Trying to grow a flower by watering its petals instead of its roots

This is the best article on Keynesian economics I may have ever come across, by David Weinberg and published in The Federalist: Why Economic ‘Stimulus’ Only Makes The Economy Worse. His summary statement captures his point perfectly:

While it remains a favorite policy prescription for politicians eager to appear as salvific heroes in times of need, it is untenable as a serious idea to stimulate anything except our national debt.

I could not recommend any article more. You should read it all, every word. There is a lot in it, but this was my favourite part:

The reality is that Keynesian policy fails for the simple reason that it targets the wrong problem. Production drives economic growth and creates an equal flow of demand. Demand is thus the consequence of production, not the other way around.

Successfully growing an economy, then, requires targeting production, not aggregate demand. Indeed, trying to grow the economy by targeting demand rather than production is like trying to grow a flower by watering its petals instead of its roots.

Here’s how his article relates to current policy.

In light of these numerous historical blunders, it is a wonder anyone takes Keynesian fiscal policy seriously anymore. Yet policymakers and politicians remain wedded to the model, as the current fury to rush through spending packages attests.

Now, lest the message here be misconstrued, this is not necessarily an argument against relief as a humanitarian measure in the midst of an economic meltdown resulting from governments around the world forcing businesses, communities, cities, states, and even entire countries to close down. This is a government-created economic disruption to deal with a public health concern.

Under these unique circumstances, there is certainly a case for providing targeted assistance. But we must not be fooled into believing that relief serves as economic “stimulus,” and nor can we ignore the fact that, beyond humanitarianism, there is no shortage of advocates calling for plain old demand-side fiscal stimulus. In that regard, there is little doubt that any Keynesian bill will blunt its drill on the same hard economic truth that stymied past demand-side exercises.

I can only hope the message spreads wider and deeper. It ought by now be obvious given the universal failures of public sector spending every time it has been tried.

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22 Responses to Trying to grow a flower by watering its petals instead of its roots

  1. BorisG

    Why Economic ‘Stimulus’ Only Makes The Economy Worse.

    It probably does. Yet it may help some people survive.

  2. Boris G

    It probably does. Yet it may help some people survive.

    What’s the point if by helping some to survive, it crushes more?

  3. 2dogs

    The COVID-19 regulations make an interesting economic argument by considering the converse.

    With the COVID-19 regulations, we have a destimulus because while willing sellers and willing buyers exists, the transaction is prohibited. There is a deficiency in neither supply nor demand; the transaction is banned.

    The converse means a stimulus can be obtained by lifting regulations, as we inevitably will when the plague has passed.

    But that concept has more general application. If lifting those regulations will stimulate the economy then, then a similar action should stimulate an economy in other circumstances, too.

    We should speak of the need for a deregulatory stimulus during any economic downturn.

  4. Mater

    Good observation, 2dogs.

  5. Entropy

    Excellent article.

    What you are saying Boris, I think, is that regardless of why the money is provided, some people are able to survive because of the provision of the package. That would be true and is a benefit, as the article outlines. However, that merely means the goal of the “stimulus” is confused, as it is being implemented to boost the economy through the goal of increasing demand, not primarily for humanitarian or welfare reasons, aka “putting food on the table”.

    At least the bulk of the ScoMo package, and it must be said Palaszczuk packages are focussed on small business and keeping people in jobs, more than the useless cash splashes and drawn out centrally planned non productive building program of the Rudd era.

  6. Buccaneer

    It’s the petals that vote.

  7. Petros

    Suddenly the governments care about small businesses.

  8. Anne

    Why are the JFK Kennedy grandkids singing “Timber” on Instagram?

    Why is Vincent Kennedy posting a picture of a Timber snake to Twitter?

    FYI, G.H.W. Bush’s secret service code name was Timberwolf.

    GHWB, then a 40 yr old CIA agent, was in Dallas, November 22nd, 1963.

    Are we about to see the Kennedy Assassination Files opened?

  9. b

    I have yet to see an explanation as to why people on welfare had to be helped at the expense of actual workers being destroyed by government decree. What additional expense would someone on Newstart incur? Scotty from marketing is going to find out that it is easy to give money away but much harder to take it back. I should invest in cannabis and methamphetamine production.

