A little over a month ago, I posted a piece on Seth Klarman's call for a change in economic policy. The bizarre action in stock and bond markets indicate something is amiss. Is 'tapering' going to tank the market (undoubtedly, if done properly)? Will our increasingly likely involvement with Syria have implications in the economy (of course)?
What all these questions imply is that we're spending too much money, somewhere, on 'stuff', rather than productive capacity. Production is what creates consumption and demand, not vice-versa as Keynesians suggest. The very first consumer had to produce (via hunting/gathering) what he/she consumed before it could be consumed. This is not a chicken-egg question, it's self-evident. Your desire to consume a hard-boiled egg may create the demand needed to have someone, somewhere to boil an egg and sell it to you. This desire, however, cannot be stimulated by providing you with cash or the means to purchase or make the egg. Before you can create that demand, you have to know it can be produced either by yourself or by someone else who you can purchase it from. If the recipe for a hard-boiled egg doesn't exist, but you desire it, your entrepreneurial spirits may be stirred to become a cook and make this for all to enjoy. That process leads to the development of consumer desire for the product.
Today, however, our government believes desires of this sort are generated by moving money, with the benefit of a 'central brain' in Washington, D.C. to guide the money into places where it can be used to increase consumption, which will drive production. This guided shifting of cash will lift all boats. Not all the money will be shifted from the rich to the poor, but some will be shifted from the future into the present, making the present more productive, and the future that much more productive because we'll borrow from tax revenues generated by increased taxes on the future rich.
Aaron Clarey prepared a useful chart showing how well this works, how much GDP we get per government dollar spent.
The problem with Keynesianism is its core belief that you can properly shift money to productive areas through a reasonably well guided government process. There are some who claim borrowing from the future limits future productive capacity, due to payments on interest. This is true to a point. One has to remember entrepreneurs borrow from the future to increase productive capacity. That concept is not flawed in business. The reason it is flawed in government is at least two-fold:
1. Dead-weight loss. A government has to pay for bureaucrats to shuffle the money from the taxpayer to the areas of productive value, and is not incentivized to do it in a timely or useful manner. An entrepreneur will do this more efficiently, realizing any wasted money is lost potential.
2. Perfect knowledge. None of us have perfect knowledge regarding what will yield great productivity. More entrepreneurs fail than succeed, but the risk and responsibility falls upon them and their investors. It's only logical that government will fail more frequently than it succeeds if it tries to use money to increase productivity. This is why Solyndras are more common than not. But the problem is the risk is absorbed by taxpayers, not investors, who may not have wanted to see the money go to a Solyndra, while the responsibilty should be borne by the politicians, but is never assigned to them in full. More importantly, government reassignation of revenues is not a tool of progress, as some politicians claim, it is a tool for resistance to change.
Markets are conducive to evolutionary improvement. Government empowers those who want to resist change.~Arnold Kling
The government's failure shouldn't be a surprise. If he was an entrepreneur, the massive failure of Obama's economic policies should almost be expected.
It is the source of the money he is using to pursue his goals that are at issue. All investors may be taxpayers, but not all taxpayers are investors. It is wrong to force them to invest when the odds of failure are high and they have no say about who gets the money.
Taxing Peter to pay Paul is using Peter for Paul. It is corrupting. Modern governments have been encouraged to think that any abuse of Peter is just fine, that Peter is a slave available for any duty that the ruler has in mind. ~Deirdre McCloskey
