Tuesday, November 16, 2010

Stimulated Ignorance - The Sequel

Background: My letter on the foolishness of Keynesian policies generated a response from the local Democratic Club Chair. Apparently I wasn't clear enough the first time around.

Darryl Conliffe’s response to my letter critical of the stimulus bill reads like President Obama’s playbook. Attack business - check. Blame Bush - check. Fault free markets - check. Sounds like a game plan guaranteed to lead a team to big losses.

Conliffe correctly stated “the idea [behind the stimulus] is that the business activity started will re-ignite consumer and business confidence, leading to more enterprise.” Keynes’ technical term for this confidence was “animal spirits”. However, some problems exist with appealing to these “animal spirits.”

First, it implies that consumers and business leaders are Pavlovian dogs salivating whenever more money is dumped into the marketplace. Contrary to the low regard the current administration holds business leaders, they aren’t stupid. These leaders fully recognize what “stimulus” spending means - attempting to generate artificial demand using money better left in the hands of the private sector.

This supports the main problem with Keynes’ theory that claims the solution to a recession is to increase aggregate demand. The business cycle is driven by investment spending not consumer spending. From 2006 to the heart of the recession in 2009, consumer spending as a percentage of GDP increased slightly while investment spending dropped 36 percent. Into the second quarter of 2010, consumer spending continued to remain strong while investment spending stayed flat. This explains why unemployment spiked over 10 percent earlier this year and remains high today - consumers never stopped consuming but investors stopped investing.

Conliffe claims the theories of Keynes are only discredited by economists “who espouse laissez-faire capitalism.” Some of the economists that Conliffe summarily dismisses include 5 Nobel laureates - Edward Prescott, Vernon Smith, James Buchanan, Friedrich Hayek and Milton Friedman. Friedman, considered to be the most influential economist in the second half of the 20th century, once responded to a similar attack on his brand of economics - “there is no [laissez-faire] economics - only good economics and bad economics.” Government’s adoption of Keynesian theory is bad economics.

[Letter to the Editor - Farmington Observer. Published 11/18/2010.]

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