“It has sometimes been suggested that our most advanced students know everything except common sense.” –Paul A. Samuelson (1915-2009)
Last weekend Paul A. Samuelson, the Nobel Prize professor who introduced millions to the follies of Keynesian economics (deficit spending, progressive taxation, the welfare state), died at the age of 94. He outlived his academic nemesis, Milton Friedman, who passed away three years ago (I was the last person to have lunch with Friedman; you can read my tribute to Friedman here).
Samuelson popularized Keynesian government policy in his famous textbook, which sold more copies than any textbook ever. Keynesian economics became all the vogue after World War II, when government officials were converted to the idea that deficit spending was an easy solution to an economic downturn.
Here are some of the more common fallacies that come out of Keynes, Galbraith, Samuelson, and Paul Krugman (Samuelson’s favorite student):
Keynesian Myth #1: “Government spending is better than tax cuts in stimulating the economy.”
Free-market Response: Recent studies by top economists show that tax cuts are far more effective than government programs in encouraging recovery.
Keynesian Myth #2: “The private economy is like a machine without an effective steering wheel or governor.”
Free-market Response: The private economy does just fine unless the government (including the Federal Reserve) drives it off the road!
Keynesian Myth #3: “While savings may pave the road to riches for an individual, if the nation as a whole decides to save more, the result could be a recession and poverty for all.” (The so-called “paradox of thrift” popularized by Samuelson.)
Free-market Response: Study after study shows that the key to higher economic growth is more savings and investment, not less, as long as it’s productive savings and investment. Consumption is the effect, not the cause, of prosperity.
Keynesian Myth #4: “The ruthless pursuit of profits has resulted in growing inequality of incomes and wealth in a capitalist economy.”
Free-market Response: Countries which have freed their economies (such as China, India, and Hong Kong) have seen poverty fall sharply and a higher standard of living for all. Adam Smith’s “system of natural liberty” raises all economic boats.
Admittedly, Samuelson was not all bad as an economist. He labeled Marx, Lenin and Stalin as “village idiots” when it came to economic logic. “Let’s try to forget about Castro in Cuba, Chavez in Venezuela, and whoever it was who reduced North Korea to starvation and stagnation,” he wrote last year.
Samuelson’s textbook has gradually improved its view of free-market capitalism over its 19 editions (now co-authored by Yale’s Bill Nordhaus). He recently replaced the “paradox of thrift” section with a pro-saving article, and criticized deficit spending under the Bush administration. He even had good things to say about Milton Friedman, at least until the financial crisis of 2008, which he blamed on the “libertarian laissez-faire capitalism, permitted to run wild without regulation” — another Keynesian myth.
Fortunately, Samuelson’s textbook is no longer #1 — in fact, it’s not even in the top ten anymore, having been replaced by more free-market textbook writers such as Greg Mankiw, Roger Leroy Miller, James Gwartney, and Glenn Hubbard.
Samuelson may be dead, but his Keynesian ideas live on in the current administration.
Despite calls by top economists (including Harvard’s Greg Mankiw in Sunday’s New York Times) to cut corporate and individual taxes, President Obama is determined to introduce a new trillion dollar stimulus spending bill.
When confronted by studies that show that increasing taxes on investments will reduce government revenues, Obama was unconcerned. “It’s all about fairness, not efficiency,” he told Business Week.
Obama is still in his first year as president. He may yet learn.