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Anti-Logic And The Keynesian "Stimulus"

Tyler Durden's picture




 

Submitted by William L. Anderson via the Ludwig von Mises Institute,

American political culture always seems to be “celebrating” the anniversary of something, be it JFK’s assassination (we just passed the 50th anniversary of that sad event) or the signing of some (mostly bad) legislation. The latest political activity to be enshrined with an anniversary is the so-called stimulus, the $800 billion monstrosity passed five years ago ostensibly to “put America back to work.”

Not surprisingly, the New York Times has editorialized that any criticism of the spending bill — at least any criticism which says “too much” was spent — is a Republican “myth and falsehood.” Not only was the “Stimulus” a legitimate piece of legislation, sniffed the NYT, but it also:

prevented a second recession that could have turned into a depression. It created or saved an average of 1.6 million jobs a year for four years. (Where are the jobs, Mr. Boehner.) It raised the nation’s economic output by 2 to 3 percent from 2009 to 2011. It prevented a significant increase in poverty — without it, 5.3 million additional people would have become poor in 2010.

Like all examples of the Broken Window Fallacy, the spirited defense of this spending bill is based upon “accounting” methods that count the people hired through “stimulus” spending as “new jobs” but fail to note how others might have lost their own means of employment. Now, this was a bill that, among other things, had workers rolling sod into the grass median of I-68 (which is near my home) in an area where runoff collected from tons of salt thrown onto roads by state highway crews (our area receives a lot of snowfall). Not surprisingly, within a year, all of the new grass was dead.

I liken the “stimulus” to throwing a bit of lighter fluid onto a pile of soaking wet wood. The flames pop up for a few seconds, but then disappear as the effects from the fluid go away. (No, repeated douses of “stimulus” fluid do not ultimately gain traction and then lead to a miraculous economic recovery.)

If Beltway political culture permits any criticism of the Holy Stimulus, it is this: “the stimulus wasn’t big enough.” Intones the NYT: “The stimulus could have done more good had it been bigger and more carefully constructed.”

The rest of the editorial is a compilation of near-plagiarism from Paul Krugman’s columns and blog posts, and it reflects how Keynesian anti-logic works. The “logical” narrative goes as follows:

  • “Enough” government spending during a recession will bring the economy to “full employment.”
  • The economy is not at full employment.
  • Therefore, there wasn’t enough government spending.

Should one question the Keynesian premises of this awful syllogism, the standard answer is: America had “full employment” during World War II. (Robert Higgs has thoroughly debunked this enduring myth.) But, then, so did Germany and the U.S.S.R., according to Keynesian standards, but no one envies what people there experienced!

The problem that occurs when one wishes to interpret the results of the Stimulus is not due to bad politics. To put it another way, Stimulus spending always will confer political benefits, given that the money is transferred from taxpayers to preferred political constituents. Those footing the bill include both present and future taxpayers, since they will have to pay later for the public debt incurred to pay for present stimulus spending.

I make this point because the stimulus always has been presented as a government action that improved general or overall economic conditions, as opposed to being a political wealth-transfer scheme. The NYT editorial drips with what only can be a religious faith in the whole system, as though politicians seeking votes are going to “carefully” construct a process that is aimed at making certain political constituencies better off — but at the expense of other constituencies.

In reality, the government-based stimulus is based upon bad economics or, to be more specific, one of bad economic logic. To a Keynesian, an economy is a homogeneous mass into which the government stirs new batches of currency. The more currency thrown into the mix, the better the economy operates. One only needs to read Krugman’s writings to see that belief in full bloom.

Austrian economists, on the other hand, recognize the relationships within the economy, including relationships of factors of production to one another, and how those factors can be directed to their highest-valued uses, according to consumer choices. The U.S. economy remains mired in the mix of low output and high unemployment not because governments are failing to spend enough money but rather because governments are blocking the free flow of both consumers’ and producers’ goods and preventing the real economic relationships to take place and trying to force artificial relationships, instead. (Green energy and ethanol, anyone?)

