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Spent theory

| Friday, Sept. 9, 2011

In difficult economic times, simplistic remedies for restoring the economy to health are in ample supply. And no remedy for a slumping economy with high unemployment is more simplistic -- and more frequently proposed -- than is increased government spending.

Higher government spending just seems such an obvious course of corrective action. The problem, after all, seems to be that consumers just aren't spending enough. This inadequacy of consumer demand leads producers to produce less stuff. And so workers are laid off, thus causing consumer spending to fall even further.

Nothing seems more obvious, and simpler, than for government to pick up the slack in spending.

But yelling "Spending is too low!" is to identify a symptom, not a cause. It's like identifying blisters -- rather than the ill-fitting shoes that cause them -- as the problem to be solved.

Too few pundits and politicians -- and, sadly, too few economists -- dig deeply enough to identify the ultimate causes of economic troubles signaled by symptoms such as inadequate spending.

In popular discussion, there's little explanation for prolonged unemployment beyond unhelpful repetitions of the fact that people aren't spending enough to reduce unemployment.

Why do consumers and businesses sometimes for extended periods spend too little• Why do human beings in market economies -- that have a long tradition of entrepreneurship, innovation and adjusting to change -- sometimes (but not always) remain mired for years in recessions?

Keynesian economists explain this inadequate spending as being the result of ... inadequate spending. The effect is the same as the cause.

If, for whatever reasons -- say, "animal spirits" -- people cut their spending, pessimism will spread throughout the economy, causing spending to remain inadequate.

This Keynesian explanation is adolescent. Lazily identifying the symptom as the underlying problem, Keynesians then craft a "theory" that shows just how inadequate spending can in fact cause inadequate spending. How clever of them!

It's understandable that many people untutored in economics fall for this nonsense. Just as many untutored in geography naturally think the Earth is flat (looks that way, doesn't it?), many untutored in economics, upon seeing businesses closing up and workers being laid off, conclude that the problem is inadequate spending (looks that way, doesn't it?).

But in economics, what can be seen only through sober, extended thinking is often more important than what is seen merely with the naked eye.

It's also understandable that Keynesianism receives many politicians' applause: It gives them intellectual cover to do what they naturally want to do -- namely, spend other people's money.

Keynesian theory is an unintended gift from some economists to politicians -- a neatly wrapped box that, when opened, transforms with mathematical wizardry and twisted theorizing that which was long held to be irresponsible and imprudent (deficit spending) into "fiscal policy" said to be scientifically necessary.

If there were a private-sector version of Keynesian economics, it would explain that increased spending funded by pickpocketing, burglary and armed robbery only seems anti-social; in fact, you see, these activities are socially productive when workers are unemployed.

Understanding how an economy actually operates requires much deeper thinking than Keynesians supply.

Why do entrepreneurs and businesses, otherwise eager to take risks and compete for consumers' dollars, remain inactive during prolonged recessions• What's needed is an answer that identifies as the underlying problem something other than the symptom.

That answer, I believe, is what economist Robert Higgs calls "regime uncertainty" -- the subject of my next column.

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