Demonstrably False Libertarian Assertions Concerning What Keynesians Invariably Say

One of the true advances in contemporary thinking is that both a power and a duty of government is to use fiscal and monetary policy to ameliorate downturns and create economic expansions. This is the legacy of Keynes, well supported by empirical research ~ Jeff Madrick, a journalist, economic policy consultant and analyst. He is editor of Challenge: The Magazine of Economic Affairs, visiting professor of humanities at The Cooper Union, and director of policy research at the Schwartz Center for Economic Policy Analysis, The New School. He was educated at New York University and Harvard.

An assertion from the Left in support of Keynesian economics, according to a certain Libertarian Blogger I have refuted here before, is that austerity (in times of economic downturns) invariably leads to a bad economy. In regards to this assertion Mr. LB says it is false, demonstrably (in a 12/16/2013 post).

In support of his case, Mr. LB presents two examples of situations in which the US government cut spending and the outcome was economically beneficial. Mr. LB further says that both of these examples are of governments cutting spending during periods of economic downturn, and that "Keynesian idiocy" says that this "should have INVARIABLY lead to a worsening of the situation AND THEY DID NOT". (Words that are capped inside quote were capped by Mr. LB).

That Keynesians say austerity in times of economic downturn leads to a worsening economy is something I agree with Mr. LB on, they just don't say it INVARIABLY, you liar. Because it would be incredibly stupid to say a possible solution to a problem should be applied regardless of the specific circumstances! Yes, this commentary by Mr. LB is yet another of his beloved straw men. In support of his straw man Mr. LB provides a few examples he says "prove" the Keynesian theory to be demonstrably false... but THEY DO NOT.

Keynesians will tell you that private sector spending is FAR preferable to government spending. The government should only step in with deficit spending intended to stimulate in times of economic downturn when private sector spending falls. Then, and only then, does Keynesian economics say the government should deficit spend to make up (at least) some of the difference.

When the economy begins to recover any stimulus spending should be dialed back. And, if the government spending is actually holding back a recovery, it should definitely be cut. Government spending could hold back a recovery if that spending is going toward manufacturing war goods... and those war goods are being manufactured by the private sector... which, given the rise of the military industrial complex, doesn't happen any more. But it used to. During wars that took place in the "olden days", manufacturers that churned out goods for the American consumer were converted to manufacture goods for the war effort.

Now, if the war were ending and those manufacturers went back to manufacturing consumer goods, well, then spending cuts of those nature could be good for the economy. And it is spending cuts at the end of a war, when the economy is poised for recovery that Mr. LB cites as "proof" that Keynesian economics is "idiocy"...

Libertarian Blogger: Harding cut spending by 50% in 1921 and the unemployment rate dropped from 12% to 2% in less than two years. (23/16/2013 AT 8:13pm).

The spending cuts by Harding were MILITARY cuts. A 4/29/2011 Firedoglake article points out that Harding's spending cuts "were purely military budget cuts..." [which, in part were a result of] post WWI demobilization". In regards to the tax cutting of Harding, the author of the article points out that they "took effect on 11/2/1921 but the economy had already bottomed in July of 1921 and started a path toward recovery before the tax cuts kicked in".

So, the Firedoglake article points out that we were already coming out of the downturn when the MILITARY spending cuts were instituted, and as the Harding budget cuts were mainly in regards to our building of Navy warships, those cuts had a positive effect, because we stopped "endlessly pouring the nation's steel and oil resources into the rat hole of battleship construction".

The second example given by Mr. LB is yet another time when military spending was cut while in the middle of an economic downturn and it benefited the economy...

Libertarian Blogger: Truman cut spending by 45% in 1946 and the following several years were amongst the best in U.S. history.

LewRockwell.com says "Harry Truman cut defense spending by very large amounts after World War II [and that] the reductions in defense spending in percentage terms were over 75 percent". The cutting began on 12/31/1945 when Harry Truman delivered Proclamation 2714, which officially ended hostilities in World War II".

Neither of these examples disprove Keynesian economics. Mr. LB says Keynesian economists at the time (end of WWII) warned that cutting spending "would cause yet another yet great depression", but it turns out they were wrong (Keynesianism was a new economic theory at the time). Plus, one can only see that an economic recession is ending AFTER the recovery has already begun. What these economists did not know was that we were poised for a recovery. Manufacturers went back to producing consumer goods and consumers (after wartime rationing) wanted to buy those goods.

Keynesian disproved? Absolutely not. Mr. LB's two wartime cutting (demobilization/ending) examples occurred when we reduced military spending and were poised for recovery. The cutting HELPED the recovery. But if we had not done the earlier spending? The recession/depression would have lasted much longer. Notice that NEITHER of these examples are of the government cutting spending at the BEGINNING of an economic downturn. It is always at the end. That is when government spending SHOULD be cut.

Keynesian economics says spending should be increased at the beginning of an economic downturn and cut when the economy is poised to recover (although that can be hard to determine, as we only know when are in a recovery some time after it has begun). Both of these examples, I would say, PROVE that Keynesian economics works. They do NOT disprove the theory as the government cutting did not begin immediately when the economy worsened (which would definitely prove Mr. LB's theory... but that ISN'T what happened).

But those two examples aren't the end of the misrepresentation of Keynesianism from Mr. LB. As "proof" that Keynesians are dumb enough to believe the government should immediately start spending whenever an economic downturn hits (and keep spending) with no regard at all to what the exact circumstances are, Mr. LB says...

Libertarian Blogger: ...the Keynesian assertion is that government spending OF ANY KIND (remember Paul Krugman's ludicrous argument pertaining to the fake alien invasion), INCLUDING WAR SPENDING, invariably has a stimulating effect on the private sector.

Yes, it is true that the nobel prize winning economist Paul Krugman said "the United States could benefit economically if the government began pouring money into anti-ET defense in preparation for possible alien invasion of Earth", he said that (in June 2012) in regards to the CURRENT economic downturn. Mr. Krugman noted that infrastructure spending would be preferable (and only gave this fictional military spending example because Republicans LOVE military spending).

Key here is the fact that the current economic malaise is not due to the the private sector being prevented from producing consumer goods because they've been converted to producing for a war effort. Nor are we wasting resources that could go toward meeting the demand for raw materials from the private sector (as was the case with Mr. LB's two military spending cut examples). The current recession is due to a lack of demand. And, if the private sector can't spend due to a lack of demand, then increasing government spending WILL help.

So, even though the alien-invasion-prompted military spending example of Mr. Krugman sounded silly... HE WAS RIGHT! But he was NOT arguing for spending "invariably", only spending when the private sector can't (due to a lack of demand). THIS is what Keynesians believe. They do NOT believe that the government should "invariably" spend in times of economic downturn, as the straw-man-loving Mr. LB claims. Obviously the only kind of invariability at play here is that Mr. LB will invariably continue to misrepresent Keynesian theory in order to "refute" it. And give bogus examples of when economic policies of a more Libertarian-bent saved the day. Pathetic.

SWTD #224, wDel #45.