Simply put, the stimulus could work only if it were directing factors of production from lower-valued uses to higher-valued uses as determined ultimately by consumer choice. If that actually were the case, then the government would not have to force consumers to use stimulus-funded ethanol and electricity created by wind power.

Austrians arrive at their position through logic, but logic that is based in what we already know about human action. Unlike Keynesian “logic,” the premises of Austrian economics are sound, so the conclusions derived from them also are sound. No wonder the Austrian position is banned from the NYT editorial page!

 

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Tue, 03/04/2014 - 19:00 | 4509483 Levadiakos
Levadiakos's picture

Um, yeah. We have those.

Tue, 03/04/2014 - 20:05 | 4509752 negative rates
negative rates's picture

People say what they want to say, and people believe what they want to believe.

Tue, 03/04/2014 - 19:02 | 4509491 Spastica Rex
Spastica Rex's picture

When do the new iPhone 7s come out? I want to consume one.

There's a bunch of other stuff I've seen on TV that I want to consume, too.

Tue, 03/04/2014 - 20:01 | 4509733 superflex
superflex's picture

Good serf.  

You will be rewarded at Camp FEMA.

Tue, 03/04/2014 - 23:58 | 4510452 Johnny Cocknballs
Johnny Cocknballs's picture

I hope you are not speaking ill of the Hope Camps, Citizen?

Tue, 03/04/2014 - 19:24 | 4509508 ZH Snob
ZH Snob's picture

the keynesian methodology is a swindlers dream.  in the future, ponzi will be replaced by keynes in the common lexicon for a lying cheat.

Tue, 03/04/2014 - 19:08 | 4509515 0b1knob
0b1knob's picture

The tribal wisdom of the Plains Indians, passed on from generation to generation, says that: "When you discover that you are riding a dead horse, the best strategy is to dismount." However, in government (and academia) more advanced strategies are often employed, such as:

1. Buying a stronger whip.

2. Changing riders.

3. Appointing a committee to study the horse. 

4. Arranging to visit other countries to see how other cultures ride dead horses. 

5. Lowering the standards so that dead horses can be included.

6. Reclassifying the dead horse as living impaired. 

7. Hiring outside contractors to ride the dead horse.

8. Harnessing several dead horses together to increase speed.

9. Providing additional funding and/or training to increase the dead horse's performance.

10. Doing a productivity study to see if lighter riders would improve the dead horse's performance.

11. Declaring that as the dead horse does not have to be fed, it is less costly, carries lower overhead and therefore contributes substantially more to the bottom line of the economy than do some other horses. 

12. Rewriting the expected performance requirements for all horses. 

And, of course ... 

13. Promoting the dead horse to a supervisory position.

Tue, 03/04/2014 - 21:10 | 4509961 Ness.
Ness.'s picture

No mention of a pension for this poor horse? WTF? I think this horse deserves a pension.

Wed, 03/05/2014 - 13:17 | 4512301 Ckierst1
Ckierst1's picture

Don't forget medical care, counselling and contraceptives for the dead horse.

Tue, 03/04/2014 - 19:13 | 4509523 mayhem_korner
mayhem_korner's picture

 

 

When production > consumption, wealth is created.  Currency expansion that is not tethered to production obscures this basic equation.

Tue, 03/04/2014 - 19:34 | 4509594 SofaPapa
SofaPapa's picture

Beautiful.  In two sentences, you have summarized the past 5 years.  I'd go further and note that it not only obscures the equation but reverses it: when consumption > production and currency is expanded to fill the difference, wealth is destroyed exponentially faster than the already significant difference between consumption and production.

Tue, 03/04/2014 - 19:17 | 4509543 Jugdish
Jugdish's picture

Keynesian = Kenyan. What's the difference?

Tue, 03/04/2014 - 19:19 | 4509547 NOTaREALmerican
NOTaREALmerican's picture

To those leaching off the best Keynesian scam ever - Big-MIC - not much.

