Authored by Peter Foster, originally posted at Financial Post,
Keynesianism has extended downturn, despite recent praise
We are now approaching the fourth Christmas of the great debate between the benign supporters of Santa Keynes and the walnut-hearted acolytes of the Hayekian Grinch. Or at least that’s how Keynesians seem to see it.
Prominent statist fans of John Maynard Keynes such as Nobel laureates Paul Krugman and George Stiglitz, and Keynes’ biographer Lord Robert Skidelsky, tend to be moralists who castigate their opponents as flinty-eyed masochists rather than level-headed students of immutable laws. Their indignant question is “Would you have us do nothing?” The response from supporters of Friedrich Hayek and his “Austrian” free-market economics is: “Yes, since what you are doing is making things worse. Moreover, it’s your policies that cause crises in the first place.”
Keynesians don’t just fail to grasp Austrian economics — which emphasizes that diverting tax dollars or government borrowing to Santa’s workshop to produce what people don’t want (such as holes in the ground, pyramids or windmills) will have painful long-term consequences — they condemn it on the basis that Austrians rejoice in suffering.
Then again, who doesn’t want to believe in Santa? (Naughty or nice doesn’t come into it. Just get those elves working). And who could support the mean green character who wanted to drain all the fun from Whoville?
The latest champion of Keynes as both economically benign and more “moral” is Peter Berezin, the managing editor of the Bank Credit Analyst. In the December edition, Mr. Berezin produces a long piece, Hayek vs. Keynes: Weighing the Evidence, in which he suggests that Keynes is winning the battle hands down.
The claim is moot, to say the least.
Keynesianism is essentially a refutation of the Invisible Hand-driven natural order identified by Adam Smith. Smith would have spotted Keynes as a “man of system” who mistook the economy for a machine and economic actors for chess pieces. The Austrians are Smith’s politically unpopular heirs.
Regurgitating murky history, Mr. Berezin writes “The apparent success of Roosevelt’s New Deal policies, and the fact that massive government spending on the war effort did end the Depression, seemed to validate the views of Keynes.”
In fact, it was FDR’s New Deal policies — which, like those of Obama, demonized “the rich,” promoted Big Government, and created uncertainty — that helped make the Depression “Great.” Meanwhile, how can war create real growth or “cure” unemployment except by forcing people into uniform?
Mr. Berezin acknowledges the collapse of Keynesianism amid the stagflation of the 1970s, but claims that its revival since the 2008 crisis has been successful — or at least hasn’t (yet) produced the disasters suggested by the Austrians.
His argument for Keynesian triumph is that stimulus really did create jobs. Nobody denies, however, that government can create short-term employment. The question is sustainable jobs. Meanwhile claims of a significant impact from government spending clash sharply with studies by the likes of the Fraser Institute’s Niels Veldhuis and Stanford University’s John Taylor.
Mr. Berezin claims that “Friedrich Hayek’s latter-day disciples” (whom he doesn’t identify) made three predictions about the government response to 2008: “soaring” interest rates, “runaway” inflation, and that fiscal austerity would “boost growth.”
These claims represent undeniable truths blown up into straw men. Other things being equal, increased government borrowing will raise interest rates and money printing will boost inflation. Fiscal austerity is obviously not a short-term growth booster so much as the inevitable consequence of overspending.
Mr. Berezin typically appears to imagine that austerity is merely an — undesirable — option. Thus, the fact that economies whose feckless governments have been forced to cut spending have “done worse” economically is cited as a flaw in the Austrian view rather than a natural consequence of the Keynesian pretensions of spending yourself rich.
Mr. Berezin exonerates President Obama for getting his employment projections wrong by suggesting that the “vicious downward spiral” of the economy in late 2008 had been underestimated. But this surely confirms that economists have no idea how to read cycles or project anything but straight lines, let alone calculate “multipliers.”
His government job-creation calculations — in particular the notion that Obama’s US$787-billion of fiscal stimulus produced three million jobs — are pure macromancy. More important, what are the longer-term adverse implications of that US$787-billion of borrowed and/or printed money, not to mention Ben Bernanke’s ongoing efforts to find new ways to drop more cash from the proverbial helicopter? And where do the 1.7 million real jobs created by the quite unexpected U.S. shale gas and tight oil booms fit into those figures? Oh, that’s right. They didn’t come from government.
Keynesianism has two insuperable flaws. The first is the belief that government spending can be a viable substitute for the private variety. It promotes the view that spending is spending and jobs are jobs. The most obvious current refutation of this notion is provided in the almost universal trend to “stimulate” growth by subsidizing alternative energy and other “technologies of the future.” One much-quoted Spanish study found that each green job “stimulated” by government expenditure cost two jobs elsewhere.
The second Keynesian flaw is that Keynes believed governments would run surpluses when times were good to compensate for those downturn-fighting deficits. Nobel economist James Buchanan pointed out that Keynes was naive not to see that his policies would promote a one-way pendulum of expenditure that inevitably led into fiscal crisis, with which the world continues to struggle.
Far from being a success, Keynesian policies have retarded recovery and extended the downturn, just as they did in the 1930s and the 1970s. They’re the “moral” policy present that keeps on taking, supported by those who claim that their opponents have hearts “two sizes too small.”