Monday, February 09, 2009

The bug-eyed Captain

Spittle flecked and flush faced, his Admiral Nelson hat askew, he stumps angrily across the bridge, leans over the railing, and screams “Government cannot create wealth.” It must be true, because no less an economic light than Henry Hazlitt told him so. Parenthetically, boys and girls, Spot has a theory that guys with dorky names who undoubtedly got picked on during recess tend to grow up libertarian; we’ll discuss it sometime.

Anyway, Captain Fishsticks is enraged, enraged Spot says, that an inestimable person such as Dave Mindeman had the temerity to disagree with the Captain. Just for the record, so did Spot. Sticks holds his postulate theologically; it is his north star. It is a matter of faith. It is also horse puckey, but we’ll get into that in a moment.

Sticks currently has bunched undies over the existence of a related notion: job creation through financial stimulus by the government. Nope. Doesn’t exist, says Sticks. The sophomoric Sticks says if the government spends a dollar, it takes a dollar from him that he could spend as he wants. It’s simple arithmetic, see?

What if the government invested the dollar on green energy and Sticks would spend the dollar on imported gin? Doesn’t matter, says Sticks; maybe I’ll get cirrhosis of the liver and have to hire a phalanx of doctors. [Spot made up the example, but he thinks it’s illustrative.]

1101651231cov_white Sticks real problem is, of course, a paralyzing fear of John Maynard Keynes. Here’s what Robert Reich said in Time magazine about Keynes (at the link):

Born in Cambridge, England, in 1883, the year Karl Marx died, Keynes probably saved capitalism from itself and surely kept latter-day Marxists at bay.

*  *  *

Yet Keynes' largest influence came from a convoluted, badly organized and in places nearly incomprehensible tome published in 1936, during the depths of the Great Depression. It was called "The General Theory of Employment, Interest and Money."

Keynes' basic idea was simple. In order to keep people fully employed, governments have to run deficits when the economy is slowing. That's because the private sector won't invest enough. As their markets become saturated, businesses reduce their investments, setting in motion a dangerous cycle: less investment, fewer jobs, less consumption and even less reason for business to invest. The economy may reach perfect balance, but at a cost of high unemployment and social misery. Better for governments to avoid the pain in the first place by taking up the slack.

*  *  *

Even [during the Depression], Keynes had a hard sell. Most economists of the era rejected his idea and favored balanced budgets. Most politicians didn't understand his idea to begin with. "Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist," Keynes wrote. In the 1932 presidential election, Franklin D. Roosevelt had blasted Herbert Hoover for running a deficit, and dutifully promised he would balance the budget if elected. Keynes' visit to the White House two years later to urge F.D.R. to do more deficit spending wasn't exactly a blazing success. "He left a whole rigmarole of figures," a bewildered F.D.R. complained to Labor Secretary Frances Perkins. "He must be a mathematician rather than a political economist." Keynes was equally underwhelmed, telling Perkins that he had "supposed the President was more literate, economically speaking."

As the Depression wore on, Roosevelt tried public works, farm subsidies and other devices to restart the economy, but he never completely gave up trying to balance the budget. In 1938 the Depression deepened. Reluctantly, F.D.R. embraced the only new idea he hadn't yet tried, that of the bewildering British "mathematician." As the President explained in a fireside chat, "We suffer primarily from a failure of consumer demand because of a lack of buying power." It was therefore up to the government to "create an economic upturn" by making "additions to the purchasing power of the nation."

Yet not until the U.S. entered World War II did F.D.R. try Keynes' idea on a scale necessary to pull the nation out of the doldrums — and Roosevelt, of course, had little choice. The big surprise was just how productive America could be when given the chance. Between 1939 and 1944 (the peak of wartime production), the nation's output almost doubled, and unemployment plummeted — from more than 17% to just over 1%.

So, who are you gonna believe, Sticks or your lying eyes?

But back to the proposition that government cannot create wealth. Spot has cited this article several times before, but it’s a good one: It Takes a Village to Make a Millionaire:

A 2004 report, "I Didn't Do It Alone: Society's Contribution to Individual Wealth and Success," spotlights successful entrepreneurs and concludes that the myth of self-made success is destructive to the social and economic infrastructure that fosters wealth creation.

  • Martin Rothenberg, the son of a housepainter and sales clerk, grew up to become a multimillionaire software entrepreneur.
  • Investor Warren Buffett is the world's second-wealthiest person.
  • Ben Cohen co-founded Ben & Jerry's with no business background and walked away with $40 million when the company was sold years later.

While these three seem typical examples of self-made success, they're not. None of them believes they did it on their own. Like others profiled in the report, they attribute their success to many factors, among them public schools and colleges, government investment in research and small business assistance, contributions of employees, and strong legal and financial systems.

"How we think about wealth creation is important since policies such as large tax cuts for the wealthy often draw on the myth of the self-made man," says "I Didn't Do It Alone" co-author Chuck Collins. "Taxes are portrayed as onerous, unfair redistribution of privately created wealth — not as reinvestment or giving back to society. Yet, where would many wealthy entrepreneurs be today without taxpayer investment in the Internet, transportation, public education, legal system, the human genome and so on?"

But our foolish Captain is not likely to be persuaded otherwise because, as Spot said, he holds his economic views as matter of faith. But you don’t, do you, boys and girls?

Nope, Spotty, not us.

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