Hostile Takeover: Resisting Centralized Government's Stranglehold on America (6 page)

Keynesianism legitimized the idea that governments can stimulate economic activity and lift the economy out of recession through deficit spending and public works projects. Whether or not such spending projects are “shovel-ready” investments in infrastructure projects that make sense is beside the point. “If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well tried principles of laissez-faire to dig the notes up again,” Keynes wrote in
The General Theory of Employment, Interest and Money,
“there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. . . . It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”
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If you worry that I am taking Keynes’s argument out of context, consider this August 15, 2011, exchange on CNN between Fareed Zakaria and Nobel laureate economist Paul Krugman, a preeminent advocate of Keynesian fiscal stimulus who has repeatedly argued that the failure of the Obama administration’s economic policies is a failure to spend far more money on far more stimulus. “Wouldn’t John Maynard Keynes say that if you employ people to dig a ditch and then fill it up again, that’s fine?” Zakaria asked. “They’re being productively employed. They’re paying taxes.” Krugman responds by wishing for “a program of government spending plus an expansionary policy by the Fed.”

What kind of spending?

If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and, really, inflation and budget deficits took secondary place to that, this slump would be over in 18 months. And then if we discovered, oops, we made a mistake, there aren’t any aliens, we’d be better. . . . There was a Twilight Zone episode like this, in which scientists fake an alien threat in order to achieve world peace. Well, this time we don’t need it [to achieve world peace]; we need it in order to get some fiscal stimulus.
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I am not making this up, but Hayek anticipated such absurd outcomes from the “logic” of the Keynesian method à la Krugman, noting that “some of the most orthodox disciples of Keynes appear consistently to have thrown overboard all the traditional theory of price determination and of distribution, all that used to be the backbone of economic theory, and in consequence, in my opinion, to have ceased to understand any economics.”
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Be that as it may, by all accounts Hayek lost the “Fight of the Century” among economists and politicians looking for an intellectual defense for bad behavior. It really came down to the incentives of planners to plan and the incentives of advisers who wanted to advise the planners. But the greater misunderstanding was with the Austrian view of markets as a discovery process, not a mathematical problem of inputs and outputs that could be tweaked and micromanaged. It was this misunderstanding that led Hayek to write his seminal paper on “The Use of Knowledge in Society,” published in
The American Economic Review
in 1945. Hayek posited that each individual, because of his unique situation within society, possesses a great deal of knowledge that is known to him alone—the knowledge of the particular circumstances of time and place. The individual may not even be able to articulate what he knows in explicit, rational terms. Institutions such as the price system emerge and continually adjust in an ongoing expression of these particular “bits of knowledge” that are dispersed throughout the market. Such market prices serve as a dynamic “system of telecommunications,” or better, as “guideposts to action.”

For Keynesians, times of downturn call for stimulating new demand. Any demand for anything will do because it’s the aggregate that matters. Government spending is, by definition, a component of Gross Domestic Product, the official government measure of economic output. We could literally spend our way to prosperity, if we just had the courage of Paul Krugman’s convictions. Can you imagine why Keynes’s ideas have such lasting appeal to congressional committee chairmen and presidents? As the great public choice scholar P. J. O’Rourke so precisely explained it, “giving money and power to government is like giving whiskey and car keys to teenage boys.”
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Think of Keynesianism as the car, and your tax dollars are the whiskey. It’s actually a Mack truck, and it has no brakes.

KEYNESIAN CONCEIT

H
ERE’S THE CONCEIT.
A
CCORDING TO
H
AYEK,
K
EYNES “WAS GUIDED
by one central idea—which in conversation he once described to me as an ‘axiom which only half-wits could question’—namely, that general employment was always positively correlated with the aggregate demand for consumer goods.”
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Get it? Macroeconomists are really smart, much smarter than the “half-wits” who still think governments shouldn’t spend money they don’t have, particularly on public projects that are never going to be “shovel ready.”

Conceited government, it turns out, comes from conceited economists.

The problem with the Keynesian view is that it ignores the fact that public expenditures must come from somewhere. Each dollar spent on burying old bottles filled with banknotes or spent on building solar panels at three times the cost of what you can sell them for means that someone else will not spend that dollar. That someone else, by the way, is you, the person who earned it. That someone else would otherwise have been able to use that same dollar in ways that are informed by a real understanding of their personal needs. That someone else was highly likely to make a better decision that made better economic sense. This is what old-fashioned microeconomists call “opportunity cost.” If you do this, you can’t do that. There is a real opportunity cost, something better is always forgone, when the government raises taxes, raises the debt ceiling, or expands the supply of money and credit. That forgone opportunity might have been food on your family’s table, an investment in a new idea by a struggling entrepreneur, or a new hire by a small businesswoman trying to figure out how to keep the doors open and still comply with the new health care mandate under Obamacare. You might consider this common sense, but the experts, like Keynes himself, think you’re a “half-wit.”

The absurd policy conclusions that can come from aggregate-demand thinking are caused by using the wrong method to understand how the world works. The bottom-up view of economic organization is unique in that it does not focus on the imaginary equilibrium states typically employed by macroeconomists, where all relevant information is already assumed to exist. Everything is known, given by definition. Too often, macroeconomists think about the economy as if it were a chessboard, where all potential moves are potentially knowable, dependent on the intelligence and strategic acumen of the player moving the pieces. This standard equilibrium view begs the key question of economic organization. “
If
we possess all the relevant information,
if
we can start out from a given system of preferences, and
if
we command complete knowledge of the available means, the problem which remains is purely one of logic,” Hayek argued. “That is, the answer to the question of what is the best use of the available means is implicit in our assumptions.”
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Planners can justify anything they want, even malinvestments in green jobs, by starting with the “right” assumptions. One great example of this was the estimated number of jobs “created or saved” crunched by Obama’s economic advisers that were used to sell nearly a trillion dollars in deficit stimulus spending to a skeptical public in early 2009. Those numbers were contrived, and ultimately proven absurdly off the mark, but they were presented with an air of scientific certainty.

