We Are (NOT) All Keynesians Now
By Martin Harris

Shortly after I read about the supposed "stimulus" effect of the money spent to re-build the Middlebury Post Office mini-plaza, I read a persuasive (for me, anyway) argument against such tax- or borrow-and-spend government initiatives in the pages of The Intercollegiate Review. In the current issue, author/historian/amateur-economist Thomas Woods uses "The Forgotten Depression of 1920" to prove his thesis, that Keynesian/Obamian deficit/stimulus spending prolongs and worsens depressions/recessions, exactly contrary to what the government-spending proponents promise. The 1920 Depression was swift and deep; there was no government intervention (in fact, government cut taxes sharply and spending even more sharply, leaving more disposable income (and spending/saving/investment options) in private hands, and within a year it was all over, except in agriculture, where chronic commodity over-production caused by continuous productivity advance without supply management has plagued the industry while pleasing urban consumers for most of the last century.

When I was an undergraduate, the Keynesian theory of government deficit spending to cure economic downturn was taught in Econ 101 as a law of nature right up there with the Newtonian one on gravity, the Boylesian/Carnotian three on thermodynamics, and the Vitruvian three on architecture. Equally unchallengeable then were the Piltdown skull and plate tectonics in Bones 101 and Stones 102, the former getting a "yes" and the latter getting a "no".  Now we know that the skull was a human-cranium/ape-jaw fraud and floating-mobile continents are real. Even Maynard Keynes is now beginning to be challenged, my old Econ lecturer and the "we-are-all-Keynesians-now" pronouncements of Milton Friedman in the 60’s and Richard Nixon in the 70’s notwithstanding.

Usually, the anti-Keynesian argument says that government spending doesn’t have the multiplier effect of private sector spending, some anti-Keynesians presenting statistics showing that tax- or borrow-and-spend actually generates less economic activity than it destroys or prevents by removing the money from the free market by statute. Consider, for example, the article by Harvard University economists Barro and Redlick in the 1 October Wall Street Journal, in which they write "Our new research shows no evidence of a Keynesian multiplier effect. There is evidence that tax cuts boost growth".

A different anti-Keynesian argument comes from Woods, who argues that there are two grades of spending, the "lower-order" category covering ordinary consumer goods, and the "higher-order" category describing long-term research and development. His theory is that it’s the occasional natural downturn in economic activity which reduces interest rates and "stimulates investment in long-term projects…" without which productivity and the overall standard of living don’t improve, and "the trouble comes from too much consumption spending and as a result too little channeling of spending into…higher-order stages of production…" such as happens during a prolonged spike in consumer spending. When government declines to "stimulate", interest rates drop and more of the slower-return-on-investment R&D becomes feasible.

The Post Office mini-plaza certainly isn’t a "higher-order" R&D project, although the monies it absorbed --$29,450 from Montpelier in a "free-money" grant based on taxes of OPM, or Other Peoples’ Money, and $18,550 from the local Downtown Improvement District—wouldn’t be enough to fund one; but equally certainly the monies would have improved overall productivity more if spent on roads or telecommunications than on exposed-aggregate pavement, street furniture, and two trees and flowers worth of landscaping. If you find Mr. Woods’ thesis persuasive, you’ll opine that the near $50K would have had more impact if left in taxpayers’ pockets where it might well have gone into investments (Econ 101, savings always equals investments because very few people any more put gold coins into treasure-chests or under mattresses) including those in the higher-order R&D category. 

As an Eagle letter writer put it recently, "If the State of Vermont insists on giving Middlebury all that money, couldn’t Middlebury save it in a rainy-day fund?"  There it would, together with other investments, go into the longer-term R&D which would fund gains in –for example, to please enviros, maybe solar panel research—or other forms of productivity enhancement which would then benefit everyone.  "All that money" isn’t all that much; as Senator Everett Dirksen once mused, it takes several billions to get to "real money". But it would be a start. As letter writer Chodkowski also observed, "The State of Vermont has no money, and yet it had $29,450 to give Middlebury for this BEAUTY project", meaning that there’s an attitudinal problem in government regarding the judicious spending of tax-derived OPM. The State Constitution, like most others not much respected any more, speaks of "frequent adherence to principles of frugality" and therefore isn’t much consulted by the Golden Dome folks these days.

Similarly, many State Constitutions are ignored on other requirements. Wisconsin's of 1848 for example, speaks of all land holdings being "allodial" and not feudal, meaning they can’t be seized by government for any financial reason whatsoever. That’s another subject for another time.

Martin Harris is a former Chairman of Citizens for Property Rights