Why Keynesians are Wrong

This is taken from a debate between myself and a friend.  Facebook isn't conducive to long winded responses, so I posted it here. 

You’d be surprised to learn that your last post contained many elements that show you do understand some things in the correct light, but I believe a loyalty and comfort found in the rhetoric of your side is preventing you from seeing your own points through to their logical conclusion.  There’s also some error in the way you are assigning cause and effect relationships to things that are in reality unrelated to each other.  Let’s dive in!

First, I’d like to retouch the primary point I was trying to make in my last note to you that was addressed incorrectly by your response.  I’ll repeat.  Keynesian economics, the belief that government spending is more effective at stimulating an economy than the private sector, is flawed for multiple reasons.  You have to understand that the government has no money that it hasn’t first taxed out of the economy.  That’s reality, that’s common sense.

What’s worse is that it’s the government that then decides what to do with that money rather than the people who gave up a portion of their lives in order to earn it.  Time is money.  If you take my money, it’s the equivalent of stealing my time.  I have worked for you instead of for myself, and have essentially become your slave.

Let’s take a husband and a wife.  If I take $50 dollars out of the husband’s pocket and use it to buy the wife a toaster oven, are they any better off than they were previously? Of course not!  Now, perhaps if they needed a toaster oven we could say at least they haven’t been harmed.  Problem is, perhaps there were other things they needed more.  I have denied them the ability to do what is best for themselves by forcing them into what it is I thought they needed.  Oh, and by the way, since I got hungry I used $10 dollars to buy my lunch first and the toaster I gave them is only worth $40.  That’s the government mentality.  Take your money, waste a sizable percentage of it, then give you the leftovers back in terms of services that you may or may not need, use, or desire.   Multiply this out by billions of dollars and it starts to make less and less sense.  

Our economy can thrive when the people themselves, through billions of voluntary transactions, decide what is desirous and what is not.  Placing that power in the hands of a few bureaucrats who run a government agency is not only bad policy, but the height of arrogance.  If we are all supposedly too stupid to take care of ourselves, how then can any one of us be responsible for everyone else?!  Our new treasury secretary couldn’t even figure out his own taxes!

The only other way, besides taxing, that government can have money to spend is simply to arbitrarily print it.  This, of course, causes inflation, a hidden tax.  Now, you’d have liberal economics “experts” try to use the Phillips Curve to justify Keynesian thinking and show that a little bit of inflation is worth the government spending if unemployment is lowered as a result.  Once again, however, reality has shown otherwise.  The stagflation of the 1970’s wasn’t supposed to be possible.  Inflation and unemployment going up simultaneously?  Unthinkable!  It did of course happen.  Nobel prize winner Robert Lucas presented an amazing breakdown of the Phillips Curve which, along with work by Milton Friedman and Edmond Phelps, pretty much killed Keynesian thinking for awhile and made room for the tax cutting and resultant growth of the 1980’s.
Anyway, now back to some of your specific points….

While we disagree on the current scope of the economic situation, I will agree that circumstances this time are different than in the past.  While I don’t believe we are there yet, I think that if we continue down the path we are on, a true depression will be a possibility.  The pork ridden spending bill that Obama has been hysterically frightening people to support, and finally won enough from Congress to pass, (though they admit to not even having read the thing and no time was given for public research into it…so much for the much talked about transparency!) is a simple continuance and exaggeration of the very problem you rightfully point out in your paper…the overspending and borrowing of the last several administrations!

Over spending got us into this situation and by God it will get us out!??? It’s like a gambler who loses $10,000 in Las Vegas and his solution to fix the situation is to gamble another $20,000!

I am also excited to see that you realize this is a global situation.  I hope that you put two and two together to understand that closing off trade to the rest of the world right now would be disastrous.  You might want to share that with your fellow democrats who lead the charge in Congress for protectionist trade policies at the behest of their union constituents.

Now, on to bailouts!

GW Bush was an idiot and he set the stage for one of the worst policy decisions I have experienced in my lifetime.  These bailouts of companies declared “too big to fail” are beyond bad policy.  Companies need to be allowed to fail!  That’s what keeps the market system honest and effective.  Should we have bailed out the 8 track tape companies?  How about the horse and buggy manufacturers?  Of course not.  When technology changes, market desires change, etc, it naturally creates an ebb and flow.  A free market system encourages the development of new products and ideas while simultaneously weaning out those products and ideas that are no longer desirable or viable.  It also teaches best practices in terms of management for companies within the same industry.  The poorly run companies should fail and be replaced by others who would learn the lessons of the failed company.  If they don’t, then they fail as well.  This is good! 

The government subsidizing an industry whose time has come or whose management is poor only serves to reward bad behavior and makes the next generation less likely to materialize.  It stunts growth by rewarding mediocrity.  How would a new company compete when the seemingly unlimited resources of the government are backing the competition?  Why bother even try to compete?  Everyone can simply enjoy the consistent mediocrity rather than take a risk to better themselves.  When government makes risk taking less desirable and punishes productivity, everyone loses. 

