Friday, February 6, 2009

Politics vs History

This article provides some historical perspective to the ongoing debate about the stimulus package. It's a bit more economically technical, but not so bad.

When I was in graduate school, the "rational expectations" objection to Keynesian theory wasn't yet being taught. In fact, I was first attracted to economics because it held out the possibility that government could manage the economy, which is the core conclusion of Keynesian theory. History shows that's just not the case.

After 30 years of life following graduate school, I have a much greater appreciation of the simple truth that I first learned in Economics 101. There really isn't any such thing as a free lunch. The Keynesian stimulus theory proposes that there is a free lunch; but only the government can see it and deliver it.

Strangely enough, it's not hard to find an economist with a reputation who still pushes that old Keynesian idea, even though the basic proposition flies in the face of a truth all of us understand instinctively.

The idea that massive government spending---financed either by creating new credit money or by borrowing older credit money that the Fed created a bit earlier---doesn't even pass the straight face test. Yet, it passes for serious public policy following an election of "yes we can" politicians that now must be seen to be "doing something" to fix the economy. Politicians have never fixed the economy and they never will. If history shows anything abundantly, it shows that.

History shows that free people engaged in voluntary exchange will fix the economy. But before people can exchange anything, they first must produce it. Production, not spending, is what makes people prosperous. Keynes' biggest mistake is that he equated spending with production, just because the two must be equal when measured in dollars.

The recession will end when businesses and investors and consumers can see a believable future. Neither monetary policy nor fiscal policy can produce goods and services. But those policies, rightly reckoned and implemented, can give us a believable future. Tripling the monetary base (which the Fed has already done) and spending another trillion dollars or so that it doesn't have(which the Obama administration is cheer leading Congress to do) isn't a believable future.

The economists who support the stimulus package do so on political grounds, not on grounds founded in economic science. To say otherwise is to dishonor what it means to be a scientist. After all, we do have half a century of really talented, bright economists who have studied this issue beyond imagination. Just because a charismatic politician made it to the presidency by raising the hopes and dreams of millions doesn't erase the evidence from fifty years of careful economic research.

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