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Monday, March 16, 2009

Are We All Keynesians Now?

A few hundred billion dollars here, a trillion or two there… after a point, one stops being able to keep up with all the bailout plans and stimulus packages. It all adds up. It must, although I have yet to see the media report an accurate running total. The numbers being thrown around are so high that they cease to have any real meaning. And because they no longer mean anything, not only do the media not bother to tally it all up, but they also don’t bother to tell us all how it will all be paid for.

There are some good reasons to be sceptical about the bleating for ever more stimulus. For one thing, without a good idea of what is driving the current downturn, it will do little good to throw money at it willy-nilly in the vain hope that the problem will just go away. What is the money to be spent on? Where will it do most good? There are varying answers to these questions. But until we can answer them, we are just throwing good money after bad. Secondly, if history is any guide here, by the time the money finds its way to where it is supposed to be directed, the cycle may have already run its course and things may already have begun to turn around (and let’s face it, much of the money will never reach a desirable destination anyway; it will end up as pork instead). During the Great Depression, things had already hit bottom before Roosevelt even came to power. In reality, it wasn’t the New Deal or the war that got the world out of the Depression, it was abandoning the gold standard.

Taxation without Generational Representation

I’ve heard it said that all of this money being thrown about likely represents the single largest intergenerational transfer of wealth in history. Wealth is being transferred from future generations to the present one. Talk about taxation without representation! It would possibly be justifiable if it could be demonstrated that the present spending binge will create enough economic growth so that future generations would reap the rewards of current investment in the economy, but who really believes this is the case? Think about the very magnitude of the debt’s principal. Got some kind of a rough picture in your head? (Well done! You’re a better person than I am.) Now think about the magnitude of the interest payments on that debt. Is it really realistic to think that any future growth we can finance through such borrowing will be able to finance that interest, let alone even touch the principal?

As we are constantly being told, thanks to the global recession/depression/crisis/meltdown [insert your hyperbole of choice here], “we’re all Keynesians now.” What does it mean to be a “Keynesian”? I ask this because it is another thing the media seems reluctant to explain. In the briefest of terms, Keynesianism refers to what is often alternatively called “counter-cyclical fiscal policy”. The idea is that governments are supposed to save up revenue during good times, and spend that extra revenue during bad times to stimulate the economy. Keynesian policy is supposed to shorten the peaks of the business cycle, in order to lessen the depth of the troughs. Governments may even have to borrow extra money to spend during bad times if that is called for. This is what is happening now; the US government is borrowing the necessary money, because they didn’t have enough extra lying around. As a matter of fact, with a brief exception during the 1990s, they have been borrowing money for quite some time now, in both good times and bad.

Until recently, Keynesianism had fallen into disrepute, and for some very good reasons. Assuming that the theory works in principle, and leaving aside the reasons for scepticism enunciated above, it works out very differently in practice. In their interesting but dry little book Democracy in Deficit: The Political Legacy of Lord Keynes (Indianapolis: Liberty Fund, 2000; 1st edition 1977), the economists James M. Buchanan and Richard E. Wagner demonstrate the dangers of Keynesianism when applied by democratic governments. It becomes a tool of the election cycle. If a government’s priorities do not stretch further than the next election, then there will always be the temptation to satisfy current political needs by deficit borrowing, leaving the resulting long run problems to be dealt with by future governments.

Of course, notoriously, Keynes concerned himself little with problems of the long run. As he famously quipped: “In the long run we are all dead.” To which some years later the economist F. A. Hayek less famously replied: “We are of course… already reaping the harvest of the work of the man [i.e. Keynes] who set this fashion, since we are already in that long run in which he knew we would be dead” (Hayek, A Tiger by the Tail. London: Institute of Economic Affairs, 1973, p. 109). Hayek had in mind his own time, the 1960s and 70s, an age of ballooning budget deficits, stagnant growth, and runaway inflation, the results of Keynesian policies applied without regard to the exigencies of the business cycle, by successive democratic governments with an eye to getting re-elected.

Chucking out the Rent-Seekers

Democratic governments must not only make the electorate happy – after all, this might not be such a bad thing, for at least then the money would be spent on the people. The real danger is that politicians need money to spend on the election cycle, and this they get in exchange for making promises to special interest groups. Such groups extract rents from governments in return for their financial support. By the term “rents” I mean things like subsidies, special rights or privileges, monopolies, trade concessions, etc. Rents, in this special sense, we may define as profits accruing to persons or organizations which are not otherwise available for purchase through the operation of a free and open market. Such rent-seeking behaviour is the hallmark of the various lobbyists, business associations, trade unions, and other assorted racketeers and social parasites that haunt the offices and corridors of political power. In this light, it will certainly be interesting to watch how much of the currently proposed stimulus spending is inevitably siphoned off in the form of rents.

Buchanan’s and Wagner’s proposed antidote to the temptations of Keynesianism for governments, was some form of balanced-budget constitutional amendment. After all, if the government’s hands are tied with regard to spending, then perhaps the rent-seekers will go elsewhere in search of profits. Such a measure would have to be adopted as part of the constitution, regular legislation being too easy for a government of the day to override or repeal.

As tempting as such a solution may sound, I must disagree with it. It is prudent to assume that there will inevitably be times when a government must be able to govern in the best interests of the people, and where this may require spending into a deficit. Recent budget woes in the state of California are a testament to this. I therefore propose a different solution.

Two Modest Proposals

Once upon a time, it used to be the case that if a parliamentary government introduced a bill which proposed to run a budget deficit, it was customary to include in such legislation a so-called sinking fund. This was a state fund into which surplus revenue would be paid, so that the projected debt could be retired in a reasonable space of time. Therefore, I propose:

1. Where a government proposes to run a budget deficit or enact extraordinary spending measures, such legislation must include provisions for a sinking fund to retire the resultant debt within a reasonable period of time.

In addition to a sinking fund, I would like to add a further measure. It has been well said — though I cannot for the life of me remember who said it — that the only way to accurately measure the public’s willingness to accept a proposed government spending measure would be to put the proposal into the taxpayer’s hands, along with an invoice for the cost to the taxpayer. Therefore, I propose:

2. That upon the introduction of budgets or extraordinary spending measures, the government provide to taxpayers an itemized invoice stating what the measures will cost to each taxpayer, along with a running total of whatever is already owed by them.

A balanced-budget constitutional amendment would tie a government’s hands too much. But what we can do is to introduce some fiscal prudence by forcing the government to provide in advance for the repayment of its debt financing, along with simple information for the taxpayer outlining what such repayment will cost them and their children. And ideally, if the spirit of the first proposal is adhered to, it should not cost their children anything. Therefore, while Proposal 1 provides for fiscal prudence, Proposal 2 ensures that there is taxation with representation, by an informed citizenry that is not spending money its children will have to pay back through indentured servitude.

1 comment:

  1. Excellent! The "God Save the Queen" of the philosophical set ;)