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Big Government Means Economic Disaster

July 16, 2010

I’m currently rereading Henry Hazlitt‘s phenomenal economics book for beginners- Economics and One Lesson– and I’m really amazed how accurate and honest he was in pointing out the many economic fallacies put forward by the statists and passionate defenders of big government. I really enjoyed the second part of the book, particularly the chapters that discuss The Broken Window, The Blessings of Destruction, Public Works Mean Taxes, Taxes Discourage Production, Who’s Protected by Tariffs, The Drive for Exports, and Government Price-Fixing. I really like these chapters a lot because they exactly point out the many errors, miscalculations, fallacies, and economic disasters perpetrated by the highly-educated planners of the Philippine government, past and present.

Hazlitt opened his book with the following remark:

Economics is haunted by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousandfold by a factor that is insignificant in, say, physics, mathematics or medicine-the special pleading of selfish interests. While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for them plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.

I decided to reread Economics In One Lesson because I plan to work on a very important project.

Today I just finished reading an online article entitled Fifth Grader Discredits Keynesians. I’d like you to read the article and learn!

Fifth Grader Discredits Keynesians

Keynesian economics, that economic theory that is once again running the country, was shown to be a complete sham this past Tuesday by a fifth grade student in small Midwestern town during a routine math assignment.    The student’s teacher and school principal were impressed enough to issue a press statement, excerpted below:

“I was working on my decimal and percentage multiplication for homework”, the student said, “and I could hear my dad complaining about how his paycheck was smaller because of all the taxes they take out.  He said his check was about 75% of what he earned.   I asked him where the other 25% went and he said to the government, but that the government was spending a bunch of that money to stimulate the economy.”

“So I thought some more about that, and it occurred to me that they can’t simply take whatever they tax from my dad and spend it somewhere else, because some other moms and dads working for the government have to get paid, too.    Of my dad’s taxes, I bet they can probably only spend maybe half of that on stuff they think will grow the economy.   I know they can actually spend all of it, but then to pay for the government workers and the things they do, they have to get even more money, which is probably what all the borrowing and debt is for that I’ve seen in the papers.”

Johnny (not his real name) described his thinking in mathematical terms to his teacher:

“If they take $1000 in taxes from my dad, but can then only put $500 to work on the stimulating stuff, then to break even that stimulus would somehow have to double the $500.  That would be a 100% rate of return.    And if they don’t get everything back that they took from my dad, then why bother taking it?   It seems like that would just create other problems.

Sometimes I see my parents watching CNBC and on that station they’ll brag about people who’ve made like 18% or more, on their investments,  for a long time.    It seems to me like the government is trying to do more than five times better than that!

I went back to my math, and said, well, what if they just wanted to match the 18% like the guys on TV?   Let’s start with the $1000 they take from my dad:  If they invested about $847 dollars (1000 divided by 1.18) from my dad, and then earned 18%, they’d get the $1000 back. Using $847 is $347 more to spend on stimulus than my guess of the $500 they spend now.  That leaves $153 (1000 – 847) of my dad’s money to pay for themselves and whatever else they do, or about 15%.

But earning 18% only gets back what they take from my dad.  They’re still not matching what my dad would have done with the money.   Say my dad can do 7% (he’s not on TV), so that one year later, his $1000 is now $1070.  That means the government actually needs to make about 26% on the $847 ((1070/847)-1), which is harder still.

Something doesn’t jive though, with the government only needing 15% for themselves, because they take more than that from my dad, and way more than that from some other people.   That wouldn’t be fair if they took more than they need, so they must need more than 15%, which means they have to earn way more than 18%, or 26%, with that stimulus to match my dad.

I think if they were that good, people would be rushing to have them manage all of their money, except I never see that in the papers, or on TV.   I can’t even find stories about that with Google, and there’s no Facebook Page for it either (although I did find the opposite.)

I know that the government spends money on a lot of other stuff, like the military and schools and roads, so that just means that of my dad’s money, maybe my first guess of them spending 50% of it for stimulus is still much too high.   That means even less money can go to stimulus, which means they have to earn even more than 100% for the stimulus to have worked!

So in the end, I don’t think they ever get all of my dad’s original $1000 back, let alone beat him, which just seems bad all around.   They should just let my dad keep his money and do what he wants with it, even if he never gets on TV.

My teacher said that what I was describing, with the government taking money from some people and spending it to help the economy was kind of like the theory of a famous economist named John Maynard Keynes.  I Googled him and came up with a whole bunch of things.

An economist who writes for the New York Times named Paul Krugman was basically wanting the government to spend a ton more money.  He seemed kind of angry about it too, like people weren’t listening to him.   His basic idea is that because the people aren’t spending their money, the government has to do it instead.   I think he’s forgetting that they have to take the money from the people first, which seems a little like my dog chasing his tail.

Then I found another story from a guy who responded to some make-believe assignment from another economist named Robert Reich, who also wants the government to spend a lot of money.   That story was kind of silly, talking about sand diggers — I had one of those and hit my brother in the head with it — but it kind of made sense, too.   Where a lot of people made reference to a Keynesian Multiplier, that sand digger story made a good case that it was actually a ‘Government Subtractor’, and it’s pretty obvious that my math shows that.   At least, it is to me and my teacher.   Maybe to you, too.”

As it turns out the teachers had a good discussion about Johnny’s homework assignment as well.   The head of the social studies department had this to say:

“The staff got to talking about the issue, and it begged the question, ‘Given that the math, and actual experience itself, shows that it basically can not work, why does Keynesianism live on?’   The really simple answer is that it is an economic theory tailor made for government, and big government in particular.   It empowers the politicians to act with a cloak of intellectual authority as they repeatedly attempt to ‘do something!’ about every this-and-that in the economy.

Several years ago I sat down with my state assemblyman to talk about the state’s budget crisis, which is now much worse.   I was impressed by his willingness to meet and talk, even though going in I knew we wouldn’t see eye to eye.   He told me how even cutting something as innocuous-sounding as a bus route can be impossible, as politicians are supposed to give things to people, not take them away.   When I suggested that by cutting spending, he’d be giving people their long-term financial security, he just smiled.

So then I said, ‘Why don’t you just agree to not take anything away, but not give anything new, either?’  — the whole ‘when you’re in a hole, stop digging!’ approach — and that with the right pro-growth policies, the state could grow its way out.   I’ll never forget: he just slumped back in his chair speechless, but with a look that was some bizarre combination of ‘Why didn’t I think of that?’ and ‘Truly you must be joking.’   In any case, it was a very eye-opening experience for me, seeing the mindset of someone with the power to actually make a difference.   I mean, he gets to vote on legislation, and I don’t.

When you combine that mindset with a voting population that is — and this is just the unvarnished truth — increasingly economically illiterate, you have the recipe for a real mess.   I mean, the textbooks spend so much real estate on FDR and LBJ’s Great Society, and with the teachers unions being puppets of the state, or visa-versa depending on who you ask, they’re not going to rock any boats with the curriculum.   A bunch of Johnny’s dad’s stimulus money is just keeping them employed.  You know I couldn’t even say that if we were a public school — no tenure for me, thank you.”

I suspect Professor Krugman is getting increasingly agitated by the current situation because he’s realizing his gig is up.   The snake oil isn’t selling the way it used to.   It’s getting increasingly clear to most people that his beloved theory of Keynesian economics, with all of its manifestations and applications, rather than running the country, is in fact running it into the ground.

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