Naturally I disagree with much of the opposition and my well-meaning colleagues on the left in regards to Keynes and his school of economics. Many in this school of thought cannot accept the fact that Keynesian economics has never worked; it did not work in the depression nor has it worked any time since then. The only time stimulus has “worked” is after the economy has already recovered and then becomes overheated by the stimulus. Keynesian economics is an excuse for politicians to buy off special interest and voters with other peoples’ money. Let me address some of the opposition’s specific points:

Stimulus spending creates jobs

False, stimulus spending financed by taxes substitutes relatively inefficient government spending for private spending. In other words, government spending “crowds out” private spending. The opposition may disagree that public spending is less efficient but the recent analysis of the government spending does not support their point of view.

It is not taxation but debt that is financing the government spending

I maintain that government debt crowds out private borrowing and investment. Many of my anti-capitalist colleagues say that government spending is not crowding out private investment because interest rates are low. Therefore there is plenty of money to finance private investment. Unfortunately, in an attempt to protect depositors, and the government guarantee of such deposits, the bank regulators have increased the credit underwriting requirements on banks. Consequently, they are not lending to small and medium sized businesses.

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Last week in New York City, during my Intelligence Squared debate about stimulus, I pointed out that Germany is doing better than the United States and explained that they largely avoided any Bush/Obama Keynesian spending binges.

One of my opponents disagreed and asserted that I was wrong. Germany, this person argued, was dong better because it was more Keynesian thanks to “automatic stabilizers” that resulted in big spending increases.

This claim was made with such certainty that I wondered if I made a mistake.

Well, we were both right about Germany doing better. In the past few years, it has been enjoying yearly growth of about 3.5 percent while growth in the United States has remained below 3 percent.

But who was right about the key issue of whether Germany has been more Keynesian? At first, I was going to be lazy and not bother combing the data. But then I got motivated after reading an excellent post about Germany’s pro-growth reforms, written for National Review by Veronique de Rugy of the Mercatus Center.

So I looked up the data on annual government spending in the United States and Germany and discovered that I was right (gee, what a shock). As the chart shows (click to enlarge), the burden of government spending has increased faster in the United States. And that is true whether 2007 or 2008 is used as the base year.

To make sure the comparison was fair, I sliced the numbers every possible way. But the results were the same, regardless of whether state and local government spending was included, whether TARP spending was included, which base year was selected, or whether I used annual spending increases or multi-year spending increases.

In every single case, the burden of government spending grew faster in the United States from 2007 to 2011.

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Rep. Jan Schakowsky (D, Illinois 9th District), whose husband has been convicted of bank fraud and tax evasion, was recently interviewed by the far-left website “truthout” and served up some rather unsettling thoughts on economics and the role of government.

You’ll remember truthout for its scoop back in 2009; it was the first site to report the big news that Karl Rove had been indicted. Unfortunately for this “news” site, Karl Rove was never indicted. That was a spot of bother, indeed, impugning the site’s veracity just a bit. You may also know that original editor, Marc Ash, was ousted from the site by a coup from within when it was discovered he was making $140,000 a year off the donors and left-wing foundations supporting the site. But he’s all for the downtrodden masses, ya know?

Now that we have established the forum upon which Schakowsky appeared, let’s look at some of the extreme things she said.

The interview began with the most likely of subjects given the national debate: as Joe Biden said, that three letter word–jobs, jobs, jobs. Schakowsky, of course, stuck to that debunked idea that government “creates jobs” and indulged her inner Keynes in every answer.

Saying she just couldn’t understand how people could say government doesn’t create jobs, Schakowsky indulged in the typically Keynesian fantasy that all left-wingers wallow in. She imagines that jobs created by the government are economic boosters because the money such people are paid will be spent in the general economy. This, she absurdly says, means that everyone is a “job creator” because they spend money. (more…)

When I introduced the concept of regime uncertainty in 1997, attempting to improve our understanding of the Great Depression’s extraordinary duration, I anticipated that many people—especially my fellow economists—would not welcome this contribution. Their primary objection, I ventured, would be that the concept remained too vague and, most of all, that it had not been reduced to a quantitative index of the sort that modern mainstream economists customarily work with, especially in their empirical macroeconomic analyses.