Tue, 03/04/2014 - 19:23 | 4509554 zionhead101
zionhead101's picture

Von Mises would roll in his grave if he saw this BILE in his good name.

 

Only a retard would not see today that ALL western Economic thought is intellectual masturbation. Sure ZH needs posts to generate comments and get clicks and nickels.

But certainly someone at Von-Mises could write about libertarianism, or maybe 'freedom' in our times, instead its KEYNES bashing, .. for what?

The end of history has arrived its FIAT to the moon, for the US-MIL, for the NSA, for the Corporations, and even for the FSA.

Get over it, its the American Way, those that are running the FIAT to the moon will pass some of the loot to the Proles. The Oligarch's can't have it all.

Me think that "VON MISES INSTIT" is like some fucking KOCH endowment group trying to maximize their FREE-FIAT.

Tue, 03/04/2014 - 19:24 | 4509555 nmewn
nmewn's picture

And O'Bozo proposed a, wait for it...FOUR TRILLION DOLLAR BUDGET today, containing a Son-of-Stimulus SIX HUNDRED BILLION for "infrastructure".

Cuz, ya know, the last 800 BILLION "shovel ready" monstrosity for building spontaneously combustible cars that catch your garage on fire, solar ovens to vaporize eagles and generally just paying off you political cronies from the public treasury...just wasn't good enough.

Oh...and Michelle ain't quite done globe trotting on our dime & throwing up CO2 into the atmosphere on Air Force Two, gotta go to Asia, spring break with the kiddies, dontcha know.

Tue, 03/04/2014 - 23:56 | 4510443 Johnny Cocknballs
Johnny Cocknballs's picture

There's yet work for the American war machine, my good fellow.  The idea is merely to prop it up until Russia is neutralized, China contained, and the ME broken up at the feet of Israeli regional hegemony.

And the Global Private Banking Empire runs out of large targets.  Be very afraid when there are no more lands to conquer, and the banks must turn on the people more directly....

...

Clearly, these kind of deficits are not only unsustainable but reckless, a theft of future labor, sidelined into the pockets of the 0.01% now.

But how do you make people see this

who refuse to see this?

Wed, 03/05/2014 - 12:07 | 4511954 detached.amusement
detached.amusement's picture

obligatory downvote for useless and TPTB enhancing CO2 reference

Tue, 03/04/2014 - 19:24 | 4509556 NOTaREALmerican
NOTaREALmerican's picture

Re:  Austrians arrive at their position through logic, but logic that is based in what we already know about human action.

Funny tho, how Austrians are as confused about humanity as Marx was. 

Tue, 03/04/2014 - 23:52 | 4510434 Johnny Cocknballs
Johnny Cocknballs's picture

Funny tho, how Austrians are as confused about humanity as Marx was.

I'll bite. What are you talking about?

Tue, 03/04/2014 - 20:38 | 4509561 nakki
nakki's picture

After NAFTA and China being signed into the WTO 4 days after 9-11 we where destined to hear that "slow sucking sound". H Ross was soo very right. Housing was the only thing that saved (temporarily) the US during Bush's tenure. The only thing that saved us in 08-09 was completely changing the rules pertaining to accounting and mark to market. That and printing fiat out of thin air. How long it lasts is anyone's guess. Who ever said "there is no such thing as a free lunch" obviously wasn't talking about Bankers or politicians.

Tue, 03/04/2014 - 19:27 | 4509565 JebusKhrist
JebusKhrist's picture

It's an uphill battle when you have tax-funded state schools pushing the idea that the purpose of government is to redistribute wealth at all cost including the destruction of wealth.

Tue, 03/04/2014 - 19:30 | 4509577 NOTaREALmerican
NOTaREALmerican's picture

It's an uphill battle when you have half the population living off of:  Big-Ag, Big-MIC, Big-Road, Big-Water, Big-Airport, Big-Energy, Big-Ed, Big-House, Big-Fin, Big-OldFart, Big-OldFartHealthcare, Big-AntiDrug, & Big-PoliceState – and (now) Big-Space.

Everybody loves the socialist scam they are living off of.

