Wednesday, January 29, 2014

The Unspoken Efficiency Loss of Keynesianism

As I age I find Keynesianism, and by extension, the entire field of economics, a progressively childish, idiotic, and naive discipline.  It's not difficult. It's not hard.  And only academics and ulteriorly-motivated bankers would try to make the field more complicated than it is to either bloat their egos or just outright steal money.  And so, much like I tire of criticizing childish ideologies like socialism, global warming, or religion, I also get tired of arguing the merits or drawbacks of different economic theories because, frankly, nobody really cares about economics as much as they care about defending their fiefdom from reality or truth.

But if there is one criticism I've yet to make of Keynesian economic philosophy idiocy, it's the efficiency loss.

"Efficiency loss?" you might ask.

Yes, efficiency loss.

The whole underpinning argument of Keynesianism is that the government needs to intervene when "aggregate demand" is not meeting aggregate supply.  And while Keynes advocated things that worked on the stimulus side (tax cuts), he also advocated boosting government spending with a magical "multiplier" effect.  Take money from one person (ie - rich), give it to another person (ie - poor), and that poor person will spend that money which will boost aggregate demand, as well as set forth a chain reaction of demand-fueled spending with that multiplier effect all Keynesians swoon over. 

The common response to this fallacy is that merely taking money from one individual and giving it to another does not increase aggregate demand.  You stole money from one person who now has to spend less, which would negate any demand increase caused by this wealth transfer.  Keynesians would argue that "well if we borrowed it, instead of taxed people, then everybody would spend more and this wouldn't happen!"  Wrong again, because in borrowing that money, that is less money that can be lent out and invested, once again having no effect on overall demand.

But there is an often overlooked drawback to Keynesianism, specifically giving people money in the form of welfare, wealth transfers, etc., that nobody addresses.  And that is the fact when you give somebody money for free, that is lost labor or production that should have happened.

For example for people like you and me and other real adults, if we want to get money we need to produce something of value to get it.  This could be fixing cars, producing cell phones, or doing somebody's taxes.  Whatever it is, it increases economic production, genuinely increases our standards of living, and results in a richer society.  But with Keynesianism, especially of the Obama socialist variety, millions of people get trillions of dollars in exchange for absolutely jack.  This "efficiency loss" is the true weakness or criticism of Keynesianism because you basically blew $1 trillion for nothing in exchange.  This "cycle" or "rotation" of spending WITHOUT A COMMENSURATE LEVEL OF PRODUCTION OF GOODS AND SERVICES not only results in no economic growth, but dilutes the purchasing power of the currency.

Don't believe me? 

OK, consider this.

Let's say everybody who collects a government check could not do so without first working on some kind of public works project at a pro-rated rate of the median wage to earn that check.  Working on the highways, fixing street lights, cleaning up the road, etc.  Do you have any idea how impeccably clean and mint our highway system would be?  Or instead said welfare recipients were required to work at the local GM plant (it's government motors after all) doing whatever odd and non-specialized chores the mechanics and assemblers didn't want to do.  Could you imagine how cheap GM cars would be?

The point is whether it was a public work or some kind of private company, society would benefit from requiring recipients of government checks to produce at least SOMETHING of value in exchange for the money.  Today we literally piss away about $2 trillion a year and get nothing in exchange.  Were there no such thing as welfare, production would be on the other side of that money, resulting in genuine economic growth, genuine economic production, and genuine prosperity.

Of course, I'm being foolish and naive criticizing this aspect of Keynesianism from an intellectually honest and economic standpoint.  I know it is nothing more than bribing the parasitic classes to vote for the socialists.  I know about half the population couldn't give two shits less about the future of the economy or the country.  And I know that about half the population has no moral qualms about being the parasites they are.

I'm just making the economic argument against this aspect of Keynesian economics in the vain hopes the Keynesians would have a cup of STFU, and to show just how stupid Nancy Pelosi and Barack Obama are when they say government checks are the best thing for the economy.


Kristophr said...

At least in Australia, they require people on the dole to sweep sidewalks, clean roadways, scrub off graffiti, and other useful projects.

The streets in Melbourne are dead clean, if nothing else.

racketmensch said...

