of course, how do we calculate points of diminishing returns for these infrastructure "investments" when there are really no prices, profits or direct customers to speak of? The method, unfortunately, is pretty much blind faith.

2. Lost Capital Is A Lost Opportunity Somewhere
A helpful mental model given by economists is to imagine paying people to dig a ditch from New York to Miami using only spoons. Unemployment may go down temporarily, but opportunity costs abound, and we're all made poorer. For every dollar you spend on some government project X -- and every brain you divert, sometimes permanently, from the higher-productivity sector (private) to the lower-productivity sector (public) -- is one dollar that cannot be used for capital to help a company grow sustainably (read: hire). Government spending takes resources away from more productive uses and puts them to less-productive uses. And we know the government does not tend to be terribly efficient in the sense of providing value to dispersed individuals. Why? Because the political sausage grinder that re-distributes said resources is particularly inefficient. In fact, all of the incentives for government are more closely aligned with the priorities of bureaucrats, politicians, special interests and lobbyists. Efficiency, after all, has no organized constituency.

3. The Multiplier Defect
The so-called "multiplier effect" has been shown not to work in practice. The theory is that government spending suddenly coursing around the economy "stimulates" it to such a degree that positive domino effects occur due to new aggregate demand. Guys with new hardhats suddenly go out and buy new Chevy trucks from union labor cartels who in turn buy the services of aromatherapists, and so on. Hence: stimulus.

But a number of economists have shown that, in hard times, many people pay down debt rather than consume a lot of goods and services with these newfound resources. Others have suggested that stimulus payments don't always find under-utilized resources, but instead create bubbles. And others have proposed the idea that, even when Keynesian-style spending can offer a short-term boost in certain sectors, a quick crash will follow--adding to the severity of those economic mood swings known as "business cycles."

While economic ebbs and flows might be a natural part of any complex system (like ebbs and flows in weather systems or ecosystems), crests and troughs can be exacerbated by attempts to infuse capital from the top down. Think of giving a kid $10 worth of candy. He will be jumping around for ten minutes or so, then he'll go into a sugar coma. Something similar can be said about the economy. Instead of pumping in resources -- whether diverted or printed from thin air -- we should be thinking about getting the rules right (conferring predictability in market action) and the incentives right (encouraging entrepreneurs to chase customer dollars, not largesse). It's about allowing local market actors with local knowledge to recalibrate and bring new innovations, efficiencies and value creation to the market system. Productivity increase is the only way to grow out of a recession.

4. Galloping Greedy Gimmies
Of course, no amount of large public expenditure can fail to end up in a special interest trough somewhere. The expenditure of resources -- human and financial -- on being someone who gets a piece of the public wad, is tremendously wasteful on net. If you're spending your time and money lobbying (whether or not you turn out to be the winner or the loser) rather than creating value through entrepreneurial activity -- never mind the corporate sponsors spending their precious ducats on similar competition for non-productive transfers -- it all amounts to a confluence of special interests that whips up a great big vortex down which resources will surely be flushed. Welcome to Washington.

5. Government as "Investor"
You thought Wall Street was bad? Just wait until you have government bureaucrats -- with no incentive to be prudent, nor any direct consequences for failure -- spending $850 billion for you. The idea that n bureaucrats in a distant bureaucracy know how to spend your money better than you and millions of other smart people in this country is, well, nothing short of kooky talk. Consider this from economist Arnold Kling:

How many people will have meaningful input in determining the overall allocation of the billion stimulus? 10? 20? It won't be more than 1000. These people ? let's say that in the end 500 technocrats will play a meaningful role in writing the bill ? will have unimaginable power. Remember that what they are doing is taking our money and deciding for us how to spend it. Presumably, that is because they are wiser at spending our money than we are at spending it ourselves.

The arithmetic is mind-boggling. If 500 people have meaningful input, and the stimulus is almost $800 billion, then on average each person is responsible for taking more than $1.5 billion of our money and trying to spend it more wisely than we would spend it ourselves. I can imagine a wise technocrat taking $100,000 or perhaps even $1 million from American households and spending it more wisely than they would. But $1.5 billion? I do not believe that any human being knows so much that he or she can quickly and wisely allocate $1.5 billion.

So much for thinking globally and acting locally. The technocrats have come to save us.


Max Borders is executive editor at Free To Choose Network. He blogs here
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30 Comments

Wise technocrats
I can imagine a wise technocrat taking $100,000 or perhaps even $1 million from American households and spending it more wisely than they would.