My argument did not lack evidence, however, and I regarded the agreement of several different forms of evidence as an important element of the argument’s force. The evidence I adduced with regard to changes in the yield spreads for high-grade corporate bonds of differing maturities seemed to me both systematic and especially compelling, though not decisive because alternative explanations of those changes might be offered. (I considered several such explanations and rejected them as unpersuasive in one way or another.) Recently, in my application of the concept of regime uncertainty to help us understand better the persistent economic troubles since 2007, I again advanced several different kinds of evidence, including as before an analysis of changes in the yield curves for high-grade corporate bonds. This time, too, the evidence is consistent with the underlying argument.

Nevertheless, the argument scarcely gained widespread assent, and most analysts either ignored it completely or, like Paul Krugman, dismissed it as a fairy tale—in his view, the sort of wholly fictitious notion that would be peddled only by think-tank whores in the pay of Republican plutocrats. (I trust that everyone who knows me will see how closely I fit this template.)

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As an economist, I eschew the soft-headed convenience of ready-made ideologies, together with their carrying rationalities, turning upon intellectual vulgarities I haven’t the stomach to bear. But even when we look askance at ideologies, focusing instead upon flinty economic facts evidenced in history, a certain resolve may be expressed without overstatement:

1. Markets are the best means to capture the wisdom of individuals acting in their own interests.
2. Taxes should be moderate, clear and specific, to afford business and individuals the most efficient options for planning investment and economic activity.
3. Regulations should be specific and not speculative; written with sufficient flexibility to address new situations, with a clear, speedy review process to put right such anomalies as may arise from human action.
4. Under this framework, capitalism provides, not merely, the most efficient means of producing prosperity for the largest possible number of persons, but also the best means by which those without it may acquire capital, by which they too can become more direct authors of their won prosperity.
5. So long as the above is true, the well-off, the well and the not-so-well-off can co-exist in social harmony, because there is the belief that with application and diligence anyone who is not well-off may become so, within the system as described.

There are further elegant truths in history offering wisdom by which clear thinking on these questions may be maintained, advanced and reinforced:

1. Too aggressive a tax rate offends the sense of accomplishment of those who toil for their own prosperity; increasing the feeling that the fruit of their labours is being apportioned by an unaccountable few for the sake of an increasing many.
2. The habitual debasement of the currency undermines the assumption of value, which instigated the resolve to labour for oneself, in the first instance.

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Commentators and pundits, some of whom ought to know better, continue to harp on the idea that the recession persists because consumers are not spending. Every Keynesian seems to believe that because consumers are in a dreadful funk, only government stimulus spending can rescue the moribund economy, given (to them, at least) that investors will not spend more because the Fed, having already driven interest rates to extraordinarily low levels, cannot use conventional policies to drive them any lower and thereby elicit more investment spending.

People, please look at the data. They are conveniently available to one and all at the website maintained by the Commerce Department’s Bureau of Economic Analysis, the outfit that generates the national income and product accounts for the United States.

According to these data, real personal consumption expenditure recovered from its recession decline by the fourth quarter of 2010. Continuing to grow, it now stands (as of the most recent data, for the second quarter of 2011) even farther above its pre-recession peak.

Real government expenditure for consumption and investment (this concept does not include the government’s transfer spending, such as unemployment insurance benefits and social security benefits) is also running higher than its pre-recession level. In the second quarter of 2011, it was running more than 2 percent higher (recall that this is “real,” or inflation-adjusted spending; nominal spending has grown substantially more).

The economy remains moribund not because consumption spending has failed to recover and not because government spending has failed to increase, but because the true driver of economic growth—private investment—remains deeply depressed. Gross private domestic fixed investment fell steeply after the second quarter of 2007, and in the second quarter of 2011 it remained 19 percent below its pre-recession peak. This figure fails to show how bad the investment situation really is, however, because the bulk of the investment spending now taking place is for what the accountants call the “capital consumption allowance,” the amount estimated as necessary to compensate for the wear and tear and obsolescence of the existing capital stock.

