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It’s an argument that I’ve had before.  Talking with a die-hard Keynesian about some apparent failure of the Keynesian theory and the inevitable response is…

Can you guess?

Exactly, “it would have gone better if we’d just spent more money”.

Now, before you misunderstand the purpose of this post, let me clarify:  I think Keynesian theory has a place, and that a bit of stimulus spending in the right areas at the right times can definitely have a beneficial effect on the economy.

But arguing with one of the “them” is at times impossible; no matter what flaws you point out in the theory, they will inevitably respond “the theory works, but you have to spend more!”

How much more?

It’s impossible to know!

Because if it doesn’t work, then you didn’t spend enough!

It’d be enough to make me tear my hair out, if I still had hair.

And that is part of the beauty and the appeal of Keynesian economics to some of its proponents; it seems so simple, and on the surface it seems so obvious that they can’t imagine anyone not immediately jumping on board.

Economy in a rut?  Spend money until you’re out!

This is, to borrow a phrase from F. A. Hayek, a fatal conceit.

If we look at the tools that a government has to influence the economy, we can split them up a couple ways.

First, infrastructure.  This one, I’m actually a fan of; infrastructure spending is something that private industry generally will not indulge in unless absolutely necessary, and it’s something that creates markets.  So, economy in a rut, construction is down, sure, by all means, dig out that pocketbook and start building needed infrastructure.

Note the caveat, however.  Needed infrastructure.  A bridge to nowhere, oddly enough, serves no one, unless there is a valid reason to expect that creation of that bridge will serve to create new markets that would allow the government to recoup its cost through taxation within a reasonable time period.

Second, adjustments to the flow of capital.  It covers a lot of bases, admittedly, but we’re talking adjustments to the money supply, interest rates, taxation, you name it.

Here, in my opinion, is where governments get into trouble.

See, infrastructure spending, in the terms of vast projects that have either needed doing and lacked taxpayer support, or new ventures that may have seemed prohibitively expensive otherwise, those are things that most governments approach with a measure of trepidation.

Twiddling the knobs and pulling the levers of capital?

There’s a lot less caution there, when there should be more.

In fact, governments often mess with those settings in the interest of preventing the economy from slowing down.  Keep the boom going, keep the boom going, just so long as it lasts until the next major election cycle.

The problem, as is patently obvious, is that attempting to keep the boom going almost inevitably worsens the bust, and arguably causes it to begin with.

If government intervenes to prop up failing industries, those industries are only going to survive if the people running them are smart enough to use the time that government has bought them wisely.  And wisdom is typically in short supply when corporations start talking about their next quarterly report.

If government intervenes to make certain portions of the market more attractive, like housing, for example, then it’s small wonder when the housing market goes berserk in a frenzy of speculation.

In the long run, the economy will never be stable so long as the government keeps intervening.  If you want stability, set limiters.  Prevent banks from getting too big, establish rules that prevent egregious abuses, establish regulatory agencies whose personnel are forbidden by law from getting involved with the industries they regulate before or after their employment in said agency.  Define the parameters of the track rather than attempt to steer the car.

The government, oft-times, is like a novice driver behind the wheel of a big rig.  Correction begets correction begets overcorrection, and we all wind up footing the bill.

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