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March 17, 2010

The Keynesian Fraud

By Monty Pelerin
Keynesian economics is mostly a fraud and always has been. It has little theoretical basis and no empirical support, as I have previous explained.

Our school system has convinced the public that government is the source of most good and can solve all problems. Generations of children have been taught that Franklin Delano Roosevelt "saved" us from the Great Depression. History textbooks proclaim this. Yet Roosevelt's Treasury Secretary clearly contradicted this myth:

We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong ... somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises ... I say after eight years of this Administration we have just as much unemployment as when we started ... And an enormous debt to boot!
- Henry Morganthau, Treasury Secretary, May 1939

Morganthau's statement is the equivalent of Ben Bernanke and Tim Geithner stating that "everything we have done has done no good." When the architect and manager of the program admits it failed, on what basis can honest historians claim that it was successful?

If only current political appointees could be as honest as Morgenthau. But the Keynesian myth is too important and must survive at all costs. It is a source of government power and an inspiration for more government spending. It is a source of many economists' income and prestige. Keynesian economics is the bedrock supporting the entire myth of expansive government. If it is debunked, then so is the twentieth-century conception of government.

In "Keynesian Economics and the Wizard of Oz," Dan Mitchell does an excellent job of exposing what more and more observers believe to be a fraud. Mitchell states:
In the ultimate triumph of theory over reality, the Keynesians say all that matters is the macroeconomic model behind the curtain showing that more government spending leads to more jobs and growth. Consider the recent report from the Congressional Budget Office (CBO), which claimed that Obama's stimulus created at least one million jobs. As Brian Riedl of the Heritage Foundation noted:

CBO's calculations are not based on actually observing the economy's recent performance. Rather, they used an economic model that was programmed to assume that stimulus spending automatically creates jobs -- thus guaranteeing their result. ...The problem here is obvious. Once CBO decided to assume that every dollar of government spending increased GDP..., its conclusion that the stimulus saved jobs was pre-ordained.

But surely this can't be true, you may be thinking. Our public servants in Washington would not make important policy decisions based on a model that automatically produces a certain result, would they? Peter Suderman of Reason pulls aside the curtain:

... those reports rely on assumption-packed models that effectively predetermine their outcomes; what they say, in essence, is that the stimulus worked because we assume it did. ...

Hypotheses in the physical sciences can be more reasonably tested. Here, data have validity because experiments are repeatable. Yet even in the purest of sciences, political influence can corrupt. The modification of data to support the global warming scam is recent evidence of that.  

Economics is a complex behavioral science. Like all behavioral sciences, it is difficult to use data to support or refute hypotheses. Compounding this problem is the political influence on any investigation. Ideology of either the researcher or the grant provider easily influences conclusions.

The behavioral sciences offer great opportunity to "fudge" conclusions. "Rent-an-economists" are available who will provide whatever conclusion you want, including the absurdity that raising the minimum wage increases employment at the lowest wage levels.  

President Dwight D. Eisenhower issued an omniscient warning in his Farewell Address that pertains to all research:

The prospect of domination of the nation's scholars by Federal employment, project allocations, and the power of money is ever present -- and is gravely to be regarded.

Any economist who works for the government must compromise his integrity. He becomes part of a political team with political goals. Either he or his scientific integrity must go when it conflicts with these goals.

Milton Friedman recognized this conflict and never would accept a government policy position as a result. He always felt that his advice could be more helpful if it were freely given and not subject to a particular administration's goals. It is a pity that so many second-rate economists seek fame and fortune by becoming political hacks and lackeys.

Monty Pelerin blogs at economicnoise.com.
on "The Keynesian Fraud"