Thursday, July 21, 2011

Stimulating Waste

In his column today, Ezra Klein sums up Keynesian economics by saying that Keynes "taught us that although markets are usually self-correcting, they occasionally enter destructive feedback loops....In that situation, the role of the government is to break the cycle. Because businesses and consumers have stopped spending, the government breaks the cycle by spending."
His description of what Keynesians believe is correct. It's why Keynesians, including the President, thought that government spending would stimulate the economy. As Klein points out, "Obama didn't just have a team of Keynesians. He had the Keynesian all-star team."
Right, but then Klein gets it wrong: "The idea [behind Keynesian economics], in other words, is not about whether the government spends money better than individuals."
Yes it is! Obama and Klein think that during a recession, "the financial system scares business and consumers so badly that they hoard money, which worsens the damage to the system." Therefore, the government must take money away from individuals, and spend it elsewhere. Eric Cantor correctly pointed out that the theory is: "government can be counted on to spend more wisely than the people."
When government spends, politicians pick winners and losers. Government normally picks big, politically connected interest groups - like big banks (in the case of TARP) or big unions (in the case of the "Stimulus Package").
In one example from the stimulus package, the government wasted $10 million on renovating an abandoned train station that no one has used for 30 years. The private sector might have created prosperity with that money.
Keynesian economics fails becuase government misallocates resourses, and because government can't create wealth. It can only move it around. Spending isn't free. The stimulus may have created or saved some jobs, but they came at a high price -- the President's own study says $278,000 each. That price must be paid by individuals, either in the form of higher taxes or inflation.
Where is the FDA when we need it? Keynesians continue to sell very expensive medicine-despite having no good evidence that it works.

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