Bruce Barlett's Keynesian claims in the New York Times

Bruce Bartlett wrote this in the New York Times.

Republicans have been warning about the loss of jobs from cuts in military spending for some time. At a hearing last October, the House Armed Services Committee chairman,Howard P. McKeon, a California Republican, said, “Defense cuts are certainly a path to job loss.” The committee’s blog often highlights the loss of jobs from military spending cuts. . . .
Historically, economists have believed that government consumption and investment spending has the same impact on jobs and growth whether it’s for military or domestic purposes. As Paul Samuelson, the Massachusetts Institute of Technology economist, put it in his best-selling economics text: “There is nothing special about G spending on jet bomber and intercontinental missiles that leads to a larger multiplier support of the economy than would other kinds of G expenditure.” . . . .
World War II ended the Great Depression. . . . .
Indeed, some economists have argued that military spending has in fact been the primary vehicle through which Keynesian economics has operated during the postwar era. The reason is that conservatives who routinely denounce government always give a pass to military spending. . . .
It is clear in today’s world that national defense does not consist only of bombs and rockets. Adequate public infrastructure, a well-trained labor force that can produce soldiers capable of operating high-tech weaponry, and a strong economy are as important as the traditional tools of war, or more so.

This strong Keynesian claim by him is very disappointing.  I wrote this on Bruce's Facebook page.
Bruce, what is all this Keynesianism that you are pushing these days?  Do you really believe that government spending increases wealth?  Don't you acknowledge that the money has to come from someplace else?  Why does moving money from where you and I would have spent it to where the government would spend it increases wealth?  Are you going to make some Keynesian claim about different marginal propensity to consume?  Don't you recognize that all the money people have is essentially spent?  If you put your pay check in the bank, either you spend it on the mortgage or car or food or the bank buys bonds or lends out the money.  To believe the typical MPC argument you would have to believe that saving is the equivalent to throwing money in a hole in the backyard.  I thought that the writing here is a bit overstated. "Republicans have been warning . . . Historically, economists have believed . . . ."  Have you heard of Milton Friedman?  All Republicans?  Why such categorical statements?



Blogger Cory Brickner said...

Hi John!

I'd just like to add that government spending is a reallocation of what would otherwise be market activities by legislative and executive fiat. If government was more efficient with capital allocation, why is there so much graft and corruption? Why did the Communist Bloc fail?

I'll answer this: Command economies do not know the legitimate market price of their goods and services, so they cannot properly calculate profit and loss. Price is the way that the market determines success and efficiency.

Also, Austrian Economics does a great job of explaining this through praxeology (human action). Murray Rothbard does an amazing job expanding on Ludwig Von Mises in this regard.

The biggest issue with government spending, aside from price, is the "seen vs. unseen" events that occur. What you see are low interest rates so people can afford more credit, or more military jobs, but what you don't see what would have happened with the allocation of resources if we would have left things alone. Namely, government creates bubbles, and those bubbles pop once it changes its spending. This is because the market, without incentives, cannot sustain this activity due to its inefficient nature.

Government manipulation of the market got us the housing bubble, the stock market crash, the Wall St bailouts. Government control of central banking gets us over-consumption and bankruptcy.

The key to wealth is savings, not consumption spending. Savings allows for investment opportunities, consumption spending when influenced by cheap credit is a recipe for disaster because you are using leverage to consume. There is no return on investment for leveraged consumption, and you shift away future investment capital. You also create false demand signals for entrepreneurs who think their return on investment will be higher than what it actually is.

If you're interested, I did a write-up on the next bubble: Student Loans.


7/03/2012 12:53 PM  

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