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This past Sunday, University of Maryland Professor Peter Morici suggested that the damage from hurricane Irene is akin to a mini-economic stimulus, exposing the perverse “logic” that is Keynesian economics and reminding us all of the crackpot economic policies under which we currently exist.

Among Morici’s claims, he cited the following logic as why we should all be praying for more natural disasters, riots, looting, and other ills that befall society (perhaps some more Fascist presidential administrations?):

“…When government authorities facilitate rebuilding quickly and effectively, the process of economic renewal can leave communities better off than before.”

A community about to undergo an economic boom, according to Morici’s logic

In an open letter directed to the so-called (read: Keynesian) academic Morici, George Mason Economist Don Boudreaux exposes the idiocy that underlies Morici’s reasoning (and, we might add, the same reasoning that progressive Leftists continues to employ)–essentially, as Boudreaux writes, that “people whose assets are destroyed will be made richer – because these destroyed assets are replaced with ones that are newer and more productive.”

To further underscore his point, Boudreaux suggests the following service to Morici:

I hereby offer my services to you, at a modest wage, to destroy your house and your car.  Act now, and I’ll throw in at no extra charge destruction of all of your clothing, furniture, computer hardware and software, and large and small household appliances.

Because, I’m sure, almost all of these things that I’ll destroy for you are more than a few days old (and, hence, are hampered by wear and tear), you’ll be obliged to replace them with newer versions that are “more economically useful and productive.”  You will, by your own logic, be made richer.

Just send me a note with some times that are good for you for me to come by with sledge hammers and blowtorches.  Given the short distance between Fairfax and College Park, I can be at your place pronto.

Oh, as an extra bonus, I promise not to clean up the mess!  That way, there’ll be more jobs created for clean-up crews in your neighborhood.

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Just last week, I made fun of Paul Krugman after he publicly said that a fake threat from invading aliens would be good for the economy since the earth would waste a bunch of money on pointless defense outlays.

Yesterday, there were rumors that Krugman stated that it would have been stimulative if the earthquake had been stronger and done more damage, but he exposed this as a prank (though it is understandable that many people – including me, I’m embarrassed to admit - initially assumed it was true since he did write that the 9-11 terrorist attacks boosted growth).

But while Krugman is owed an apology by whoever pulled that stunt, the real problem is that President Obama and his advisers actually take Keynesian alchemy seriously.

And since President Obama is promising to unveil another “jobs plan” after his vacation, that almost certainly means more faux stimulus.

We don’t know what will be in this new package, but there are rumors of an infrastructure bank, which doubtlessly would be a subsidy for state and local governments. The only thing “shovel ready” about this proposal is that tax dollars will be shoveled to interest groups.

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I’ve poked fun at Paul Krugman for his views on health care and British fiscal policy, and I’ve semi-defended him about unemployment subsidies and housing bubbles.

Now it’s time for some more mockery.

Back in 2001, Paul Krugman received some much-deserved criticism for stating that the 9-11 terrorist attacks would be stimulative for the economy.

He committed the “broken-window” fallacy, popularized more than 150 years ago by a famous French economist, Frederic Bastiat.

Breaking a window at the local bakery, Bastiat explained, might generate business for the town glazier, but only at the expense of some other merchant, like a tailor, who would have benefited if the baker didn’t have to spend money on a new window.

In other words, the destruction of wealth is not good for an economy. At best, it makes us poorer and then shifts how current income is allocated. This is why Bastiat wrote (perhaps predicting the emergence of Krugman):

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

But we have to give Krugman credit for a bizarre form of ideological consistency. He is willing to advocate bigger government, no matter how sloppy the reasoning or how quirky the rationale.

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While driving home Friday, I had the miserable experience of listening to a financial journalist being interviewed about the anemic growth numbers that were just released.

I wasn’t unhappy because the interview was biased to the left. From what I could tell, both the host and the guest were straight shooters. Indeed, they spent some time speculating that the economy’s weak performance was bad news for Obama.

