The Folly of Keynesianism

by truenorthsaf

Well that was quick. The most recent federal budget has not just broken the pledge by Justin Trudeau and the Liberal Party to run four “modest deficits” of ten billion dollars; it has exploded it into smithereens. At nearly thirty billion, this year’s deficit is nearly three times the amount promised, seemingly out of thin air, on the campaign trail and by the time of the next election it is still projected to be somewhere in the teens. When will the books be put back into the black? Even the Finance Minister doesn’t seem to know (funny that, I could have sworn it was in his job description somewhere). Given the track record of the last Trudeau to hold power, the Canadian public could be forgiven for feeling uneasy at decisions of the new one in only the first few months of his mandate.

Morneau

Cause what’s twenty billion between friends?

Oh but don’t worry, we are told, be happy. This is all just classic Keynesian economics, long overdue after the growth killing austerity of the misguided past government. Never mind the debatable validity of Keynesian economics as a whole. Its track record rests largely on FDR’s successful “rescue” of the United States economy from the depths of the Great Depression in the 1930s, and even this overlooks that the USA still hadn’t fully recovered economically in 1939 when the Second World War broke out (war being indisputably the single greatest economic stimulant in the world – admittedly one with some rather nasty side effects such as death and destruction and all-around misery) and in the aftermath of that was one of the few major industrial powers to emerge unscathed with an entire continent looking to rebuild as a market for its goods.

The reality is that while the government pouring money into the economy does generate growth, it is growth that is artificial in nature in that it is tied wholly to government largess with no actual basis in economic fundamentals. When the taps get turned off, as inevitably they must, so too does the growth generated by that government spending. I will concede that sometimes this is indeed necessary for all its flaws; I offer apologies to any libertarians reading this but no letting the American banking system go bankrupt in the aftermath of 2008 would not have been a good thing – though admittedly not tying the bailout to genuine reforms of the banking system was a missed opportunity.

Even putting aside the arguable merits of Keynesianism, the fruits to be born of this new fiscal mandate are likely to be few. A very small proportion of the new spending proposed by Monsieur Trudeau (less than the original ten billion proposed for the entire deficit in fact) is actually earmarked for the kinds of investments in infrastructure and productivity that will boost economic growth. The rest is being doled out to various pet projects and favoured causes such as the CBC or scientific research councils or native affairs. Whatever the virtues and social goodness of such projects, their economic impact is minimal at best. If spending in and of itself were all that mattered (and not what the money was actually spent on) then Greece would be the economic powerhouse of Europe and austerity-burdened Britain would be a basket-case while funnily enough it is the reverse that is the case.

Infrastrcutre

If one must borrow to spend money, better spend it on this than the CBC

And that is the true folly of Keynesianism. Whatever arguments can be made about the theoretical implications of spending X number of dollars to generate X percentage of growth, the cold hard reality is that once the government begins borrowing money it soon becomes a habit that is nearly impossible to break. For proof look no further than the Ontario government of Kathleen Wynne (many of whose former advisors now make up Trudeau the Younger’s inner circle oddly enough) who over a nearly decade and a half period in office reduced the province from the economic engine of the country to that of have-not status with ten cents of every tax dollar going towards interest payments on Queen’s Parks debt and provincial crown assets being auctioned off in a fire sale just to meet operating costs. How did this happen? For the simple reason that once politicians begin the habit of using taxpayer money to buy votes it becomes a pretty irresistible one to break.

This is true even with conservative politicians, as we’ve seen down in the States and elsewhere. Even the previous Tory government of Stephen Harper saw overall spending levels rise year over year for the first half of their term in office before finally beginning the work of cutting their way back to surplus following the 2011 majority victory. With governments’ of a leftist persuasion, which do not even have the philosophical disinclination to avoid debt whenever possible of their conservative opponents, and instead view it as a good thing, it is all but a hopeless endeavor. Indeed, one of the tremendous ironies of Stephen Harper’s legacy is that he may well be remembered as one of the few governments in history to actually follow Keynesian orthodoxy by and large according to its actual specifications, by spending heavily in a time of economic downturn largely on shovel ready infrastructure projects and then restricting spending to return to surplus as the economy began to recover. This stands in stark contrast to Monsieur Trudeau who has resolved to spend heavily on things completely unrelated to the growth in a time when the economy is growing, likely leaving nothing in the tank should things begin to turn sour.

Empty Pockets

And that at its heart is the problem. Whatever the abstract and theoretical merits and flaws of Keynesian economics they are largely irrelevant due to the inability time and time again for the theory to be applied as it was meant to, turning a theory of fiscal stimulus into a reality of structural and permanent deficits. The continued insistence of Keynesianism as a solution to economic woes is the mentality of an alcoholic who tells himself “I’ll only have one” before entering a bar with the full knowledge that he will not be leaving until he is carried out hours later by the staff after he passes out face first in the peanut bowl. Just as libertarians make the error of assuming the indisputable rationality of the individual, so to do progressives deceive themselves with the belief that the state is somehow wholly logical and reasoned in its actions. Instead far too often, the state merely becomes a tool by which democratically elected politicians say and sadly do whatever is necessary to secure their own re-elections. Like a teenager with his parents’ credit card, the end result of this is often nothing more than a pile of cheap tat and an even higher mountain of debt.

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