Propagating The Keynesian Myth!

Since we’re closing in on the beginning of a torrid, year-long election season [3], it’s not surprising that the government’s penchant for giveaways is hitting high gear. The failed stimulus packages, and even the talk emanating from the Occupy Wall Street crowd, tend to revolve around one economist’s viewpoint – John Maynard Keynes.

Perhaps that isn’t entirely accurate, as Keynes was really a brilliant man. However, his theories have been so distorted by political agendas that one can hardly reconcile his true theories from those advocated by left-wing radicals and liberals in general. What’s become known as the Keynesian school of thought generally preaches that government must stimulate the economy through spending when the private sector will not or cannot.

The concept of government stimulus in and of itself may not be totally wrong. In essence, stimulus spending is borrowing against future demand. If times are terrible and you believe demand will improve, you can mitigate downturns by injecting money into the economy. The thing to remember, however, is that stimulus spending doesn’t really create anything. The only way to create wealth is to create value and enterprise. And, that’s something that government spending and activities can’t accomplish.

For example, let’s say a man has an annual salary of $60,000 and wants to purchase a $40,000 truck. So, he goes to his employer and asks for the $60,000 upfront while agreeing to work for nothing the rest of the year. The employer agrees, and the employee buys the truck.

What has changed is the timing of when the money is spent. Instead of having $60,000 to spend over the next 12 months, the employee is spending $40,000 upfront and then has only $20,000 to live off for the remainder of the year.

However, the lure of this policy from a political standpoint is obvious; you reap the rewards now and pass the bills down the line [4]. If done prudently, you could actually mitigate the pain at the bottom. But, if done liberally, it becomes nothing more than a form of socialism, with the same inevitable consequence that the bill ultimately comes due [5].

A college professor this week addressing the Occupy Wall Street crowd actually advocated the forgiveness of all outstanding college loans. Among other things, he argued it would help stimulate the economy.

Again, while the indebted college graduates would have more money as a result of being relieved of their obligations to repay debts they willingly incurred, such widespread debt forgiveness wouldn’t stimulate anything. That’s because the banks and their shareholders would have less money to spend. And, in the case of the government guarantees, it would be the taxpayer ultimately paying the bill.

Admittedly, we’re passing those costs on to the next generation. But, as we have learned with Greece, Europe and the Soviet Union, there is a limit to how much future demand and how far you can pass debt to future generations.

Having read much of Keynes’ work, I truly believe he was a pragmatist and likely would advocate fiercely against the present-day distortions of his theories. He seemed to understand better than most the complexity of the market, but he also believed in the market. And, he was prepared to address the problems that inevitably arise.