Wednesday, February 4, 2009

Pols Never Learn

A classic essay from Hans Sennholz

Keynesian Budgets Threaten the Economy

Federal legislators and administrators apparently cannot free themselves from the spell of Keynesianism. It has such a compelling attraction because it elevates to good economics the thing they like to do most—spend other people’s money. Keynesianism permits administrators to yield to any and all spending pressures by Congress, and encourages them to take the lead in new spending initiatives. It confers respectability on political profligacy.

Unfortunately, government spending does not sustain, stimulate, or invigorate an economy. On the contrary, it diverts economic resources to many unproductive uses and thereby aggravates a recession. Boosts in spending allocate more resources to the ever-growing bureaucracy and the favorite recipients of Federal largess. This is why the Federal budgets may actually deepen and prolong the present recession...

Government spending always is presented as a benefit without cost, a grand addition to the general welfare, a social achievement of the highest order...

The Keynesian call for a sharp rise in Federal spending as an antidote for recession is neither thoughtful nor helpful; it completely misinterprets the causes and consequences of recession and, therefore, prescribes the wrong medicine. A recession is a time of readjustment and recovery when businessmen correct the mistakes made in the past and put their houses back in order. It is an integral part of a business cycle that begins with a boom, leads to a bust, and ends with recovery. If, for any reason, government prevents the readjustment or even promotes more maladjustment, it makes matters worse. In the end, the recession may turn into a deep depression, just like the Great Depression during the 1930s...

Under the sway of Keynesian thought, many politicians and officials are determined to hasten recovery through deficit spending and money creation, which they call “contra-cyclical.” Actually, their policies are “contra-recovery”; they aggravate and prolong the recession by consuming capital en masse, crowding out business, and depressing business activity. The currency and credit expansion falsely lowers interest rates, which again misleads businessmen in their investment decisions. In short, government deficit spending and money manipulation are the most potent recovery suppressors.

The present recession may prove this point. When Federal deficits are made to swell to Unprecedented levels while the recession deepens and lingers on, the Keynesian model obviously fails to demonstrate economic reality. It misinterprets the causes of recession and, therefore, prescribes a wrong medicine, in fact, a very harmful medicine.

read the entire essay

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