Stossel on Keynsianism

Written by Melissa Stewart on July 25, 2011 – 4:27 am

This is right on the mark

His description of what Keynesians believe is correct. Its why Keynesians, including the President, thought that government spending would stimulate the economy. As Klein points out, Obama didnt just have a team of Keynesians. He had the Keynesian all-star team.

Right, but then Klein gets it wrong: The idea [behind Keynesian economics], in other words, is not about whether the government spends money better than individuals.

Yes it is! Obama and Klein think that during a recession, the financial system scares business and consumers so badly that they hoard money, which worsens the damage to the system. Therefore, the government must take money away from individuals, and spend it elsewhere. Eric Cantor correctly pointed out that the theory is: government can be counted on to spend more wisely than the people.

Part of the problem here is in nomenclature. People dont think of saving as spending. So I will shift a word a bit. The idea of Keynesian economics is that the government can deploy your money better than individuals can.

The cause of the asset bubble for this argument is almost irrelevant. Households, finding themselves over-leveraged, want to deleverage by buying fewer things and saving more money. The Keynesians explicitly wanted to prevent this by taking the money that would have been saved and spending it. This destroys value in two ways. As Stossel points out, it shifts money from being deployed with an eye on productivity to being deployed with an eye on politics. From a value-creation standpoint, this has to destroy value. In addition, by slowing the process of deleveraging, it slows the recovery, unless individuals in the mean time can be convinced that they really dont need to deleverage. And is that really the post-bubble message we should be sending out?

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