Why can't Keynesianism work?
Keynesianism is a rationalization that you can tax and spend your way into prosperity, and it ignores human nature.
~ Aristotle Sabouni
Created: 2017-05-15 |
To Keynes, the problem in a down economy was fear.
- The private sector would over-react and over-cut (e.g. markets weren't perfectly efficient) and unemployment would spike, the cost of labor would crash, which would feedback on consumption. While things would eventually recover, he thought government could smooth the downspike.
- Keynes theory was that in those down markets, government could spend up to where the economy "should be" (the balance point), and we could take up some of the slack (soften the fall from unemployment and create artificial consumption).
- While government still isn't as efficient as private sector, it was less of a loss than doing nothing (and those jobs just not getting done). Once the economy went back up, you could CUT those government spending/programs/jobs, the private sector would replace them with more efficient versions private sector jobs as things got better, and you changed a big dip into a smaller dip, which let you grow more overall. So in the short term (and micro-view), that's better than nothing.
But it's a collection of fallacies:
- That Government knows where spending should be: politicians don't, but even if they did, all the incentives for them are to overshoot (waste). That Government would never overspend (and be a net loss), if they do (and they are incentivized to do so), then that is a long term loss/burden on the economy.
- You have to exist in an information vacuum. If the public sees spending going up -- they know that most be covered with borrowing (inflation) or taxes (burdens). If they react to any of that (and they will), that will swamp any benefits.
- Then as the economy gets better, they'll trim the government programs at the right rate, so the people can move back to the more efficient private sector. Which denies human nature. Once you create a program, everyone involved has an incentive to perpetuate it and expand it. So it never goes away.
- That jobs were fungible -- so whatever government spent on was exactly replacing what was being lost elsewhere. (In Keynes more primitive agrarian and physical labor / low skill society, it was less implausible than today's specialized blue, white collars).
- It only works if efficiency is pretty close between private/public sectors. In the real world, we know that's not even close. So the burdens caused by the government program (taxes/borrowing) far exceed the net benfits of doing it via private hiring, or not doing it at all.
Details[edit | edit source]
(1) Government Bureacrats know where spending "Should" be[edit | edit source]
Do you trust government to know exactly where spending should be? Even presuming you're enough of a rube to trust "the experts" to know the exact the economy should be (over or undershooting is losses in efficiency) -- then certainly you're not naive enough to ignore the conflict of interest. These people work for the government, are fans of big government, and their friends are in the government, they will be incentivized by overstating where we should be, and you think they'll still tell us the exact right levels and not overstate them for personal reward?
(2) You have to exist in an information vacuum[edit | edit source]
If people SEE government spending (and borrowing), they're generally smart enough to react to it. Since they realize government spending means the government must either tax, print money or borrow (to fund that spending), thus they KNOW they’re going to get hit by either taxes or inflation: which hurts their purchasing power. So they react (sometimes in advance of the policies even kicking in), by saving more, spending less, or sheltering investements. That negative economic reaction swamps any of the theoretical benefits in Keynes algorithms, sometimes before the policies have a chance to be implemented.
Hayek believed that consumers were smart enough to see government spending and react. Keynes didn't factor that into his models. Guess which maps better in the real world?
Keynes positive multipliers (of spending) turn it into negative multipliers, if people are smart enough to know that government spending means inflation or taxes. Which is why spending didn't work in the information desert of the 1930's, but certainly can never work in today's world.
(3) You have to CUT government spending/programs when the economy gets better[edit | edit source]
If you don’t cut when you have the opportunity, all you succeeded in doing is replacing the more efficient private sector with the less efficient public sector, over time.
As Milton Friedman observed, "nothing is as permanent as a temporary tax/program".
Once you create a program it becomes a special interest and thus has impetus that not only keeps it around forever, but tries to make it grow. And in good times, everyone is more tolerant of that wasteful program, so there’s no leverage to implement a cutback. Which means that whole sector suffocates under the weight of a subsidized government competitor. (They reinvest, innovate and grow, less).
Thus if you didn't cut the program, you did soften the dip, a little... but you also soften the recovery by even more. The economy can never climb back to where the economy would have been without that less efficient replacement holding it back. Since any gain in economic efficiency at least partly translates to higher salaries, you lost a lot of earning/economic potential. Since it is just a missed opportunity and hidden cost, leftonomics pretends it doesn't exist. But we know better. We might not be able to quantify (or might disagree over) the exact value of a lost opportunity, but we should all agree that some potential was there.
(4) You really need to be replacing the same jobs you're losing[edit | edit source]
In the early 1900s, on the job training took hours. Whether working a hoe, hammer, or welder, a worker was a worker was a worker. There was lots of grunt work, and much less skilled labor. Assembling a car, digging a ditch, a monkey could do it. So creating productivity required a body. In the modern economy, it doesn't work that way.
Unions have made job mobility difficult in low-skill jobs, and most jobs aren't low-skilled union ones any more. More of our economy is built around high skill jobs (that have far less worker mobility). Replacing a computer programmer with a ditch digger doesn't work (or vice versa), nor does replacing a SEO Optimization person with an accountant work. So a government temporary bridge projects doesn't help out of work IT folks, or autoworkers, accountants and so on. Retraining programs can't solve recessions since, the training lasts longer than the recession itself. So all it can do is take potential workers out of the economic pool of contributor (even fractional contributor, if they're doing something below their skill level), and moves them to the pool of taker/burden for the duration of the recession (while they're in training). This magnifies the depth and length of the recession. (This was demonstrated with Obamanomics).
(5) Government has to be as efficient (or close to it) as the job it is displacing[edit | edit source]
If you replace 100 workers with 200, you lose 100 workers worth of money for the same output. That negative multiplier means the economy lost 100 workers worth of potential output. And it's the output (what we produce) that is real net value to the economy. That's where the famous Milton Freedman anecdote (that predates him) about replacing workers shovels with spoons comes from [1], it's not how many workers are working, it's how much they're producing that matters. And in the end, rarely, government programs start out as efficient, and they entropy quicker in a productivity sapping bureaucracy (there's no profit incentive for continual improvement in efficiency).
Conclusion[edit | edit source]
This is why Keynesian magic positive multipliers never actually worked in the real world. None of Keynes assumptions were valid. In the real world, experts have biases, and we have nothing to guage where the economy should be. But even if we did, human nature leans towards self interest and corruption -- so we wouldn't spend at the right levels. If you think the fear of a recession is bad, think of the fear of getting taxed out of business by government when a recession starts. As soon as people see government stepping in, they start saving more, and that swamps any theoretical benefits. And of course a ditch digger and computer analyst are not interchangable. If the jobs government creates are different than the ones lost, you will cause more harm (unfair competition) in the sectors it chooses to help -- while simulktaneously doing nothing for the sectors that lost jobs. And government jobs aren't as efficient as private sector, and will never go away. All you did is force the public to pay more for goods and services they could have gotten without governments help.
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