Wednesday, April 25, 2012

Keynes a Symptom, not a Cause

The current wails about "austerity" signal the real problem with the big-government welfare state.  The Wall Street Journal properly points out that the Keynesian notion of austerity vs. growth is what Candidate Obama used to call a "false choice."
Spend more and you're for growth, even if a country raises taxes to pay for the spending. But dare to cut spending as the Germans suggest, and you're for austerity and thus opposed to growth.

This is a nonsense debate that misconstrues the real sources of economic prosperity and helps explain Europe's current mess. The real debate ought to be over which policies best produce growth.
And government spending doesn't increase prosperity.  How could it?  Government spending forces one set of people to pay for the goodies of another set.  What good could possibly come from that?

The bigger issue is the unsustainability of the welfare state model.  It is analogous to a homeowner up to his ears in debt.

When you ring up a lot of debt you are anticipating your future income.  You are assuming that you will have income in the future to service your debt.  But what if things go wrong?  What if you don't get the promotion, or your workplace closes?  Then you are in a world of hurt and if millions of people have overborrowed like you then it will endanger the health of the whole economy.  As Bagehot pointed out in the 19th century, the economy depends on "sound" people managing their money with prudence.

The welfare state is the same.  It sets up a high level of government spending assuming that the good times will always roll.  People sign up for the government programs and the free stuff and reduce their work effort to match.  When there's a recession the government revenues fall off and the programs that looked affordable in the good times cause the national debt to soar.  And of course the last people on earth to think that maybe government spending should be cut are the beneficiaries of all the free stuff.  That is called "balancing the budget on the backs of the poor."

Even if we say that welfare state spending is, overall, a good thing there is still the question of how much of a good thing the nation can afford.  A century of the welfare state shows it is almost impossible to adjust the size of the welfare state until there's a crisis.  The only time that government tightens its belt is when there's a looming sovereign debt crisis or galloping inflation.  This is surely not the best way to run a railroad.

In fact, of course, the social needs that government dominates--pensions, health care, education, and welfare--are not necessarily activities that must be performed by government.  They are social needs, for sure, but the clumsy force-centered model of government is surely not the way to meet such needs, which are not best met with one-size-fits-all government.

In fact the opposite is true.  The relief of the poor should not be a responsibility shuffled off on the government.  It should be the responsibility of each of us, as individuals and as groups joined into social service organizations.  Education is the same.  We are all called to raise up and educate our children, and to be there to help with our neighbor's children, and it is monstrous to shuffle it off on government functionaries who, like government workers since the dawn of time, think only of their emoluments and pensions.

Moreover, these social tasks are particularly the interest of women.  You can tell that just by listening to the conversation of women.  Yet our society encourages women in "careers," which were originally a brilliant notion to cure men of soldiering and divert their attention to fighting for dominance in organizations for the production of products and services rather than organizations for the securing of loot and plunder.  This is what we want for women?  Did anyone ask women what they wanted for themselves?

Keynesianism is not an economic system, it is a tactic for getting government out of a jam.  In the modern economy the government's demands upon the economic system have a depressive effect.  That's because it is all waste.  But this depressive effect becomes really serious in an economic downturn.  The Keynesian tactic solves this by continuing the government programs at their pre-recessionary levels, borrowing the money that's needed to continue its handouts, and inflating the currency to create an artificial stimulus.  Usually it works, at the cost of a 20-30 percent decline in the value of money.  But in a big downturn, like the aftermath of the 2008 credit crisis, some nations will be in danger of sovereign debt default before the economy recovers.

The solution is to radically reduce the size of government.  That will have two benefits.

First, it will reduce the weight of government spending and debt on the economy and enable government to respond with huge expenditures if there ever is a real catastrophe needing government help: think major earthquake or war.

Second, it will reduce the amount of freeloading and put the freeloaders to work helping their fellow citizens by producing products and services and by neighborly volunteer effort working to solve social problems.  This will benefit the freeloaders, and help them live happier, more productive lives, and also deliver more prosperity to society as a whole.

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