Japan announced that it will pump 1.4 trillion dollars worth of yen into its economy via an unprecedented quantitative easing program by the Bank of Japan. Japan whose economic woes have been piling up has been on the Keynesian band wagon for years. Critics like Paul Krugman have complained that the stimuluses have been far too small to combat the problems in Japan’s languishing economy. Advice the Japanese seem to have taken to heart in a big way.
The fact that Japan’s economy has structural problems seems to be irrelevant to those rushing to fix a poorly running car by putting more gas in the tank. The previous stimulus packages, even if they were too small according to Krugman and others, have shown themselves to have been totally ineffective. To think doing more of the same will have different results is illogical to the point of being psychotic. Maybe time will show this author to be wrong but history says differently.
The fact is the fallacy at the bottom of the Keynesian strategy is too often overlooked. Spending does not equal wealth production nor is all economic activity equal. Keynes famously suggested that government spending on anything, even pyramid building, would boost economic activity and by default the economy as a whole. He was wrong then and Krugman is wrong now. Mutually beneficial trades not arbitrary spending is the basis of a healthy economy.
To put this in perspective compare the consequences of consumers buying sub sandwiches from a franchise and the government building a pyramid (or parks, monuments, solar companies, what have you).
People buying the subs they like let the shop owner know what meat, bread and condiments to buy to satisfy future demand. This in turn tells bakeries to bake more bread and what type. Similarly butchers and condiment suppliers will supply what is needed according to this demand. In fact the simple act of buying sandwiches creates a chain of events of people working to satisfy each other’s desires and needs. It also employs people to do the same and thus becomes self-sustaining.
The pyramid project on the other hand pays a quarry for stone, masons to cut it and creates demand for cranes and trucks to move the stones. Not only does this activity consume the resources of the government but it also draws private resources into the equation to be invested in heavy equipment manufacturers and other activity associated with the pyramid project (not to mention the capital the government is extracting from the economy to do the project). While it is true this creates employment it does not create self-sustaining economic activity based on mutually beneficial trades. This becomes readily apparent when the activity stops. The truck manufacturer goes out of business, the crane company cuts back and the quarry closes. Not only this but much of the private capital diverted to the project is also lost. The end result is an economy that is worse off for the effort not better!
These simplistic examples also show the foolishness of those that equate tax cuts to government spending. One increases personal spending on items of personal benefit the other increases political spending for political benefit. One increases the number of mutually beneficial trades the other does not. In fact Keynesian stimulus is in the end counterproductive as it redirects capital away from economically beneficial activity to politically beneficial activity; activity that ultimately absorbs capital and destroys it.
The fact is if the government had a huge rainy day fund that it could draw on in times of trouble it might be able to stop an economic free fall by spending. Even borrowing might do the same but it will come at a huge price and not do as good of a job as substantial and directed tax cuts. What government spending cannot do is create sustained economic growth. You simply cannot increase normal economic activity by distorting it. Those that attempt it enter into an economic trap with no clear way out. The only way to forgo the economic consequences that happen when the pyramid construction stops is to continue to build pyramids. An action that in and of itself undermines the economy and forces more and more of it under government control. The end result of an elongated unbroken Keynesian cycle is economic stagnation, calamity and/or a slide into socialism.
Japan’s latest experiment in Keynesian economics is one that is bound to ultimately fail just like it has before. If it has a silver lining it is that maybe it will show once and for all Keynesian economics for the fraud it is. Unfortunately Japan is not the only country going down this rabbit hole; the EU and the United States are not far behind.
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Spending does not equal wealth production nor is all economic activity equal.