Many bad ideas go under the rubric “Keynesian economics,” but perhaps the worst is that government spending — no matter what kind — can genuinely stimulate of an economy and increase the general welfare.
To see how ridiculous this idea is, have a look at what the leading Progressive Keynesian, Paul Krugman, and leading conservative Keynesian, Martin Feldstein, agree on: a big war is apparently the only way left to get the U.S. economy out of its doldrums. The National Journal reports that at a recent economic forum, Krugman and Feldstein agreed that Washington is too paralyzed to sufficiently stimulate the economy. “Only a high-impact ‘exogenous’ shock like a major war — something similar to what Krugman called the ‘coordinated fiscal expansion known as World War II’ — would be enough to break the cycle,” the report stated.
”I don’t think we’re about to launch a war against anybody,” Feldstein responded. “But Paul is right. That was the fiscal move that got us out” of the Great Depression.
Here is Keynesian economics taken to its logical end: government spending is so essential to restarting a stalled economy that a major war — with all its death and destruction — may be the only way to achieve the stimulation needed. It may go too far to say that Krugman and Feldstein would relish a war, but only by a little. They clearly believe that in the current circumstances, war is our only hope.
There is a superficial logic here. If you believe government spending stimulates an economy, then why not war? In a big war government taxes and borrows huge amounts of money in order to buy large quantities of things — airplanes, tanks, Humvees, bombs, guns, bullets, supplies, clothing, food. It also pays lots of people — bureaucrats, soldiers, sailors, pilots, engineers, manufacturing workers — to do things. In turn the recipients spend that money on the necessities of life. Hence, the jumpstart to the economy.
But of course war means death, injury, and destruction. How can making things that will be used to destroy other things, including lives, produce economic well-being? Are we really ready to accept the Orwellian notion that war is prosperity?
If we have reached the point of seeing war as a source of good things, it is time to check our premises. Right away we see that if the government pays people money to make war materiel, private entrepreneurs can’t pay them to make things consumers will want to buy. This is the “broken window” fallacy: being so distracted by the visible “benefits” of a government policy that one overlooks the unseen costs. Government doesn’t create resources; it only moves them around. When government taxes or borrows, it transfers scarce resources and labor from the productive sector to politicians and bureaucrats. The Keynesian will say that since the resources are idle, there is no cost and only benefits from the transfer. That is a shallow response.
Resources may well be idle, but there’s a reason for that. A recession follows a government-produced inflationary boom that misallocates resources by artificially lowering the interest rate. The misled entrepreneurs thus put resources in the wrong places and commit them to the wrong purposes relative to consumer preferences. When the boom ends and the recession sets in, the errors reveal themselves and have to be corrected. That takes time, but government delays the recovery by interfering and by poisoning the investment climate with uncertainty. Who will commit to a long-term project while unsure what tax or regulatory policy might be next month or next year?
As for World War II’s ending the Great Depression: nonsense. The Depression was bad because living standards fell when, because of the previous inflationary boom, production didn’t match consumer preferences. Business projects were liquidated, creating high unemployment, and government interference and uncertainty impeded recovery. The war did not restore living standards — consumer goods were rationed — and unemployment ended only because of conscription. Improved statistical aggregates for national income or investment only concealed what was really going on. What ended the Depression was not government spending but the retrenchment of government after the war.
So thank goodness we don’t need a war to prosper. Shame on those who say we do.