The Keynesian Subtractor

March 19, 2013

Government leaders once believed that the earth was flat and that it was at the center of the universe.  Today, they believe in Keynesian economics.

As in the past, neither logic nor evidence that their beliefs are wrong can sway them to change.  And why would it?  Keynesians believe in government spending.  Government spending increases the power of those who are doing the spending.  But does anyone really think it helps the economy?

The Keynesian Multiplier

The key to Keynesian economics is the Keynesian multiplier.

Let’s say the government spends a dollar (the government never spends just a dollar, but we’re simplifying here).  Person A receives the dollar and spends part of it; Person B, who receives the portion of the dollar that was spent also spends part of it; Person C, who receives the portion of the dollar that was spent by Person B then spends part of it, and so on.

The net result, according to the Keynesians, is that $1 of government spending yields somewhere between $1.50 and $5 in economic growth, depending on what brilliant Keynesian economists like Paul Krugman say the multiplier is.

By now, though, the Easter bunny should have greater credibility than Keynesian economists.  If government spending really did yield economic growth, the economy would be thriving today.

With a $3.8 trillion federal budget, government spending has never been higher – yet the economy has been sputtering along.  Gross Domestic Product (GDP) of the United States grew at an average rate of 3.22% from 1948 to 2012.  Coming out of the financial crisis, it grew at a rate below 2.4% in 2010, just above 1.8% in 2011 and 2.2% in 2012.

Private Sector vs. Public Sector

There are plenty of academic explanations for why Keynesian economics is idiotic, but common sense should suffice.

For starters, every dollar has to come from somewhere.  A dollar that goes to the public sector in the form of taxes is a dollar taken from the private sector.  Does anyone really believe that a dollar in the public sector will create more growth than a dollar in the private sector?

In the private sector, businesses attempt to spend every dollar as efficiently as possible to maximize their return on investment.

In the public sector, government agencies just try to spend every dollar, period.  The more they spend, the higher their budget will be the following year, because the base for spending will increase.

If the Keynesian multiplier worked, the $814 billion “stimulus” program during President Obama’s first term should have given the economy a huge boost.  Where all that money went is as mysterious and evasive as the economic benefits it produced, but a few of the projects it funded include:

  • $15 million to build an airport in Ouizinkie, Alaska, which has a population of 165
  • $426,000 to rebuild a bridge that is used by an average of 10 cars a day
  • $600,000 to support a school district in Kansas that no longer exists

The stimulus program began in 2009.  You’d think that if it were going to give the economy a $1.22 trillion boost, it would have happened by now.  Has Ouizinkie achieved full employment or any news jobs, for that matter?

Another problem with the Keynesian approach is that if the government borrows money to spend, it has to be paid back with interest.  Even at today’s record-low rates, we’re paying $280 billion a year just to service the federal debt.  That amount will continue growing as the debt increases and as interest rates rise.

How much will paying off debt stimulate the economy?  Not at all.  It is a drag on the economy and will be even more of a drag every year, especially as interest rates increase.  Every dollar spent on servicing the debt is a dollar that is not spent to help the U.S. economy grow.

It’s about time politicians recognized that there’s no such thing as a Keynesian multiplier.  There’s only a Keynesian subtractor.

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