October 31, 2011

This Halloween, Keynes's Zombie Lives On

I read an interesting op-ed by Paul Krugman today in which he criticized what he called "weaponized Keynesians" which he defined as "those who believe that the government does not create jobs when it funds the building of bridges or important research or retrains workers, but when it builds airplanes that are never going to be used in combat, that is of course economic salvation." If the supercommittee does not come up with a plan for deficit reduction by the approaching deadline there will be automatic cuts triggered in the defense budget. Krugman uses the piece to attack House and Senate Republicans for their hypocritical stance on the issue of defense spending. Republicans who so adamantly support cutting government spending to bolster the economy do a complete 180 when it comes to defense and to defend this stance they claim "such cuts would destroy jobs."

Krugman is indeed right to focus on this inconsistency on the part of Republicans who seem inconsistent on how economic prosperity comes about, via the free market or government intervention? He claims that "to admit that public spending on useful projects can create jobs is to admit that such spending can in fact do good..." Much of the evidence Keynesians use to support their economic theories comes from observing the effects of past military buildups. But where Krugman ponders why anyone would choose to spend on bombs as opposed to bridges, I wonder why the Nobel Prize recipient and his conservative opponents in government all still subscribe to the notions of Keynes and his incomplete understanding of the world of human action.

Both ideological groups are wrong to varying degrees in this case. We can have a separate debate on the normative issues of tax policy and where to spend government income. But to think that anyone might still be looking towards the government and further deficit spending to solve our economic woes and create jobs is embarrassing. Increasing the money supply, lowering interest rates, and an all around attitude of fiscal irresponsibility throughout government and financial sector brought about our current recession. Instead of identifying the misallocation of factors of production towards capital goods that easy money causes, Keyensians in both parties believe inadequate consumer demand is the culprit and it only takes a little government spending to boost that demand and jump start the economy. They really seem to believe the jobs they "create" would still be there a year from now when the government stops paying for them.

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