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Mr. Borders may be able to imagine such a situation, but I can't.
How does that technocrat know what I need more than I do?
How does that technocrat know what my neighbor needs more than my neighbor does.

At the absolute best, the technocrat will, by lucky chance, spend those dollars as well as I or my neighbor. In the aggregate, those technocrats will spend, even $1, less wisely.

The arrogance!
Those of us who support free markets, private property rights and individuality demonstrate respect for our fellow human beings.
It is the socialists, who claim to be looking out for our neighbor, who have true contempt for themselves and for everyone else.
That is the fundamental, black and white issue that should be acknowledged.

Brilliant economic thoughts
I never thought of Max Borders as being an economic giant. But here I think he's really nailed it:

"For every dollar you spend on some government project X -- and every brain you divert, sometimes permanently, from the higher-productivity sector (private) to the lower-productivity sector (public) -- is one dollar that cannot be used for capital to help a company grow sustainably (read: hire)."

I just never thought of it that way. So this would mean that $50,000,000,000,000 (fifty trillion) our high productivity, private-sector investors put into credit default swaps must have resulted in... oh, let's say, at one million dollars per job created... fifty million jobs!

That's incredible. You don't see brilliant decisions like that coming out of government work. It's remarkable that we even need rescuing at all, from the prosperous conditions private investors have created for us.

Do you Roy? I mean, do you - who evade “essential differences” and “conceptual knowledge” - think?
Just wondering.

CYA: didn't trust the Freddie and Fannie
"Credit default swaps are insurance-like contracts that promise to cover losses on certain securities in the event of a default. They typically apply to municipal bonds, corporate debt and mortgage securities and are sold by banks, hedge funds and others. The buyer of the credit default insurance pays premiums over a period of time in return for peace of mind, knowing that losses will be covered if a default happens. It's supposed to work similarly to someone taking out home insurance to protect against losses from fire and theft."

"All of this makes it tough for banks to value the insurance contracts and the securities on their books. And it comes at a time when banks are already reeling from write-downs on mortgage-related securities. "These are the same institutions that themselves have either directly or through subsidiaries invested in the subprime market," said Andrea Pincus, partner at Reed Smith LLP. "They're suffering losses all over the place," and now they face potentially more losses from the CDS market."

"The CDS market then expanded into structured finance, such as CDOs, that contained pools of mortgages. "

http://www.time.com/time/business/article/0,8599,1723152,00.html

Another unintended consequence of CRA and government backed mortgages.

'War on Poverty'
How effective was that spending?
But it doesn't matter to the faithful because all spending is good.

Is this supposed to be a comment?
I did express a thought. If it provoked one in your own mind, maybe you could share it with us. Just saying "just wondering" doesn't qualify.

As a matter of fact, here's something you could clear up for us. You say there are two things I "evade": essential differences and conceptual knowledge.

This means nothing to me. How about refining your thoughts and sharing them?

There's a critical distinction
In the War on Poverty we gave money to people without any. They did nothing to earn it.

In the currently proposed infrastructure projects, we offer paying work to people who've lost their jobs. So they earn it through working for us.

If the projects are wisely chosen, they're things we need to do that private industry has no interest in doing. Would a profit-seeking enterprise decide to improve a public school if no contract was offered? I don't think so.

So (a) we have jobs that need to be done, (b) we have skilled people who need the work, and (c) we have money to pay for it. What's the problem?

What does 'earning' it have to do with any stimulus?
BHO said spending is stimulus.

What did you do to earn your 'stimulus' last year?

How to people 'earn' the 'earned income tax credit'?

You declared / implied that there are NO essential differences between Man and Beast
If you can't "grasp" such an elemental, in-your-face knowledge, how can you claim to think?

You don't understand the word "work"?
Are you telling me you don't agree that just giving people money for nothing is a failed strategy?

My opinion is that when we urge that the government spend money in solving some problem, we should maximize the work that money does for us. After all, it's our money that's being spent.

And so I said this: "So (a) we have jobs that need to be done, (b) we have skilled people who need the work, and (c) we have money to pay for it. What's the problem?"

Money spent in this manner does work in the economy.. and each time it changes hands it sends a portion back to the government as revenues. By the time it's finished working we have new public works like schools and bridges available. None of it, if properly spent in this fashion, is money wasted.

