Keynes's Wrong-Turn Hypothesis
|
Posted: 01/08/09
|
|
Keynes's Wrong-Turn Hypothesis
By Thomas E. Brewton
As Keynes observed, people often unknowingly are the prisoners of
erroneous doctrine propounded by long dead theoreticians, in this
case doctrine of Keynes himself.
I have noted before that Wall Street Journal news reporters often
display pervasive, sometimes subtle, liberal-progressive-socialist
biases. Unlike the Journal's editorial board writers, among other
things, they still parrot the nonsense popularized by economist John
Maynard Keynes during the 1930s Depression.
Since Keynesian economics is the reigning school of thought in
socialistic academia, it's no surprise that Keynesian nostrums are
repeated, without evaluation, by today's reporters.
One example is in the Journal article titled The Doomsayers Who Got
It Right.
http://online.wsj.com/article/SB123086035502948067.html
The Journal reporter writes:
"Those who saw the crisis coming, on the other hand, fret that U.S.
government spending on bailouts and stimulus plans that preserve
failed business models could increase the likelihood of a worse
calamity later.
"They foresee a long season in which consumers cut their spending,
and instead sharply increase the savings rate. That would be healthy
for savings-anemic U.S. households, which have spent beyond their
means for years, but deeply problematic for a country where consumers
drive 70% of all economic activity."
The matter of concern is the statement that increased personal
savings would be "deeply problematic for a country where consumers
drive 70% of all economic activity."
Keynes asserted that the root cause of our Depression was excess
savings. His thesis was that savings take money out of circulation,
thereby reducing consumption and putting ever greater downward
pressure on business activity and job creation. The appropriate
remedy, in Keynesian doctrine, is endlessly expanded government
deficit spending.
This same thesis, needless to say, is widely advocated by Democrat/
Socialist and liberal Republican politicians, by Wall Street
operatives, and by liberal-progressive-socialist economists. News
reporters and commentators, in the main, go along for the ride.
So, what is wrong with the Journal reporter's statement?
First, is assumes that money placed by individuals in savings
accounts will no longer be available in the flow of economic
activity, that it will, in effect, be buried in the back yard or
under a mattress.
What really happens is that savings, through one channel or another,
end up as increased deposit balances on lenders' balance sheets.
Several beneficial effects arise from this.
One is that banks and other financial intermediaries have increased
and more stable lendable funds. Consumers with higher savings are
more creditworthy and will find it easier to obtain bank loans. Ask
yourself why former investment bank titans Goldman Sachs and Morgan
Stanley opted to become commercial bank holding companies and compete
to get stable bank deposits.
Government stimulus programs, in contrast, produce temporary and
therefore unreliable bursts of increased bank deposits, leaving
lenders wary of significant increases in lending activity.
Another benefit is that, with balance sheets strengthened by stable
savings deposits, financial institutions are less dependent upon
Federal largesse and less likely to become ensnared in European-style
regulatory management of lending and investment policy. Innovative
new businesses and existing small businesses, which create
disproportionately more new jobs, will gain additional financial
support.
In contrast, as the price of bailout funds government is nudging
banks into lending to keep Detroit's Big Three automakers and the UAW
union afloat, and to compel higher investments in the least
profitable of auto products: hybrid or battery-driven "green" cars.
The second major problem with the erroneous Keynesian doctrine
expressed in the Journal news story is that consumption does not in
fact drive the economy. The wages and profits, from which come
consumer spending and saving, cannot exist without the long chain of
business expenditures for investment in new equipment, new process,
and for payments to materials suppliers and workers.
Consumption expenditures are just one of the by-products of business
expenditures. Business expenditures are the real drivers of the
economy.
Business expenditures for new investment and for production of basic,
intermediate, and consumer goods are as large as, generally larger
than, consumer expenditures.
The exception is a period like our recent one, in which government
deficit spending leads to excessive fiat money creation by the Fed.
That impels an unsupportable increase in borrowing, as the value of
the dollar declines. Consumer borrowing in this circumstance, as we
have witnessed over the last 15 to 20 years, leads to negative
savings. Consumer spending was increasingly floated on credit-card
and home-equity-loan borrowing. Spending more than we produce does
not make a healthy economy. It just booms imports.
Government stimulus programs may be welcomed by businesses and
consumers in the vain hope that they will provide relief from a
recession. But we know from unvarying experience, beginning here
with the Roosevelt New Deal, that government stimulus spending never
ends a recession. In fact such spending tends to prolong and to
worsen a recession.
One reason for the failure of stimulus programs is that consumers,
already fearful of losing jobs, tend to use stimulus payments to
reduce debt and to increase savings. Very little of it goes to added
consumption goods spending. President Bush's stimulus program early
in 2008 was a flop. President-elect Obama's will end the same way.
Another and more fundamental reason is that business does not like
uncertainty. When the Federal government begins tinkering with the
economy, as it did in the Depression and as it is doing now, it
creates new layers of bureaucracy to administer new and more
restrictive business regulation. Government typically increases
business taxes at the same time, while mandating costly new business
methods (think of the looming presence of president-elect Obama's
Carol Browner and other other Al Gore environmentalists).
In such times of high costs, low profits, and prospective government
experimentation and regimentation, prudent businessmen hesitate to
increase production or to make new production investments. And
without production increases there will be no increased payments to
suppliers and workers and therefore no wage increases or added jobs.
Government stimulus spending financed with more debt adds to
inflationary pressures. This is what occurred in the 1970s
stagflation. During a high inflation period, which almost certainly
will hit us within the next couple of years, people's nominal incomes
increase, but their costs of living rise even faster. Worse, as
their nominal income rises, they are pushed up into higher tax brackets.
The final injury of the fiction that consumer spending drives the
economy is that the government pays for its ineffective, indeed
counterproductive, stimulus programs by stealing consumers' lifetime
savings. By the mid-1980s, when the 1970s stagflation was finally
halted by Paul Volcker, the real purchasing power of consumers'
lifetime savings was less than half what it had been before President
Johnson's Great Society welfare-state entitlements set in motion our
destructive 1970s inflation.
Thomas E. Brewton is a staff writer for the New Media Alliance, Inc.
The New Media Alliance is a non-profit (501c3) national coalition of
writers, journalists and grass-roots media outlets.
Click Here to Read and Post Feedback
Send this page to a friend
Distributed by www.ChristianWorldviewNetwork.com
Disclaimer: Worldview Weekend, Christian Worldview Network and its columnists do not necessarily endorse or agree with every opinion expressed in every article posted on this site. We do however, encourage a healthy and friendly debate on the issues of our day. Whether you agree or disagree, we encourage you to post your feedback by using the feedback button.
455 Views
Printer Friendly Version |
Return to home
|
|
|
