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Give me that old-style Keynesianism?

By Daniel M. Ryan
web posted October 26, 2009

In short, a characteristic of an investment expenditure is that the good in question is not being used to fulfill the needs of the in­vestor, but of someone else—the consumer. Yet, when government confiscates resources from the private market economy, it is pre­cisely defying the wishes of the consumers; when government invests in any good, it does so to serve the whims of government officials, not the desires of consumers. Therefore, no government expenditures can be considered genuine "investment," and no government-owned assets can be considered capital. Government expenditures are divisible into two parts: consumption expendi­tures by government officials, beneficiaries of government subsi­dies, and other nonproductive recipients; and waste expenditures, where government officials really believe that they are "investing" in "capital." These waste expenditures result in waste assets….

- Murray N. Rothbard, Man, Economy and State, Chap. 12, section 9, subs. A.

What's striking about this snippet is its increasing common-sensicality. Many people would have deemed it fatuous forty years ago. Schools? Roads? "Waste assets?" A competent Austrian economist could respond that any value derived from them is salvage-value, or making the best of a necessarily sub-optimal allocation of resources. Back in the olden days, though, most common-sensical people would have dismissed that rejoinder out of hand, as patch-work cleverness or something worse.

Today, however, this passage resonates. We all know of the infamous "Bridge to Nowhere." It's increasingly known that Japan's much-vaunted stimulus programs contained a lot of Bridges to Nowhere. The connection between them and Japan's Lost Decade (now close to two) isn't that easy to avoid anymore. Nor is the realization that the Obama stimulus program looks an awful lot like "Money to Nowhere." Nor is the sense that something's been lost recently…that today's governments seem unable to do something as simple as fix a road or a school, without misprioritizations - waste - multiplying.

The Heart of Keyesnianism

Prof. Rothbard's reasoning strikes at the heart of Keynesianism. Thanks to recent careful readers of the General Theory, we know that Keynes's main concern was the reluctance to invest. In a nutshell, the Keynesian system advocates government investing in assets that the free market won't touch because of entrepreneurial inefficiencies. This point is obscured at times by rhetorical flourishes, and the book's discursive narrative, but it gives with Keynes's own criticism of the free market. He concludes that an "unemployment equilibrium" can exist because of hoarding, as caused by unwarranted pessimism. This conclusion forms the base of his recommendation that governments take up the slack in recessionary times.

There is a certain class bias in the General Theory that's reflective of the man himself. Keynes' position in the British class system was fairly high, high enough to get him a professorship in economics despite him having no degree in the subject. [He double-majored in mathematics and classics for the baccalaureate, and never got his master's degree.] It's true that he placed second in the Indian Civil Service exam, an achievement that our meritocratic society can identify with, but that exam was reserved only for the elite. It's an achievement comparable to getting the second-highest GPA in Andover. Non-Andoverites don't even qualify.

Given his background, it's unsurprising that he simply assumed that government officials would have the foresight to invest soundly when or where the private sector wouldn't. People of Keynes' class find it easy to believe there's something disreputable about business, and that business is common, middle-class, "excitable." They also find it easy to believe that government officials can better businesspeople – provided that the "right sort" are in government! – because that attitude meshes well with the deference expected from new money by old.

We're long beyond the times when government was reserved for the "better people," ones unaccustomed to being questioned. We also have intellectual tools that weren't around 'way back when Keynes was alive. Instead of a pedigree, a business plan is expected. Given this advance, it's odd that today's government investment decisions aren't better than those of several decades ago. If anything, the progress of the merit system should have led to skilled bureaucrats improving upon the old gentleman-amateurs.

The Heart Of The Common

Common sense points out what's flawed about the Keynesian system. It's not run by disinterested aristocrats; it's run by politicians and civil servants, whose only disinterest lies in the outcome. In other words, they're detached from failure or success.

On the other hand, they're quite interested in ratcheting up the spending. More spending means more photo opportunities, and possibly more campaign contributions. It also means more promotions within the civil service administering it. More spending means more work, more hires, more supervisory and administrative needs, more promotion by seniority. On the other hand, cutting back is in no-one's interest except the taxpayers'.

For those who tend to look down on common sense, a single term suffices: the tragedy of the commons. Government funds are a common. Theoretically owned by everyone, they're really owned by no-one. Consequently, they're overused. Governmental overspending, when seen in this light, is as unsurprising as high-seas overfishing. A deficit is as inevitable as a clear-cut forest. The same lackadaisical attitude shows up in both.

Thanks to Keynes' class bias, he never thought of recommending legal controls over the government-investment process. Our age knows better. A requirement that every proposal be accompanied by a business plan, with accountability and penalties if said plan was merely someone's wishful thinking, would plug a major hole in the Keynesian dike.

Can Keynesianism Be Revived?

In order for government investment to mean something, it has to be investment. Once again, common sense explains why. Investment at a loss can only be temporary. There may be more "virgin forest" somewhere, but even those virgin fields run out eventually. In order to be self-sustaining, there has to be a return on the investment. At the very least, there has to be a return of the investment.

With government investment, return of capital means funds returned to the Treasury. A profit means more money returning to the Treasury than was dispersed. Since the Keynesian system depends upon government officials finding profitable opportunities that private businesspeople won't touch, a good government investment should return more to the Treasury than was disbursed. If businesspeople are as irrational as Keynes claimed they were, then such opportunities should abound in downturns. They should be all over the place nowadays.

Ironically, a good example of a government investment on a plausible Keynesian basis is the TARP program. The only way the U.S. government can lose on the deal is if the remaining financial institutions default on their issued preferreds. If not, then the U.S. taxpayer has earned a minimum of 5% per year. Any warrants gains are over and above that base return.

Cuts in marginal tax rates can also count as an investment (from the government's standpoint) if the resultant economic growth lead to more tax revenues. Although not really an investment, because tax cuts allow taxpayers to keep more of their own money, well-timed marginal rate cuts can act as one because of their effect on receipts. A tax cut of this sort can be pegged as a quasi-investment.

Or Not?

However, Prof. Rothbard's point still sticks. Because government can intervene in the free market, it can distort what an investment means. The TARP program may well be a success from the Keynesian standpoint, but only because of Federal Reserve intervention. Had the Fed not been pumping the balloon, TARP might well have been a disaster. The same point applies to any government investment: governments are notoriously bad at regulating themselves.

Accountability by business plan will not lead to a Keynesian nirvana, one where permanent deficits turn into a permanent reserve of surpluses, but it will repair one of the budget-busting weak points of Keynes' system. It would also give the taxpayers a break. "Before funds for any project are authorized by the Treasury, there shall be filed a business plan that reasonably projects a return of funds deployed through taxes. If such a plan is not filed, then the funds disbursed shall be deemed non-stimulative spending and/or transfer payments." This simple proviso, as a mandatory operating procedure, might well remove the Lorax-esque threat of national bankruptcy.

It would also encourage a return to the old days when government capital spending led to educative schools and usable roads. At least, common sense says so. ESR

Daniel M. Ryan dances with the Grim Reaper.


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