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Adam Smith Institute on the privatization of Keynes Keynesian economics may have gone out of fashion, but it is still here with us today in a different form. That is the theory of ASI president Madsen Pirie, who writes that Keynesianism has been privatized by the current UK government.
Keynesian economics used to be about government spending being used to flatten the business cycle. Now the privatized Keynesianism is about pushing private citizens into doing it. As Pirie writes:
They make saving less worthwhile by burdening companies with taxes and regulations, depressing share prices. They make spending easier with lower interest rates and by measures which boost house prices and encourage people to borrow.
The privatized Keynesianism builds up indebtedness and inflated house prices, and cuts into investment and pension provision. Government hopes that the boom part of the cycle will come to the rescue, and that rising wealth and prosperity will solve these problems.
Or will the privatized Keynesianism inflict the same long-term damage on the economy that the old Keynesianism did?
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Not as much, as you don’t get crowding out*. State sector money doesn,t make private spending less profitable, basically.
* Hayek
This is private debt spending and it probably behaves as such.
Debt can allow a prudent investor to work their way back up into the black. Or, it can allow a wastrel to dig ever deeper into the red, leading to bankruptcy.
Basically the result of these tricks will be (depending on chance, productivity, and personal character) either a shallow bust and a glacially slow recovery, or a shallow bust that lingers (and perhaps “improves”) until the debt runs dry, and then flips harshly downward into a full blown Depression.
I’m prepared to believe that some privatised Keynesianism such as Madsen Pirie describes exists as an accidental side-effect of government policy. (Could we call it Compliance Inflation?) But quantitatively it’s surely not a very significant factor beside Gordon’s massive direct inflation–neoclassical endogenous bollocks notwithstanding–of the state sector and the public-private-partnership (AKA crypto-state) sector. Or is it?
I wouldn’t necessarily call this ‘private’ in a strict sense. People will make what seems to be the best choice available to them, and if they’ve been led down a narrow path via State interference, then, at the very least, it is a modified form of Statism. Is it ‘private’ when the State endeavors to prompt individuals via the tax code to behave certain ways? Is it ‘private’ when I have basically one way to save tax deferred? Certainly to individual ‘chooses’ but from a threadbare list of options. Simply because the individual ulitmately makes some sort of decision doesn’t mean it’s within the realm of liberty. At the end of the day, it is always individuals who make choices about how to conduct their lives, but it is the Statist element that eliminates many of the options. Essentially the trick is for the State to make the individual THINK they are free when they really are not. I make the best of what is available, but I gnash my teeth over having simply column A and column B (at best) to choose from.
You know, Keynesians seem notoriously hard to pin down. Hell, they even claim that cutting taxes is a Keynesian measure!
Or is that more revisionist history after their many failures?
TWG
Cutting taxes is certainly one of the so called weapons in the Keynsian arsenal, but it’s goal isn’t to shrink the size of government, it’s to increase the deficit which Keynesians incorrectly believe stimulates economic growth.
Even a broken clock is right twice a day.
Quote :
“Cutting taxes is certainly one of the so called weapons in the Keynsian arsenal, but it’s goal isn’t to shrink the size of government, it’s to increase the deficit which Keynesians incorrectly believe stimulates economic growth.”
Would it be fair to describe the present US administration as Keynsian – given this comment and the main article.
No. In the private sphere repaying the debt burden may require some vigorous contortions but the only way the public sector debt is repaid is via taxation (and hopefully asset sales).
Somebodies debt is also, don’t forget, somebody else’s asset.
The central bank will add liquidity by dropping interest rates if we get into crunch situation.
Interesting that the government has reformed insolvency laws, making personal bankruptcy a one-year process and generally making it much easier to write off personal debt. Credit card companies will take a very big hit in a future downturn.
I fail to see how Dr Pirie’s arguments extend beyond the basic Austrian theory of a credit expansion.
http://thefilter.blogs.com/thefilter/2004/08/privatising_key.html
“Would it be fair to describe the present US administration as Keynsian – given this comment and the main article.”
I’m not sure exactly what the larger theory is behind the Bush administration’s economic policies, but it walks, looks and quacks like Keynsian. The problem I have with that is the people on the left and right in America are calling this supply-side economics, which most certainly isn’t what they are practicing.
A true supply side administration would probably spend the same on the war on terror, but would never have doubled the budgets of the education and energy departments, signed a giant rich farmers subsidy bill, a giant highwys bill, deceitfully push through a giant new entitlement program, or increase funding for the NEA.
For perverse political reasons both parties want to label Bush’s economic policies as “supply-side” when they most certainly aren’t.
The followers of Lord Keynes have long argued that (under certain conditions) an expansion of spending generated by an expansion of credit-money (via the Central Bank) can be benifical to the economy.
Now this credit-money expansion can go to the government (i.e. the government can borrow the new money and increase government spending) or it can go via private individuals or organizations (they can borrow the new money and spend it).
Where Lord Keynes differed from earlier “monetary cranks” was that he did not normally argue for just printing money and spending it or handing out (as the “Social Credit” people did), J.M. Keynes tended to argue for a complicated process of the central bank (or Federal Reserve system in the United States) generating extra credit-money.
The Keynesian process looks more respectable than just printing off notes.
The basic question is this – is a credit boom (whether this money goes into government spending or private spending) a “good thing” (via the “multiplyer effect”) – or does it lead to a boom-bust cycle.
Mainstream economists (such as Milton Friedman – although he may have changed his position) tend to argue that credit-money expansion does not lead to a boom-bust cycle – at least as long as the credit-money expansion does not lead to a large scale increase in the “price level” (mainstream economists define inflation as a rise in this “price level” rather than an increase in the supply of money).
“Austrain” economists deny that the government can get away with these games for ever.