"Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist."
-- John Maynard Keynes, 1936
John Maynard Keynes was the most influential economist of the first half of the 20th century. He is correctly associated with the policy of increased government spending and deficits to combat economic downturns. Keynes is the economic icon of the Obama administration, which uses his multiplier to justify its huge stimulus programs and soaring deficits.
Keynes would be irritated to know that I count him among the "defunct economists" whom he disparaged.
The appeal of Keynesian economics is its simple logic. If government spending for goods and services is part of GDP, then any increase in government spending must raise GDP.
As President Obama explained in a town hall meeting on Feb. 8, 2009:
"Republicans say this is not a stimulus bill but a spending bill. What do you think a stimulus is? That's the whole point." (Laughter from the crowd).
Keynesian economics is easy, even for stupid people. More thought and analysis are required to understand why it has not worked as it is supposed to. Keynesian skeptics must show that increases in government spending cause other components of GDP, such as consumption, investment, or exports, to fall. Such countervailing forces require more nuanced and sophisticated thought. They are not for the mentally lazy or those seeking simple answers.
Liberal commentators and comedians appear to accept Keynesian economics as such an evident truth that non-believers must be stupid. Keynesian economics has become a liberal dogma, not subject to challenge by reasonable people.
Consider comedian Bill Maher's quip to a former Obama advisor on Aug. 6, 2011:
"Keynesian economists and climate scientists both know real things, but the stupid people who don't know things get an equal vote. Isn't that frustrating?" (Laughter from the audience.)
Liberals target the Tea Party as their favorite nominee for the "stupidity" prize. Tea Party members are not only dunces. They are irresponsible hostage takers who do not care if they bring the country down with them.
Here is a shocker for Obama, Maher and Tea-Party haters: Since the Nobel Prize in economics was established, seven Nobel Prizes have been awarded to economists who cast serious doubt on Keynesian economics. Not one Nobel Prize has been awarded to an economist who advanced the Keynesian agenda. New York Times liberal columnist, Paul Krugman, won his Nobel Prize for trade theory, not for macroeconomics.
Maher's "stupid people" who reject Keynesian economics, it seems, are in rather distinguished intellectual company.
Let me go down the list of Nobel-laureate Keynesian skeptics:
1) Permanent or life-cycle income (Milton Friedman, Franco Modigliani)
This theory says that consumers are forward looking. They base their consumption decisions on income they expect to earn over a longer period of time, not what they earn now. They change their spending only in response to changes in long-term income, not in current income.
This proposition is well accepted by the mainstream of economists. It says that consumer spending is unlikely to be affected by transitory changes in income. A permanent tax cut or increase will affect consumer spending. A temporary tax change will not.
Lyndon Johnson was the first to learn this lesson when his income tax surcharge of 1969 failed to affect consumer spending.? The Obama administration is learning this lesson as consumers try to figure out whether their Bush tax cuts will be extended.
2) Crowding Out (Milton Friedman)
This proposition says that increases in government spending crowd out investment and even consumer spending. In its simplest form, it says that when the government borrows for spending, less capital is left for private investment and for consumers.
3) Ricardian Equivalence (future Nobel Laureate Robert Barro?)
This fancy term -- dating back to the 19th century writings of David Ricardo -- rejects the notion that people are stupid with respect to the effects of government taxes and spending.? Instead, people and businesses are forward looking and understand that increased government spending and deficits must eventually be paid for by higher taxes. Alarming deficits alert households and businesses to expect higher taxes. They respond by spending less to build their balance sheets to prepare for the day of reckoning.
We are now going through our first large-scale test of this proposition, and it appears to hold. Businesses and households are indeed retrenching in the face of soaring deficits. The Obama administration has even encouraged this type of behavior by its constant talk of new taxes. The Tea Party is a creation of? Ricardian equivalence. It proclaims to the world that if we do not stop this spending, the day of reckoning will come soon and it will be brutal.
4) Rational expectations (Robert Lucas, Finn Kydland, Edward Prescott)
Rational expectations came about to explain the stagflation of the late 70s and early 80s. This theory maintains that households and businesses pay attention to government policy. Instead of acting like mindless robots, they try to outguess government policy makers so as to not get caught off guard. If? people correctly anticipate expansionary economic policy, they nullify its effects on GDP and employment.
5) Mundell, Effect (Robert Mundell)
This work shows that in a globalized economy, expansionary fiscal policy sets in motion forces that cause exports to fall, thereby reducing GDP.
We can pardon a comedian like Maher who is simply trying to please his liberal audience. We should not expect him to know anything about the Nobel laureates I listed above. There is no reason not to expect him to be "stupid" with respect to modern macroeconomics.
President Obama is another matter. Presumably he has access to economists of all persuasions. Any number of them can tell him the things I just described. They are well known. No one is keeping them secret. They are found in modern principles textbooks. If he cannot understand what they are saying, then he might qualify for the?epithet Maher directed at Keynesian skeptics.
Perhaps the president simply does not want to hear from those who disagree with the course he has chosen. It could be that the president's goal is not recovery and economic growth but growing the size and scope of government to achieve his goal of a redistributive state.
If that is the case, we are in for trouble.
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