Tag Archives: Keynesian

They aren’t “think tanks”, they’re cartels

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Keynesianism is the heroin of economic policies. Those who are hooked rave about the highs it brings and will do anything for their next fix. It sounds simple enough to hear their explanation: inject some taxpayers money into the economy and watch it soar. The trick apparently is in finding the right “vein” to inject it into. So addicts might call for a massive public sector house-building programme, or a new high-speed rail line, or upgrades to the motorway network, or a new airport. There are a host of possibilities and they all have the same appeal: create work and stimulate the economy. It’s taxpayers money, they acknowledge, but it’s going straight back to the taxpayer and it’s making the money supply go round faster thus stimulating the economy.

Does anyone remember the Soviet Union? How short memories are. The state making investment decisions is never a good idea, and under the present climate of incompetence and lack of control it is potentially a disastrous one. To raise the money they want to spend, Keynesians would have to raise taxes by at least as much and in reality substantially more because collecting taxes is an inefficient process. If they wanted to spend say £10 billion on house building, they’d probably have to raise £20 billion to make up for the tax dodging that would be triggered. That £20 billion would be money taken out of taxpayers’ pockets which would result in less spending on other parts of the economy. The money supply would not in fact go round faster, it would slow down.

The truth is, Keynesians are not injecting money into an economy, they’re diverting it away from things the taxpayer was already spending it on: food, clothing, consumer goods, running a car and all the other everyday expenditures they’re already struggling to meet. And it’s not going straight back into taxpayers’ pockets, they’re tying it up in long-term capital projects. Central planning of an economy is always a bad idea. Always. If they really want to stimulate the economy they should leave as much as possible in the pockets of the taxpayer.

Here are some of their proposals examined:

Build more houses

Why won’t that work? Nobody could afford to buy them despite record low interest rates because banks are not making mortgage loans. If they were lending more money, there would be more houses bought and sold. Thousands of perfectly good houses were demolished under Labour’s disastrous Pathfinder scheme, but there are plenty more that could be renovated and returned to use which would happen if people were able to get mortgages to buy them with in the first place.

Build more railways

Why won’t that work? There is a massive amount of investment going on already, with new stations and upgraded lines which is part of the justification for increased fares. But turning stations into improved shopping centres isn’t really addressing the problem: people don’t make decisions on whether to travel by train on the basis of whether the station has a Costa cafe, they decide on the basis of the train fare. Right now fares are rising above the rate of inflation and the plain fact is, people can’t afford them.

Build a new airport

Why won’t that work? Heathrow airport in particular is seriously damaging Britain’s reputation as a place to travel to and to do business with. So Keynesians want to build a new runway, or better yet, an entirely new airport. The problem is, the nightmare that is travelling through Heathrow isn’t because of delays in the air, it’s the hours on the ground spent checking-in and going through security and especially getting through immigration on the inward journey. Spend the money on more immigration officers instead.

Build more roads

Why won’t that work? Everyone gets stuck in traffic, right? And where does that happen? In city centres, at junctions, places like that where traffic merges. And where do they want to build new roads? Out in the open country where there are no traffic jams. So how does that help? It doesn’t, you’re still going to be stuck in traffic jams, you’ll just get to the next one faster. But so will everyone else which means you’ll all sit in it longer. The other problem with the build-more-roads solution is that people can’t afford to drive, it is increasingly expensive to run a car.

To sum it up.

The bottom line is, you can’t buck the markets. Every individual in the market is making their own buying decisions on the basis of what they know they want, not on the basis of some state-mandated five year plan. All the Keynesians end up doing is interfering in the smooth operation of the market and as can easily be demonstrated the real solution to any problem they highlight is often simpler and cheaper – government should get out of the way.

Stuck in the Keynesian cycle lane

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Consider the newspaper industry. An essential source of in-depth news and reportage. Essential because a well-informed populace is the prerequisite for a healthy democracy. In their day, newspapers would sell in vast numbers, most homes would have a daily paper delivered, sometimes two, and many cities had evening newspapers. But now newspapers are struggling to survive and there is much anguish over new business models such as charging for online access, or using celebrity bloggers to pull in the readers while at the same time slashing costs and sacking trained, experienced journalists. The industry is in turmoil and sales of printed papers are a fraction of what they used to be.

How would Keynesians deal with this problem?

Well, first of all, I’m not a Keynesian, and secondly, it’s not a problem. It is simply progress and the natural effect of supply and demand in a free market economy. People aren’t buying newspapers in such great numbers any more because they don’t want to; they have found other sources of news and information. As someone who believes in democracy I am worried about where they are getting that news and information from now, but that’s a different problem. Instead, I want to explore the Keynesian approach because a market fluctuation of this magnitude is something they consider to be a problem and I’d like to examine their solutions because there is a pattern to them.

Keynesians would want to see newspaper production raised to its previous high, to safeguard jobs and to preserve a part of the economy intact in what is, to them, a cyclical event. We would once more see vendors on every street corner shouting “Extra! Extra! Read all about it!”, we would once more have newspapers delivered to every home. They just wouldn’t be bought at the same volumes as before because the consumer has already made his choice. However, since they’re being printed at excessively high volumes there is an unsustainable shortfall in revenue, to pay for which the Keynesians would give the newspaper barons huge subsidies until the market stabilises again.

Is that the problem solved then? Not really. We need to ask, “Where does the money come from?” It’s not free money. It’s not even the government’s money. It’s taxpayers’ money and in the past that fact was obscured by sleight-of-hand, by pretending the government had ‘reserves’ or could reallocated expenditure from one area to another. Taxpayers are getting wise to those old tricks and they are increasingly asking the same question. They know that extra government spending means higher taxes and that means less money in their own pockets. So what do they do to compensate? They cut back on spending, not buying things they would have preferred to spend money on.

Let’s imagine for the sake of argument that everyone cuts back their spending on the same thing. Let’s imagine that up and down the country people stop going to football matches. Every Saturday teams run out onto the pitch and play their games in front of empty stadia, while at home millions of former football fans spurn the subscription fees on television and watch soap operas on freeview instead. The government of the day becomes very unhappy because now instead of talking about football with their friends, everyone is talking about how useless the government is. The government are reminded of bread and circuses, something Roman emperors would only forget at their peril.

So they turn to their Keynesian advisors again, the ones who fixed the newspaper problem, and ask them to fix this problem too. Well, as they say, if all you have is a hammer every problem looks like a nail. So the Keynesians look at this problem and see another business cycle that needs to be hammered flat. So they pummel it with taxpayer subsidies to keep the star players and their WAGS in champagne and tasteless mansions and all is well with the world again. Except for the taxpayer. He now has this subsidy to pay for as well and his taxes go up again and the cycle repeats itself: The taxpayer must make economies in some other area of expenditure. Perhaps bread?

Of course it doesn’t work like that in the real world. In the real world people make individual choices and cut out expenditure that is less important to them. This aggregates across all market sectors and results in a general decline in economic activity proportionate to the money being squandered. It also results in a loss of crowd wisdom in ferreting out obsolete goods or inefficient services because the free market is now being manipulated and distorted for political purposes. We can be sure that whatever part of the economy is impacted by consumers making free market choices, Keynesians will step in with taxpayers’ money to smooth out that particular business cycle.

You can read all about it in the newspapers.