Tue, 03/04/2014 - 19:28 | 4509566 DOGGONE
DOGGONE's picture

Hey Tyler,
These are massive deceptions by omission
http://patrick.net/forum/?p=1230886
Please show them!!!

Tue, 03/04/2014 - 19:29 | 4509567 medium giraffe
medium giraffe's picture

Wow.  Can hear the breathless Austrians winding up to the mother of all 'I-told-you-so's.  Well great, but we're still fucked.

Tue, 03/04/2014 - 19:37 | 4509612 Australian Economist
Australian Economist's picture

I was reading through the comments section of the NYT editorial and came across this:

And what exactly would the alternative have been to the stimulus ?

Do little or nothing, like Herbert Hoover did ?

Hoover's Treasury Secretary Andrew Mellon advised President Herbert Hoover to "liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate... it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."

Mellon advocated spending cuts to keep the federal budget balanced and opposed fiscal stimulus measures.

The end result was a thoroughly wrecked economy, massive job losses, epic homelessness, and a nation of soup and breadlines.

 

The problem was Hoover didn't take any of Mellon's advice, here is a quote from a speach he made to the American Bankers' Association:

 

We have all been much engaged with measures of relief from the effect of the collapse of a year ago. At that time I determined that it was my duty, even without precedent, to call upon the business of the country for coordinated and constructive action to resist the forces of disintegration. The business community, the bankers, labor, and the Government have cooperated in wider spread measures of mitigation than have ever been attempted before. Our bankers and the Reserve System have carried the country through the credit storm without impairment. Our leading business concerns have sustained wages, have distributed employment, have expedited heavy construction. The Government has expanded public works, assisted in credit to agriculture, and has restricted immigration. These measures have maintained a higher degree of consumption than would have otherwise been the case. They have thus prevented a large measure of unemployment. They have provided much new employment.

 

Why is Hoover in modern times portrayed as laissez-faire when he is anything but? He did the exact opposite of what Austrain Economics say should be done in a recession (i.e. Keynesian Stimulus).


Tue, 03/04/2014 - 20:26 | 4509833 NOTaREALmerican
NOTaREALmerican's picture

Re:  Why is Hoover in modern times portrayed as laissez-faire when he is anything but?

Because the "Hoover Institute" loves laissez-faire economics.   Guilt by association.

The "Conservatives" are as brain-dead as the "Progressives". 

Everybody want socialism for their own "bad luck". 

Tue, 03/04/2014 - 22:51 | 4510281 elwind45
elwind45's picture

Without socialism how you going to get 51% to go along with anything remotely democratic

Tue, 03/04/2014 - 19:42 | 4509639 disabledvet
disabledvet's picture

Where's "Gosplan hero" to chime in on all this?
http://en.wikipedia.org/wiki/Command_%26_Conquer:_Red_Alert_series

Tue, 03/04/2014 - 20:09 | 4509771 medium giraffe
medium giraffe's picture

Red Alert. +1 & internet high five.  Tank rush!

Tue, 03/04/2014 - 19:49 | 4509671 kchrisc
kchrisc's picture

Summary of Keynesian Economics: Steal more to keep the previous scam from unraveling.

I do think that that just about sums it up.

 

"Guillotines are 'stimulating' as well."

Tue, 03/04/2014 - 19:58 | 4509719 Encroaching Darkness
Encroaching Darkness's picture

And don't forget, cook the books (BLS, inflation numbers, unemployment numbers, virtually every government statistic) to keep (as long as possible) the low-information voters from figuring out that endless debt and endless waste / fraud / corruption is not a PLAN. Nor is it a SOLUTION.

It's amazing; people hit their thumb, it hurts, they stop / quit / try something else; government wastes TRILLIONS, asks for more, no one calls BULLSHIT on national TV and demands new leaders.

By that measure, Bernanke is a GENIUS. He's not already hanging from a lamppost on Wall St. with Dimon, Blankfein, Timmah, etc.

