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"Why I Will Never Be A Keynesian"

Richard Epstein:

Yet that is not how matters sit with the new Keynesians. Posner seeks to find a larger space for public investment in a downturn by declaring that “[an a]mbitious public‐works program can be a confidence builder,” seeking to tap into Keynes’s explanation of how the government can promote the “return of confidence.” But the argument ignores the obvious indignant response that a poorly run government program can destroy confidence and further demoralize businesses who think that higher taxes will snatch away the fruits of their efforts. Only by assuming the eternal and unalterable benevolence of government can one posit that all soft externalities will move in the same direction. Think of the public cynicism about the Alaskan “bridge to nowhere,” or foolish public expenditures that led to the construction of the Murtha‐Johnstown‐Cambria Airport. These projects shatter public confidence.

What is missing from this entire paean to public works and expenditures is any sense of the public‐choice dynamics that make pork barrel politics the order of the day. I am no social historian, but I suspect that public expenditures were also hijacked for partisan advantage in the Great Depression. But by the same token, I think that the size of the heists are far greater in a $787 billion pork barrel package, most of which is directed toward delayed capital expenditures that do not have (if any expenditure has) their supposed stimulus effect. In the end, it seems clear that the best solution is to lower taxes and not to leverage high taxes as an excuse for expanded public spending.

. . .

There is some debate about the extent to which these policies are attributable to securities regulation or to private covenants. The right answer is some mixture of both, which suggests that both public and private parties did not perform ideally in the financial meltdown. But that observation hardly makes the case for more extensive governmental control over lending markets. Rather, the key question is who learns more quickly from their mistakes. There are only two choices: government bureaucrats who are systematically immunized from the consequences of their decisions or private lenders who (even with imperfect employment contracts) are not. No private bank will lend on the terms that the FHA is prepared to supply. The reasons are too evident to require extended discussion.

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The real task is to figure out the right set of property rights that will give individuals incentives to make the right personal choices. Sound institutions will boost confidence across the board and encourage investment so long as no one has to factor into the equation the huge levels of gratuitous uncertainty that stem from useless government intervention. We have to accept that external circumstances will create good and bad times. No economic theory can ward off hurricanes, disease, or war, even if sound social institutions can contain some of their adverse effects. But the purpose of government is not to eliminate all the uncertainties of nature and politics. It is to not add to the confusion by creating baroque structures of taxation, regulation, and government spending that add fresh layers of uncertainty through mechanisms that expend real resources in order to reduce social output. One does not have to be a Keynesian to know that the sum of three negatives (administrative cost, allocative distortions, and unneeded uncertainty) is always negative, no matter what their relative proportions. Getting out of the gimmick business will do more good than all the bogus short‐term stimulus packages that muddle‐headed or devious politicians can generate. We do not want government to do nothing, but we do not want it to do something stupid either. The presumption remains: Government intervention is bad until shown to be good. For that reason I am not, nor will I ever be, a Keynesian.

For more on the devastating public-objection to huge deficits, see "With debt, deficit come more red tape".

But debt and deficits aren't the only monstrously growing manifestations of out-of-control government in the nation's capital. When government spends tax dollars, a flood of rules and regulations invariably follows. Some of the red tape is meant to prevent waste, fraud and abuse. But far more of it is a damaging burden on the individual liberty and free enterprise that have made this country the most prosperous in human history. The recently issued 2010 edition of the Competitive Enterprise Institute's "Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State" provides some chilling insights into just how burdensome federal bureaucracy has become.

Regulatory compliance costs imposed on businesses last year exceeded $1.87 trillion, or an amount equal to 8.3 percent of the gross national product, according to the CEI report. Such costs are only going to grow. Washington issued 3,508 new regulations in 2009. More than one-tenth of the new regulations issued in 2007 each resulted in at least $100 million in compliance costs. All of us pay for these regulatory costs because businesses pass their costs on to consumers in the form of higher prices.