Keynes, Government Spending, And You
One of the most notable economists of our age was John Maynard Keynes. There is a nice summary of his work here:
along with some of the discussion about how his generally pro-market bias has been diluted into a more social interventionist argument by subsequent reinterpretations and revisions.
There is even an entire site devoted just to him:
In this discussion, I’ll be referring to Keynesian Economics as commonly applied (i.e. with revisions) and not strictly as originally published. In particular, I’d like to focus on one of his major assertions: That in times of economic downturn, the government ought to borrow money and spend it to boost economic activity.
But first, a note on my biases: I was trained in economics with an emphasis on Keynesian methods. The primary text in my first 2 major introductory classes was simply named Economics by Paul Samuelson and leaned heavily to a Keynesian point of view.
It’s taken a while to get past that.
The Implied But Missing Bits
I don’t know if it was simply understood to be implied, or equally simply, left out. But I think there is a ‘missing bit’ in Keynes; at least as taught to most folks (and our politicians, if they have any economics education at all, have gotten the simple short form of “borrow and spend in a downturn” followed with a very large “period”).
What I think is missing: The key phrase is ‘to boost economic activity’. If a government borrows $100 and spends it to advertise how important government help is to the recovery, has it really boosted “economic activity”? The notion is that all expenditures are equal, but they are not. I would assert that $100 spent on investment is far more ‘valuable’ to economic activity than $100 spent on bread subsidy.
Yes, bread subsidy is good for the folks eating the bread, and good for the baker, but at the end of the day, most of the bread would have been made and eaten anyway. And also at the end of the day, the bulk of the value HAS been eaten. If the same $100 went to buying a bread maker, much more bread would be made over time and at lower costs. The effect would not be a fleeting increase in bread sales, but a long term increase in total bread available to all people. And increase in national wealth.
In a nutshell, that is the model of what I see wrong with the simple Keynesian “borrow and spend” prescription for government spending in times of downturn. It emphasizes consumption spending more than investment spending. If we all get a government check to go dig a hole in our front yard on even days and fill it in on odd days, all that happens is we wear out a lot of shovels and diminish our national wealth. “Shovel Ready” is a very poor way to select projects to fund.
There is an interesting article on the impact of such government spending here:
Private Enterprise Invests, Government Consumes
On CNBC they had a brief round table with Larry Kudlow mentioning a study that had found that for each $1 of government ‘stimulus’ you got 70 cents of gain. Basically, you lose 30% of your wealth in the process. I did not manage to write down the details in time, but I think that he said it was an IMF study on the efficiency of government spending on economic stimulation.
Any company that gets less than $1 per $1 spent ceases to exist pretty darned soon. Not so for governments.
But that is, IMHO, the reason for the persistent failure of ‘stimulus’ plans and at it’s root, the reason that The Socialism Shiny Thing always fails. (Eventually… Economies can take a generation to collapse, so it can be 50 years for a socialist government to “run out of other people’s money to spend” (to borrow a phrase from Maggy Thacher.)) The folks in government generally do not think about net wealth creation nor investment in economic capacity growth. They think instead in terms of bread and jobs. And jobs digging holes to fill them in are not wealth creating, nor is eating loaves of subsidized bread…
To the extent that some socialist or communist governments have emphasized investment over consumption, they have had very good economic growth and success (in an economic productivity sense). So the Stalin era of the Soviet Union had massive increases in economic output (and at horrific humanitarian costs as millions died…) and the present emphasis on economic growth in Communist China (with their odd blend of communist government with capitalist markets) has also had success. Yet, eventually, the people will demand their governments give them the goods. And that is when socialism falters.
Oddly, that seems to be the same thing that is driving the European Union onto the rocks and is causing the US to falter. That ‘voting for themselves the largess of the public purse’. So we have a massive “stimulus” bill that didn’t stimulate economic growth because it was not investment oriented, it was political payoff and bread & circuses focused. And we have Greek and Spanish stagnation as folks demand more bread and less bread makers.
So at the the end of this, I’d speculate that what Keynes ought to have made more clear was that the government ought to borrow and spend on investments that increase national wealth and productive capacity more than on bread and circuses.
That private enterprise is more capable of making good investment choices has been pretty well proven over time. IMHO, it is that divergence between political driven decision making and private enterprise driven decision making that is the foundation for the failure of The Socialism Shiny Thing over time; and the failure of capitalism using “Keynesian Stimulus” in market failures.
And that would explain such things as the present success in China (and why it’s a long term money maker, though the timing is important for trading in and out) and it would explain why I’m not seeing much worth investment in the USA under the present regime. By looking at the relative ratio of ‘public consumption’ expenditure vs ‘economic investment’ expenditure, you could know in advance what countries will grow and which will stagnate or collapse. Thus the BRIC (Brazil Russia India China) growth vs the European contraction and the USA stagnation.