I started a three part series “Exploring the Myths of the Consumer-Driven Economy” a couple of days ago, and I intend to get back to that. But yesterday was a day full of events that just demand comment. Ben Bernanke gave assurances and the recession might end this year, and it sent the stock market up and gold solidly down. Then later that day, Barack Obama addressed the nation and reaffirmed what Newsweek had already declared on its cover. We are all Socialists now.
It was a long hard road to get America here; we have a strong tendency towards individualism and an inherent distrust of the powers of government. At least, we used to once upon a time. Not anymore. Now we have to depend on the powers of the state to correct the excesses of the free market, and we can not rely on the forces of free enterprise to get us out of this crisis. It is only through the intervention of government that we can put this crisis to a end. Or, in the words of our new President:
As soon as I took office, I asked this Congress to send me a recovery plan by President’s Day that would put people back to work and put money in their pockets. Not because I believe in bigger government — I don’t. Not because I’m not mindful of the massive debt we’ve inherited — I am. I called for action because the failure to do so would have cost more jobs and caused more hardships. In fact, a failure to act would have worsened our long-term deficit by assuring weak economic growth for years. That’s why I pushed for quick action. And tonight, I am grateful that this Congress delivered, and pleased to say that the American Recovery and Reinvestment Act is now law.
Here we see the appearance of a few Keynesian chestnuts. Largest among them is the Keynesian multiplier. The concept is that an increase in demand spending has huge ripples across an economy that are many times larger than the original increase in demand. Hence, the $185 billion or so that the act is giving to consumers will create a huge gain in demand that is many multiples of this amount.
I’ve written about the concept of the Keynesian multiplier before. I liked it to the concept of a perpetual motion machine. It’s an idea that has fascinated humanity for a long time. All you have to do is put in enough energy to start the system in motion and it will run forever. Or, in this case, that you can get far more out of the economy that you put in. Barack specifically references this concept by saying that our “long term deficit” would have been “worsened” because of the “weak economic growth for years to come.”
This is notion is nothing but pure fantasy. If governments could run deficits in order to gain increased economic growth and thereby gain more tax revenue, then our government would have paid off all of its debt a long time ago. If the government could get $1.5 dollars back for every $1 it spent, then it should spend $1 Trillion dollars a second. We all know it doesn’t work like that. For that matter, if a few billion dollars in free money was all that was needed to get the consumers spending again, then our economy would have been rescued with last years stimulus bill. It wasn’t.
Keynesianism’s greatest triumph is that it has been so throughly disproved time and again but still remains the economic theories politicians revere as gospel. The other tenet of Keynesianism that was featured prominently in Obama’s speech was the love-hate relationship with the banking system. Karl Marx blamed the world’s economic ills on the greed of capitalists and employers; in The General Theory of Employment, Interest and Money John Maynard Keynes blamed the lender. If only lenders did not demand their silly “liquidity preference” and loaned money more freely, then economies would grow without limit.
True to Keynesian form, banking was front and center in Obama’s speech:
You see, the flow of credit is the lifeblood of our economy. The ability to get a loan is how you finance the purchase of everything from a home to a car to a college education; how stores stock their shelves, farms buy equipment, and businesses make payroll.
But credit has stopped flowing the way it should. Too many bad loans from the housing crisis have made their way onto the books of too many banks. With so much debt and so little confidence, these banks are now fearful of lending out any more money to households, to businesses, or to each other. When there is no lending, families can’t afford to buy homes or cars. So businesses are forced to make layoffs. Our economy suffers even more, and credit dries up even further.
That is why this administration is moving swiftly and aggressively to break this destructive cycle, restore confidence, and re-start lending.
If you listen closely you can hear the Keynesian wag of the finger at those silly lenders and their preference to keep their money liquid. If we can’t solve that problem, then we’re doomed.
Sure, our the answers to this our crisis may “… exist in our laboratories and universities; in our fields and our factories; in the imaginations of our entrepreneurs and the pride of the hardest-working people on Earth…” but it’s the financial sector that the real answer to our problems. The imagery used here is almost deifying the common man. I hear the voice of FDR.
These are great sounding words that invoice the image of one united nation working together to fight a common enemy. That image always makes me nervous because, after conjuring the image of the noble collective, next comes the list of sacrifices we all must make in its name. The speech didn’t ask for a lot of sacrifices, but it’s still early in his Presidency. Give him time.