Tyler Cowen: We Need to Turn To Keynesian Macroeconomics for Guidance

Tyler Cowen is completely out of the closet.

In a column in today's NYT discussing the budget sequestration process, he goes full Keynesian. Though, all of the observations by the general director of George Mason University's Koch-funded Mercatus Center are not inaccurate, he does make this important point:

Half of the sequestration would apply to the military budget, an area where most cuts would probably enhance rather than damage future growth. Reducing the defense budget by about $55 billion a year, the sum at stake, would most likely mean fewer engineers and scientists inventing weaponry and more of them producing for consumers.

In the short run, lower military spending would lower gross domestic product, because the workers and resources in those areas wouldn’t be immediately re-employed. Still, that wouldn’t mean lower living standards for ordinary Americans, because most military spending does not provide us with direct private consumption.

To be sure, lower military spending might bring future problems, like an erosion of the nation’s long-term global influence. But then we are back to standard foreign policy questions about how much to spend on the military — and the Keynesian argument is effectively off the table. 

On a practical note, the military cuts would have to be defined relative to a baseline, which already specifies spending increases. So the “cuts” in the sequestration would still lead to higher nominal military spending and roughly flat inflation-adjusted spending across the next 10 years. That is hardly unilateral disarmament, given that the United States accounts for about half of global military spending. 

This is a fairly decent analysis of the military spending "cuts" via sequestration, though, a comment must be made in even this part of Cowen's analysis. Economist Murray Rothbard questioned how the role of government spending relative to a country's gross  product should be viewed overall. Rothbard wrote:

Since government activities are more likely to be depredations upon, rather than contributions to production, it is more accurate to make the opposite assumption: namely, that government contributes nothing to the national product and its activities sap the national product and channel it into unproductive uses.

Cowen seems to be  thinking along these lines somewhat when he writes that  lower military spending wouldn't mean a lower standard of living for Americans, and that it would re-direct engineers and scientists into developing consumer products, rather than military products. Though, he then spends a sentence discussing the decline in GDP that the "cuts" would cause.

But, here's kicker, there is another point with regard to this same comment where Cowen seems to have put himself in a contradictory position. To emphasize, here is Cowen's exact wording is:

Reducing the defense budget by about $55 billion a year, the sum at stake, would most likely mean fewer engineers and scientists inventing weaponry and more of them producing for consumers.

In the short run, lower military spending would lower gross domestic product, because the workers and resources in those areas wouldn’t be immediately re-employed.

BUT, what re-employed workers and resources would there be? Cowen writes just a couple of paragraphs down:

So the “cuts” in the sequestration would still lead to higher nominal military spending and roughly flat inflation-adjusted spending across the next 10 years.

Thus, there would be no worker and resource cuts that would need to be re-employed, if inflation-adjusted spending stays the same. It is just inconsistent, sloppy thinking by Cowen.

This, however, was the most cogent part of Cowen's analysis. From here, he goes into thinking more reminiscent of Paul Krugman than an economist that actually understands how the world works.

Cowen writes:

The other half of sequestration would apply to domestic discretionary spending, where the Keynesian argument against spending cuts has more force.[...]  much discretionary spending goes toward useful projects — building or repairing roads, for example, or research toward medical innovation. Limiting these investments would bring the Keynesian argument into play, and perhaps harm productivity, too. So we should look to substitute some areas for others — and turn to Keynesian macroeconomics for guidance.

See Walter Block on why there is no need for government to be involved in road construction, management and ownership. But, most alarming, is Cowen's implied endorsement of government medical research. Government medical research is a distortion of overall market structure. Further, government funded medical research redirects research in favor of government chosen projects, which results in politically correct research versus what the market would demand, and opens up such funded research to crony science. It is hard to see how any free market economist could be in favor of such a government role. Cowen has not only abandoned the Austrian ship, he has abandoned free markets.

As for his Keynesian justification for government spending, it simply puts him in the same camp as other apologists for government spending. Cowen has always been teetering on the edge of sound economics, this column places him completely in the statist, interventionist camp. Very sad. You could get a better understanding of sound economics watching Hunter Thompson interview Keith Richards.