Money spent on letting people sit on the sofa and watch TV still does some work.. it benefits the sellers of beer and potato chips. But that's not the kind of bang for the buck we're looking for.

Also you ask "How to people 'earn' the 'earned income tax credit'?"

Earned income is earned income. You can find the definition on the IRS web site.

Not just declared it, I've explained it
I've just checked back at our other thread on this subject. And I see I've left you speechless.

As you are human, and thus appear to have a claim on the ability to think, certainly you can come up with some quality that we bipeds possess.. and which all the beasts of the field lack. But it's not the ability to reason and it's not the ability to communicate. Because they share those qualities with us.

is it the possession of a soul? If so, please define that elusive possession. It can't be dependent on anything unique in our DNA. Because that's just like the DNA of our closest relatives.

Is it phlogiston? That's a substance once thought universal in us, and even at one time thought to weigh in the neighborhood of half an ounce per person. But the concept hasn't stood the test of time.

Pray tell, what is it we have that the others haven't got? Verbalize, O sentient creature!

Government redistribution of wealth is bad.
Given your support of Keynes, you don't seem to mind the government giving away our money.

Then what makes private redistribution of wealth good?
When wealth is controlled privately, it only goes toward the acquisition of things one person wants to own. Or toward personal power. It's a rare individual who decides to donate his wealth toward the well being of others.

On the other hand, public wealth is dedicated to the good of society in general. And I happen to think that's a higher value.

So much so that I'll work toward eliminating graft and waste in government. They can be as bad as the worst robber baron, grubbing his profit from the pockets of his employees.

Force is not used.
As you have stated, free market exchanges are win-win.

"Or toward personal power. It's a rare individual who decides to donate his wealth toward the well being of others.
"

Ever hear of Henry Ford, Dale Carnegie, Bill Gates, Chuck Feeney, (http://www.amazon.com/Billionaire-Who-Wasnt-Fortune-Without/dp/1586483919/ref=pd_bbs_1/102-9842324-6427354?ie=UTF8&s=books&qid=1186680259&sr=8-10
JD Rockefeller,

"As his personal wealth grew, Rockefeller’s interest in philanthropy increased. He was impressed in 1889 by an essay written by Andrew Carnegie and entitled The Gospel of Wealth. “The day is not far distant,” Carnegie said, “when the man who dies leaving behind him millions of available wealth, which was free for him to administer during life, will pass away unwept, unhonored, and unsung.”

Rockefeller wrote a letter to Carnegie: “I would that more men of wealth were doing as you are doing with your money but, be assured, your example will bear fruits and the time will come when men of wealth will more generally be willing to use it for the good of others.” In the same year—1889—Rockefeller began his philanthropic work in earnest, making the first of what would become $35 million in gifts, over a period of two decades, to found the University of Chicago. In 1901 he established the Rockefeller Institute for Medical Research, now Rockefeller University. In 1903 he created the General Education Board at an ultimate cost of $129 million to promote education in the United States “without distinction of sex, race, or creed.”"

"In 1909 he established the Rockefeller Sanitary Commission for Eradication of Hook-worm Disease to cure and prevent the disease, particularly in the southern United States. Rockefeller was prepared to begin the Rockefeller Foundation in 1909, even signing a deed of trust to turn over 72,569 shares of Standard Oil of New Jersey stock worth $50 million. But difficulties in seeking a federal charter for the Foundation, desired by Rockefeller though never obtained, resulted in a delay until 1913, when the Foundation was officially incorporated in the state of New York. Since its inception, the Rockefeller Foundation has given more than $14 billion in current dollars to thousands of grantees worldwide. In the chronology that follows, we highlight the work that the Rockefeller Foundation has brought to life."

http://www.rockfound.org/about_us/history/timeline.shtml

Those individuals who have worked very hard and earned a fortune are not 'in' to power. Usually it is those who inherited wealth like the Kennedy's who leverage their wealth into power or it is politicians who sell themselves, like Bill Clinton, to gain a bit of wealth. The robber barons are the socialists like yourself and Soros who want to force others to their will.

roy still has trouble with reality
"It's a rare individual who decides to donate his wealth toward the well being of others."

From the surveys I have seen, this is true of liberals, but it isn't true for anyone else.

Myself for example, I've been giving 10 to 12 percent of my pre-tax income to charities for years.
I know many, many people who do the same.

Liberals on the other hand are noted for their unwillingness to share anything.