  10. Tim Neilson

    It’s the petals that vote.

    Winner!

  11. bollux

    I have yet to see a decent explanation as to why welfare recipients needed to have an increase. Better financial solutions should be targeted towards those who have been devastated by closures. Scott Morrison is going to find out itis easy to give other peoples money away but much harder to take it back.

  12. BorisG

    Entropy, I agree. We may support using taxpayer fund to help struggling people and businesses, but don’t call it stimulus. It is redistribution, which is fine at the time of crisis. I wish our governments were more honest and transparent.

  13. BorisG

    I have yet to see a decent explanation as to why welfare recipients needed to have an increase.

    Good point.

  14. thefrollickingmole

    A few good points, I was hit by this one.

    In fact, reduced federal spending combined with the release of wartime command freed up resources in the economy, and private actors did not hesitate to respond. As a torrent of surging productivity unleashed an economic expansion, growth reverberated for decades, directly contradicting the Keynesian models.

    All those factories which expanded or sprung up during WW2 didnt keep churning out tanks when the war ended.
    Instead a massive amount of retooling and converted “supply” was unleashed on consumers.
    If Keynes was right then all the wartime production could have continued making wartime goods as there would have still been a boom for consumers as the money was being spent (using bombers to dig those holes in the ground and tanks to bury they money in them)

  15. BoyfromTottenham

    bollux:
    ‘I have yet to see a decent explanation as to why welfare recipients needed to have an increase.’
    I totally agree – as a self-funded retiree in a defined contribution scheme, there are no options other than Cash and Bonds in my super fund that are currently not exposed to the crashing stock market. Since 23 Feb every share-related option has fallen by 20 to 40%, and since 9 March bond returns have halved as well to about 2%. There is nowhere to hide. But we seem to be the only group that isn’t getting a COVID19 handout. I really hope that this virus situation resolves sooner rather than later.

  16. Tom

    Keynsianism is the junk science of economics, popular with socialist charlatans whose only real objective is to increase the size of government. In a just world, their abysmal record of failure trying to pump-prime economies would have them sacked, but they’ve ingratiated themselves with bureaucrats and central bankers dedicated to relentlessly increasing the size of government.

    Needless to say, Australia is the world capital of Keynesian dunces and they have every single politician in their thrall.

  17. BoyfromTottenham

    thefrollickingmole: And the German ‘economic miracle’ after WW2 was apparently accompanied by wholesale removal of red tape and regulations, resulting in Germany’s GDP rising far faster than poor, debt (and regulation) laden Britain over the next 2 or 3 decades. So the Brits won the shooting war and lost the economic war to the enemy. If we are not careful, we will win the COVID19 war but like debt-laden Britain, lose the economic recovery war.

  18. amortiser

    Re production preceding consumption, this is probably the best and simplest analogy I know:

    Build it and they will come.

  19. Another Ian

    Re thefrollickingmole
    #3376768, posted on March 26, 2020 at 10:12 am

    https://www.redpowermagazine.com/forums/topic/128743-ford-steps-up/

  20. Bad Samaritan

    BoyfromTottenham(10.56am). If the govt is as stupid as it appears to be then I will be trying my luck at Centrelink too. first time ever….Have done the registration of interest, and will now see how sports-punter with no sports left to punt on goes. I am a small businessman I tell’s ya!

    BTW: Assets do not matter. As it’s only income they care about now you should give it ago.

  21. thefrollickingmole

    Another Ian

    Good little example i suppose. Thanks for that.

  22. John A

    While it remains a favourite policy prescription for politicians eager to appear as salvific heroes in times of need, it is untenable as a serious idea to stimulate anything except our national debt.

    And Keynesianism is particularly useful for such politicians since it presumes that government is the supreme authority. Hence Keating’s infamous reference to getting hold of the levers of the economy.

    Although according to Wikipedia, Keynes eschewed Marxism, he was a Bloomsbury Group member and strongly progressive in his politics. There is no reference to any faith in God, and I presume that he held to no such higher authority.

    So although he saw through Marx’s inadequate history and economics, I read his thinking to be collectivist, focused around government as that supreme authority.

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