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Keynes is still dead

By Mark Milke 
web posted August 2, 2010

The famous British economist, Lord John Maynard Keynes died in April 1946 at the relatively young age of 63. Some of his flawed ideas lived much longer.

John Maynard KeynesKeynes' contention that governments could effectively smooth out economic cycles through extra spending—"pump-priming"—was popular in the 1930s and beyond.

Occasional examples popped up to signal alternative approaches.  Fifteen years after Keynes' death, John F. Kennedy preferred the cut-taxes-and-let-a-thousand-opportunities-bloom approach. The economy indeed blossomed.

But Keynes' ideas were assumed by many to be the correct approach. Then, in the 1970s, high inflation and high unemployment—something Keynesian theory thought impossible—drove an apparent permanent stake through some Keynesian notions. It was only in the last two years that his ideas have been resurrected and for political reasons.

Recall that in Canada, the federal Tories announced they would spend an extra $62-billion in "stimulus" money—this only after almost losing parliamentary power in late 2008/early 2009. Their reasons were political, not economic. But their surface justification helped revive Keynesian theory in the popular mind.

So Ottawa threw money at pump-priming activities such as $36,993 for Edmonton cricket pitches and $112,500 for "Gilbride's road improvements" (somewhere in rural Ontario). Those projects and many others were justified with reference to "Canada's Action Plan," AKA, the Conservative Keynesian stimulus program.

The penny-ante nature of such projects reveal the conceit of the Keynesian notion that several thousand here, a million there, or tens of millions over there, could actually have much of an impact on a  $1.5 trillion economy, or save it from recession.

The folly is even more clear in retrospect. In the most recent federal budget, and with reference to the last half of 2009, the federal government proclaimed "government investment in infrastructure increased by 25.1 per cent in the third quarter—the largest increase in nearly a decade—and 16.3 per cent in the fourth quarter." 

Here's the problem: Even if the presumed Keynesian stimulus could work, much of the extra spending occurred after the recession had already ended (in June 2009).

To credit the "stimulus" as the reason Canada exited the recession is to assert public expenditures between July and December 2009 somehow travelled backwards through time to inflate the economy earlier in the year. It's a chronological impossibility.  

Government spending can affect the economy. But it's a question of how efficient and effective such spending is compared with private sector pockets from which the money has been picked.

After all, if I borrowed a million dollars and threw it off the top of Toronto's CN Tower, there would be a stimulative effect. People who picked up the money would presumably spend part of their lucky windfall.  But the money came from somewhere—borrowing—and that has its own price tag. 

Problematically, all the stimulus spending worldwide now risks halting the tepid economic recovery. That's because people can figure out that more public debt leads to higher taxes down the road; they then decide to retrench. Businesses make the same calculations.

Thanks to past prudence by the federal Liberals in the mid-to-late 1990s, Canada can at least  finance the latest faux experiment in Keynesian pump-priming. That's not the case elsewhere. Greece has a debt-to-GDP ratio of 123 per cent while Italy is in desperate straits with a ratio of 127 per cent. The U.S. debt burden is 92 percent of its economy and rising fast. Japan, which followed Keynes and his modern disciples, busily primed its pump since the 1990s. It now has a debt-to-GDP ratio of almost 200 per cent.

Japan and the United States are poster boys for the failure of Keynesian stimulus efforts. Deficit spending has simply stolen from future growth by larding up that future with a massive debt overhang. Japan has had two decades of massive public spending above tax receipts; it treaded economic water for much of that period. The multiple American stimulus packages that spent borrowed money on everything from home tax credits to cash-for-clunkers only pulled future consumption ahead and dampened present spending. Now the U.S. faces a second possible recession but with even higher debt levels.  

In Canada, low interest rates, better banks and automatic stabilizers (such as Employment Insurance payments) helped prevent a deeper recession and get us out earlier than most. That Canada's governments cut some business taxes also helped. (In contrast, removing more money from employers in a recession is the shortest route to a longer unemployment line.)

Here's what didn't help Canada exit from the recession: stimulus gimmicks such as "Gilbride's road improvements" or cash for cricket clubs.

Near the end of his life, as Keynes biographer Robert Skidelsky chronicled, Keynes confessed to a friend that in thinking about how to rescue Britain from its problems, he was forced to rely more on Adam Smith's ideas—in other words, those often opposite his own. Sixty-four years after his death, and after another expensive demonstration on the impotence of the new stimulus, Keynes' theories also deserve a burial. ESR

Mark Milke is the research director for the Frontier Centre for Public Policy. His column appears weekly. Visit Frontier's website at www.fcpp.org.






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