I may be saying the same thing in a slightly different way, but when you "artificially" increase demand for a limited good you simultaneously raise prices. So the taxpaying schmuck gets it coming and going, and such things like EBT cards free up the recipients' cash for items that aren't covered like booze, cigarettes and contraband. The schmucks aren't just getting screwed; we're being made "air-tight"!

Maximo Macaroni said...

The other effect of welfare is to devalue work and destroy price signals. If some loser is getting $200 a week ($5 an hour) to do nothing, then the striver making $10 an hour ($400 a week) is really only netting $5. That's why the minimum wage is such a disaster. It gives workman A, whose labor is worth less than minimum wage, what is in effect a welfare payment. And it screws up everyone else's price signals. How could Macdonald's price its hamburgers properly if everyone could get hamburgers at a set price from the government?

gatmando said...

One more efficiency loss: how much must be spent to support this wealth transfer management? The bureaucracy is enormous and only getting larger.

finndistan said...

Reminds me of the idiot i have on my facebook who wrote a one page essay on how ownership should end, and everybody should have equal money and nobody needs cars when there is public transport, and that is why socialism and communism needs to be instated. Etc etc...

One thing they do not understand is incentive. why would a man have the drive to study 20 years to become a brain surgeon, when he could just lay about and become a life guard at the beach for the same income?

It's idiocy to the deepest craphole.

One day I mentioned on a coffee table that socialism will not work because women are not all of the same beauty and men will in the end try to get more resources in order to have access the better looking women.

I was called an idiot.

Compared to these idiots, I am a fucking genius.

Seriously, who is going to decide who is going to fuck who?

If good looking women require resources, but everybody is equal...

fuck it.. if what these humanity loving thinkers get what they want, we will be living in dirt huts, latest after the current generations are dead.

Eric B said...

Also, since the productive must be taxed more to pay for all this stuff, at some point the productive say its not worth working any more to have 60% of my earnings taken from me. I'll sit back and enjoy my life instead.

JC said...

Let's not forget administrative costs of shuffling this cash. The sainted WFB called it the program whereby it costs a dollar to fllip a bum a quarter.

Thorfinnsson said...

This post is a good argument against redistribution. It is not a good argument against Keynesian economics. In fact it isn't an argument against Keynesianism at all.

John Maynard Keynes did not advocate redistribution. Keynes advocated expansionary fiscal and monetary policy as a possible policy response in times of persistently high unemployment, low private investment, and idle industrial capacity.

I am on the right, economically and socially, but I find attacks against Keynes exasperating. It's worth considering the environment in which Keynes evolved these views.

After WWI, Britain attempted to restore the pound sterling to its prewar gold valuation, despite the radical change to the British money supply and Britain's net international investment position during the war. The result was chronically high unemployment, declining wages, and low private investment. Incidentally, the FED colluded with the Bank of England after 1925 to prevent British deflation by holding down interest rates in America, producing a wild stock market boom (and we know how that ended!). Keynes suggested that putting idle men to work producing something useful was surely better than letting them be idle on the dole.

His views fully developed during the Depression. Let's bear in mind what the situation was like when the Depression had fully developed. In 1933, half of America's industrial plant and equipment was idle. Unemployment, which then was calculated honestly, was at 33%. Private had fallen off a cliff, as had state and municipal investment in infrastructure. Was it really so unreasonable for Keynes to suggest stimulating economic demand with expansionary fiscal and monetary stimulus in such a situation?

It's worth noting that Britain recovered faster during the Depression than America by abandoning prewar, orthodox economics. In 1931 the Chancellor of the Exchequer, Neville Chamberlain, abandoned free trade and imposed an Imperial Preference duty. The Pound was taken off gold and devalued. British industrial output rose sharply, and firms began hiring and investing. This was accomplished without fiscal stimulus--Chamberlain in fact cut government salaries (including in the armed forces) by 10%.

Stimulus in such an environment is not taking from one man and giving to another. The funds are borrowed (either through capital markets or inflationary monetary policy), not taken via tax revenue. In an environment where business isn't investing, this doesn't crowd out private investment either.

The real problem is that politicians and bankers use Keynes as an excuse to pursue reckless fiscal and monetary policies forever. Keynes himself was against this, advocating that national budgets be balanced over an economic cycle by accruing surpluses in good years.