PrintFebruary 28, 2011
Bury Keynesianism, not Cash in Coal Mines
John Maynard Keynes once suggested that the government could create jobs by burying bottles full of money in coal mines, covering them with trash, and encouraging people to dig them up. I know, pretty dumb idea. If Korea builds cars, China builds computers, India builds accountants, and we take money out of the private economy to subsidize a government bottle burying program, which economy will generate more wealth in ten years?
Technically it's true that such a program would create jobs and would put money in the hands of people who would then spend it and generate economic activity. But economic busy-ness doesn't necessarily create wealth. Spending forty hours a week rearranging the furniture in your house is not a recommended get-rich scheme. Paying people to do a job that creates no wealth is the same as paying them to watch television. Then again, this might not be convincing to people like Nancy Pelosi, who think that unemployment compensation is an excellent stimulus program.
Keynes, who also recommended putting people to work digging holes and filling them up, argues that government make-work programs produce more wealth than they cost, a magic trick called the multiplier effect. Keynesians are fond of calculating multiplier effects with great precision: every dollar spent on the stimulus will generate $1.53 of economic activity, etc. Other economists like Milton Friedman and Robert Barro believe in a negative multiplier effect, since we have to pay government to supervise the bottle burying and wealth redistribution. We simply move money from one pocket to another, minus the government commission. (See also Jeffrey Folks' AT article, Multiplier Effect Defect.)
Some of our most decorated economists continue to push Keynesian policies. Nobel Prize winner Paul Krugman wrote a 2009 piece called "Time for Bottles in Coal Mines," arguing that Stimulus projects that came in under budget are a bad thing, since the whole point is to shovel as much money into the economy as possible. It's hard to make this stuff up.
The bottles in coal mines program came up again in Alan S. Blinder's Friday column in the Wall Street Journal. Given the column's title, "The Economic Silly Season Is Upon Us," one might hope for a criticism of Keynesianism, but, alas, Blinder turns out to be Paul Krugman-lite, who dismisses any concerns about the deficit as "silly." Here's the discussion of his "third element of silliness -- the one that seems to afflict only Republicans":
How many times have you heard Speaker of the House John Boehner (and others) refer to "job-killing government spending"? That phrase has become an official GOP mantra, on a par with "death taxes" and "death panels" -- and it's just about as truthful...But even if you dislike some particular piece of government spending, how exactly does it kill jobs? (The taxes raised to pay the bills may kill jobs, but we are talking about deficit spending here.) If the government either hires people itself or purchases things from private companies, doesn't that create jobs?
Back in the 1930s, an exasperated John Maynard Keynes quipped that, if the British government refused to spend money on anything sensible, it could at least bury cash around the country and invite people to dig it up. If a ridiculous policy like that would create jobs -- as it would have -- then surely even lame-brained government spending will create jobs, too.
The obvious flaw in the idea is that money in those bottles has to come from somewhere. Government has no money that it hasn't taken from the people, and so when government "hires people or purchases things" it can only do so by taking money out of the private sector.
Blinder loves to add caveats that make him sound more reasonable -- he talks about a "ridiculous" policy but then adds that "it would have" created jobs. He calls these Keynesian schemes "lame-brained" but, like Krugman, he actually supports them. Perhaps we could really get the economy humming if we create a new cabinet level post to supervise placement of bottles in coal mines, shut down our existing coal mines, and put the miners to work burying cash-filled bottles, thereby creating jobs and attacking global warming at the same time.
Similarly: "The taxes raised to pay the bills may kill jobs, but we are talking about deficit spending here." He appears to be fiscally responsible by worrying about higher taxes, but he makes a distinction without a difference; at some point we either have to pay off the deficit or devalue the dollar. This is not know-nothing GOP silliness:
The Ricardian equivalence proposition (also known as the Barro-Ricardo equivalence theorem) is an economic theory that suggests consumers internalise the government's budget constraint and thus the timing of any tax change does not affect their change in spending. Consequently, Ricardian equivalence suggests that it does not matter whether a government finances its spending with debt or a tax increase, the effect on total level of demand in an economy being the same. [Wikipedia]
Blinder also ignores Ricardo's first proposition about the timing of any tax change later in his editorial:
It's the actual spending cuts and/or tax increases that can wait until our economy is stronger -- not their enactment. A smart Congress would legislate future spending cuts and tax increases right now, but delay their start. That would show seriousness of purpose and reassure the bond market without damaging the nascent recovery.
I would expect the exact opposite. Delaying sacrifice would prove our lack of seriousness of purpose, and the bond market would not be reassured by the delay of an action it perceives as negative. Current market prices always anticipate future events, especially ones that we can predict with 100% certainty, as would be the case with a Congressional promise to raise taxes down the road.
This would all be an arcane theoretical debate if we didn't have Keynesians in charge of the public purse strings. The Obama Administration has spent several trillion dollars on Keynesian stimulus -- what he likes to call "investments." So far he has only confirmed that Keynesianism does not work. Alarmingly, the President and his economic advisors are undeterred by the reality facing them.
