Old Keynesian Dogs, Old Fiscal Tricks

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As a dog returneth to his vomit, so a fool returneth to his folly (Proverbs 26:11).


We are about to be thrown back into the tender mercies of Keynesian economists. In the current setting, this will push the economy lower rather than higher.

The main Keynesian solutions to a faltering economy are federal budget deficits and monetary inflation. This two-part program assumes unemployment at 25% and annual deflation at 10%: the Great Depression in America.

Problem: it's not 1936 any more.

Two recent articles reminded me that the intelligentsia of the United States is like Louis XVIII, the king of France in the post-Napoleonic restoration: he had forgotten nothing and had learned nothing.
What the intelligentsia learned from the popularizers of Keynesian economics after 1936 they have not forgotten. They have learned nothing new.

KEYNESIAN ECONOMICS

The heart of John Maynard Keynes' analysis in 1936 was the idea of a permanent free market equilibrium with high unemployment. For some reason, which he never explained coherently, sellers refuse to lower their prices when faced with buyers who refuse to buy at yesterday's pre-Depression prices. This is especially true of workers who refuse to cut their wage demands.

Keynesianism is based on two fundamental ideas: (1) sellers do not learn that something is better than nothing, and therefore will not lower their selling prices; (2) economists do not learn that government spending that is financed by debt is accomplished in one of only two ways: (a) money lent by savers, which could have been lent to businesses or consumers; (b) money lent by a central bank, which lowers the purchasing power of the currency unit. This is a philosophy of something for nothing.

We are told by economists that there are no free lunches. But, except for Austrian economists, all economists really do believe in something for nothing. They debate with each other about which "something" can be obtained for nothing – "nothing" always being a piece of legislation.

Non-Austrian economists believe that a gun, when held by a salaried government official and pointed at a citizen to extract his wealth, can sometimes produce economic growth, whereas a gun held by a thief and pointed at a citizen to extract his wealth always produces economic loss. The first produces something for nothing, whereas the second produces nothing for something. What is the difference? This: the person holding the gun.

KEYNES AND THE NEW DEAL

Early in Franklin Roosevelt's first term, Keynes met with Roosevelt. We know the date: May 28, 1934. Roosevelt's Secretary of Labor, Frances Perkins, noted in her published recollections that Keynes came out of the meeting and commented on the President's lack of economic literacy. Later, when speaking with Roosevelt, she noted that he said he thought Keynes must be a mathematician, rather than a political economist.

Both men had the other pegged exactly. Roosevelt knew no economics, and Keynes had earned a bachelor's degree in math. He had no degree in economics. He got his job at Cambridge University in 1909 because his father, a Cambridge economist, put up half the money to hire his son.

Because the meeting was in 1934, and because Keynes had not yet come up with Keynesianism – he was still working on it – I do not think the meeting was important for the future of the American economy. Keynes justified in theory in 1936 what every Western government had been doing for several years: printing money, raising taxes, running deficits, and regulating the economy.

The New Deal did not end the Great Depression in the United States. World War II did. The war allowed governments to increase deficit spending, inflate tremendously, impose price controls, draft young men and put them to work killing each other (which reduced the labor pool), and hire women to work in munitions factories at below-market wages, using patriotism to persuade them to enter the labor force. Patriotism was used as a way to persuade men and women to work at what would have been below-market wages in 1938. Then inflation and rationing reduced real wages even more.

Economics teaches this: "When the price falls, more is demanded." This is true of the price of labor. Keynes knew this in 1936, and wrote specifically that the reduced real wage rates produced by monetary inflation would fool workers into going back to work. But it took worldwide deception – wartime wages – to achieve this on a scale sufficient to end unemployment.

None of this is taught in any textbook – not in economics, not in history. To teach it would alert students to the economics of war, which centralizes the power of the State. This is the thesis of economist Robert Higgs in Crisis and Leviathan. This book's thesis and data never get into college textbooks.
With this as background, let me summarize the first of two documents.

Continued