Economist Alan Blinder wrote an op-ed in the June 21 Wall Street Journal entitled, “The GOP Myth of ‘Job-Killing’ Spending.” He opened by citing Keynes—no surprise here—and then stated the following: Right now, I’m worried about the damage that might be done by one particularly wrong-headed idea: the notion that, in stark contrast to Keynes’s teaching, government spending destroys jobs. Without getting into the specifics of the piece, I am challenging his central thesis. Contrary to Blinder and Keynes, government spending is not the appropriate response to high unemployment, and it’s not difficult to understand why.
Let’s start with one crucial point: Government dollars must come from the private sector, sooner or later. Government cannot spend unless it first (1) confiscates it in the form of taxes, (2) devalues the currency by printing money, or (3) incurs debt that we (or our children) must pay down the road. Understanding each of the possibilities is the key.
In the first instance, government is merely spending what would have been spent in the private sector; there is no increased demand to “stimulate” the economy and create jobs. Put another way, government spending $10 on paperclips might help the office supply industry, but the $10 a taxpayer doesn’t have to spend on a movie ticket will hurt the entertainment industry. Unless government spending improves efficiency in some way—building a critically needed road, for example—Washington is merely substituting our spending with its own, complete with the political paybacks and bureaucracies that must be created to oversee it. In almost all cases government spending produces less bang for the buck as well. Would you rather spend $10 on your own or ask someone in Washington to spend it for you?
The second instance is just like the first because the $10 bill government prints is offset by comparable inflation—a reduction in value of existing currency. The money is your pocket or in your 401(K) is worth less, a whole lot less when this is done on a large scale. Financing government spending with the printing press is an insidious form of taxation. You don’t see the money taken from you, so you are tempted to believe that you’re getting something from Washington for nothing.
In the third instance, government can create jobs in the short run by spending money it does not have, thereby creating the need for more labor and additional hiring. This is the crux of Keynesian philosophy: Government must intervene when the economy is in a slump to get things moving again. The problem here is that the jobs created are not sustainable, unless you plan to borrow forever. Don’t laugh…this appears to be the strategy of many on the left, although most would agree that the bills must be paid at some point, ostensibly by “the rich.” Just take a look at the massive national debt and you should see the folly in this argument. Politically speaking, borrowing to ease the pain of current economic adjustments is doomed from the beginning.
So how can Keynesians like Blinder actually argue for more government spending as a solution to high unemployment? The answer lies in two assumptions. First, Blinder assumes that government is smarter than you are. If left to make your own financial decisions, you just might not spend it wisely. Instead, government can “invest” in education, technology, healthcare, and so on in ways that “grow” the economy. There might be a kernel of truth in this statement in limited instances, but the political process makes implementing such a top-down approach unworkable. It just creates more bureaucracy, debt, and dependency.
Second, Blinder assumes that government is actually capable of managing the economy. Even if economic models were reliable predictors, it is ridiculous to suggest that even the best minds are capable of collecting and processing the data needed to plan an economy. As Hayek put it, economics is about conveying to leaders how little they know about the world they think they can design.
In the end, the issue is one of freedom. Are we best suited to make our own decisions or is government capable of managing our decisions more effectively? Keynesians like Blinder and Obama argue for the so-called experts in government. I’ll put my money—what’s left after taxes at least—on individuals making their own decisions.
The real problem here is the debt. Spending money we don’t have to create jobs is an illusion. People without jobs need to improve their skills, move, or accept less in wages. It’s not up to the government to find them work.
It absolutely boggles my mind that so many on the left, in the administration and “degreed economists” can see the utter stupidity of government intervention. I am struggling to think of one thing the Feds do thats on time and on budget. USPS? Nope. Amtrak? Nope. Social Security? Nope. Everything they touch turns to “fill in the blank”! My biggest issue is that Dr Parnell is not in DC right now hitting these guys over the head with a shovel (figuratively), before the completly ruin the greatest country on earth. Parnell for President!
One of your best pieces Dr. Parnell. Well done and thanks. I read the referenced Blinder article the other day and my head nearly exploded. Can we for once try a pure free market approach to solving these problems? And can we discuss the immorality, in addition to the economics and stupidity, of the Keynesian model?