THE SEEN AND THE UNSEEN

I
N THE REAL WORLD OF MARKET PROCESSES, INDIVIDUALS DEPEND ON
the reliability of relative prices as guideposts to action. They depend on money as a stable standard of value that facilitates economic calculation. Investors use these market signals to determine where to invest and where to allocate resources. Do I build more housing? What is the expected value of a new home should an individual borrower default on their mortgage? Do I buy more house for my family than I need, or can really afford, because the annual double-digit increase in its value over the past three years makes it a sure bet? What are competing returns on capital if I pull out of mortgage-backed securities and seek less-risky financial instruments with a lower yield?

Every government action creates unforeseen consequences that must distort relative prices. There is a difference between what is seen, or intended, and what is not seen—the unintended consequences. The nineteenth-century economist Frédéric Bastiat described this, the seen and the unseen, particularly well: “In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause;
it is seen.
The other effects emerge only subsequently;
they are not seen;
we are fortunate if we
foresee
them.”
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In terms of their methods and their policy prescriptions, this was the unbridgeable gulf separating Hayek from Keynes. Hayek wanted to “pierce the veil of aggregates and look at the distortive effects on relative prices and relative output produced by boom-time credit expansions,” says economist Mario Rizzo. Hayek’s view says: “Let us look at the distortive effects that booms leave us as we work our way through a recession. Let us concentrate on sustainable lines of expenditure both during the boom and during the road out from the bust.”
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As clever as Keynes was, he presumed too much. He didn’t know what he could not know, but he was too arrogant to admit it.

HAIL, CAESAR!

A
ND THAT’S THE PROBLEM WITH CZARS.

They presume the knowledge necessary to outguess the millions of people who reveal their preferences in the marketplace, in a kaleidoscope of decisions, actions, and reactions to the decisions of others. And they have the power to act whether you agree with their dictates or not.

By the way, when exactly did it become acceptable in the United States of America to confer the title of “czar”? Particularly to describe the politicians and bureaucrats who supposedly work for We the People? America does not do the “czar” thing.

Americans, whose founding was a revolt against the tyranny of King George III, should revolt against the very suggestion that anyone holding public office hires a “czar” to oversee anything. It’s offensive. A czar is a dictator by another name. Former senator Russ Feingold, a progressive Democrat, said it well at a Senate Judiciary Committee hearing in 2009:

I should note that while the term czar has taken on a somewhat negative connotation in the media in the past few months, several presidents, including President Obama, have used the term themselves to describe the people they have appointed. I assume they have done so to show the seriousness of their effort to address a problem and their expectations of those they have asked to solve it. But historically, a czar is an autocrat, and it’s not surprising that some Americans feel uncomfortable about supposedly all-powerful officials taking over areas of the government.
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As Jonah Goldberg, author of
Liberal Fascism
, has pointed out,
czar
derives from
Caesar
and
Kaiser,
words not typically associated with constitutional governments. Yet the word
dictator
was used to describe various potentates in FDR’s administration. “We had a ‘dictator for steel’ and a ‘dictator’ over at the NRA and elsewhere,” wrote Goldberg. But “you can see the appeal as pretty much no one has a living memory of life under the Czars. Americans wouldn’t tolerate a ‘car king’ or ‘car dictator’ or even a ‘car Caesar.’ But ‘car czar’ sounds both ironic and quaint.”
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The Russian people probably had a different view of life under real czars.

This is one of the more disturbing rhetorical turns in modern American political discourse—the casual comfort with which the press and government officials seem to use the term
czar
, more and more often to describe politically appointed Schedule C bureaucrats assigned to various government policy portfolios. Intended or not, the term seems to cede more power, greater expected responsibility onto government officials to “take charge,” to “do something.” A “green jobs czar” infers that we need to create green jobs as a national imperative, regardless of the opportunity cost. A “car czar” suggests that America is no longer capable of making cars without the financing, control, and top-down direction of the federal government. A “health care czar” seemingly implies that decisions of patients and doctors are to be superseded by the decrees of experts who will better manage the cost and quality of the care you and your children can receive.

The very nature of our constitutional democracy prohibits such concentrated power with any individual, including the President of the United States. But it particularly prohibits such power seated with an unelected, not-accountable-to-anyone bureaucrat.

It’s a careless, sloppy misuse of language.

Or is it? The growth in use of the term seems to coincide with the expanding power of the executive branch of government over the prerogatives of the legislative branch. By some accounts, President Obama has somewhere between thirty-three and thirty-eight individual public policy “czars” working for him, the most of any U.S. president. There is no fully objective, agreed-upon use of the term, as it is used to refer to high-ranking policy officials working in the executive branch, but it usually denotes White House–appointed bureaucrats who can operate without congressional oversight and can avoid the bright spotlight of Senate confirmation hearings. Simply by appointing policy czars with direct access to the West Wing, the Obama administration has been able to avoid a great deal of congressional scrutiny that certainly would have occurred otherwise.