Tuesday, October 21, 2008

Why Keynes is Wrong for America — or Anywhere Else

This squeak from the wheel went to the Washington Post earlier today in response to the announcement that Chairman Bernanke had given his imprimatur to a second stimulus package. People will wonder how, if the first one didn't work, a second will be of benefit (except to buy votes for whoever can spout the line closest to Keynesian Political Correctness). The answer is simple: when something doesn't work the first time, throw money at it until it works (which it can't) or you're broke. This is similar to the dictum I learned working on an assembly line: You can fix anything with a hammer; if it breaks, it needed replacing anyway. (Naturally, the hammer we used to whack things until they worked, a solid chunk of steel bar stock, itself finally broke.) For what it's worth, then:

Dear Sir(s):

The headline in today's Washington Post ("Economic Stimulus Gains Traction," Washington Post, 10/21/08, A1), while no doubt giving a measure of hope to some people, indicates that Keynesian economics is as bankrupt of ideas as the world will soon be financially. The only puzzle is why, since the first stimulus package failed to work (and was, in fact, followed by the financial meltdown), is another proposed?

Keynesian economics, the entrenched economic philosophy of both parties, is based on the demonstrably false assumption that the State can continue to create money backed by nothing but government debt, and somehow avoid paying the bill when it comes due. One of the most damaging myths to come out of the 20th century is the fixed belief that Keynes' programs brought the United States out of the Great Depression. On the contrary: the New Deal began faltering badly in the "mini-depression" of 1936-37 when the Keynesian stimulus package began having its predictable counterproductive effect. What brought the U.S. out of the Depression was not the inflation-induced false prosperity of Keynes, but the increasing real demand created by the war in Europe.

The irony is that neither the New Deal nor the war was necessary to bring the country out of the Depression. Had the reforms recommended by Dr. Harold Moulton in his book, The Formation of Capital (1935) been implemented, the financial integrity of the country would have been restored, real production would have taken place, and jobs created naturally in response to the increase in real demand.

As president of the Brookings Institution and a leading authority on money, credit, and banking, Dr. Moulton was fully aware of the fallacy of Keynes' basic assumption: that the State could create money at will to finance deficits, but that the private sector could not do the same thing to finance capital formation. The former results in an inflationary, debt-backed currency, while the latter creates an asset-backed, appreciating currency.

Further, the capacity may not exist in the American economy to sustain Keynesian programs. According to the Federal Reserve's "Flow of Funds Report" for the first quarter of 2008, total debt in the United States (business, consumer, and government) is $50 trillion. This is 350% of GDP. In 1929, total US debt was approximately 140% of GDP — and the country's productive capacity was completely intact; jobs and industries had not moved overseas.

In contrast to the Keynesian New Deal or some variant thereof is a proposal called Capital Homesteading for Every Citizen. By focusing on providing credit for ordinary people to become owners of the means of production, thereby creating and maintaining their own jobs, Capital Homesteading eliminates reliance on unproductive government spending, bailouts, and endless stimulus packages, and replaces them with productive money creation that builds ownership into ordinary people, putting wasted resources, excess capacity, and idle people back to work.

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