Keynesian Dead Weight

On Monday, the Washington Times ran a great editorial from Richard Rahn of the Cato Institute, in which he laid out some interesting facts about the relationship between government spending and job creation… or, more to the point, job destruction.  Rahn also delivers a sound thrashing to crackpot New York Times economist Paul Krugman, which I heartily encourage clicking the above link to read.  Merely excerpting a good Krugman beatdown is like carving a slice out of the Mona Lisa.

The nourishing factual heart of Rahn’s column takes the form of a table that shows how “More Spending Kills Jobs,” and the trenchant observation that “If additional government spending could create more jobs, it would be expected that over the long run, the socialist or semisocialist economies would have full employment and the smaller-government, developed economies would have higher unemployment.”  This theory runs rather strongly counter to the empirical evidence of history.

Rahn also makes a telling point about the inefficiency of government spending:

What also typically is ignored by the neo-Keynesians is that there is an enormous tax extraction cost for the government to obtain each additional dollar. Estimates of this extraction cost typically run from $1.40 to well over $2.50 of lost output for each dollar the government obtains. In addition, there is vast literature showing how specific government spending programs have little or even negative benefit and, as a result, are actually wealth and job destroyers. Thus, the real deadweight loss of additional government taxing and spending is estimated to be in the $3 to $4 range.

(Emphasis mine.)  In other words, money is losing up to 75% of its value when absorbed by the government and pumped into its programs.  That’s an awful lot of dead weight.

The basic logic of Keynesian stimulus, at least in its modern incarnation, always seemed flawed to me.  People naturally wish to engage in the activities that create jobs: spending money, pursuing business opportunities, and exploiting resources in a constructive fashion.  More specifically, people have an appetite for purchasing each others’ labor, which is the essence of job creation. 

In its simplest form, this is easily understood by taking a look around your own home.  You probably have lots of little chores and improvements you could use some help with.  You might be happy to hire trustworthy, skilled assistance at a low price (assuming you’ve gotten about all the help you can expect from your spouse and children.)  Unfortunately, that kind of help doesn’t usually come cheap, so you haven’t hired anyone to clean up your to-do list.

For many people, this calculation is a question of cost, more than desire.  You’d really like to hire yard workers, carpenters, electricians, painters, or whatever else you need, but it’s simply too expensive.  Maybe you’ll get lucky and find some good workers at a price you can afford someday. 

Likewise, you’ve probably turned down at least one job in your life because it just didn’t pay enough.  You have a natural inclination to make the best possible profit for your labor.  Your calculation of acceptable profit changes as your circumstances change.  The odds are good you were grateful to have a job in high school that you would never accept today.  

People need each other, and they are forever seeking to match cost with desire.  It’s all perfectly natural and consistent with common sense… but projected over a nation of millions, it also forms an incredibly complex system, a network of conditions and preferences that never stops mutating.  It can be influenced, but the notion of controlling something so intricate – without crippling it – is absurd.  No matter their skills, and even if they were somehow purged of all ideology and preconceptions, even the finest panel of experts could never know enough, fast enough, to pursue opportunity as well as the distributed intelligence of countless free people.

Attaching two or three dollars of “dead weight” to every dollar the government seizes sounds about right.  Now, in some circumstances, it can be reasonable to pay a premium in exchange for leveraged resources.  Those situations are emergencies.  When faced with wars or natural disasters, it’s understandable that efficiency might be sacrificed for expedience.  That is why all Big Government programs are now sold as responses to time-critical emergencies – to use a phrase that became popular in the postwar era, “the moral equivalent of war.”  We have “wars” on all sorts of issues these days.

What has all the massive, failed Keynesian stimulus of the past few years been, if not “The War On Unemployment?”  Of course it didn’t work.  Employment isn’t a short-term crisis to be solved with massive, wasteful infusions of government money.  Jobs are long-term arrangements – in fact, they usually become more valuable the longer they last, to both employer and employee.  Treating unemployment as an immediate, existential crisis that calls for trillion-dollar government “stimulus” worked about as well as trying to “fix” a drought with a fire hose.