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| "I don't have to make sense. I am John Maynard Lord Keynes." |
No, if we’re
going to reject something or disagree with it, it will (we hope) be because we
disagree with what is said, not who said it or when it was said. The “problem” with Kates’s article thus is
not with the fact that he said it, nor when he said it. It isn’t even with what he said. We don’t really disagree with anything he
said.
What we disagree
with is what he didn’t say — which is
always a very large receptacle of wrigglers to unseal. Kates correctly noted where his analysis
differs from that of Keynes and why . . . but not where he agrees with
Keynes. This would not only have
strengthened his argument against Keynesian economics, but led him to a
possible solution.
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| "You know . . . even I can see that doesn't make any sense." |
True, Kates
clearly believed he was giving a solution to the tyrannical rule of Keynesian
economics. That is, instead of
increasing taxes to fund increased public expenditures to stimulate the
economy, decrease taxes to fund increased private expenditures to stimulate the
economy.
The
problem-behind-the-problem with Keynesian economics, however, is not so much
what the Keynesians are doing. Instead,
it is what the Keynesians (and others, such as Kates) think they are doing.
The issue Kates
addressed is the difference between tax cuts to stimulate the private sector,
and tax increases to stimulate the public sector. He correctly pointed out that while
Keynesians think they are the same in their effects, they are, in fact,
radically different.
But here’s where
the problem-behind-the-problem comes in.
Being trapped in the past savings paradigm, the Keynesians and others
think they are doing one thing when they are actually doing something quite
different. And that spells disaster no
matter how you look at it.
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| "The money is worthless. I'm guarding the container." |
What the Keynesians think they’re doing. Even Keynesians will admit that their
monetary policy is not “tax and spend” . . . at least, not directly. It’s “print
and spend.” This presumably replaces the
direct taxation of income, with the indirect taxation through inflation of
purchasing power.
Print and spend
is actually worse than tax and spend, because there is no limit to the amount
of money you can print as there is to the amount of income you can tax. Keynesian theory is that by printing money,
all you’re doing is chopping up the wealth of the economy into smaller and
smaller pieces.
Redeeming all
those promises is not a problem because in an emergency, the government can
simply increase direct taxes and drain excess purchasing power out of the
economy. This is how Georg Friedrich
Knapp said the State can control the economy: back the entire money supply
exclusively with government debt. If
more purchasing power is needed, issue more debt. If less is needed, tax away the excess.
It is impossible
to go bankrupt, because the money is 100% backed by the total wealth of society. You only have to be careful not to increase
the amount of government debt too much faster than wealth is created, because
imposing a 100% tax is unrealistic politically.
You should therefore limit increases in debt to a reasonable proportion
of new wealth that has been created, except when you can get away with more.
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| The Black Hole of Government Debt |
What the Keynesians are really doing. Unfortunately for Keynesian monetary
theorists, they don’t understand money.
They think that what they are doing when backing new money with
government debt is cutting up the existing wealth of society into smaller
pieces. What they are actually doing is
issuing claims against both existing wealth and as-yet uncreated wealth.
And that’s the
problem behind the problem. Government
debt that is anything other than borrowing existing savings is backed not by
the power to tax existing wealth, but the power to tax future wealth . . . that
may or may not materialize. As long as
people believe the government will eventually be able to tax enough to redeem
its promises, things won’t get too bad.
The moment people
lose faith in the government, however, all bets are off. The money becomes worthless, and either
hyperinflation kicks in, other currencies come into use and the government
becomes worthless, or both.
And financing
government spending by creating money instead of taxing or borrowing existing
money is one of the best ways to ensure that future wealth is not created.
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| What can you buy with worthless money? |
True, taxing away
or borrowing savings dries up consumer demand to a limited extent. A government can only borrow what already
exists, however, and can only sustain high taxation for a limited period. There seems to be a limit of 20% of GDP on
the amount of taxes that can be collected.
And most financing for new capital formation comes out of future
savings, anyway, even if the economists and politicians think otherwise.
It is inflation
that really kills consumer demand. As
the value of the currency is eroded, people pay more and get less. This in turn lowers the demand for new
capital, and thus new jobs. Nor does
increasing transfer payments (funded by new debt instead of taxes) make things
better, as it only masks the problem for a while, making the underlying problem
worse at the same time it claims to be solving it.
Half the problem
is exactly what Kates said it is: the government is spending too much. The answer is not, however, to cut
taxes. It’s stop the government from
creating money, and restrict all new money creation to the private sector — and
even then, all new money must be backed by wealth, either existing inventories
or new capital (which, when it comes down to it, means future inventories).
In other words,
the money supply must — not should, must
— be backed by existing assets or reasonably expected (and specific) future
assets. It should not be backed by vague
hopes of taxes that the government might be able to collect if everything works
right and everybody is exceptionally lucky.
#30#