Wednesday, January 15, 2014

Smashing Keynesian Economics

Robert Barro, an economics professor at Harvard and a senior fellow at Stanford's Hoover Institution, does a pretty decent job in WSJ of smashing the Keynesian view that transfer payments boost the economy. You really don't see much of this from the mainstream. Here's a key snippet:
Keynesian economics—the go-to theory for those who like government at the controls of the economy—is in the forefront of the ongoing debate on fiscal-stimulus packages. For example, in true Keynesian spirit, Agriculture Secretary Tom Vilsack said recently that food stamps were an "economic stimulus" and that "every dollar of benefits generates $1.84 in the economy in terms of economic activity." Many observers may see how this idea—that one can magically get back more than one puts in—conflicts with what I will call "regular economics." What few know is that there is no meaningful theoretical or empirical support for the Keynesian position.

The overall prediction from regular economics is that an expansion of transfers, such as food stamps, decreases employment and, hence, gross domestic product (GDP). In regular economics, the central ideas involve incentives as the drivers of economic activity. Additional transfers to people with earnings below designated levels motivate less work effort by reducing the reward from working.

In addition, the financing of a transfer program requires more taxes—today or in the future in the case of deficit financing. These added levies likely further reduce work effort—in this instance by taxpayers expected to finance the transfer—and also lower investment because the return after taxes is diminished.

This result does not mean that food stamps and other transfers are necessarily bad ideas in the world of regular economics. But there is an acknowledged trade-off: Greater provision of social insurance and redistribution of income reduces the overall GDP pie.

Yet Keynesian economics argues that incentives and other forces in regular economics are overwhelmed, at least in recessions, by effects involving "aggregate demand." Recipients of food stamps use their transfers to consume more. Compared to this urge, the negative effects on consumption and investment by taxpayers are viewed as weaker in magnitude, particularly when the transfers are deficit-financed.

Thus, the aggregate demand for goods rises, and businesses respond by selling more goods and then by raising production and employment. The additional wage and profit income leads to further expansions of demand and, hence, to more production and employment. As per Mr. Vilsack, the administration believes that the cumulative effect is a multiplier around two.

If valid, this result would be truly miraculous. The recipients of food stamps get, say, $1 billion but they are not the only ones who benefit. Another $1 billion appears that can make the rest of society better off. Unlike the trade-off in regular economics, that extra $1 billion is the ultimate free lunch.

How can it be right? Where was the market failure that allowed the government to improve things just by borrowing money and giving it to people? Keynes, in his "General Theory" (1936), was not so good at explaining why this worked, and subsequent generations of Keynesian economists (including my own youthful efforts) have not been more successful.
You can read the rest here.


  1. What is "regular economics?" Food stamps make people lazy? Most of the recipients are children. Goofy analysis. Article reads like parody.

    1. For once try not to be a complete ass Jerry. Since any school age child can get 3 free meals a day via the government school system and a variety of other anti-poverty programs why do they need food stamps? The real purpose of food stamps is to artificially jack up demand for agricultural products produced by the very greedy and influential agribusiness lobby. Involuntary malnourishment in this country is quite rare and the real problem is over eating by a corpulent and self destructive population of gluttons, hence our ubiquitous obesity epidemic.

      If there is a parody here it is your knee jerk, fact free, Compassion Nazi blather. Go back to your video game and stuffing your ignorant face with last nights pizza you buffoon.

  2. "Regular economics" is the world where production precedes consumption...Where rain means wet sidewalks and not the other way around...