A Keynesian Concession?

Keynesian Paul Krugman, in his bi-weekly column arguing for more fiscal stimulus, gives us a new twist on his argument why we need to double down:

Everybody knows that President Obama tried to stimulate the economy with a huge increase in government spending, and that it didn’t work. But what everyone knows is wrong.

Think about it: Where are the big public works projects? Where are the armies of government workers?

So, not only has the stimulus spent $800B without any more stuff, it doesn’t even hire more people! Alan Blinder makes a similar point–we have 500k fewer government workers at all levels–in spite of spending rising 16% over the past 3 years at all levels (from inflated 2008 levels, no less). Keynesians see that data and thinks it implies we need more spending, whereas others have looked and found that is what happens when you waste money on food stamps, Medicaid, and welfare. Private companies don’t benefit from wasting money, and neither do governments.

Here in Minneapolis, we spend more on fixing roads, but they get worse:

In the third year of Rybak’s five-year $19.25 million acceleration of street repairs, engineers rated the average condition of city streets at 70 on a scale of 100, down from an 82 average in 1995. The rating has slipped by a point in each of the first two years of Rybak’s street-spending surge.

How is this possible? Milton Friedman called it Gammon’s law: ‘In a bureaucratic system, increase in expenditure will be matched by fall in production.’

Consider that the Omaha Public Schools used more than $130,000 in federal stimulus dollars to buy books on diversity.

The book says that teachers should acknowledge historical systemic oppression in schools, including racism, sexism, homophobia and “ableism,” defined by the authors as discrimination or prejudice against people with disabilities…

The Omaha school board approved buying 8,000 copies of the book–one for every employee, including members of the custodial staff–in April.

With investments like that I’m not shocked we aren’t seeing big increases in public works projects, employees, and especially productivity. The multiplier supposedly works independent of actually producing anything tangible, which is why I can’t take this theory seriously. Now even Krugman admits there has been nothing created, which just means we should spend even more money, highlighting that the Keynesians will argue for more continually (like the series of ineffectual Japanese fiscal stimulus packages in the 1990’s).

About Eric Falkenstein 136 Articles

Eric Falkenstein is an economist who specializes in quantitative issues in finance: risk management, long/short equity investing, default modeling, etc.

Eric received his Ph.D. in Economics from Northwestern University , 1994 and his B.A. in Economics from Washington University in St. Louis, 1987

He is the author of the 2009 book Finding Alpha.

Visit: Eric Falkenstein's Website

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