The Central Conceptual Error of Keynes in Half a Sentence
June 14, 2012
The British newspaper, The Guardian, is the British New York Times. This column's headline asks the question: Did Republicans deliberately crash the US economy?
When you read it, you know he thinks they did, but he never really says so. He surely offers no proof.
Here is his thesis: "Be it ideology or stratagem, the GOP has blocked pro-growth policy and backed job-killing austerity -- all the while blaming Obama."
Then he asks a series of questions -- questions that no liberal columnist asked, 2009-2011, when the Democrats controlled Congress.
So why does the US economy stink?Why has job creation in America slowed to a crawl? Why, after several months of economic hope, are things suddenly turning sour? The culprits might seem obvious --- uncertainty in Europe, an uneven economic recovery, fiscal and monetary policymakers immobilized and incapable of acting. But increasingly, Democrats are making the argument that the real culprit for the country's economic woes lies in a more discrete location: with the Republican Party.
Democrats blamed Bush for two years, 2009-2011. That's politics. So what?
In recent days, Democrats have started coming out and saying publicly what many have been mumbling privately for years -- Republicans are so intent on defeating President Obama for re-election that they are purposely sabotaging the country's economic recovery. These charges are now being levied by Democrats such as Senate majority leader Harry Reid and Obama's key political adviser, David Axelrod.
Democrats in Congress are not saying this. Not yet, anyway. Obama keeps saying that the economy is slowly recovering. Now would not be the time for an incumbent Democrat to say that the economy stinks. Voters will hold Obama responsible, not the House of Representatives.
Obama's position bothers James "It's the Economy, Stupid" Carville, who says this positioning will backfire on Obama. But recovery is the Party Line at the White House today.
Our British columnist admits that his thesis is hard to prove. There is only "circumstantial evidence to make the case," he admits.
He follows Krugman's line.
Republicans have opposed a lion's share of stimulus measures that once they supported, such as a payroll tax break, which they grudgingly embraced earlier this year. Even unemployment insurance, a relatively uncontroversial tool for helping those in an economic downturn, has been consistently held up by Republicans or used as a bargaining chip for more tax cuts. Ten years ago, prominent conservatives were loudly making the case for fiscal stimulus to get the economy going; today, they treat such ideas like they're the plague.
Republicans have voted for back-to-back $1.3 trillion deficits. But for Krugman & Co, these were austerity budgets.
And then, there is the fact that since the original stimulus bill passed in February of 2009, Republicans have made practically no effort to draft comprehensive job creation legislation. Instead, they continue to pursue austerity policies, which reams of historical data suggest harms economic recovery and does little to create jobs. In fact, since taking control of the House of Representatives in 2011, Republicans have proposed hardly a single major jobs bill that didn't revolve, in some way, around their one-stop solution for all the nation's economic problems: more tax cuts.
But tax cuts are Keynesian. This is why President Kennedy demanded tax cuts in top marginal income tax brackets in 1961. Congress gave him what he wanted. The economy grew.
The central issue for Keynesians has always been federal spending, not tax hikes. They have never complained about federal deficits, except for being too small.
After winning the House of Representatives in 2010, the GOP brokered a deal to keep the Bush tax cuts in place, which has reduced the tax burden as a percentage of GDP to its lowest point since Harry Truman sat in the White House. At the insistence of the White House, Congress also agreed to extend unemployment benefits and enact a payroll tax cut -- measures that provided a small but important stimulus to the economy, but above all, maintained the key GOP position that taxes must never go up.
At this point, the columnist invoked the central thesis in Keynesian economics. He invoked it so strongly that it stands as a testimony to the power of his analysis.
But as Congress giveth, Congress also taketh. The GOP's zealotry on tax cuts is only matched by its zealotry in pursuing austerity policies. In the spring of 2011, federal spending cuts forced by Republican legislators took much-needed money out of the economy: combined with the 2012 budget, it has largely counteracted the positive benefits provided by the 2009 stimulus.
Did you spot it? Did it leap out at you? I hope so.
Here it is: "In the spring of 2011, federal spending cuts forced by Republican legislators took much-needed money out of the economy."
This is the heart, mind, and soul of Keynesianism: money left in the hands of taxpayers is money taken out of the economy. Ever since 1936, this has been the central core of the mixed economy. This was Keynes' central assertion. It is Keynesianism's central error.
Money is not taken out of the economy unless (1) the central bank sells assets, or (2) the central bank raises the reserve requirement percentage, or (3) depositors withdraw currency from the banks and hoard it, refusing to spend it at businesses that deposit currency in their banks. An example of the latter is when immigrants take currency and send it back to their home country, where it circulates as an untaxed shadow currency.
We need a comprehensive presentation, from comic books to econometric articles, that focuses on this statement: "In the spring of 2011, federal spending cuts forced by Republican legislators took much-needed money out of the economy."
The Keynesian mixed economy rests on this conceptual error.
Ever since 1936, Keynesian economists and analysts have hit free market economists with some variation of "government spending cuts as austerity."
This guy regards a $1.3 trillion deficit as austerity.
His peers, including Krugman, want more.
In the end, that might be the worst part of all -- one of two major political parties in America is engaging in scorched-earth economic policies that are undercutting the economic recovery, possibly on purpose, and is forcing job-killing austerity measures on the states.
There is no attempt by majority Republicans to propose $1.3 trillion in spending cuts, let alone a budget in surplus. But this does not satisfy Krugman & Co. On June 3, Krugman made his position clear: there is not enough federal spending. To price this? He blames states, which act independently of Washington.
How is that possible? Isn't Mr. Obama a big spender? Actually, no; there was a brief burst of spending in late 2009 and early 2010 as the stimulus kicked in, but that boost is long behind us. Since then it has been all downhill. Cash-strapped state and local governments have laid off teachers, firefighters and police officers; meanwhile, unemployment benefits have been trailing off even though unemployment remains extremely high.Over all, the picture for America in 2012 bears a stunning resemblance to the great mistake of 1937, when F.D.R. prematurely slashed spending, sending the U.S. economy -- which had actually been recovering fairly fast until that point -- into the second leg of the Great Depression. In F.D.R.'s case, however, this was an unforced error, since he had a solidly Democratic Congress. In President Obama's case, much though not all of the responsibility for the policy wrong turn lies with a completely obstructionist Republican majority in the House.
This is the logic of a Nobel Prize-winning Keynesian. He is representative. Keynesians have run the West's economies ever since 1940. Their deficit-running political predecessors imposed deficit spending after 1930, but they had no theory justifying this. That was before Keynes put his finger in the wind in 1934, ran to the head of the parade in 1936, and became the world's leading economist.
We need some aspiring young economist to devote his career to proving this: historically, conceptually, and rhetorically. //www.garynorth.com/public/department135.cfm