What irked me was the implicit Keynesian thinking in the interview. Both of them kept talking about how the economy would have been weaker in the absence of government spending, and they fretted that “austerity” in Washington could further slow the economy in the future.

This was especially frustrating for me since I’ve spent years trying to get people to understand that money doesn’t disappear if it’s not spent by government. I repeatedly explain that less government means more money left in the private sector, where it is more likely to create jobs and generate wealth.

In recent years, though, I’ve begun to realize that many people are accidentally sympathetic to the Keynesian government-spending-is-stimulus approach. They mistakenly think the theory makes sense because they look at GDP, which measures how national income is spent. They’d be much less prone to shoddy analysis if they instead focused on how national income is earned.

This should be at least somewhat intuitive, because we all understand that economic growth occurs when there is an increase in things that make up national income, such as wages, small business income, and corporate profits.

But as I listened to the interview, I began to wonder whether more people would understand if I used the example of a household.

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That seems like a joke question, but it’s an apparently serious belief of Bruce Bartlett, a former supply-sider and Bush Administration official who has flipped sides and joined the left.

I’ve known Bruce for decades and he’s a fun guy to hang out with, but he’s gone hard to the left in recent years, pimping for a VAT and urging GOPers to sell out on health care.

But now he is officially crazy, because he wants us to believe that Obama is a conservative, or at least a moderate conservative.

Bruce cites five reasons in his article for this bizarre hypothesis.

1. “His stimulus bill was half the size that his advisers thought necessary”

This is a rather strange assertion. Obama flushed $800 billion down the federal toilet on a fake stimulus, but we’re supposed to believe he’s a “moderate conservative” because he didn’t waste even more of our money.

2. “He continued Bush’s war and national security policies without change and even retained Bush’s defense secretary”

Okay, maybe this is true. I’m not competent to make any sweeping judgments on foreign policy.

3. “He put forward a health plan almost identical to those that had been supported by Republicans such as Mitt Romney in the recent past, pointedly rejecting the single-payer option favored by liberals”

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Someone must have imagined that my hopes for improved economic understanding might be excessively optimistic and thus needed to be curbed to restore my normal emotional balance, because that person undertook to smash any such hopes to dust by e-mailing me a link to a Huffington Post article by Paul Abrams, “Economically, World War II Was Stimulus on Steroids.” This screed turns out to be an ostensible macroeconomics lesson composed in equal measure of economic foolishness, historical ignorance, and ideological tendentiousness — the veritable epitome of a worse-than-worthless contribution to public enlightenment.

The opening paragraphs indicate the direction of Abrams’s argument:

The next time someone argues that the New Deal failed, and only the Second World War ended the Depression, as ‘proof’ that government spending does not work, one can respond with the details of economic growth and unemployment reduction up to 1940, or one can ignore the claim and thank them for making your case for massive government spending in a deep, broad recession.

Right wing politicians are loathe to credit the New Deal with any success in hoisting the United States out of the Great Depression, but credit World War II for that achievement, believing that that somehow disproves Keynesian economic theory.

That claim, however, undermines their entire premise.

Abrams concludes that “massive government spending at a time of severe economic downturn and dislocation can indeed get an economy humming again,” as World War II shows; the New Deal was merely too timid. He seems unaware that his argument merely restates the fallacy-ridden hodge-podge of conventional wisdom about how World War II “got the economy out of the Depression” that has dominated the thinking of economists, historians, and the public ever since the war itself.

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Dear Mr. President,

The Keynesian school of thought on the economy is that of the potential instability of the private sector and the undependability of the market driven self-adjustment factor. Keynes during his day said that in times of depression (or deep recessions) the government should focus entirely on spending by  injecting the national economy with lots of cash. So the task was simple: spend more on goods and services thereby shifting aggregate demand in the other direction and presto we are out of the recession.

