Monday, May 4, 2009

Can We Please Bury Keynes Already?

President Obama has decided to borrow trillions. This is motivated by an economic idea advocated by an English economist John Maynard Keynesian who wrote a classic book “The General Theory…” during the Great Depression. Keynes thought that when times are good we slow up on the brakes and use fiscal policy to depress the economy, lest it overheat and usher in inflation. When times are bad, use government spending and/or tax cuts to generate demand and prop up employment. This is what Obama advocates when he says he’s going to grow the economy from the “bottoms up”. He means he’s going to try and give people purchasing power by giving 95% tax cuts and he’s going to give them jobs via government infrastructure and public works projects.

Well, Mildred, we’ve learned a lot since the 1930’s. Keynesian ideas are useful tools in teaching macroeconomics to undergraduates. Otherwise, these ideas are a weak way to organize a sound economic policy. This has been realized but old ideas die hard as the neo-Keynesian school in economics attests.

What has proven to be vitally important in economics is the study of microeconomics and analysis of individual and firm behavior. This is truly where the rubber hits the road, especially with respect to investment. The Obama people do not seem to grasp how their policies are negatively impacting market psychology and the investor class. Ultimately, economic growth occurs when entrepreneurs take risks and companies develop products and services that individuals want to buy. Buyers buy when they perceive value and like the price. Companies that fail to do this… fail. And, it’s generally good because people move to the industries that produce products where buyers perceive value. New jobs in new industries are created. For anybody who likes to learn and likes new challenges from life, this is a good thing.

Keynesianism would work if people were mindless cogs, which is what liberals do tend to think of the folks so it’s not shocking they espouse it. Keynesians live in a world of models, math, past data, where the actors and variables all seem to somehow be passive data points. Keynesian economics would work if (1) people were unable to think long-term in terms of investment and business planning and (2) if the money to hire people to dig ditches came like manna from heaven without any need to be financed by taxes, printing money, or via bond markets. Indeed if people acted like robots with no capacity to think through portfolio decisions, Keynesian economics would be a splendid idea. Unfortunately, the government spending part of the money given to dig ditches or bankroll new infrastructure jobs does have to be financed by taking money out of somewhere else in the economy in the short and long-term.

I thought we buried Keynes by the time I was knee deep in graduate economics courses in the 1990’s. But I suppose ideas die hard. It is my sincere hope that by at least the end of this administration Keynes will die a final death. Perhaps another great depression will be the only way for the final nail to be put in the proverbial coffin. It’s not my hope. But looking to Keynes to satisfy your economic needs is like looking to porridge to fill your stomach. It was once an interesting idea. Once upon a time.

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