"On the other hand, public wealth is dedicated to the good of society in general. And I happen to think that's a higher value."

roy, you have said many, many stupid things in the past, but this has got to be the dumbest thing you have ever said.

There is no such thing as public wealth. There is property and money that are controlled by the govt, but if you think one penny of that money is dedicated to "the public good" rather than the power and convenience of politicians and beaurocrats, than you are delusional.

In roy's world, there is nothing more noble than using someone else's money to buy votes.
Which after all is the only purpose behind any money spent by govt.

Sure
I suppose bosses in private industry never use force over their employees?

Everyone in a position of power over another uses that force to get people under their control to do what they want them to do. That's a law of life, not just some rule of government.

But you say something even more disturbing: "As you have stated, free market exchanges are win-win."

I certainly did not. I don't make all-inclusive statements like that. Some are win-wins. Others are win-loses. Yet others are lose-loses. Give me an example of an exchange and I'll give you my take on it.

That's just the way your brain works. Whenever you believe in something it becomes some universal rule. And evidence is swept aside.. the Rule is true, so it must ALWAYS be true.

This resembles nothing so much as Marxist thinking. They were also people who had a loose wire in their brains, so that the rules in their minds were always true.. while reality was often just mistaken.

No such thing as public wealth?
First, let me congratulate you. There aren't many who still tithe. If you're donating 10-12 percent of your income to charity, that's very commendable. I can't do much above four percent.

That said, what would you call our nation, with its distributional network, its power grid, its public lands and network of laws? Is all that not our Common Wealth?

Contrast it with an old time monarchy, where everything was owned by a single individual. Czarist Russia was such a place. Everything and everyone was just the czar's private property.

Here's another one: the old Congo Free State. Everyone and everything was a possession of King Leopold of Belgium.

I like what we have here, and will certainly work to protect it from rapacious buccaneers who would convert it into their own private property.

No you didn't (explain) Roy. You just ASSERTED that there is no difference betwen Man and Beast
And you wrote about some anecdote.

That's is NOT an explanation.

Employees can quit.
"Everyone in a position of power over another uses that force to get people under their control to do what they want them to do. That's a law of life, not just some rule of government."

Only government can 'legally' use a gun. No one else can.

EVERY FREE trade is win-win or it would occur. I value what I want to buy more the money in my pocket and the seller values my money more than what he wants to sell me. We trade and we both have something we value more than before the trade.

that is correct, things owned by the govt are not public
they are owned by politicians and used for the benefit of politicians.

Okay, you explain it
I'm sure you can do a much better job convincing us of your point of view, than I have done illustrating mine.

Go to it. No one's stopping you.

You are such a liar
Are you an employee? If so, how about quitting?

Why not? If it's as easy as you say, you should be able to do it any time you feel like.

Of course you won't get any unemployment benefits. And you migyt find it very difficult to get another job. THAT's the power your boss holds over you. He can replace you a hell of a lot easier than you can replace him. And you know it.

Now. "Only government can 'legally' use a gun. No one else can."

There is hardly anything more legal in this nation of ours than the right to own and use a gun. Next.

"EVERY FREE trade is win-win or it would occur."

I see English is your second language. We like to use the "single negative" when we want to say it will NOT occur.

"Free trade" is the term of art that's employed when we want to flood the world with our own cheaper goods while putting local domestic competition out of business. We subsidise heavily things like rice and cotton so dirt farmers in the third world can't compete. Then when they and their families have safely starved, we raise the price of our goods. It's all "free".. right?

Which politicians own the Interstate Highway system?
Name them. State the legal justification behind selling those public assets to certain politicians. Give us news reports as to when this happened. Find that title has been transferred. And show us how they execercise rights of ownership, when the roads are open for all to use.

Explain how YOU are a RODENT Roy? YOU do it Roy. YOU implied that you are NO DIFFERENT than a RODENT
..

ownership means control
When govt owns something, those who control govt own it.

It's really simple when you get past your marxist notions that the govt really gives a flying flip about anyone other than the people who run govt.

I can quit tomorrow. No will stop me.
Every FREE trade is a win-win or it would not occur.

Free trade is a trade where the parties are not FORCED to trade.

Socialism: state CONTROL of property.
The state does not have to have title, but if the state controls your property, you do not truly own it.

Medical animal testing alone
proves Beanie Baby hopelessly stupid about this matter.

Beanie, were you beaten severely as a child?

And if so, why weren't you beaten even more severely?

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