However, Keynes put forth these thoughts during the Great Depression. In which inflation was not a threat, prices were falling, and unemployment was reaching 25 percent. Since the goal was to get the national economy back to full employment, the only model used for analysis was the aggregate demand curve in relation to real GDP gaps. There was no need to study aggregate supply and aggregate demand, prices and real job growth because he was only interested in what market participants would buy during the depression if the economy was producing at full capacity. So a new model called the Keynesian Cross was coined which basically focuses on the differences in total spending to the value of total output. It doesn’t account for true distinctions for price levels and real output, i.e., real job growth.

An increase in aggregate demand effects real output and prices but doesn’t always translate to a dollar-for-dollar improvement in real GDP. Again, and to his defense, Keynes’ ideas were during the Great Depression — falling prices, etc., — this is not the Great Depression, so when supply and demand increases so do prices. As a result we still stay short of full employment, consumer spending stays down, wages become relatively low, the economy fails to rebound and possibly falls back into recession.

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Based on this morning’s numbers, I’ve updated my chart showing what the Obama Administration said would happen with the so-called stimulus compared to what actually has happened. As you can see, the unemployment rate is about 2.5 percentage points higher than the White House claimed it would be at this point.

Since I just did an I-told-you-so post about Greece, I may as well pat myself on the back again (albeit for another completely obvious prediction). Here’s the video I narrated a couple of years ago on the Obama faux stimulus.

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For thousands of years, philosophers have told us that if we are to live our lives at their best, we should seek truth, beauty, and goodness. Of course, each of these qualities has raised thorny issues and provoked ongoing arguments. That people have carried on such arguments, rather than surrendering themselves to their raw appetites and animal instincts, may be counted a valuable thing in itself. A final resolution of such deep questions may lie beyond human capacities.

In regard to goodness and beauty, I have nothing worthwhile to add to the discussion. For guidance in seeking goodness, we may look to saints, theologians, moral philosophers, and moral exemplars of our own acquaintance. For demonstrations of beauty, we may turn to nature and to artists, great and small, who have adorned our lives with the grace of music, poetry, and the visual arts. My own professional qualifications, as an economist and an economic historian, do not equip me to contribute anything of value in these areas.

I do feel qualified, however, to speak with regard to truth, because the search for truth has always served as the foundation of my intellectual endeavors. Moreover, my study, research, and reflection within my own professional domains have brought home to me a relationship that others might do well to ponder and respect―a relationship, indeed, an array of relationships, between truth and freedom, such that anyone who seeks the triumph of truth must also seek to establish freedom in human affairs.

When I began my academic career in 1968, my research specialty was the economic history of the United States. I was expected to publish the findings of my research in reputable professional journals. For a young man just beginning to master his field, carrying out publishable research was a daunting task. Thousands of other writers had already contributed to building up the literature in my field, so adding something of enough importance to merit its publication in a good journal was hardly an easy task.

I discovered, however, that one way to proceed was by identifying significant mistakes in the existing literature and correcting them. Moreover, I soon found that many such mistakes had been made. To put this statement in another way, I found that the existing sources often failed to tell the truth about one thing or another, and in some cases the falsehoods propounded by one writer led later writers, who relied on those false statements, to make errors of their own.

We often think of the scientific or scholarly enterprise as a cooperative process in which the establishment of one truth facilitates the establishment of another, but, unfortunately, the process often works in an adverse way, too, as the establishment of one falsehood fosters the establishment of another.

The errors in my fields of study and research take two main forms: factual and interpretive.

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In the 1930s, John Maynard Keynes, the most influential economist of the last century, and future Nobel laureate Friedrich Hayek engaged in a legendary battle of ideas about the role of the government in ending and causing economic downturns.

Last year, George Mason University economist Russ Roberts and director-producer John Papola retold that debate in the form of a rap video, “Fear the Boom and Bust,” in which Hayek and Keynes fight it out over the causes of the Great Recession.

In a new video, the battle continues: Should government juice spending via massive stimulus or “do nothing” once a recession is underway? And did World War II end the Great Depression? Whatever side you take, the video, which pulled over 500,000 views in its first week, is sure to entertain and edify.

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London was just hit by heavy riots as part of a protest against the “deep” and “savage” budget cuts of the Cameron government. This is not the first time the U.K. has endured riots. The welfare lobby, bureaucrats, and other recipients of taxpayer largesse are becoming increasingly agitated that their gravy train may be derailed.