Tue, 03/04/2014 - 20:37 | 4509875 easypoint
easypoint's picture

None of it makes sense if one starts with the assumption that the government is actually trying to help the economy. Simply follow the money and as the lawyers say "Cui bono." 


Tue, 03/04/2014 - 20:10 | 4509753 notquantumdum
notquantumdum's picture

Politicians spend money to solve political problems, not economic ones.

In order to "stimulate" the economy with higher government spending, the government either has to increase tax collection, borrow more, or print more.  That might temporarilly stimulate things; but ultimately, the bill comes due.  In order to actually improve the economy with stimulus, wouldn't the government spending have to create more jobs than the private sector spending which is, in the long-term, reduced by the increased taxes, borrowing, or printing?

Does anyone really think that government spending is more efficient than private sector spending at creating jobs?

If so, I have a bridge for sale.

Tue, 03/04/2014 - 20:21 | 4509821 Shad_ow
Shad_ow's picture

Government spending is only to stimulate votes for the controlling party and enrich donors.  Nothing more than money laundering on a scale never seen before.

Tue, 03/04/2014 - 20:15 | 4509797 HisNameIsRP
HisNameIsRP's picture

Everyone get a shovel

Wed, 03/05/2014 - 12:10 | 4511971 detached.amusement
detached.amusement's picture

f that, everyone get a pitchfork and/or torch

 

may produce better results if pliers are included with that blowtorch

Tue, 03/04/2014 - 20:50 | 4509910 AdvancingTime
AdvancingTime's picture

We should understand that demand drives investment, confidence is not the real driver. Lack of real growth is about lack of real demand. Much of the demand we see today is driven by artificially low interest rates and a mirage in the markets they distort. By this I mean that the distortion and illusion that the economy is healthy tends to cause people to make poor economic choices. The article below looks into and questions the quality of growth!

http://brucewilds.blogspot.com/2014/01/false-demand-fuels-wrong-kind-of-...

Tue, 03/04/2014 - 22:39 | 4510247 elwind45
elwind45's picture

This distortion is an illusion that there is more capital available than demand when in fact it is opposite. Banks are allowed free access to almost interest free loans which they can use to speculate. However the account is not fully liquid and cost associated with borrowing forces it to take risk which forces premium increases upstream. Thus risk is artificially inflated and must be recognized as a cost of carry which further inflates its drag on investment returns. Cash entering the system must be corralled and kept on account at the Fed as the only true tier one capital. Items such as food and energy must remain outside CPI while a billion other prices are tracked. By excluding food and energy and measure everything else we create the illusion of growth when in reality its increasing income from selling the same hydrocarbon for more money. Only by vacating investments overseas and reinvesting that new resource back home can the Fed ever see true growth to panic rate policy?

Tue, 03/04/2014 - 22:10 | 4510135 elwind45
elwind45's picture

There was a stimulus two housing bailout bills and a 750 billion dollar tarp and then the 850b.dollar stimulus bill. All of it in trust against future earnings safely drawing interest I might add at the Fed. money produced from this transfer from the future was used to fund banking activities around the world. It sent gold to 2000 oil to 150 and converted jobs into pinkslips! Now it is used to drain liquity out of the system before its spent again? Money will come back here so fast everyone gets a MyRa but you cant have it until your 59 and 6 months and pay 25% to social security.

Wed, 03/05/2014 - 09:03 | 4511122 Dorelei
Dorelei's picture

Keynes teaching is  like Viagra. One day your  down and need a  boost to achieve your manly task.

Of course  after some hours the effect wears  off and your pockets empty.

But then 9 months later a kid might be born and take care over you in your old days !

So where is the problem ? Maybe  your so logical  brain  ???

And yes I take a dump on Friedman and Hayek graves any time I'm passing by ...

Wed, 03/05/2014 - 09:31 | 4511186 kurt
kurt's picture

I pray for a SHORT mises article.

Wed, 03/05/2014 - 10:02 | 4511268 Schmedley McGil...
Schmedley McGillicuddy's picture

Excellent analogies and logic applied.

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