Punchinello’s Chronicles

January 5, 2010

Underwater States Demonstrate Keynesian Economics

A lot of people want to blame Bush for the troubles we’re having, or they want to blame President Obama. There are more who want to blame the bankers on Wall Street or the politicians in congress. Of course there’s my favorite “bad guy” in the Federal Reserve, and I also look at everyone who’s ever used a credit card. But when you really boil it all down, the trouble we’re having is mostly a result of a bad theory.

John Maynard Keynes basically came up with a concept of how nations can run a smooth economy. He did this back around the early part of the 20th century, and was a touchstone for Franklin Roosevelt in handling the Great Depression. In a nutshell, we’re told that a controlling entity (e.g., the Federal Reserve or a central bank) manages the growth of the economy through raising and lowering interest rates.

My simplistic understanding of it all is that it’s like a car with a gas pedal and a brake. To drive anywhere, you keep a foot on each pedal. When you step on the gas you go forward, when you step on the brakes you slow down. The two pedals represent lowering interest rates (gas pedal) and raising those rates (brake).

Keynesian economics tells us that the best way to get to the store is go back and forth between the two pedals. If you step on the gas and go too fast, immediately step on the brake. When you notice you’re hardly moving, step on the gas again. Use both feet as often as possible, but try not to use them both at the same time.

Additionally; if you’re going too slow, then immediately stomp on the gas pedal with all your might. If you can, call a tow truck to come hook you up and pull while you’re giving it gas. And don’t forget to get someone in another tow truck to push the car as fast as it can go. But…when you’re going that fast, be sure to keep your foot on the brakes while you’re in between the two trucks. Make sense? Nope…doesn’t to me either.

The theory is that if I can borrow money cheaply (lower rates) I’ll use loans to start or expand a business, hire lots of people, buy equipment, buy houses, buy cars and so forth. But if it costs me a lot of money to borrow money, I’ll but those plans on hold. And remember that for everyone I hire and pay with a salary, they’ll go out and buy cars and houses, TVs and shoes too.

Where it begins to fall apart is that putting plans to expand on hold is NOT the same thing as shrinking a business. If I have 10 stores and want a cheap loan to open an eleventh, then I’m already employing X number of people. Just because I can’t open a new store doesn’t mean I’m going to lay off some of my existing workforce. Right? Seems like common sense to me. But that’s not how the Keynes theory works.

Instead, if you offer more money at lower rates, businesses and people will borrow more and spend more. Note the foundation on what we call “consumerism,” where borrowing to buy is A Good Thing. Meanwhile, if you make it hard to borrow money, companies will start laying off employees.

There’s a lot more to this, of course, but what bothers me is that the entire theory totally rests on either inflation or deflation. What ever happened to just having a basic and normal economy? How come people can’t buy what they can afford, or not buy what they can’t afford? If a business grows too big, they won’t sell enough to keep all their stores open. So they close some stores or sell less stuff. So?

Ah, but you see, those poor people who lose their jobs because a store closes during a bad economic cycle are in trouble. It’s no fair and they shouldn’t have to be stuck with bad luck and a down cycle. The Government should make things better so NOBODY ever has to lose their job due to bad economic cycles. Right? Nobody lose jobs: that’s the takeaway point. Government and central bank intervention so Nobody Loses Jobs.

We now get a chance to see all this in daily operation, watching the various states of the union. Only a couple of years ago, the economy was booming. Everyone paid taxes and money poured into the coffers of the state capitols. Because they had extra money, politicians got an easy re-election by cutting taxes. Hey, they didn’t need the money and they sure as hell weren’t going to stop spending.

Now, only a few years later the economy is in trouble. People are spending less and tax revenues are going down. Suddenly the states are in debt. They’ve spent too much, and their annual budgets are too high, based on predictions from a few years ago. And again, they have no intention of cutting their spending, except in services and employment.

Following proper Keynesian economics, the states decide to lay off hundreds of thousands of state employees. There are cuts to public schools, cuts to social services, cuts to infrastructure services, and cuts to anything else they can get away with. But they can’t cut pension funds and many types of services because it’s part of the law to keep those going.

We can say that government spending is analogous to borrowing money at interest rates. When the economy is good, the states spend money. They collect money in taxes, then spend it. That’s pretty much the same as a business borrowing money from a bank at low rates, then spending it to build a business. The key difference is that a state government produces nothing at all. A business actually increases the tangible assets of the country.

When the economy slows down, the state stops spending money. They stop collecting tax revenues (people aren’t working) so they have to cut back on everything. Unlike a business, which simply stops growing but continues to sell their line of products, a state has no money. A state manufactures nothing. All the state can do is work with the donated tax money they collect.

See how this connects? If you have a potholder company and times are good, you make 1,000 potholders and sell them. When times slow down, you make 800 potholders and sell those. But you stay in business, you keep your employees and you maybe try to expand into some additional line of business…maybe aprons. Either way, even if you cut some of your expenses, you’re still employing people based on money you get by selling something you create out of raw materials.

A state, on the other hand, creates nothing out of raw materials. When the times go sour, the state gets less money. So they have to issue IOUs, or they have to lay people off. It’s poetic justice that so many people with government jobs also are part of the whole Keynesian economics theory.

Keynes felt badly, maybe, about how raising interest rates would mean some people would lose their jobs. But, he figured that’s the price you pay for living in an economy that “on average” is doing well. Sort of like the guy with one foot in the fire and one foot in a bucket of ice: On average, he’s feeling comfortable.

It always comes back to this unexplained idea that for some reason we NEED to hire people or fire people based on the growth or contraction of the economy. It’s The Only Way. Nobody wants to talk about prudent management. If you’re only selling 1,000 potholders then why on earth would you manufacture 10,000? Oh…I forgot…government subsidies. Oh…wait…another one; Wall Street analysts’ quarterly expectations.

Another way the federal government gets away with this is that they DO manufacture something out of raw materials. They can print money out of plain paper. They have a gun that says unless you take that paper as money they’ll shoot you or put you in jail. States, on the other hand, can’t print money.

Too bad, so sad. The various bankrupt states in the country now get to explain to their laid-off employees how Keynesian economics is really the answer to everything! It must be, otherwise why would everyone in Washington have revived it? Why is the federal government worrying that despite the trillions of fake money already spent, we haven’t spent enough? Who cares about debt! It’s “got to work” because Mr. Keynes said it would work! Just ask Ben Bernanke, the head of today’s American central bank.

In fact, to hear them talk about the current economic um…slump…we’re just stepping on the brakes a bit too hard. The answer is to lower interest rates even more! From, like…zero? To what again? And we should pour money into the economy so people can borrow-borrow-borrow! Oh wait…we did that and lent money to people who couldn’t pay it back. No matter, the theory works. That’s all that counts. The hell with the facts!


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