The vast majority of protesters have been peaceful, but some hooligans took the opportunity to wreak havoc. These nihilistic punks apparently call themselves anarchists, but are too dense to understand the giant disconnect of adopting that title while at the same time rioting for bigger government and more redistribution. My anarcho-capitalist friends must be embarrassed by the potential linkage with these angry morons.

Speaking of rage, Paul Krugman is equally dismayed with Prime Minister Cameron’s ostensibly penny-pinching budget. Summoning the ghost of John Maynard Keynes, he asserts that such frugality is misguided when an economy is still weak and people are unemployed. Indeed, Krugman argues that the U.K. economy is weak today precisely because of Cameron’s supposed austerity.

Not surprisingly, the purpose of his argument is to discourage similar policies from being adopted in the United States.

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Dr. Peter Diamond has once again found himself in the cross-hairs of Sen. Richard Shelby of Alabama, the highest ranking Republican serving on the Senate Banking Committee.  A Nobel laureate and MIT professor, Diamond has been nominated three times for the vacant seat on the influential Federal Reserve Board, twice having been blocked by Republicans at the committee stage for approval to the full Senate.

At the nomination hearing this past Tuesday, Sen. Shelby provided a critical analysis of Diamond’s economic philosophy.

“In short, Dr. Diamond is an old-fashioned, big government Keynesian. Many of us believe that this is not the economic philosophy the Fed should be embracing at this point in our economic history. Our economy is already suffering from excessive government debt and misguided regulation.  Our financial regulators should be trying to take steps to strengthen our markets, rather than replace them with new layers of government.”

Shelby noted Diamond’s support of the President’s $800 billion stimulus package and his call for additional fiscal stimulus.  He also referenced a paper written by Diamond and former CBO Director Peter Orszag that argued for higher taxes.   “The policy preferences of Fed nominees matter,” Shelby observed.

Sen. Pat Toomey of Pennsylvania, a former bond trader and veteran of the financial services community, is no fan of the Fed’s monetary policy, which he feels is over accommodating.  He raised some serious concerns about the likelihood of rising inflation and the result that would have on the Fed’s forthcoming exit strategy from its monetary policy.

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If any one thing estimated in the Commerce Department’s National Income and Product Accounts may be described as the engine of economic growth, private domestic business net investment is that thing. This variable has such tremendous importance because, if accurately gauged, it tells us better than any other measure how many resources are being devoted to building up the private business capital stock and improving it by innovation. An economy that has anemic private business net investment almost certainly will falter soon, if it is not doing so already.

Notice that every aspect of this awkwardly named variable is critical.

• First, it has to do with private investment, not so-called government investment. The latter, which looms fairly large in the official accounts, ought never to have been labeled as investment, because it comes about not as a result of wealth-seeking motives and rational economic calculation, but as a result of political motives, calculations, and actions that often clash with the creation of real wealth, rather than contributing to it.

• Second, we are looking here at business investment, excluding what the Bureau of Economic Analysis calls private “household and institutions” investment, which has somewhat murky underlying objectives, determinants, and consequences.

• Third, we are examining net, rather than gross, investment. The latter includes a large element of expenditure aimed merely at compensating for the wear and tear and obsolescence of the existing stock of private business capital. For example, even at the most recent peak for gross private domestic business investment, in the third quarter of 2007, it was running at $1,661 billion (annual rate), whereas net private domestic business investment was only $463 billion (annual rate), or about 28 percent of the total. (The investment data cited in this article are taken from Table 5.1, Saving and Investment by Sector, in the National Income and Product Accounts, accessed 02/16/11.)

It is obviously important that businesses compensate for ongoing depreciation of their existing stock of capital goods, which includes structures, tools and equipment, software, and inventories. But unless firms do more than make up for depreciation, they do not expand their productive capacity except to the extent that they can embed improved technology in their replacements for worn-out or obsolete capital goods. In general, economic growth requires net investment, and more rapid economic growth requires a greater rate of net investment.

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