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Sunday, February 1, 2009

The Keynesian Fallacy

Jeff Jacoby has an interesting piece about the bloated stimulus. In it, he explores a fallacy not only of those that support this bill but those that support Keynesian economic policy altogether.

In the face of rapidly rising unemployment and idle productive capacity, any kind of federal spending will have a stimulus in the short run," he wrote. "Digging holes and filling them in would help to create jobs and consumer demand because those wielding the shovels would earn a paycheck that they could spend."

In other words, to the true Keynesian, any spending is good spending as long as it winds up getting to the people. Of course, if this is the case, then the stimulus, as it is currently written, isn't the best Keynesian approach there is. If you really want to truly be a Keynesian then, what you need to do is by pass the government altogether and give the money directly to the people. If it really doesn't matter how unproductively the money is spent, then just give it to the people directly. Why give it to the Department of Education, their function is to educate not create jobs. The best Keynesian use of EACH AND EVERY DOLLAR would then be to put directly into the hands of the people. In other words, a true Keynesian would say that the money should just be split evenly among the people. In other words, a truly Keynesian stimulus would just give everyone an equal stimulus check.

Think about, a defender of this stimulus says it wouldn't even matter if the government paid someone to dig a ditch and then fill it up again. If we are going to pay people to be totally unproductive, then we may as well cut out the charade as well. A truly Keynesian approach shouldn't even bother to put to work. Just give everyone money.

This is where the entire Keynesian model falls apart. Keynes believed that...

Government investment in infrastructure - the injection of income results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.[1]

Why bother with government infrastructure at all? Just give everyone money. Wouldn't that have the same stimulating effect? After all, if it matters not whether or not the work is productive, why even have people work at all?

In fact, this is the fallacy of the entire Keynesian model. It believes that government infrastructure puts money in people's pocket. In fact though, as the new Keynesians point out, government infrastructure investment is only a means to an end. It is intended to ultimately put money into people's pockets. Yet, we don't need to even have government infrastructure. We can just borrow $800 billion and spread it around the people.

This is where the entire model falls apart. The exact same thing that Keynes wants could simply be accomplished with across the board tax cuts. This, too, would put money into people's pockets. It would put that money there immediately since it would money more take home pay immediately. If the goal is to put more money into people's pockets, then government spending is a round about way of doing it. The best way is to simply reduce everyone's tax burden.

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