Keynes and the Proposed Stimulus Plan

I was going to lead in with the joke from Wayne's World about Dick York-Dick Sargent-Sargent York, because the author of the article I wanted to link to is by Dick Armey, but I can't really connect that joke to what I'm going to talk about.

This article by Dick Armey gives a great explanation about Keynes as critiqued by Friedrich Hadler. It's probably one of the best explanations about the problems with Keynesian economics that I've read so far. Here are a few key paragraphs:

A father of public choice economics, Nobel laureate James Buchanan, argues that the great flaw in Keynesianism is that it ignores the obvious, self-interested incentives of government actors implementing fiscal policy and creates intellectual cover for what would otherwise be viewed as self-serving and irresponsible behavior by politicians. It is also very difficult to turn off the spigot in better economic times, and Keynes blithely ignored the long-term effects of financing an expanded deficit.

Of course, despite Mr. Obama's campaign promises to adhere to "Pay As You Go" budgeting, no one seems terribly worried about paying for what will likely be a trillion-dollar stimulus package. What everyone should agree on is that the money has to come from somewhere, either through higher taxes, borrowing or printing.

If the government borrows the money for the stimulus, then it will either have to print money later or raise taxes to pay it back. If the government raises taxes to pay for the stimulus, it will, in effect, be robbing Peter to pay Paul. If the government prints the money, it will increase inflation, which will decrease the value of the dollar. That would, in effect, rob Paul to pay Paul back with devalued currency.

I had to read that first paragraph a couple times to really figure it out. And I think those last two paragraphs are key. In the debates and throughout the campaign, Obama spoke so often about how he is not going to raise taxes on the middle class, and that it would only go up for the top 5% or less (which is another issue).

However, with the way things have turned out, he is going to need to figure out a way to pay for the stimulus package that is going to eventually amount to more than a trillion dollars. As Armey points out, it either comes through taxes, borrowing, or printing. Borrowing, in any scenario, turns into either taxes or more printing of currency, and both of those present problems. Higher taxes is wealth redistribution and destructive to free market capitalism, and printing money results in inflation, which essentially turns into a tax (some would say even more devastating in its consequences than just taxes) of sorts on everyone.

The biggest question regarding the stimulus, I think, is will spending all this money create more money in the long run? Is it better than doing nothing? I've recently started following the blog of an economics professor at the University of Michigan (Carpe Diem), and he has been posting all sorts of indicators that suggest that the economy will be rebounding later this year. So then a logical question that may arise is to ask if Democrats are just exploiting this recession to push forward their agenda?

As people have become apprised of what is entailed in the stimulus package, it seems like the only way that massive spending increases will be enacted into legislation is by pulling the wool over the eye's of the public and not actually telling them the real reason why this package has to go through immediately. In the latest Rasmussen Poll regarding the stimulus, public sentiment has turned against the bill as only 37% favor it, while 43% oppose the legislation. That's a pretty strong shift given that just two weeks ago 45% supported it, with 42% in opposition.

I think this goes back to the comment made by William F. Buckley about how he would rather be governed by the first 2000 names in a phonebook than by the Harvard faculty. For some reason, elites, especially academic ones, think they are so enlightened when it comes to knowing what's best for everyone else. They come up with far-reaching programs that are supposed to move us closer to a Utopia, when in reality, the common person knows exactly what it is that they want for themselves and that course of action is usually what's best for the rest of society as a whole. Generally speaking, what's good for me is going to be what's good for you, and nobody is better at deciding at what I want for me than me. It's that simple.