The Tyranny of Crackpot Ideas
RALEIGH – President Obama is reportedly about to recommend yet another round of government stimulus and “job creation” gimmicks. He means well, I suppose, but seems hopelessly lost in the fantasies of John Maynard Keynes and other crackpot economists.
“Crackpot?” did you say? How can Keynes, the founder of 20th century macroeconomics, be considered a crackpot?
Easy. He advocated the economic equivalent of the following principles:
• Water runs uphill.
• Plants don’t need light to engage in photosynthesis.
• Gravity makes objects fall away from each other.
Only a crackpot scientist would try to make you believe these things. Similarly Keynes tried to make people believe that transferring money from one pocket to another made you wealthier, that destroying productive capacity of the economy made it healthier, and that lowering price of labor and other goods would not result in a higher demand for those goods.
Keynes was a clever propagandist. But his principles have not survived the test of time. As Harvard economist Robert Barro argued in yesterday’s Wall Street Journal, the notion that governments can stimulate the economy through multiplier effects – magically turning a dollar of revenue into two or more dollars of output – is not only nonsensical but empirically false. There is “zero evidence,” Barro wrote, “that deficit-financed transfers raise GDP and employment – not to mention evidence for a multiplier of two.”
Unfortunately, a lack of logical and empirical foundation has never prevented crackpot ideas from becoming widely accepted for generations. Consider the case of Marxism. By the time my son Alex was in first grade, he had already figured out the foundational building block of Marxist economics – the labor theory of value – was utterly preposterous.
Alex and his friends had discovered on the playground that while two kids might put the same amount of time and effort into a task, such as playing kickball or digging a foxhole for mud-clod wars, the value of their respective efforts was rarely the same. One kid invariably worked smarter than another, or better guessed what his fellows wanted done.
To suggest that labor determines value is to fly in the face of practical experience. But Marxist economics persists in the fevered dreams of petty tyrants and the cloistered fantasies of petty professors. Right now, some unsuspecting university student is about to get a lecture on the labor theory of value from a Marxist bitter-ender. Fortunately, the student is likely to be inattentive or drowsy, and thus miss the “lesson.”
When crackpot ideas become policy, the results range from unfortunate to catastrophic. Since the onset of the Great Recession in 2007, for example, policymakers of both parties have increased the maximum number of months a jobless person can receive unemployment compensation. No doubt these increases were motivated by concern for recipients, but you can’t will reality to change. By reducing the cost of passing up “unattractive” jobs, these UI benefit extensions have increased the unemployment rate by a full percentage point, according to some analysts.
Even today, with the long-term jobless making up a larger share of total unemployment than at any time since the Great Depression of the 1930s, there are some three million vacant positions that employers cannot seem to fill. If given a choice between taking a pay cut to reenter the workforce or staying on UI benefits for a few more months, hoping for a better offer, it is entirely rational for many UI beneficiaries to stay on the dole.
But the policy is irrational. It hampers economic recovery, worsens the federal government’s fiscal imbalance, and allows the human capital of unemployed workers to deteriorate.
No doubt the president will find a host of Keynesian economists to praise his forthcoming jobs package, just as he found plenty of cheerleaders for his previous stimulus and bailout policies.
One thing America has no shortage of is crackpots.
Hood is president of the John Locke Foundation.