Rooted in Reason: Nurturing the Seeds of Liberty


Who Understands Your Money Better Than You? by maliab
August 11, 2011, 6:36 pm
Filed under: Economy | Tags: , , , ,

Surprise!  You may not know it, but you’re an economic genius.  Or above-average at least.  Assuming, that is, that you base your spending decisions on long-term appraisal of your income, government policy, and its probable effects.  Of course, if you do these things, than you’re probably more than a little frustrated and concerned about our current state of affairs.  But your worries and predictions about higher taxes and the inevitable problems that come with large-scale government spending are the bane of Keynesian economists (including the Obama Administration).  As Paul Gregory explains in his recent Forbes article, Obama and other Keynesians are prepared to laugh at the Tea Party members (and, it must be pointed out, followers of Milton Friedman’s free market principles) who actually understand the real state of things better than they, as they cling to their increasingly discredited belief that greater government spending grows the economy:

The appeal of Keynesian economics is its simple logic. If government spending for goods and services is part of GDP, then any increase in government spending must raise GDP.

As President Obama explained in a town hall meeting on Feb. 8, 2009:

“Republicans say this is not a stimulus bill but a spending bill. What do you think a stimulus is? That’s the whole point.” (Laughter from the crowd).

 

Keynesian economics is easy, even for stupid people. More thought and analysis are required to understand why it has not worked as it is supposed to. Keynesian skeptics must show that increases in government spending cause other components of GDP, such as consumption, investment, or exports, to fall. Such countervailing forces require more nuanced and sophisticated thought. They are not for the mentally lazy or those seeking simple answers.

Gregory goes on to list five principles from Nobel-Laureate Keynesian skeptics that demonstrate that our current course of government spending is disastrous.  Consider number two:

2) Crowding Out (Milton Friedman)

This proposition says that increases in government spending crowd out investment and even consumer spending. In its simplest form, it says that when the government borrows for spending, less capital is left for private investment and for consumers.

Gregory rightly takes offense at the fact that the Tea Party has been a subject of ridicule from those who accept the Keynesian theory without question.  Perhaps the Obama Administration and other adherents of this philosophy of government intervention and expansion simply resent the Tea Party crowd for not being stupid enough to accept their policies without question.

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