Diary

Benn Stiell Destroys The Foundations For The Stimulus Package

Read. It’s devastating:

. . . when nature fails us we console ourselves with Scripture, not science, and when markets fail us we turn to Keynes. His famous quip that “In the long run we are all dead” is a profoundly satisfying justification for borrowing a trillion dollars, right now, never mind that it contradicts an essential insight of our discipline: in the words of Frédéric Bastiat from 1848: “The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen” – in other words, the long run.

One of these good economists was Bastiat’s fellow Frenchman Jacques Rueff, who in a 1947 journal article attacking The Fallacies of Lord Keynes’s General Theory pointed out that governments “have a choice between only two solutions: to allow the apparatus of production to adapt itself to the structure which, by the movement of prices, the will of the consumers tends to impose upon it, or to adapt the desires of consumers by authoritative regulation to the structure of the productive apparatus which we do not propose to change”. And insofar as the government’s “investment programme diverts means of production from the areas where they are more desired to less useful employments, it will reduce the standard of living”.

But Nobel Prize-winner Paul Krugman, who calls today “The Keynesian Moment”, justifies such a trillion dollar investment programme on precisely the Keynesian foundations that Rueff demolished – the claim that money “would otherwise be sitting idle”. When Mr Krugman buys his stimulus bonds, I am curious where the “idle” money will come from. Will he sell stocks? Bonds? Withdraw funds from the banking system? If it is not to come from a cash box, it is not idle, and Mr Krugman can only fall back on the hope that the government will use his funds more productively than businesses can.

But hope is precisely the platform on which President Barack Obama ran during his campaign. Hope has enabled the president to raise the estimate for the number of jobs his stimulus plan will create from 2.5m to 3m and then to 4m in the space of just a few short speeches. It is the ultimate faith-based initiative. In the spirit of unity he promised to bring to Washington, his proposal comprised 60 per cent new spending and 40 per cent tax cuts, the same proportion as that of Democrats to Republicans in Congress. Yes, we can!

Any way we can get our Representatives and Senators to read this editorial? It may save them from casting a disastrously wrong vote.