The latest word from the "fiscal cliff" negotiations is that we will get about the worst of all possible results: tax increases but few or no spending cuts. The forces defending every last dollar of the unsustainable spending seem to have two main arguments, one being the "Washington Monument" strategy (see yesterday's post) and the other being Fake Keynesianism.
Fake Keynesianism is the prescription that all government spending is good and government spending must always remain high and increasing because it keeps people employed and enables them to spend money -- or something like that. If you believe in Fake Keynesianism then by its logic you would also believe that the two most successful economies in the world are North Korea and Cuba and that the government could improve our economy by paying everyone to dig holes and then fill them back in.
Here's a little round-up of recent statements in the Fake Keynesianism category:
From Nelson Schwartz in today's New York Times:
Another big question mark is whether unemployment benefits for more than two million jobless Americans will be extended beyond Jan. 1. . . . [F]ailure to extend them would deliver another sizable blow to a still-fragile economy, experts said.
Love those unnamed "experts," all of whom seem to have fallen for Fake Keynesianism.
From economist Menzie Chinn of the University of Wisconsin (via Media Matters):
[W]e too can make the current US recovery worse than that of the Great Depression; just implement a front loaded fiscal contraction, heavy on spending cuts.
From economist Alan Blinder (former Vice Chairman of the Fed) (via NPR):
Blinder says the looming sequester cuts will slow the economy at a time when it's already weak.
Similar quotes can be found everywhere from the likes of Paul Krugman and Robert Reich. How about this one from Paul Samuelson:
[W]ere we again planning . . . to shift from astronomical deficits to even the large deficits of the thirties then there would be ushered in the greatest period of unemployment and industrial dislocation which any economy has ever faced.
Samuelson is dead you say? The quote is from 1943, where Samuelson warns against cutting spending when World War II is over. The spending was cut. Result: boom. Oh, even though some 10 million people were redeployed from government to private employment within about a year and a half, the government statistics measured a 12% drop in gdp. Unfortunately, the government doesn't have appropriate tools to measure these things. This article by David Henderson needs to be read by everyone. Key quote:
Most of the policies that Samuelson had feared actually happened, and in spades. Price controls were eliminated. Not only was the federal budget deficit decreased, but also, in 1947, the budget surplus was over 5 percent of GNP. Demobilization happened big-time. Between 1945 and 1947, when the postwar transition was complete, the number of people in the armed forces fell by 10.5 million. Civilian employment by the armed forces fell by 1.8 million, and military-related employment in industry fell off the cliff from 11.0 million to 0.8 million. As demobilization proceeded, optimistic employers in the private sector scooped up millions of the soldiers, sailors, and others who had been displaced from the armed forces and from military industries.
There are also numerous voices today pointing out the necessity of cutting spending. But few are pointing out that Fake Keynesianism is just a fallacy, adopted by far too many seemingly bright people. The government cannot spend our way to prosperity.