I see you rightfully criticize what the banks have done with the money…so far as they have let us know.  There is such a lack of transparency here it’s insulting.  We have a right to know the use of every penny of our tax dollars.  This is, however, an example not of evil corporations, but rather of how government “charity” often goes wrong.  I think you’ve made my point here.  The road to Hell is paved with good intentions.

To also further clarify a point regarding the banking industry, I hope you realize that it was actually government policy that led to much of the recent breakdown…especially in the housing sector.  When the government started mandating that banks make loans based not on ability to pay, but rather demographic and social makeup, that was bad enough.  To top it off, guaranteeing those loans through Fannie and Freddie set the stage for what we ended up with.  It was like sending someone to Las Vegas and saying that they could keep any winnings they won, but any losses would be covered by the government.  Of course many bad decisions where made, but essentially it was at the behest of the government meddling where it should not have been.  Government encouraged greed, and people took advantage.  Both were wrong.

I’ll take strong exception to one statement you make: Democrats and liberals don’t believe in getting everyone up on their feet, at least not the liberal elitists that control much of that party.  I think you, as an individual, may have that desire (and rightfully so!), but the party itself certainly doesn’t as is made evident in its policy making.  They believe in punishing success and tearing down those in one economic spectrum for the supposed benefit of those at the other end. Truth is, you can’t help one person by hurting another.  

It is Conservative policy (notice I don’t say GOP policy) that actually believes that all people are capable of making something out of themselves.  What you can’t do is punish productivity and discourage people from risk taking.  That is what government policy does.  It encourages laziness and ineptitude by crushing the human desire for self-betterment.  Government makes success harder.  As a business owner, I know that first hand.  And I’ll be honest with you with a specific example.  I am barely holding things together right now as it is.  If my taxes go up even slightly under the Obama administration, the first place I am going to cut expenses is by letting go my part time employee.  Liberal tax policy never takes into consideration the economic slowdown the policies create; they simply think “Yea more money to spend!”  Truth be told, most of the problems government feels obliged to try to “fix” have often been caused by other policies designed to “fix” something else.  It’s a never ending cycle.  The government is a roadblock to prosperity.     

I also hope you were joking when you suggest that “very, very, very, little makes it to the bottom” and started to compare the US to some third world country.   The poor in this country would live like kings in the rest of the world and have continually been improving themselves for decades in this country.  “The rich get richer and the poor get poorer” is just a flat out lie.  Truth is, in a growing economy, both rich and poor get richer.  It’s the numbers, I can’t help what reality is.
Furthermore, check out this article. http://www.opinionjournal.com/editorial/feature.html?id=110005242
It’s the first I grabbed out of a seemingly endless supply that say the same thing.  Here’s a brief snippet, “In other words poverty is relative, and in the U.S. a large 45.9% of the "poor" own their homes, 72.8% have a car and almost 77% have air conditioning, which remains a luxury in most of Western Europe. The average living space for poor American households is 1,200 square feet. In Europe, the average space for all households, not just the poor, is 1,000 square feet.”

I lived in Europe and can attest to the fact that what they consider middle class over there would almost be considered poverty in this country.  For heaven’s sake, a microwave was considered a luxury good!

On a philosophical level I want to ask you a question.  You seem to imply that all business is evil and greed.  You point to some of the examples that hit the news right now, but are you really serious about not trusting the private sector!?  First of all, your blanket statement would be like someone saying that all Muslims are terrorists.  It’s just not true, but all you hear about is the bad side and so it seeps into the cultural mindset.  Is there greed and corruption in the private sector?  YES!  And these are the very businesses that you want our government to save?  Wrong solution.  This is a test of our will to be a free market economy.  These companies have failed in many cases because of their greed and corruption.  Allowing them to fail is the message that needs to be sent.  It won’t be totally disastrous because others will quickly come to fill the void.  But here’s my question.  If you don’t trust the people in business to take care of this economy because of greed and corruption, are you suggesting that the government itself is made up of people who have a spotless record in terms of their own greed and corruption?  It seems you are trying to replace one demon with another.  At least Coke can’t mandate me to buy their product, or put me in jail if I refuse to buy one.  Government corruption, rewarding certain people through policy because they gave a lot of support to a powerful congressman, is a much deeper threat to the future of this country if you ask me.  Furthermore, government is the one entity that simply won’t “fail” as any business running by the same inefficient practices would.  Until you have fought the government bureaucracy, you just really have no idea what you’re messing with.       

Ok, I’m beyond long winded now.  I’ll sum by saying both the Republican and Democratic Parties are pushing this once great nation in the wrong direction.  We haven’t had Conservative philosophy in action for decades…and even then we only got half.  1980’s tax policy pushed up revenues by huge numbers, but spending continued at record paces.  And your tribute to Roosevelt is strongly misguided.  The government programs he started which are still in place, like the ponzi scheme of social security, aren’t helping anyone…they are responsible for the ridiculous entitlement spending we can no longer afford and are going to bankrupt a generation.  Obama talks about cutting entitlements, too bad his actions don’t match his rhetoric.  This bill we’re getting is only going to increase the growth of government into unsustainable levels and our collapse becomes all the more imminent.